Issue 9 volume 10 sePTemBeR 2014

HK$70.00

AHEADOF THE CURVE Why CPAs must innovateinside their own offices

PLUS· Lee White: CAANZ kicks off· Internationalizing the yuan· Institute committees’ young blood

Members continue to provide valuable input

I am glad to see some of you have responded to the government’s consultation on improving the regula-tory regime for listed-entity auditors, either through the Institute, the media or directly to the Financial Services and the Treasury Bureau.

The Institute is in support of the overall principle of reform to enhance the independence of audit regulation in Hong Kong so that it is in line with international standards, serves the public interest and sustains Hong Kong’s status as a worldwide financial centre.

Some issues under the consultation have yet to be resolved and we will continue to work on them. These relate to registration of individuals who as-sume ultimate responsibility for quality control, separation of inspection and disciplinary functions, the power to enter CPA firm premises for inspec-tion, financial penalties and funding of the indepen-dent oversight body.

This is an important consultation for the profes-sion, so do give your views before the deadline on 19 September.

You may be aware of the Chinese State Coun-cil’s recent announcement that, among others, the Certified Tax Agent qualification as a requirement for the provision of tax agency services in the Mainland will be cancelled. However, it does not provide specific details on timetable, implications on existing qualification holders and transitional arrangements.

We understand from a subsequent notice is-sued by the Ministry of Human Resources and Social Security that the State Council’s announce-ment means only to change the status of various qualifications and professions instead of cancelling them altogether.

The Certified Tax Agent and four other qualifications — real estate brokers, land registration agents, mining rights appraisers and certified asset valuers — would be changed from Occupation

Entry Qualification to Occupation Standard Evaluation Qualification. As a result, governmental bodies will no longer exercise any entry control into the occupations affected and prescribe the continued professional education as a condition for maintaining the qualification.

As this would significantly impact the business development potential for Hong Kong profession-als, we will continue to keep in touch with relevant government authorities and professional bodies to monitor the development and update you as ap-propriate.

Early this month, I had a valuable opportunity to attend a two-day exchange meeting with the Guangzhou Institute of CPAs to reinforce the coop-eration between the two institutes for the benefit of our small- and medium-sized practitioners.

We discussed about the changes in Guang-dong’s business registration that are going to bring both challenges and opportunities for SMPs, the capability of Hong Kong firms to expand their ser-vice scope, the Institute’s support in adding value to members, and how firms in both places could cooperate to benefit mutually.

Next month, the Cross-straits, Hong Kong and Macau Accounting Profession Conference will take place in Macau. Institute Council member and Ethics Committee Deputy Chairman Raymond Cheng, Chief Executive Raphael Ding and myself will participate in panel discussions on ethics, professional judgment and the sustainable development of accounting firms.

Lastly, to continue our commitment to support members’ development to meet the latest market needs, we have set up an online resource centre for the new Companies Ordinance on our homepage. It comprises comprehensive information from the Institute, government and accounting firms for you to learn more about how to fulfil the requirements brought about by the new law.

“ This is an important consultation for the profession, so do give your views before the deadline on 19 September.”

Dear members,

Clement ChanPresident

President’s message

September 2014 1

01 President's message04 Institute news06 Accounting news09 Business news12 Companies news

REGULARS

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ISSUE 9 VOLUME 10 SEPTEMBER 2014 CONTENTS

56 Business travelHonnus Cheung visits the popular scenic delights of Hangzhou

58 After hoursGeorge W. Russell on bourbon; Joe Wu on watches

60 Let’s get fiscalNury Vittachi discovers less can be more – or not

LIFESTYLE

SOURCE

44 Mainland taxationCharles C. Comey and Matthew Y. Lau on offshore holding companies

46 China individual income taxHow travel allowances can be exempted from individual income tax

48 Technical updateAmendments to several HKFRSs issued by the Institute

50 TechWatch 142The latest standards and technical developments

53 People on the moveThe latest professional appointments from around the region

55 EventsA guide to forthcoming courses, workshops and member activities

14 Two countries, one systemLee White, CEO of Chartered Accountants Australia and New Zealand, tells George W. Russell about his organization’s cross-border mission

20 Inside innovationAccounting firms often urge clients to embrace new ideas. George W. Russell finds out what CPAs are doing to innovate from within

26 Exchange of ideasGeorge W. Russell reports on efforts to internationalize the yuan amid its booming usage in trade settlement and financial instruments

32 Success ingredientRamona Dzinkowski asks Kathy Liu, CFO of Kizan International, about the evolution of apparel industry supply chain management

38 A fresh perspectiveJemelyn Yadao interviews young Institute members who are active in the Institute’s committees and working groups

FEATURES

President: Clement Chan

Vice Presidents: Ronald Kung, Dennis Ho

Chief Executive and Registrar: Raphael DingEmail: ce@hkicpa.org.hk

Deputy Director of Communications: Stella To

Editorial Advisory Group: Daniel Lin (Convenor), Eric Tong (Deputy Convenor), L.S. Chan, Louis Chow, Felix Shui, K.M. Wong, Raphael Ding, Chris Joy

Editorial Manager: John So

Editorial Coordinator: Maggie Tam

OFFICE ADDRESS:37/F, Wu Chung House, 213 Queen’s Road East,Wanchai, Hong KongTel: (852) 2287-7228 Fax: (852) 2865-6603

MEMBER AND STUDENT SERVICES COUNTER:27/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong

WEBSITE: www.hkicpa.org.hkEMAIL: hkicpa@hkicpa.org.hk

A PLUS is the official magazine of the Hong Kong Institute of Certified Public Accountants. The Institute retains copyright in all material published in the magazine. No part of this magazine may be reproduced without the permission of the Institute. The views expressed in the magazine are not necessarily shared by the Institute or the publisher. The Institute, the publisher and authors accept no responsibilities for loss resulting from any person acting, or refraining from acting, because of views expressed or advertisements appearing in the magazine.

© Hong Kong Institute of Certified Public Accountants September 2014. Print run: 6,700 copiesThe digital version is distributed to all 37,408 members, 16,488 students of the Institute and 699 business stakeholders every month. Subscription: HK$760 for 12 issues per year.See www.hkicpa.org.hk/aplus for details.

M&L

Editor: George W. Russell

Managing Editor: Gerry HoEmail: gerry.ho@mandl.asia

Copy Editor: Jemelyn Yadao

Production Manager: Jasmine Hu

Art Director: Martin Megino

EDITORIAL OFFICE: 2/F, Wang Kee Building, 252 Hennessy Road, Wanchai, Hong Kong

ADVERTISING ENQUIRIES:Advertising Director: Derek TsangEmail: derek.tsang@mandl.asiaTel: (852) 2656-2676

About our name: A PLUS stands for excellence, a reference to our top-notch accountant members who are success ingredients in business and in society. It is also the quality that we strive for in this magazine — going an extra mile to reach beyond grade A.

NEWSTHE INSTITUTE

4 September 2014

Cross-straits conference to discuss professionalism of accountantsInstitute delegates prepare for annual event in Macau

Institute President Clement Chan and Chief Executive and Registrar Raphael Ding will head to Macau on 13 October to attend the Cross-straits, Hong Kong and Macau Accounting Profession Conference 2014.

They will be joined by Council member and Ethics Committee Deputy Chairman Raymond Cheng, who will act as a moderator at the event.

The theme of this year’s conference is “Professionalism and professional judgment”, and the subthemes will cover the integrity of accountants and ethical standards; sustainability of business success for accounting firms; and the application of professional judgment amid an increasingly complex economic environment.

Senior accounting professionals from the Mainland, Hong Kong, Macau and Taiwan are expected to address the conference to share their experiences about the profession in general as well as opportunities for cross-border cooperation.

This will be the ninth edition of the conference. The annual event took place in Xining, Qinghai province, last year.

Disciplinary findings

Cheng Man-kit, CPA

Complaint: Cheng was guilty of dishon-ourable conduct. In November 2013, he was convicted in the Magistrate’s Court and charged with both attempted in-decent assault and indecent assault. Cheng was fined HK$1,000 and sen-tenced to 14 days imprisonment. After considering the information available, the Institute lodged a complaint against Cheng under section 34(1)(a)(x) of the Professional Accountants Ordinance.

Decision and reasons: Cheng will be removed from the register of certi-fied public accountants for six months with effect from 6 October. In addition, Cheng was ordered to pay costs of the disciplinary proceedings of HK$14,965. When making its decision, the Disci-plinary Committee took into consider-ation the particulars in support of the complaint, the nature of the offences and the conduct of Cheng throughout the proceedings.

Chui Yiu-chung, CPA

Complaint: Failure or neglect to observe, maintain or otherwise apply paragraphs

100.5 and 150.1 “Professional Behaviour” of the Code of Ethics for Professional Ac-countants for the respondent’s failure to comply with relevant laws and regula-tions and avoid any action that discredits the profession when he took and dupli-cated the apartment keys of a female col-league and attempted to gain entry into that female colleague’s flat.

Chui had pleaded guilty to two charges and was sentenced to 80 hours of community service for his conviction of the offences of loitering and theft, con-trary to section 160(3) of the Crimes Ordi-nanc (Cap. 200) and section 9 of the Theft Ordinance (Cap. 210) respectively. Chui notified the Institute of the conviction in accordance with his membership obliga-tions. After considering the information available, the Institute lodged a complaint against Chui under section 34(1)(a) of the Professional Accountants Ordinance.

Decision and reasons: Chui was repri-manded and ordered to pay a penalty of HK$20,000 to the Institute. In addition, he was ordered to pay the costs of the disci-plinary proceedings of HK$14,681. When making its decision, the Disciplinary Com-mittee took into consideration the par-ticulars in support of the complaint, the nature of the breaches and the conduct of Chui throughout the proceedings.

Details of the disciplinary findings are available on the Institute’s website: ww.hkicpa.org.hk.

Regulatory actions

Leslie Cheng & Co., a firm of certified public accountants (practising)

Complaint: Failure or neglect to ob-serve, maintain or otherwise apply para-graphs 100.5(c) and 130.1 “Professional Competence and Due Care” of the Code of Ethics for Professional Accountants.

The complaint concerned the firm’s failure to act with sufficient diligence to identify material understatement of liabilities in the audits of financial state-ments for two consecutive years. During the course of the audits, the firm was provided with information indicating that the client entity had undertaken contract work, which was complet-ed with remaining unpaid contract amounts. The firm admitted that it had omitted to carry out further procedures to identify the unpaid contract amounts, which represented material liabilities that should have been included in the financial statements.

Regulatory action: In lieu of further proceedings, the Council concluded that

September 2014 5

ObituariesThe Institute notes with regret the passing of Ng Wai-ming and Sum Wai-man.

the following resolution should resolve the complaint:• The firm acknowledges the facts of

the case and areas of its non-compli-ance with reference to the professional standards;

• The firm be reprimanded; and• The firm is directed to pay an adminis-

trative penalty of HK$10,000.

Ng Shiu-hong, a certified public accoun-tant (practising)

Complaint: Failure or neglect to ob-serve, maintain or otherwise apply Hong Kong Standard on Investment Circular Reporting Engagements 300 Accoun-tants’ Reports on Pro Forma Financial In-formation in Investment Circulars, which required reporting accountants to docu-ment matters that are important in pro-viding evidence to support their opinion

and evidence that their work was carried out in accordance with HKSIR 300.

Ng was the engagement director of a deregistered corporate practice, which issued an unqualified opinion on the un-audited pro forma financial information of a group of companies contained in a circular issued by a listed company for the purpose of a substantial acquisition.

The complaint concerned Ng’s con-currence with the company’s decision to treat a very substantial acquisition of an indirect interest in a subsidiary as busi-ness combination in the unaudited pro forma financial information, instead of as an acquisition of an asset. The subsid-iary held a mining licence to a coal mine located in Russia but the mine had not been in operation.

The relevant working papers did not contain sufficient documentation on matters, which are important in provid-

ing evidence to support the unqualified opinion on the unaudited pro forma fi-nancial information that the financial in-formation was not misleading.

Regulatory action: In lieu of further pro-ceedings, the Council concluded that the following resolution should resolve the complaint:• Ng acknowledges the facts of the case

and his non-compliance with the refer-enced professional standard;

• Ng be reprimanded; and• Ng is directed to pay an administra-

tive penalty of HK$30,000 and costs of HK$10,000.

Information on the Institute’s complaint handling process and guidelines for the resolution are available on the Institute’s website: www.hkicpa.org.hk.

Almost twice as many large companies in Britain are seeking new auditors this year due to the introduction in 2016 of a new European Union rule requiring regular auditor rotation to increase competition, according to figures released by PricewaterhouseCoopers last month.

PwC said 56 companies on London’s FTSE 350 index are likely to put their auditing contracts out for new bids this year, up from 30 tenders in 2013 and 18 in 2012.

“Tendering activity is at unprece-dented levels,” said James Chalmers, Head of Assurance at PwC in the United Kingdom.

The U.K. Competition and Markets Authority will introduce new rules later this year making it compulsory for companies

to put their annual audit out to tender every 10 years.

A new EU law approved earlier this year will also force listed companies across the bloc to hire a new auditor at 10 to 24-year intervals, starting in 2016.

NEWSACCOUNTING

6 September 2014

Alibaba Pictures, the recently bought film production arm of China’s largest online commerce company, said last month that it would delay publishing its finan-cial results after the discovery of possible accounting irregularities.

The media company’s new management identified “possible non-compliant treatment” of financial information for periods before its acquisition by Alibaba Group, it said in a Hong Kong stock exchange filing.

The scandal is a red flag for

investors as Alibaba prepares for what may become the largest United States initial public offering ever, media reported. “This makes you wonder whether there was enough due diligence in Alibaba’s decision to buy ChinaVision,” Tony Chu, analyst for RS Investments Fund, which is considering whether to buy Alibaba’s shares, told The Wall Street Journal.

Some analysts, however, were quoted as saying that unless the accounting problems widen, it is

unlikely for the incident to affect investors’ appetite as the film business is small compared with the company’s central e-com-merce operations.

In March, Alibaba agreed to buy 60 percent of the company, formerly known as ChinaVision

Media Group, for HK$6.24 billion to gain rights to television dramas and English Premier League soccer.

Alibaba has announced acquisitions worth US$5 billion in the past year, according to data compiled by Bloomberg.

More companies will put auditor contracts up for bids, according to PwC

Accounting, tax preparation, bookkeeping and payroll services generate more average profit than other industries in the United States, according to financial information company Sageworks.

A financial statement analysis by Sageworks for the 12 months ended 1 July, found that accounting-related industries had an average net profit margin of 19.8 percent, which is more than double the average net profit margin for privately held companies overall.

Legal services, oil and gas extraction, and the rental or leasing of commercial and industrial machinery and equipment were also near the top of the profitability ranking.

Issues come as company prepares for New York stock market launch

Accounting tops U.S. list of most profitable sectors

Alibaba’s film unit uncovers possible cash irregularities

PricewaterhouseCoopers improp-erly watered down a report sent to regulators about its client and one of the world’s biggest banks, Bank of Tokyo-Mitsubishi UFJ, it was revealed last month.

The firm subsequently ac-cepted a US$25 million fine from New York state’s chief financial regulator and a two-year ban from undertaking consulting work for banks.

The settlement focuses on PwC’s work for the Japanese bank, which regulators suspected

of routing billions of dollars through its New York branches on behalf of countries blacklisted by the United States, such as Iran and Sudan. PwC was hired by the bank to monitor its operating procedures in 2007.

According to The New York Times, the firm’s initial draft of a report about the bank acknowl-edged certain limitations of its examination and highlighted how the bank had stripped out the names of Iranian clients to avoid detection. But, after pressure from

the bank, the language in PwC’s report filed with regulators was whitewashed.

“When bank executives pres-sure a consultant to whitewash a supposedly ‘objective’ report to

regulators – and the consultant goes along with it – that can strike at the very heart of prudential oversight,” Benjamin Lawsky, the state’s Superintendent of Finan-cial Services, told media.

Deloitte last month announced that Frank S. Friedman had been chosen as the Big Four firm’s new Chief Executive Officer in the United States.

“I am truly humbled to serve as CEO,” Friedman said in a statement on 17 August. “It is an honour to have the opportunity to lead Deloitte.”

Friedman has worked with the firm for 34 years after graduating from the University of Kansas in 1979. He became the firm’s chief financial officer in 2011. It is un-clear whether Friedman will serve as an interim CEO or will serve a complete four-year term, accord-ing to The Wall Street Journal.

Friedman succeeds Joe Eche-varria, who retired last month to pursue his interest in public service, according to the firm.

Echevarria was elected in 2011 to a four-year term, but decided to leave the firm nine months before his term was up.

September 2014 7

Hertz earnings forecast hit by ongoing audit costs

Big Four firm faces penalty for protecting bank

Global accounting standards goal achievable, says IASB official

American rental car company Hertz Global Holdings said last month that it is withdrawing its full-year financial forecast and expects 2014 results to be “well below” its previous guidance, due to accounting-review costs.

The company said in a regulatory filing that its full-year results would also be affected by “operational challenges,” including recalls by car manufacturers, higher-than-expected operating costs and weak demand in its equipment rental

business. These extra costs and the potential revisions

following a review of the past three years’ results meant it was withdrawing its previous guidance.

Hertz previously forecast an adjusted profit of US$1.7 to US$2 per share on revenue of US$11.4 billion to US$11.7 billion.

In June, Hertz said it would restate or correct financial results for the past three years to fix accounting errors originating in 2011.

Ian Mackintosh, Vice-Chair-man of the International Accounting Standards Board, called global accounting stan-dards “desirable, achievable, and… inevitable” in a speech in Johannesburg last month.

Standards in countries that have not adopted International Financial Reporting Standards, such as the United States “add cost, complexity, and trans-

lation risk to companies and investors operating in today’s global marketplace,” Mackintosh said. “As eco-nomic globalization continues apace, so too will the force of the arguments in favour of IFRS adoption within these remaining jurisdictions.”

Mackintosh’s comments contrast with recently reported comments by IASB Chairman

Hans Hoogervorst. Singapore’s The Business Times reported that Hoogervorst said that full con-vergence with U.S. accounting standards is unachievable.

Deloitte appoints new CEO in U.S.

NEWSBUSINESS

Global demand for gold drops as China, India shun purchases

The worldwide demand for gold fell 16 percent in the second quarter to 964 tonnes from 1,148 WRQQHV�D�\HDU�HDUOLHU��DVb&KLQHVH�and Indian consumers curbed their jewellery purchases, the :RUOG�*ROG�&RXQFLO�VDLG�ODVW�month.&RQVXPHUV�LQ�&KLQD�ERXJKW�

144 tonnes of gold in the quarter, a 45 percent decline from the same period a year ago, while

jewellery demand in India fell by 18 percent to 154.5 tonnes, ac-cording to the council’s quarterly report, Gold Demand Trends./DVW�\HDU��&KLQD�RYHUWRRN�,Q-

dia as the world’s biggest consumer of the precious metal, following a 28 percent drop in the price of gold that triggered a buying frenzy among retail customers.2YHUDOO�JOREDO�MHZHOOHU\�

purchases dropped 30 percent,

while bar and coin demand fell by 56 percent, according to the London-based council. :HVWHUQ�PDUNHWV�VXFK�DV�

United States and the United .LQJGRP��KRZHYHU��H[SHULHQFHG�the most increases. Demand in the U.S. for the second quarter increased 15 percent to 26.1 WRQQHV�ZLWK�WKH�FRXQWU\�WDNLQJ�LQ�PRUH�LPSRUWV�IURP�,QGLD��&KLQD�and Italy.

Declining sales offset by increased interest from U.S., U.K.

%XVLQHVV�DFWLYLW\�LQ�WKH�HXUR�currency zone slowed in August DPLG�ZHDNHQLQJ�IDFWRU\�RXWSXW�in its two biggest economies, Germany and France. 7KH�ODWHVW�0DUNLW�&RPSRVLWH�

3XUFKDVLQJ�0DQDJHUVł�,QGH[�for the zone fell to 52.8 from a reading of 53.8 in July. A reading

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DFWLYLW\�ZHDNHQHG��JURZLQJ�DW�LWV�slowest pace in 14 months.,Q�)UDQFH��SULYDWH�VHFWRU�

DFWLYLW\�H[SDQGHG�ODVW�PRQWK�after three months of contraction JLYLQJ�D�UHDGLQJ�RI�����XS�IURP�49.4 in July, but manufacturing DFWLYLW\�VKUDQN�,Q�*HUPDQ\��WKH�LQGH[�

slowed to 54.9 from 55.7 in July as growth in industrial produc-WLRQ�ZDV�WKH�ZHDNHVW�LQ�D�\HDU�since the country and manufac-turing jobs were cut, according WR�0DUNLW��

Purchasing managers pessimistic as factory output shows weakness

Hong Kong cuts 2014 growth forecast amid tourist spending slumpHong Kong’s economy contracted for the first time in three years during the second quarter after a decline in tourist spending, prompting WKH�JRYHUQPHQW�WR�FXW�LWV������JURZWK�IRUHFDVW�7KH�HFRQRP\�LV�IRUHFDVW�WR�H[SDQG���WR���

SHUFHQW��WKH�JRYHUQPHQW�VDLG�LQ�D�VWDWHPHQW�last month, compared with its February predic-tion of 3 to 4 percent.

Gross domestic product for the three months ended 30 June contracted a seasonally adjusted 0.1 percent after a 0.3 percent growth in the first quarter, preliminary data from the

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year-on-year, slower than the first quarter’s ����SHUFHQW�JURZWK�DQG�ZHDNHU�WKDQ�WKH�����SHU-FHQW�H[SDQVLRQ�IRUHFDVW�RI�HFRQRPLVWV�SROOHG�by The Wall Street Journal.5HWDLO�VDOHV�LQ�+RQJ�.RQJ�KDYH�GURSSHG�

IRU�ILYH�FRQVHFXWLYH�PRQWKV�WR�-XQH�DV�&KLQDłV�economic growth moderated and Beijing’s anti-corruption campaign cut Mainland YLVLWRUVł�VSHQGLQJ�RQ�OX[XU\�LWHPV�VXFK�DV�watches and jewellery.

9 September 2014

AFP

September 2014 11

Bank of America agreed last month to pay a record US$16.65 billion to settle charges it sold flawed mortgage securities that helped precipitate the global financial crisis.

It is the largest fine ever imposed by authorities in the United States on a single company, according to news reports.

The bank will pay a total of US$9.65 billion in cash to the Justice Department and provide about US$7 billion in aid to homeowners strug-gling with their mortgages.

Bank of America’s issues stemmed from loans sold by Countrywide Financial and Merrill Lynch. The bank bought Countrywide, the biggest lender at the time of the crisis, for US$2.5 billion in 2008.

Both institutions sold the loans to investors without explaining the full extent of the risk involved. The Justice Department also found problems with Bank of America’s own mortgage securities.

“It’s kind of like going to your neighbourhood grocery store to buy milk advertised as fresh, only to discover that store employ-ees knew the milk you were buying had been left out on the loading dock... yet they never told you,“ Associate Attorney General Tony West was quoted as saying by the media.

Oil prices fall to their lowest level in nine months

Global oil prices dropped to their lowest rate in nine months despite IHDUV�WKDW�FRQIOLFWV�LQ�8NUDLQH�DQG�Iraq would trigger higher prices. %UHQW�FUXGH��D�EHQFKPDUN�

price, fell to US$103.70 a barrel RQ����$XJXVW��LWV�ORZHVW�OHYHO�VLQFH�1RYHPEHU�������,Q�-XO\��RLO�SULFHV�VSLNHG�WR�WKHLU�KLJKHVW�OHY-els in nine months at US$115.71 SHU�EDUUHO�ZLWK�YLROHQFH�LQ�,UDT�cited as the reason for the rise.

The current dip in price has

led to an increase in demand. ,UDT�KDV�VFKHGXOHG�WR�H[SRUW�about 2.4 million barrels per day of Basra Light crude in September, up from 2.2 million LQ�WKH�SUHYLRXV�PRQWK��BBC News reported.

“Oil prices seem almost eerily calm in the face of mounting JHRSROLWLFDO�ULVNV�VSDQQLQJ�DQ�unusually large swathe of the oil-producing world,” the Inter-national Energy Agency said in a

report released last month. Sanctions imposed by the

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the industry seems to be that neither set of sanctions will KDYH�DQ\�WDQJLEOH�QHDU�WHUP�impact on supplies,” the IEA noted in its report.

Japan’s economy fell an annualized 6.8 percent in WKH�VHFRQG�TXDUWHU�DIWHU�D�VDOHV�WD[�LQFUHDVH�ZHQW�LQWR�HIIHFW��JRYHUQPHQW�GDWD�UHYHDOHG�ODVW�PRQWK��

It is the biggest contraction since the March �����HDUWKTXDNH�DQG�WVXQDPL��7KH�ILJXUH��KRZHYHU��ZDV�EHWWHU�WKDQ�WKH�PHGLDQ�PDUNHW�IRUHFDVW�RI�D�7.1 percent drop.2Q�D�TXDUWHUO\�EDVLV��-DSDQłV�HFRQRP\�VKUDQN�����

percent in the second quarter, compared with a 1.8 SHUFHQW�IDOO�H[SHFWHG�E\�DQDO\VWV��DV�EXVLQHVV�DQG�

KRXVLQJ�LQYHVWPHQW�GHFOLQHG�-DSDQłV�FRQVXPSWLRQ�WD[�ZDV�LQFUHDVHG�WR���

SHUFHQW�LQ�$SULO�LQ�D�ELG�WR�LPSURYH�WKH�FRXQWU\łV�fiscal position, and led to a change in consumer VSHQGLQJ�SDWWHUQV��3ROLF\PDNHUV�KDYH�WKH�RSWLRQ�WR�implement an additional increase to 10 percent by 2015, if needed.7KH�ZHDNQHVV�FRXOG�IRUFH�WKH�FHQWUDO�EDQN�LQWR�

trimming its upbeat fiscal year economic projections ZKHQ�LW�UHYLHZV�WKHP�LQ�2FWREHU��Reuters reported.

'LFNłV�6SRUWLQJ�*RRGV��RQH�RI�the biggest sports retailers in the United States, recorded US$20 PLOOLRQ�RI�SUH�WD[�FKDUJHV�UHODW-ing to the restructuring of its golf business, citing a slump in the number of Americans playing golf and a grim long-term future for the sport.Ń$V�PXFK�DV�ZH�DOO�ORYH�JROI��

the business reality is that golf IURP�D�EXVLQHVV�YLHZSRLQW�LV�XQGHU�SUHVVXUH�ń�&KDLUPDQ�(G�6WDFN�ZDV�TXRWHG�DV�VD\LQJ�E\�

the Financial Times. It was also reported that the

FRPSDQ\�ZDV�IDFLQJ�VHYHUDQFH�costs for around 500 Profes-sional Golfers’ Association of America members who offer golf lessons in its stores but were being laid off. Ń,�WKLQN�JROI�IURP�D�SDUWLF-

ipation standpoint and how it translates into retail is in a structural decline. We don’t see WKDW�FKDQJLQJ�ń�6WDFN�VDLG�

Sports giant Adidas is also re-structuring its golf business after net sales dropped by more than a fifth in the second quarter, the FT reported.

Golf business in “structural decline”

Japan’s economy suffers biggest contraction since 2011Bank of America settles flawed mortgages deal

Fast food giant Burger King announced last month that it was in talks to buy Canadian coffee-and-doughnut chain Tim Hortons, a merger that would move the fast-food restaurant’s headquarters to Canada in a so - called tax inversion deal.

While the two companies are expected to argue that a tie-up is driven by strategic benefits, the move seems structured to allow Burger King to lower its effective tax rate, according to media reports.

The American corporate tax rate is about 35 percent, while

Canada’s is about 15 percent.The combined companies

would have a market value of about US$18 billion. It would also lead to the creation of a restaurant operator whose offerings span breakfast, lunch, dinner and snacks.

The exact price Miami-based Burger King is offering was not disclosed.

“The new company would be the world’s third-largest quick service restaurant company, with US$22 billion in system sales and over 18,000 restaurants in 100 countries,”

Burger King said in a statement.

The 60-year-old Burger King and the Oakville, Ontario-based Tim Hortons, which is cele-brating its 50th anniversa-ry this year, would remain standalone brands if the deal goes through, the U.S. company added.

Burger King joins many American companies that have recently considered taking over foreign companies and moving their headquarters abroad to lower their overall tax bill.

NEWSCOMPANIES

12 September 2014

Computer giant sees sharp fall in profits

Hewlett-Packard reported declining profits for the quarter that ended 3 July despite higher computer sales.

Income stood at US$985 million, compared to US$1.39 billion in the same period a year earlier.

The drop is primarily due to expens-es related to the company’s restructur-ing plan in a bid to improve profitability. Restructuring charges increased in the quarter to US$649 million from US$81 million in the previous year, according to the company.

At the same time, revenue rose 1 percent to US$27.6 billion in the quarter, driven by a 12 percent increase in its personal computer sales. “My con-fidence in the turnaround grows stron-ger,” Chief Executive Meg Whitman said in a statement.

The firm also narrowed its earnings

forecast for the full year, but said it was still in a position to make purchases if necessary. “We’re in a position to make acquisitions the way we weren’t over the past year,“ Whitman said.

Swiss drugmaker Roche agreed last month to buy InterMune, a biotechnology company in the United States that makes lung disease therapies, for US$8.3 billion.

Under the terms of the agreement, Roche will acquire InterMune, which is based near San Francisco, through an all-cash transac-tion, paying US$74 a share.

The takeover allows Roche to expand into the area of respiratory disorders, one of the biggest drug markets in the world. It is Roche’s largest acquisition since 2009 when it bought a stake in biotech corporation Genentech for US$46.8 billion.

It also follows a string of healthcare com-panies merging at a record pace. Year-to-date activity topped US$346 billion, compared to US$212 billion a year earlier, according to data from Thomson Reuters.

Recent deals include U.S.-based AbbVie’s purchase of the British pharmaceutical company Shire for US$54 billion.

Roche, U.S. biotech company in takeover deal

Purchase of Canada’s Tim Hortons would lower its obligations

Burger King, hungry for tax relief, looking to swallow doughnut chain

Russia’s consumer protection agency announced last month that it would conduct unsched-uled checks on McDonald’s restaurants across the country.

The move by Rospotrebnadzor came just after the watchdog tem-porarily closed four McDonald’s restaurants in Moscow, claiming that the company had violated several food safety laws.

“There are complaints about the quality and safety of the prod-ucts,” the regulatory agency said in a statement. “There has been a selection of microbiology tests, sanitary and chemical tests, and identification indicators,” it added.

The fast-food chain said it

was open to any checks and that its main priority was to provide customers with “top quality menu items.”

The checks and restaurant closures come amid tensions and sanctions between Russia and the West over the crisis in Ukraine, prompting analysts to suspect that the probe into McDonald’s, considered a symbol of the United States, were politically motivated. Rospotrebnadzor denied this claim.

The outlets that have been shut include the first McDonald’s in the country, in Moscow’s Pushkin Square, which opened 24 years ago.

September 2014 13

Gap to bring 40 stores to India

Russian food safety watchdog puts pressure on McDonald’s

BOC’s aircraft leasing unit orders Boeing jets worth US$8.8 billion

Gap revealed last month that it was going to open 40 outlets in India in a bid to expand in Asia’s third-largest economy.

The San Francisco-based clothing retailer said it is partnering with Arvind Lifestyle Brand, a unit of tex-tile manufacturer Arvind, to open the stores in India. The first shops will be in Mumbai and Delhi next year.

“India is an emerging, vibrant market and an important next step in our global expansion strategy,” Steve Sunnucks, Gap’s Global President, said in a statement.

The announcement comes after the company recorded a 3 percent increase in net sales for the second quarter to US$3.98 billion, compared to US$3.87 billion last year.

Swedish clothing brand Hennes & Mauritz and Britain’s Tesco are expected to also set up stores in India in the next year.

BOC Aviation, the aircraft-leasing subsidiary of Bank of China, ordered 82 Boeing jets last month worth a total of US$8.8 billion with the aim of meeting the demands of customers as travel in Asia booms.

The bulk of the orders was for 50 B737 MAX 8 planes and 30 next-generation B737-800 planes. The 80 planes are valued at US$8.14 billion. The company also ordered two 777-300ER aircraft.

The company also said that the orders would allow BOC Aviation to build on its fleet

for the next seven years.About half of the orders, which will be

delivered from 2016 to 2021, will go to Asia, said Robert Martin, Chief Executive Officer of BOC Aviation. The rest will go to the United States and Europe “generally more for replacement [of older aircraft] than for growth,” Martin said.

Boeing has projected a travel boom in the Asia-Pacific region over the next 20 years, driven by a growing middle class and strong regional economic growth.

A photograph taken on 31 January 1990 shows Soviet customers standing in line outside the just-opened first McDonald’s in the Soviet Union in Moscow’s Pushkin Square.

AFP

Profile

14 September 2014

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September 2014 15

Combining national accounting institutes is a rare event. George W. Russell asks

Lee White, Chief Executive Officer of the recently constituted Chartered Accountants Australia and New Zealand, about working across borders in an age of globalization

Photography by Bob Seary

TWO COUNTRIES,

ONE SYSTEM

Profile

16 September 2014

A s the rain pounds down, saturating the streets of central Sydney, Lee White is unfazed by the disappearance of the view

across picturesque Darling Harbour and, be-yond, the leafy suburb of Balmain. After all, White’s horizons have grown substantially in recent months.

White is the inaugural Chief Executive Of-ficer of Chartered Accountants Australia and New Zealand, the first transnational member of the Global Accounting Alliance, a group of leading professional institutes from various countries. The organization’s remit extends more than 5,000 kilometres from Perth to Auckland – a six-hour flight.

“I have a real sense of excitement about the new organization,” says White, former-ly chief executive officer of the Institute of Chartered Accountants in Australia, which merged with the New Zealand Institute of Chartered Accountants to form the new group.

The two professional bodies officially became Chartered Accountants Australia

and New Zealand on 1 July, bringing more than 100,000 accountants in both countries – 73,000 in Australia and 33,000 in New Zea-land – under the same umbrella.

The motivations for union were similar to those of the three professional bodies that merged to form CPA Canada. Adding 30 per-cent to the subscription rolls creates greater purchasing power. “The unification is de-signed to reinforce the Chartered Accountant brand and provide the financial capacity to deliver enhanced education, thought leader-ship and products and services for members,” says White.

The bodies have worked together for de-cades but mutual cooperation was enhanced in 2010 when the two accounting organiza-tions established common technology plat-forms and later began to develop a joint Char-tered Accountants Programme.

From there, union wasn’t a huge step: In August 2012, the two boards met in a joint session to discuss the merits of a combined body. A consultation paper was issued in March 2013, a month after the programme had launched, and, after a feedback period,

a final proposal was issued in August 2013.A members’ ballot was held in October

2013. After a passionate campaign, more than 40,000 ICAA members voted, with 78 percent voting for the proposal. More than 16,000 NZICA members voted, with 69.6 percent voting yes.

White characterizes the vote as “over-whelmingly in favour” of the merger. “Our new organization will work to ensure the next generation of the sharpest minds will strive to uphold the Chartered Accountant designation.”

Cooperation beyond bordersFar from being perceived as a threat to sover-eignty, approval for the unification proposal was signalled by both governments. “This is a great example of Closer Economic Relations,” says White, referring to the Australia-New Zealand Closer Economic Relations Trade Agreement, one of the world’s most compre-hensive bilateral free-trade pacts, covering virtually all goods and services.

The pact became effective from 1983. “For the past 30 years, the two governments

have worked towards bringing the countries and their means of business together,” White says. “We were warmly received by both governments and they are looking forward to seeing what the flow-on effects might be to other parts of business.”

White is aware that the organization’s impact extends beyond the borders of Aus-tralia and New Zealand. He points out that his organization is represented on the Inter-national Federation of Accountants board and its committees and standard settings boards. “Accounting bodies have an import-ant role in identifying jurisdictional issues and supporting international standard de-velopment,” he says.

The new body’s influence could have particular resonance in Hong Kong, where many of its members practice, including some who also have membership of the Hong Kong Institute of CPAs. “A strength of our or-ganization is the number of valued members we have in Asia, and specifically in Hong Kong,” says White.

He notes that communication between the two institutes occurs at the grass roots – “there are Hong Kong residents who pur-sued education and work opportunities in Australia before returning to Hong Kong,” he says – and at senior levels. “Since both bodies are founding members of the Global Accounting Alliance, there is frequent dis-

cussion,” White adds.Hong Kong accountants continue to eye

economic opportunities in Australia, espe-cially given its growing economic tie to China. “Chinese growth continues to contribute strongly to the Australian economy [and] it’s also leading to some adjustments in Aus-tralia,” he observes. “Mining investment remains strong, and we’re also seeing more growth in the non-mining sectors.”

However, the Australian government has indicated that foreign accountants might no longer be welcome. Early this year, the De-partment of Employment called for account-ing to be taken off the skilled occupation list for immigrants, saying there was no shortage.

White says his organization disagrees,

and points out research that suggests ac-countants will continue to rank among the most highly sought-after occupations. “The confluence of economic conditions, signifi-cant regulatory changes and developments in technology are contributing to demand for skilled and experienced accountants,” he says.

Information overloadAustralia’s 23-year streak of economic growth – powered by Chinese demand even in the depths of the post-2008 global finan-cial crisis – has created demand for finance professionals. “Accountants are in roles that are part of the engine room of the economy,” says White, “providing financial and busi-ness advice to government, industry, finan-cial institutions, markets, investors, small business and consumers.”

At the same time, he adds, the regulatory

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“ A strength of our organization is the number of valued members we have in Asia, and specifically in Hong Kong.”

Profile

18 September 2014

Piecing together a regulatory framework

No single body is responsible for regulating the accounting pro-fession in Australia. Instead, several organizations are involved in the regulation of the various branches of the profession in what is termed a “co-regulatory framework.”The major players are:• Australian Securities and Investments Commission, which

regulates auditors, financial planners and company directors. It also supervises liquidators through the Companies Auditors and Liquidators Disciplinary Board.

• Tax Practitioners Board oversees tax practitioners.• Australian Prudential Regulation Authority, which regulates

auditors and trustees of pension schemes, which are known in Australia and New Zealand as superannuation funds. It also monitors directors and senior managers of insurance companies.

• Insolvency Trustee Service Australia, which regulates trustees in bankruptcy.

As Lee White, Chief Executive Officer of Chartered Accoun-tants Australia and New Zealand, points out, other organizations

also play a role in the overall regulation of the profession. “The co-regulatory environment comprises the regulators, government standard-setting bodies and the three professional accounting bodies – CAANZ, CPA Australia and the Institute of Public Accoun-tants,” he says.

The Accounting Professional and Ethical Standards Board is also an important oversight body. White says Australian accounting is rooted in a strong ethics system. “The heart of the Chartered Accountant designation is a responsibility to act in the public interest,” he say.

Professional standards also require members to meet the technical standards overseen by the Australian Accounting Stan-dards Board. The board undertakes standard-setting jointly with the New Zealand Accounting Standards Board, usually with the intention of issuing common standards.

Both countries have separate auditing and assurance stan-dards boards, which also consult with each other.

The unification of the accounting institutes in Australia and New Zealand required both countries to make changes to legisla-tion, which are expected to be finalized in the next few months.

landscape has grown more complex. The accounting profession in Australia operates under a co-regulatory framework (see Piec-ing together a regulatory framework below). “Underpinned by ethics and accountability, the profession has been entrusted to operate in the public interest and has an enduring commitment to ethical practice, integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.”

As in other jurisdictions, the global finan-cial crisis put audit quality in Australia un-der the spotlight. Reviews of the profession conducted by Treasury and the Australian Securities and Investments Commission (of which White is a former chief accountant) in 2010 and 2011 concluded that Australian au-dit quality was high and that no fundamental regulatory changes were needed.

White notes that the profession is likely to be affected by reforms initiated by reg-ulatory bodies overseas, notably the Unit-ed States, United Kingdom and European Union. Smaller firms are particularly vulner-

able to regulatory burdens, he adds. “Small to medium practices have a range of signif-icant challenges to address,” says White. “Practices need to ensure that they are com-municating to clients the value offered by professional accountants.”

One area that needs attention, according to White, is the financial literacy of boards of directors. A recent Australian Financial Reporting Council survey found that both di-rectors and financial professionals rated the knowledge of directors of basic accounting principles as higher than their knowledge of specific, more technical accounting issues.

“A number of respondents expressed concern that the increasing complexity of accounting standards is making it more diffi-cult for directors to acquire and maintain the level of financial knowledge needed to sign off on financial statements,” says White.

The IFRS Foundation Trustees recently visited Sydney for talks and the major issue that emerged was the complexity of financial reporting, especially with regard to disclo-sures. “It’s about getting the balance right be-

“ Small to medium practiceshave a range of significant challenges to address. They need to ensure that they are communicating to clients the value offered by professional accountants.”

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tween disclosing enough and not too much,” says White. “There needs to be a focus on im-proving the quality and relevance of finan-cial information, and ensuring that the right information is disclosed rather than simply cutting down or increasing volume.”

Building confidenceWhite is upbeat about the overall future of the profession in Australia and New Zealand. “The base is very solid,” he says. “Professional accountants continue to be held in high esteem in terms of trust and also as primary advisers.

They continue to be recognized for their exper-tise. The challenge is to continue to leverage and retain this value, which the new organiza-tion will set out to do.”

The CEO points to Australia’s professional liability scheme as an example of building trust. A five-year liability-capping scheme – drawn up in the individual states and effective from October – has been approved as part of a regime shaped from the point of view of clients rather than practitioners.

White says that given accountants’ respon-sibility to act in the public interest, liability

should be approached from the consumer’s point of view, not the practitioner’s.

“This is all about providing confidence to consumers that the professionals that they are dealing with actually have sufficient insurance coverage so that if there was something that they needed – i.e., something that the consum-ers needed to claim on – that it would be avail-able for them to do that.”

He adds that the focus of the new organiza-tion will remain on members. “Being a mem-ber-centric organization means members are at the core of every decision we make,” he says.

“I am dedicated to ensuing that the strate-gic objectives of the new organization are de-livered. The values and attributes that derive from the work that chartered accountants do every day are evident in our new organization and are what we will represent.”

White says his priorities include encour-aging and developing future generations of accountants and engaging with business and government to help influence policies. “Ac-countants shape businesses around the globe,” he says. “We are constantly engaging with governments to assist in shaping sound public policy that reflects the environment that busi-nesses operate in.”

In his new job after two and half years as ICAA CEO, White says he still has the enthu-siasm for enhancing the profession where he can. “Accounting has been a lifelong passion of mine and I know it’s a lifelong passion for all of our members,” he says. “Our members are members for life.”

Technology

20 September 2014

Illustrations by Martin Megino

September 2014 21

Accounting firms constantly advise their clients to embrace new technology, but what groundbreaking developments are going on behind their own doors? George W. Russell looks at innovation culture within CPA firms

S ettling into his role as the first Chief Innova-tion Officer at a major CPA firm, Derek Bang has no illusions about the challenge of getting his accountant colleagues to think big.

“I must say that many CPA firms are sim-ply not known for trying new things,” says Bang, CIO of Crowe Horwath, the eighth largest CPA firm in the United States by revenue. “They tend to follow in terms of compliance, and they colour in between the lines as it were.”

Bang’s appointment last November was prompted by the firm’s desire to promote innovation as a way of improving per-formance and sharpening strategy. “We want to broadly chal-lenge the traditional ways in terms of service delivery and cli-ent experience,” Bang, an American Institute of CPAs member, tells A Plus from his office in Indianapolis.

With the wealth of new hardware, software, apps and ro-

botics being constantly developed, it’s no surprise that ac-counting firms, as trusted business partners, urge their clients to innovate or risk falling behind competitors. But amid tougher competition, pressure on prices, automation, outsourcing and new regulations, some industry experts believe accounting firms should be looking at their own need to innovate.

Innovation advocates warn that, with technological and cultural evolution, clients may become less dependent on the current CPA business model. “With one click, clients will by-pass the accountant,” Rob Nixon, Chief Executive Officer of Proactive Accountants Network, a Brisbane-based consultant to CPA firms in 38 countries, told a conference in Bali in July.

He was referring to initiatives such as the Australian Taxa-tion Office’s myTax service. Already, 30 percent of small busi-nesses use the do-it-yourself option and thus no longer need an accountant to file their returns. “Digital disruption is going to

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22 September 2014

kill a certain part of your revenue,” said Nixon.

Such disruption, say experts, needs to be harnessed to work in the firm’s favour. “There seems to be a great divide between the accounting firms who have adopted

technology and those that have not,” says Tanya Titman, Managing Director of Con-

solid8, a Brisbane-based consultant to ac-counting firms.

Innovation specialists say the first step for any CPA firm is to figure out where they fall short.  “CPAs have to change their perspec-tives in order to be in a position to identify the innovation, which really helps them with their day-to-day challenges,” says Hubertus Eichler, Head of Corporate Governance, Risk and Compliance Services at Mazars in Munich.

   To be sure, the innovation bug is be-ginning to bite accounting firms. In

2009, PricewaterhouseCoopers in the U.S. launched iPlace, as a way for em-ployees to suggest innovative ideas that could help the firm’s customers. “People are bubbling over with ideas and creative ways to deliver more val-ue to clients,” PwC’s U.S. Innovation

Leader, Mitra M. Best, said at the time.

Best  noted that many of the ideas that iPlace receives are also suggestions for internal use by the firm. One initiative that changed the way PwC in the U.S. collected employee expense receipts saved “hundreds of thousands” of dollars, Best recently noted in her blog.

Applying digital innovation strategies for both in-house and client use is also true to KPMG. “We continue to focus on inter-nal innovation,” KPMG’s Global Chairman, John Veihmeyer,  said recently, citing the firm’s investments in cloud computing and data analytics.

The change of mood is especially notice-able in the mid-tier level and smaller firms that are less focused than the Big Four on lucrative advisory work and more heavily de-pendent on audit and tax, where cost savings through innovation can really matter.

Consultants acknowledge that firms smaller than the Big Four and even the larg-est of the mid-tier firms might not be able to afford the luxury of a chief innovation officer. “The  reality  is  that in a smaller accounting firm the principal needs to wear a CIO hat,” says Titman.

“From my point of view, accounting firms generally are open towards technical inno-

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September 2014 23

vations that help them improve audit effi-ciency,” says Eichler. “This is especially true for tools that support them in structuring and documenting the audit process.”

Experts stress that there is more to inno-vation at CPA firms than buying a shiny new box of tools and installing its contents on the firm’s computers. “To a lot of people, inno-vation equals software,” says Bang at Crowe Horwath.

A former healthcare industry consulting partner, Bang led the development of Crowe  Revenue Cycle Analytics, the firm’s patented healthcare revenue analysis and reporting application. Crowe Horwath says its suite of apps have added US$100 million to its bottom line in the past five years.

Such apps are part of the global accounting software market, worth nearly US$100 billion in 2012, according to the Gartner consultancy in New York. Products range from large sys-tems created by enterprise giants Oracle and SAP, to bespoke in-house auditing software such as PwC’s Aura, and solutions for smaller companies made by providers such as Intuit, Xero, Sage, Microsoft and Hong Kong’s own FlexSystem.

Beyond technologyWhile CPAs might be struggling in adopting technology,  other  innovative ideas can es-cape them. “I observe that CPA firm owners are still lagging behind when it comes to in-vesting in the success skills – we used to call them ‘soft’ skills – for their employees,” says Rita Keller, Principal of Keller Advisors in Beavercreek, Ohio, which advises U.S. ac-counting firms.

There are exceptions. In Hong Kong, inno-vation tends to be more technology focused. Mazars recently implemented a cloud-based regional enterprise risk planning platform embracing its operations in China (including Hong Kong) and Singapore. The platform will be deployed in the rest of the Asia-Pacific region in the next 12 months and progres-sively implemented in other regions.

Stephen Weatherseed, Managing Direc-tor of Mazars and a Hong Kong Institute of CPAs member, says ERP brings economies of scale. “It aligns our business processes across three practices,” he says. “In terms of financial reporting, [ERP] frees up our team from tedious tasks such as processing so they can focus more on value-added tasks, such as analysis and forecast-ing.” Eichler, a member of the In-stitut der Wirtschaftsprüfer in Deutschland, led the develop-ment of Kulturkompass. This methodology to gauge the firm’s progress in corporate culture – an index of environ-mental, sustainability, gover-nance, human rights and other measurable characteristics – was introduced across the Mazars firm.

In many cases, in-novation for CPAs is not so much about creating a killer app as identifying a process that can be streamlined. “A culture of continuous improvement is innova-tion,” Weatherseed says, “but it doesn’t have to be software. With auditing, it’s a case of ‘what did we do last year?’ That’s a basis for challenging that process. That is innovation.”

At Crowe Horwath, the innovation quest is divided into three main battlefronts: functional knowledge, such as standards and compliance; industry experience, whether banking, healthcare or manufacturing, etc.; and applied technology, which is knowledge gleaned from clients, business partners and other external sources.

While employees have been keen to of-fer suggestions – one employee cut a client

Technology

24 September 2014

“ CPAs have to change their perspectives in order to be in a position to identify the innovation, which really helps them with their day-to-day challenges.”

software update process from two days to 10 minutes – Bang stresses that the company has to “truly back ideas up with support, funding and infrastructure and get ideas executed.”

 Heads in the cloudIndustry consultants say demographics also play an important part to help innovation win out at CPA firms. Keller, an AICPA member, says much of the lack of willingness to invest in new practices and technologies is caused by a generation of owners near retirement age. “They make the spending decisions and have no desire to invest when they will not reap the benefits of the investment,” she says.

As the next generation of leaders takes over in accounting firms, Keller sees continued and accelerated acceptance of more innovative solutions to practice management and client service. “I see many firms in the U.S. establish-ing ‘next generation councils’ and empowering them to research issues that they would like to see the firm implement,” she notes. “This is the kind of cultural activities that will keep innova-tion moving inside CPA firms.”

In Hong Kong, some technology vendors see difficulties in coordinating rollouts of technology across firms with a worldwide footprint. “But how many accounting firms

can do this in practice? Most partnerships are not global,” observes Ashley Clarke, Chief Operating Officer of FlexSystem and a speaker at the Institute’s information tech-nology conference in November (See How In-stitute members can keep up with technology trends below).

Cloud-based technology might go to-wards breaking down some of those national barriers, according to Titman at Consolid8. “Cloud technology has revolutionized the industry,” she says. “We see the future for ac-countants is around providing clients with seamless integration of all the technology pro-

viders. The providers who focus on delivering a system with scalability will not just survive but will thrive.”

Some firms say they realize the impor-tance of scalability. For example, Mazars sees innovation as a key strategic issue supervised by the network’s global executive board, ac-cording to Weatherseed. “The board empha-sizes this importance through requiring each of the Mazars global business units to incor-porate innovation in their plans,” he says. “All partners in Mazars have innovation included as part of our annual appraisal.”

Eichler, his German colleague, sees real innovation at CPA firms occurring only if their management moves beyond structured anal-ysis into change management and thought leadership. “I have not seen a lot of real non-IT-based innovation in accounting firms in the past 20 years,” he says.  

Keller in the U.S. agrees. “At this point in time, CPAs have evolved to where they are embracing technology tools – software and hardware – much more rapidly,” she says. “To profitably and efficiently provide services they must budget and spend dollars on other innovations. CPAs will stay far away from ‘bleeding edge’ but they realize they must be on the leading edge.”

How Institute members can keep up with technology trendsAccountants in Hong Kong will continue to be significantly affected by technological change and need to make sure they are familiar with the latest developments.

“We need to keep ourselves up to date with global techno-logical trends as our clients’ expectations will evolve and change according to those trends,” says Stephen Weatherseed, a Hong Kong Institute of CPAs member who is Managing Director of Mazars Hong Kong office and a member of the Mazars Greater China Board.

To assist with such knowledge, the Institute will host an information technology conference, entitled “Enabling finance transformation through today’s technologies,” on 15 November at the InterContinental Hong Kong in Salisbury Road, Tsim Sha Tsui.

The first session, “Hong Kong: Transition to cashless society” will feature speaker Francis Cheung, Finance Director and

Alternate Chief Executive at Octopus Cards and an Institute member.

Irene Chin, Finance Director at Miramar Hotel and Invest-ment and an Institute member will speak at an industry-specific session entitled “How to leverage information technology in the finance function of the hospitality industry.”

At the third session, C.F. Wong, Head of Finance at GP Elec-tronics (HK), will address the conference on the subject of “Using technology to improve efficiency.”

An intermission will be followed by a panel discussion, while the topic covered in the next session is “Empower end-user computing to reconnect business thinking.” Ashley Clarke, Chief Operating Officer of FlexSystem, will be the speaker.

The final session, featuring Brad Paterson, Vice President and Managing Director, Asia Pacific at Intuit, will examine "How technologies impact the future of the accounting profession."

Finance

26 September 2014

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Illustrations by Harry Harrison

China is attempting to internationalize the yuan by signing bilateral deals, encouraging its use in the settlement of trade and broadening the range of financial products available. George W. Russell

asks experts about the future of the world’s seventh-most traded currency

September 2014 27

A fter more than two decades working in the Main-land, Jimmy Leung knows all the quirks of the ren-minbi, China’s “people’s currency,” also known as the yuan. He remembers the currency confusion of the 1980s caused by multiple exchange rates:

the official rate, the market rate and the black market rate.He also recalls the 1990s, when non-citizens had to change hard

currency for used foreign exchange certificates at the Bank of China and use them at designated outlets such as hotels and the infamous state-owned Friendship Store chain.

“You did not want renminbi in Hong Kong in those days,” says

Leung, now China Banking and Capital Markets Leader with Price-waterhouseCoopers in Shanghai and a Hong Kong Institute of CPAs member. “Nobody wanted it.”

But like many observers, Leung believes today that the renminbi is on an unstoppable path to becoming a major world currency.

There are many reasons to welcome the ability to invest and trade in yuan, Liu Linan, Greater China Rates and Foreign Exchange Strategist at Deutsche Bank in Hong Kong, wrote in a recent report tracing the currency’s internationalization. “Currency risk can be neutralized by raising capital in the offshore renminbi bond mar-ket to fund onshore subsidiaries.” Yuan bonds also offer a relatively

EXCHANGEIDEASof

competitive source of financing and the po-tential to tap a new investor base. “Invoicing goods in yuan for Chinese buyers may pro-vide competitive advantages and the poten-tial for significant cost savings,” Liu noted.

The most obvious growth of the yuan is in international trade settlement. At the end of 2013, the yuan was the eighth-most used currency in terms of value, behind the U.S. dollar, the euro, the pound sterling, the Jap-anese yen, the Australian dollar, the Swiss franc and the Canadian dollar. (It had over-taken the Canadian dollar by June this year.)

It is likely to rise higher. Last year, the yuan became the second-most used currency in global trade finance – letters of credit and bills for collection – after the U.S. dollar, ac-cording to the Society for Worldwide Inter-bank Financial Telecommunication.

Moreover, many countries are eager to enter the offshore yuan trade: Beijing has signed numerous bilateral currency swap deals in which the central banks can sup-ply each other’s currencies without a delay. These will create more yuan liquidity over-seas and reduce transaction costs by elimi-nating the need for converting into a third currency.

Treading carefullyLeung at PwC expects China to extend the reach of the yuan in a cautious manner, firstly aiming to encourage more availability out-side China before it expects any worldwide role. “In the short term, the objective of the government is clearly to internationalize the currency,” he says, “but it is far from being a global one.”

While the yuan assumes more impor-tance as a medium of exchange, it lags far be-hind as a future reserve currency. “To be a re-serve currency, you need a flexible exchange rate, an open capital account and deep finan-cial markets so foreign investors can actual-ly get hold of renminbi-denominated assets

and can move relatively freely in and out of them,” insists Eswar Prasad, a former head of the China desk at the International Mone-tary Fund. “In all these dimensions China is not there yet.”

However, the nation is moving in the right direction. Tim Pagett, Financial Ser-vices Industry Leader at Deloitte China in Hong Kong, notes that earlier this year, the Central Bank of Nigeria announced it would increase the renminbi’s share of its currency reserves from 2 percent to 7 percent. “We feel that the renminbi will slowly start be-coming a strong and viable option as a re-serve currency,” he says.

According to data compiled by Standard Chartered, at least 30 central banks have already invested in renminbi assets: about 10 central banks hold renminbi as part of their reserve portfolios, and another 20 or so have signed the local currency swap lines with the People’s Bank of China to create renminbi liquidity.

Such swap deals also have a wider mean-ing. “Signing a bilateral swap is a symbolic yet significant gesture from the central banks on their acceptance and support to the ren-minbi,” says Pagett. “This provides a posi-tive signal to the industry on the renminbi’s acceptability for settlement and financing purposes.”

Despite such international attention, Hong Kong is expected to remain the priority off-shore yuan market. “It’s a part of China, it has a lot of transactions already, there are lots of Chinese banks in Hong Kong,” says Walk-man Lee, a Financial Services Partner with

KPMG China in Beijing and an Institute member.

Since 2009, Hong Kong has seen a rapid growth in yuan deposits, notes Vijay Chander, Executive Director for Fixed Income at the Asia Securities Industry & Financial Markets Association. He also points to strong demand for so-called dim sum bonds, yuan-denomi-nated bonds issued outside the Mainland.

In the first quarter of 2014, 29 new dim sum bonds totalling US$6.5 billion were is-sued, almost triple the same period last year, according to London-based data provider Dealogic. “Hong Kong will cater to the needs of domestic Chinese issuers wishing to issue dim sum bonds for many years to come,” says Chander.

Competing citiesHowever, Hong Kong does face increasing competition. Thomas Gilles, Head of the China Desk at the Baker & McKenzie law firm in Frankfurt, says the currency swap deal between Germany and China “opens up possibilities of new capital market products, such as dim sum bonds issued” directly in Frankfurt.

Rival financial centres are playing to their own strengths as they seek to peck away at Hong Kong’s current near-monopoly on the offshore renminbi market. Gilles points out that Germany is China’s largest trading part-ner and Frankfurt is its financial capital so they have advantages.

Other cities have their niches, large and small. “London is a major world financial centre with a lot of bond issues and also, by a large margin, the largest centre for the set-tlement of foreign exchange transactions,” says Andrew Carmichael, a Partner with the Linklaters international law firm in London.

“Luxembourg is the largest asset man-ager for funds and mutual funds in Europe, and Singapore is the private wealth centre in Asia, while Hong Kong is more China ori-

Finance

28 September 2014

“ Signing a bilateral swap is a symbolic yet significant gesture from the central banks.”

entated,” he adds. “If the renminbi is to be a global currency, London, Luxembourg, Sin-gapore and Hong Kong want to play their parts in that.”

The increasingly cross-border nature of the yuan trade, adds Leung at PwC, is a re-flection of the Chinese economy’s opening up. “After 2000, there were a lot of chang-es,” he says. “China’s accession to the World Trade Organization in 2002 meant there were a lot of commitments in terms of open-ing up to other parts of the world, including the currency.”

The Chinese government has also be-come more open about its regulation, Leung adds. “Fifteen years ago you heard nothing from PBoC, you heard nothing from the Ministry of Finance, about their thoughts or their participation in the global economy. You heard absolutely nothing about currency policy. It was very opaque.”

This increased transparency makes the

renminbi a viable option as central banks seek an alternative to the U.S. dollar for its foreign exchange holdings. More recently, it seemed the euro’s default position as the world’s second reserve currency has been shaken.

“The euro was seen as a prime candidate for those seeking alternatives to the dollar, but it has unfortunately faced its own share of uncertainties arising from the debt crisis,” points out John Zhu, Greater China Econ-omist at HSBC. “This has led to increasing interest across the world in holding non-tra-ditional currencies [and] many global inves-tors are increasingly seeing the yuan as an alternative.”

Into the unknownIt could take some time. Peter Zöllner, Head of the Banking Department at the Bank for International Settlements, told a March conference that the proportion of

global reserves denominated in U.S. dol-lars might fall from between 65 and 70 per-cent to between 50 and 60 percent over the next 20 years, with the yuan accounting for perhaps a third to a half of the substitution.

Such moves, of course, are unlikely to threaten the greenback’s primacy. “In the short term, the U.S. dollar remains the major reserve currency and there’s a long way for the renminbi to go,” says Lee at KPMG. “They have to prove to the world that

A PLUSA PLUSA PLUS

“ If the renminbi is to be a global currency, London, Luxembourg, Singapore and Hong Kong want to play their parts

in that.”

September 2014 29

Finance

30 September 2014

they’re as stable as the U.S. dollar.”In the meantime, the Chinese government

is expected to continue to drop hints as to the likely direction of the yuan’s international-ization. “Developments in the Shanghai and other free trade zones will give some clues as to the Chinese authorities’ thinking in terms of the degree of freedom they are willing to consider or contemplate with regard to cap-ital movements into and out of China going forward,” says Chander at ASIFMA.

He sees only increased use of the yuan in trade and more central banks and fund managers invest in yuan assets. “Finally,” Chander adds, “there will be the conver-gence in both forex and interest rates be-tween the onshore and offshore markets, leading to a de facto convertible currency even if de jure capital account convertibility

in China is some way off.”CPAs involved in treasury and risk man-

agement are reminded to be aware of the complications surrounding the increased use of the Mainland currency. “You have to think about how to hedge the currency risk,” says Lee, adding that although many Hong Kong accountants are already familiar with the yuan. “I think some companies want to

use it as a settlement currency because they know how to manage the currency expo-sure.”

The main risk, say experts, is that the yuan is not really freely convertible and the PBoC sets the rate. “It’s very different from, say, the Australian dollar or the euro, where you have a mechanism,” says Lee. That cre-ates a management risk. A company might want to establish a separate procedure to look after the fluctuation of the renminbi.”

So when will we expect to see a more liberalized yuan environment? Experts say the time when it bypasses or even becomes comparable to the U.S. dollar is unknown. “I really cannot tell,” says Leung at PwC. “The important factor is full conversion of the currency, and for that, nobody can predict a timetable.”

“ In the short term, the U.S. dollar remains the major reserve currency and there’s a long way for the renminbi to go.”

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September 2014 31

Monetary milestones1948 First renminbi or “people's currency” issued by

newly founded People's Bank of China. It is also known as the yuan.

1949 Yuan becomes sole legal currency.

1955 Exchange rate set at 2.46 yuan to the U.S. dollar.

1960s-70s Yuan stable in terms of inflation, as government sets wages and prices in centrally planned economy.

1971-78 Yuan gradually revalues to 1.50 yuan to the dollar.

1979 As China opens its economy, exporters are allowed to retain a percentage of foreign exchange.

1981 First round of yuan devaluation. State Council in-troduces "internal settlement rate" of 2.80 yuan per dollar. The more realistic exchange rate is based on China's average export cost per dollar plus a 10 percent margin.

1983 State Council decides the PBoC should function solely as central bank, not a commercial bank as well.

1985 Internal settlement rate abolished. China sets rate at 2.80 yuan to the dollar, ending dual exchange rate system.

1990s Exporters suffer increasing losses because of the yuan's overvaluation.

1993 U.S. Treasury labels China a currency manipulator for first time.

1994 China unifies its dual exchange-rate system by(January) moving the official rate of 5.80 to the dollar to the

prevailing market-determined rate of 8.70, devalu-ing the yuan by 33 percent overnight.

1994 First foreign exchange trading centre opens in(April) Shanghai, starting China's inter-bank foreign

exchange market. Yuan rate is set around 8.28 yuan per dollar as part of a tightly managed floating exchange rate policy.

1996 China allows the yuan to be fully convertible into foreign currencies for trade purposes but main-tains rules and limits on buying and selling foreign currencies to make loans and investments.

1997-99 Yuan is pegged at 8.28 to the dollar through fre-quent central-bank interventions.

2002 China begins to relax its capital controls gradually after joining the World Trade Organization, but international pressure mounts for China to let the yuan appreciate faster to help balance global trade.

2004 China allows Hong Kong banks to offer limited retail yuan banking services to facilitate cross-border tourist spending.

2005 China shifts from a decade-old peg against the dollar to a managed float, based on a basket of currencies. It devalues the yuan by 2.1 percent overnight to 8.11 against the dollar.

2007 The first yuan-denominated bonds are sold in Hong Kong.

2008 China pegs the yuan against the dollar at 6.83 as an emergency measure to help stabilize China's economy amid the worsening global financial crisis.

2009 China launches trial programme allowing compa-nies in select cities to settle imports and exports in yuan, naming Hong Kong the pilot city for yuan settlement outside the Mainland.

2010 China ends a two-year-long peg to the dollar,(June) returning to a managed float based on a basket of

currencies.

2010 China's central bank and the Hong Kong Monetary(July) Authority agree to expand the scope of yuan

clearing in Hong Kong and offshore yuan trading takes off.

2010 McDonald's becomes the first nonfinancial(August) foreign company to issue yuan-denominated

bonds in Hong Kong.

2010 China allows select exporters to keep some of(October) their foreign-currency earnings offshore in a trial

programme.

2011 China launches a pilot programme to let domestic(January) companies use yuan for investments outside

China.

2011 Hong Kong-listed Hui Xian Real Estate Investment(April) Trust becomes first yuan-denominated initial

public offering outside China but falls sharply on its debut.

2012 Cross-border trade settlement scheme expanded(March) to all Chinese companies with import or export

scope on their business licenses.

2013 Shanghai Free Trade Zone is set up to test an (September) offshore yuan market in Shanghai.

2013 China settles 20 percent of trade in yuan, up from zero in 2008.

2020 Yuan will rank only after the U.S. dollar, euro(forecast) and the pound sterling as the world's

fourth most-used payment currency and 30 percent of China's trade by then will be settled in yuan.

Sources: Deutsche Bank, EY, HSBC, Ministry of Finance, Standard Chartered

Success ingredientKathy Liu, Chief Financial Officer, Kizan International

When Kathy Liu moved to the United States, she discovered that her experience as a Hong Kong Institute of CPAs member was not the only expertise she brought to business. Almost as important was her ability to act as a bridge between cultures.

The company she has worked for since 1990, Kizan International, was keen to establish low-cost manufacturing in an emerging China. However, doing business in the Mainland back then first required establishing local relationships, and this meant un-derstanding the nascent business culture. To this end, “my training as a Hong Kong CPA was essential,” she says.

However, she also found herself drawing on two other experiences: as a translator and as a university instructor of business study courses. “My ability to understand finance at a very high level and communicate details in different languages proved invaluable.”

At that time there were very few colleges [in China] teaching foreign languages in their business programmes, she explains, so most top business executives there knew very limited English. “With my knowledge of Asian business practices, being fluent in Chinese as well as a Hong Kong CPA, helping Kizan International establish their Asian offices was a natural fit,” she says.

Today, she is Chief Financial Officer of Kizan – a pioneering apparel manufacturer and dis-tributor based in Brisbane, California, 15 kilometres south of San Francisco – and oversees the finance aspects of the company’s operations in the U.S., China, Vietnam and Bangladesh.

Liu has seen globalization of the apparel industry first hand and, in her role as CFO, has been responsible for leading her company into unknown territory.

32 September 2014

Photography by Chloe Jackman

Kathy Liu, Chief Financial Officer of apparel manufacturer Kizan International, tells Ramona Dzinkowski about evolving from her focus on production and distribution to the leading edge of supply chain risk management and analysis

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September 2014 33

ing there created opportunities to network with Asian executives and gain a deeper un-derstanding of Chinese business culture and practices that would help her negotiate within their environment.

“I happened to be a lecturer at a local business college, where they offered a joint programme with certain organizations from China,” she explains. “[Chinese businesses] would send their executives to learn about U.S. accounting and commercial law, as well as taxation.”

Success ingredient

34 September 2014

Kizan was one of the early trailblazers in developing the fashion and textile business in China. In the early 1990s, when the company was considering exploring production oppor-tunities in the region, the business challenges were many. “When we were first exploring manufacturing options, China actually had its door closed to foreign countries,” she says.

“There were no investors and no business banking facilities at all. Even going in and out of China attracted scrutiny from the govern-ment.” There was little awareness in China of accounting and finance principles at that time, she recalls. “They didn’t even have a basic con-cept of profitability.”

China experienceLiu came to the U.S. in 1980 after graduating with an accounting degree from Hong Kong Polytechnic (now university) in 1977 and obtaining her Hong Kong CPA qualification in 1979. In the U.S., she acquired another ac-counting degree followed by a master’s degree specializing in taxation, both from Golden Gate University in San Francisco.

Her later experience teaching account-

Included in the mix of roughly 30 exec-utives were managers from a variety of dif-ferent industries and government agencies who were there to learn about capitalism. “Because of my fluency in Chinese, I was able to take some of the intermediate accounting and tax-related course material and translate them into Chinese so that they would be able to understand without too much difficulty,” says Liu.

The benefit to Kizan of developing rela-tionships with Mainland business and gov-ernment leaders became clear when Liu was tasked with helping to open its first Asia-Pacific office in Beijing.

Her teaching experience introduced her to early Mainland business culture too. “In order to gain the trust of Chinese businessmen, you have to be able to make them understand you and make them feel comfortable,” she says. “Establishing some good relationships helped me to understand how I needed to work within their environment in China.”

One of the main successes Liu was able to achieve was “very solid relationships with suppliers” to the point where they no longer required a letter of credit from Kizan to start production or require a percentage of the goods prepaid.

“With such short lead times required in the industry, your letter of credit is going to delay the whole process," says Liu. “However, now our suppliers get paid when they put the goods on the ship coming to the U.S. port.”

Changing parametersMore than 20 years after making her first for-ay into apparel manufacture, Liu is now at the forefront of supply chain risk management and analysis. Founded in 1972, Kizan trades under the brand name Louis Raphael and spe-cializes in the design, production and import of menswear.

The company’s products are made by more than 60 factories and mills in seven countries and sold primarily in the U.S. in retailers such as Macy’s, JCPenney and Nordstrom.

Liu says that the rag trade has changed dra-matically over the past two decades. For ex-ample, retailers have by and large eliminated

“ There were no investors and no business banking facilities at all. Even going in and out of China attracted scrutiny from the government.”

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September 2014 35

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costly warehouse facilities and are pushing suppliers for faster turnaround in order fulfil-ment. “This meant we’ve also had to evolve,” she says.

With an active footprint in more than 9,000 stores of major retail accounts across the U.S., the company needs to focus on inventories. “We’ve upgraded our inventory replenishment system because this is an indispensible com-petitive advantage for us,” says Liu, adding that retailers can access the Louis Raphael sys-tem as if they owned such records.

“This helps to minimize the risk of stock-outs or incurring extra inventory holding costs.”

At the same time, she explains that Kizan also benefits, as the company can track sales and analyse buying trends in order to adjust their own purchase and manufacturing plan. “That is a new process that we have been quite

pleased with in recent years,” she says.Liu adds that manufacturers can also coop-

erate with retailers to create items sold for spe-cific prices. For example, Macy’s might want a pair of Louis Raphael wool blend dress pants to be priced at US$74.99. “We would have to start with the customer’s expectation of price and do the reverse engineering to find a manufac-turer, or find a design and fabric that will allow us to produce at a cost that will also provide acceptable profit margins,” says Liu. “So we would all have to work together on that one.”

Keeping up with the trendsIn fact, teamwork is an important aspect of Liu’s role as CFO, which has evolved to meet the requirements of retailers and the need to respond to new consumer purchase patterns. “The CFO must work more closely with the

supply chain managers to support retailers in being flexible, to adapt to changes in pro-duction cycles,” she explains. “That would in-clude finding appropriate credit facilities and methods to finance production.”

Liu adds that technological adaptations are also bringing challenges to the retail en-vironment. “We have to understand how con-sumer purchase processes have changed with the addition of a variety of different channels (such as on the Internet), as well as know their specific requirements and service expecta-tions,” she says.

Like the major U.S. retailers that are de-pendent on online sales, Louis Raphael’s products are increasingly sold by online-only outlets such as Belk and Amazon.com. “All of these different channels require different in-ventory management,” Liu says, adding that Kizan had to re-assess its sourcing relation-ships to allow for greater responsiveness to different trading patterns.

“We also must show our ability to ship di-rectly to the online consumers,” she notes. To do this, she says, the company has built a highly sophisticated supply chain manage-ment system. “It administers current and future inventory pipelines, supported by cus-tomer behaviour analysis, proprietary IT sys-tems and precise forecasting tools.”

Such changes mean significant investment in technology is crucial. “My role as CFO is also to work with the IT team, to continue the IT investment for the future,” says Liu. “It’s easy for a CFO to cut costs by not investing for the future, but we all know that IT is one area that requires a lot of capital investment.”

In addition, regulatory changes and other external influences also keep Liu busy. “I’m of-ten responsible for driving workflow changes due to compliance, human rights, regulatory and legal requirements not only in the U.S. but also in foreign countries,” she notes.

Liu expects that she will have to evolve even further as not only technology and the regu-latory environment will continue to change, but, most importantly, the aspirations and ex-pectations of customers will change as well. “We have to provide the flexibility and value they’re looking for,” she says.

38 September 2014

(From left to right) Eddie Chu, Eddie Kam, Gary Poon, Jennifer Cheung, Paul She and Edward Tsui

Young members

September 2014 39

Photography by Samantha Sin

While seasoned accountants dominate the Institute’s committees and working groups, a number of active

young members have joined in despite the steep learning curves and lack of time. A few of them talk to

Jemelyn Yadao about their commitmentand special roles

A FRESH PERSPECTIVE

40 September 2014

Young members

I n a room of 14 or so accomplished and vocal CPAs, Paul She would hesitantly say a few words to agree with what the others said. “I was quite nervous during the

first few board meetings,” remembers She, Practising Director of Audit and Assurance at Mazars, and a member of Hong Kong Insti-tute of CPAs.

He is also the youngest member of the Institute’s Qualification and Examinations Board, which, among other things, advise goals and priorities for the Institute’s Quali-fication Programme for developing and nur-turing newly qualified CPAs.

After two years, he now confidently shares his personal views and even chairs

the board’s Module A (Financial Reporting) moderation subgroup. “Rather than just following the theme of the meeting, I finally found the confidence to disagree [with others’ views if necessary].”

She rejects the notion that newly qualified accountants have little to contribute. “I can, for example, share first hand information with the committee on what areas newly qualified CPAs are good and not

good at, and how the focus of the examina-tions should be adjusted,” says She.

The Institute has long depended on members to contribute their time to its stat-utory and non-statutory boards and working groups, with a large number of these volun-teers being naturally made up of senior mem-bers who are more experienced and often have relatively more free time on their hands than others.

However, a few of those seats are also occupied by a growing number of younger members who are just as dedicated to giving up their time to the Institute and the overall development of the accounting profession.

For Gary Poon, an Institute member who

is Principal of CPA firm Poon & Co., Convenor of the Institute’s Young Members Group (for-merly the 25.35 Group) and Deputy Conve-nor of Small and Medium Practitioners Lead-ership Panel, while young members may be less experienced, they bring much needed diversity and unique insights into the room. “I strongly believe that young members have a lot of different ideas and perspectives that can certainly contribute to the development of the Institute, so the benefits are mutual,” he says. “Future programmes on financial controllership and mentorship, which are in the pipeline, were ideas suggested by the Young Members Group.”

Poon has been actively serving on differ-ent committees, panels and working groups of the Institute since the age of 27 and was a Council member in 2011 and 2012. “My con-tributions and inputs [over the years have been based on] my expertise and experience as a multidisciplined practitioner with solid technical skills gained from the Big Four and training from the Chartered Financial Ana-lyst and Master of Business Administration programmes,” he adds.

Apart from committee work, young mem-bers are also active in helping to organize other accounting-related activities for the In-stitute. Edward Tsui, Chief Executive Officer of corporate finance firm AE Majoris Adviso-ry, is one of them.

Tsui started connecting students with successful CPAs and business people after approaching representatives of the Institute while studying at university. “I needed their help as I was setting up events for my fellow students,” he remembers. After he graduated, he was invited to join the Institute’s first young members panel in 2004, set up in the same year, and was its youngest member.

Being surrounded by notable accoun-tants and panel advisors such as Immediate Past President Susanna Chiu and Paul Chan,

“ I strongly believe that young members have a lot of different ideas and perspectives that can certainly contribute to the development of the Institute, so the benefits are mutual.”

Hong Kong’s Secretary for Development who was Institute president in 2006, allowed him to build strong relationships with those who he idolizes. “Paul Chan has been a great men-tor to me since we first met through the panel. He also supported me as I was starting my own business.”

Eddie Kam, Principal of Venture Partners

CPA and an Institute member, participates in the Professional Accountants in Business Leadership Panel, Corporate Finance Com-mittee as well as Young Members Group as Deputy Convenor. But it was basketball that prompted his decision to volunteer. “It was quite a lot of work handling the budget, meetings, calling the members to attend

practice games and tournaments,” he says of his experience as past convenor of the Insti-tute’s Basketball Interest Group. “But I was happy.”

Time for changeFinding enough time to attend meetings is one of the main hurdles for members who join the Institute’s committees and working groups, particularly for most young mem-bers who are spending most of their time developing their careers and thinking about starting a family.

“It’s not easy for us to spare some time to the Institute but we do it because we all want the same thing – to develop better services for young members and enhance their sense of belonging to the Institute,” says Tsui, cit-ing the Young Members Group’s recent suc-cessful parenting seminar as an example.

Like other young members, Jennifer Cheung, Director of  HSBC Global Banking and an Institute Council member, regularly sacrifices some of her holidays, lunch breaks and weekends as Deputy Convenor of the Young Members Group, and chair of the working group for the upcoming Mentorship Programme.

While this is never unmanageable, pro-fessional accountants in practice tend to get more support from their employers, com-pared to members working in the corporate world, observes Cheung.

Eddie Chu, Deputy Head of Finance Ac-counting at Natixis Asia Pacific, a French corporate and investment bank, agrees. “For PAIBs like myself, joining meetings and ac-tivities means making time outside of work-ing hours.” says Chu, who is also a member of the Young Members Group.

Being persistent in balancing family, work and volunteering is the biggest chal-lenge for Chu, but contributing to the young members activities, particularly in career and professional development, is both im-

September 2014 41

Young members

42 September 2014

portant and worthwhile, he notes. “I’m willing to devote my personal time for this work.”

While most employers in Hong Kong sup-port those wishing to serve the community, auditors and accountants below managerial level who work longer hours and often travel extensively, will find it difficult to do meaning-ful work for the Institute, says She at Mazars who is also Deputy Convenor of the Young Members Group, “When an auditor becomes manager, it’s easier to participate.”

Before being promoted to audit manager, She participated in another Institute commit-tee but his many work trips to the Mainland

forced him to drop out. Another challenge for him was understand-

ing the process and technicalities of setting examination papers when he was appointed to chair the Module A moderation subgroup. Institute staff, he says, were there to teach him the ropes. “Some young members may think that if they join a committee, they won’t be given much support and guidance but actually this is not the case. Not only do fellow members help but also the Institute staff,” he says.

Priceless benefits The benefits of volunteering time to the Insti-

tute as a young member are manifold and go beyond networking opportunities. Members learn a lot from the experience as “committee works come with great responsibilities,” says Poon. “The experience to chair and convene the Young Members Group was a great one as it was my first experience to chair a commit-tee with more than 20 members. It’s all about teamwork and team spirit.”

For Cheung at HSBC, being involved means constantly handling the diverse interests and objectives of CPAs. “You learn a lot more in that context where everybody has a different agen-da, and understanding how to manoeuvre that

September 2014 43

is a very good learning experience,” she says. Choosing to work for the Institute over join-

ing a charity, she believes, has also allowed her to contribute to society in a more meaningful and substantial way. “I’m not very athletic so I can’t do charity marathons,” says Cheung with a laugh. “I thought serving the Institute would be a better use of my skill sets and interests than other types of community service.”

By speaking up at such meetings of, for ex-ample, the financial controllership working group, Cheung feels she is giving young mem-bers a more assertive voice. “The challenges of society have changed a lot in the past 10 to 20 years [so] our perspective might be slightly dif-ferent from the perspective of senior members. Hopefully, I bring that context to the table.”

Kam at Venture Partners, who is one of the youngest members in the Institute’s Corpo-rate Finance Committee, is also unfazed by the number of years of experience his fellow committee members have. “Those who are more senior may represent those foreign or Mainland-based securities houses, whereas my opinions can reflect those of the local, Hong Kong-based ones. We [as young members] can reflect what they want, what kind of rules and

regulations will make them suffer or which ones will help them survive.”

Gradual immersionThe nomination period for the Institute’s com-mittees and working groups will take place in November. According to Poon, the gender distribution of young members who currently volunteer to the Young Members Group is – like the overall membership – around 50:50.

“Our female members of Young Members Group understand the needs of our peers better than we male members do,” says Poon. “They have previously organized a number of very successful events including networking parties

with special themes, dessert wine tasting, flo-ral jamming, soft skill training and parenting seminar.”

Female committee members, on the other hand, appear to be less available during office hours or weekends for meetings than their male counterparts, he adds. With the increas-ing number of female members in the past few years, Poon strongly encourages both men and women to contribute to the Institute and the profession early in their careers.

Tsui believes a change in mentality for some young members may lead to more of them participating in the future. “If we only fo-cus on what we can take from the Institute rath-er than how we can contribute, then one day the Institute may run out of resources,” he says.

Those considering the idea of volunteer-ing don’t necessarily have to start by joining a board. “I would encourage them to start doing something they like first and base their contri-butions on what they are interested in,” says Kam, referring to his memorable Basketball Interest Group days. “You can then start joining other committees that focus on the profession and specific industries, and gradually partici-pate at a deeper level.”

“ If we only focus on what we can take from the Institute rather than how we can contribute, then one day the Institute may run out of resources.”

418

3652

70 63

93No. of members serving the Institute’s various committees and subgroups:

Source: The Institute

Age distribution

29 or below

30-34 35-39 40-44 45-49 50-54 55 or above

336

Female

Male

81

255

Foreign investments into China are typically structured through one or more holding companies

domiciled in offshore jurisdictions. Planned and implemented properly,

an offshore holding company structure can provide investors with enhanced governance and economic rights, ease of public listing and disposal without triggering onshore regulatory approvals, and reduced withholding tax rates on returns of their Mainland investments compared to a direct investment into a Chinese entity.

In recent years, however, the State Ad-ministration of Taxation has significantly increased scrutiny on the use of offshore holding companies to structure foreign ownership in operating businesses in China.

In Circular [2009] No. 601, for exam-ple, the SAT emphasized that an offshore holding company can only take advan-tage of the preferential withholding tax rates under a double tax treaty between China and the offshore jurisdiction if the holding company is the “beneficial owner” of the applicable income.

Among other things, the circular requires a “beneficial owner” to have substantive operating activities and not be merely an agent or “conduit.”

Similarly, under Circular [2009] No. 698, a disposal of an offshore hold-ing company that lacks a “reasonable business purpose” and represents an “abuse of organizational form” is subject to challenge by the SAT.

In such a case, the SAT may disregard the existence of the offshore holding company and re-characterize the trans-action as a disposal of the underlying

Tax risks increase for those managing offshore holding companies in China

Mainland company, resulting in Mainland-sourced capital gains subject to a 10 percent withholding tax.

Provided there is a reasonable business purpose for use of an offshore holding company (such as the purpose of pursuing an initial public offering and listing in Hong Kong or the United States), it is generally believed that Circular 698 would not apply to the sale of a holding company that is listed on the Hong Kong stock exchange, since the SAT is unlikely to disregard the existence of a publicly traded company.

A recent case, however, highlighted one situation in which such a sale may be subject to Mainland taxation, even without recourse to Circular 698.

Case studyThe Cayman Islands subsidiary of a private equity fund incorporated in the U.S. paid 279 million yuan in Mainland enterprise income tax and interest for the 2011-12 year to an SAT bureau in the province of Hei-longjiang after the bureau determined that the subsidiary avoided taxes on the transfer of shares in a company listed on the Hong Kong stock exchange.

The fund’s Cayman Islands subsidiary agreed to sell shares in a Cayman Islands company listed on the Hong Kong stock exchange to a U.S. publicly traded company.

The Cayman holding company had four Mainland subsidiaries, and a majority of the Cayman holding company’s officers who were responsible for its business operations and management worked out of one of the Mainland subsidiaries. The Cayman holding company’s management department per-sonnel were also located in that subsidiary.

In accordance with Circular 698, the Cayman-based seller submitted a letter to

the local Heilongjiang bureau of the SAT claiming tax exemption on the capital gains from the transaction.

The transaction drew the bureau’s scrutiny. Notably, however, the bureau did not challenge the transaction under Circular 698, signalling its recognition that it would be difficult to characterize a publicly traded company as a tax shelter.

Instead, the bureau asserted that Main-land tax was payable on the transaction on the rationale that Cayman holding company should be treated as a Chinese resident com-pany, since it was “effectively managed” by personnel based in one of its Mainland subsidiaries. The transfer of the Cayman holding company’s shares, therefore, would generate China-sourced capital gains subject to a 10 percent withholding tax.

AnalysisUnder current Mainland enterprise income tax law, a China resident company includes any domestic or foreign company that is “effectively managed” in the China. Resident companies must pay tax on their worldwide income and outbound payments, including dividends and interests, as resident compa-nies are generally subject to withholding tax.

To date, the SAT guidance on what it means to be “effectively managed” in China has focused on foreign companies that are China-controlled, defined as foreign companies in which the main investor is a Chinese company or company group. (The guidance has not explained what constitutes a “main investor” or whether there is a required shareholding percentage. It is clear, however, that only a Chinese company, rather than a Chinese individual, could be a “main investor” for this purpose.)

For this reason, it has generally been

Charles C. Comey and Matthew Y. Lau warn of intensified scrutiny when structuring foreign ownership in operating businesses

Mainland taxation

44 September 2014

thought that without further official guid-ance, the SAT would not apply these rules to foreign companies that are not China-controlled.

The Heilongjiang case, however, could represent such an application and an expan-sion of the SAT’s position on the scope of the “effective management” rules. Unfor-tunately, reports of the case did not specify whether the Cayman holding company was China-controlled.

If it was not, then the case shows that even a foreign, publicly traded company that is not China-controlled could be character-ized as a China resident company as long as it is “effectively managed” in China. Given the number of offshore holding companies that are managed from China at some level, such a sweeping application of the “effective management” rules would have significant tax implications.

Looking aheadIf, as the Heilongjiang case suggests, a non-China-controlled offshore holding company may be treated as a China resident company, the tax consequences will be far-reaching, including:�•� �Enterprise�income�tax�would�be�imposed�

on the holding company’s worldwide income;

•� �Withholding�tax�would�be�imposed�on�all�dividends, interest and royalties paid by the holding company; and

•� �Withhold-ing tax would be imposed on all capital gains from the sale of the holding company.

Given the severity of these consequences, investors might consider taking steps to ensure that their offshore holding companies would not be treated as “effectively man-aged” in China.

Possible planning measures to consider might include:•� �Ensuring�that�the�holding�company’s�

major financial and operational decisions are not made or approved by Chinese companies or personnel working out of such companies;

•� ��Ensuring�that�the�holding�company’s�board meetings are held outside of China;

•� ����To�the�extent�practicable,�ensuring�that�a�majority of the holding company’s direc-tors and senior management personnel do not ordinarily reside in China;

•� �Ensuring�that�senior�management�person-nel do not perform their duties inside the Mainland; and

•� �Keeping�the�holding�company’s�major�properties, books and records outside the Mainland.

Similarly, in order to avoid subjecting the disposal of an offshore holding company to Mainland taxation under Circular 698, inves-

tors might consider adopting measures to reduce the risk that

the disposal would be viewed as an “abuse of organizational form.”

Possible planning measures to consider might include:•�������Structuring�the�offshore�holding�company�

to conduct substantive business activities;•� �Ensuring�that�the�sale�of�the�holding�com-

pany is not the practical equivalent of the sale of the underlying Mainland company; and

•� �Ensuring�that�the�documentation�does�not suggest that the actual purpose of the disposal is to transfer the underlying Mainland company.

We�await�further�guidance�from�the�SAT�on the exact scope of the Heilongjiang case, its precedential value, and its intended effect on the “effective management” rules.

Also, given the development of the “effec-tive management” rules in China and India, we query whether other emerging econo-mies will begin taking a similar approach in expanding the scope of their home country taxation.

Charles C. Comey is a Corporate Finance Partner in Palo Alto, California, and Matthew Y. Lau is a Tax Attorney in Hong Kong with Morrison & Foerster.

A PLUS

September 2014 45

港合作日益密切，北上就業、出差成港人生活常態。新趨勢亦引發納稅新問題，如內地出差補貼是

否徵收個稅，及橫琴等國家新區個稅差額是否有補貼等問題，成為不少北上港人諮詢熱點，本文將對這些問題作出專題解答：

香港員工按合理標準取得的境內、外出差補貼是否徵收個稅？對外籍個人及港澳台人員按合理標準取得的境內、外出差補貼免徵個人所得稅，應由納稅人提供出差的交通費、住宿費憑證（影印本）或企業安排出差的有關計劃，由主管稅務機關確認免稅。

在珠海市橫琴新區工作的港澳居民享受個人所得稅差額補貼的具體規定如何？2013年1月1日起，對在珠海市橫琴新區工作的港澳居民實行優惠的個人所得稅政策，按港澳與內地個人所得稅負差額給予補貼。 優惠範圍：港澳居民「在橫琴工作」是指因工作關係而在橫琴任職、受僱或在橫琴提供獨立個人勞務。香港、澳門居民，是指擁有香港、澳門居民身份的個人。補貼，是指對上述個人所得在橫琴實際繳納的個人所得稅稅款和上述所得按照香港、澳門地區稅法測算的應納稅款的差額給予的全額補貼。 申請辦法：可享受補貼的納稅義務人應向橫琴財政部門提出申請，申請可以由納稅義務人本人提出，也可委託代扣代繳義務人或代理人提出。申請每年度辦理一次，對上一年度補貼的申請截止日期為下一年度的6月30日。

申請資料：•個人所得稅稅負差額補貼申請表；•香港、澳門居民永久性身份證或者香港、澳門相關部門出示的居民身份證明；

•在橫琴工作的勞動關係證明或勞務合約；•橫琴地稅部門提供的上一年度的個人所得稅完稅證明；•香港、澳門地區稅務部門或者註冊會計師事務所出具的應納稅額的稅務鑒證報告；• 香港、澳門居民在中國內地開設的銀行戶口帳號；•任職單位（代扣代繳義務人）營業執照和稅務登記證（代扣代繳義務人申請適用）；

•提供獨立個人勞務的需提供臨時稅務登記證明文件；及•書面授權委託書（代理人申請適用）。

港人在內地如何申請認定稅收居民身份？對於來內地從事受僱活動或提供勞務的香港特區個人，根據其自報居住情況、受僱或從事勞務情況，以及在香港特區所負的納稅義務，並相應查閱其持有的身份證、回鄉證和委派公司、企業或香港特區政府有關部門開具的證明進行判斷。 主管稅務機關通過納稅人正常申報及查證不能確定其是否為香港特區居民；或者來自第三國或地區，確實無從判斷，又申請享受《內地和香港特別行政區關於對所得避免雙重徵稅的安排》(以下簡稱《安排》)待遇的，主管稅務機關將開具《關於請香港特別行政區稅務主管當局出具居民身份證明的函》，由納稅人據此向香港特區政府稅務局申請開具香港特區負有居民納稅義務證明，或將情況遞

交稅務總局審定。不能提供證明的，不得享受《安排》待遇。

香港高管人員同時擔任內地企業董事取得的報酬應按甚麼項目申報？在中國境內沒有住所的個人擔任中國境內企業高層管理職務同時又擔任企業董事，或者雖名義上不擔任董事但實際上享有董事權益或履行董事職責的，從該內地企業取得的報酬，包括以董事名義取得的報酬和以高層管理人員名義取得的報酬，均應按「境內企業董事和高層管理人員納稅義務」的規定確定納稅義務。 對上述外籍董事同時在公司任職、受僱的情形，其取得的董事費收入應與工資收入合併，統一按工資薪金所得項目繳納個人所得稅。對董事費收入按勞務報酬所得項目徵收個人所得稅的方法僅適用於個人擔任公司董事，且不在公司任職受僱的情形。對上述個人僅以董事費名義取得收入，而不主動申報從事企業日常管理工作每月應取得的工資、薪金收入額的，主管稅務機關可以參照同類地區、同類行業和相近規模企業中類似職務的工資、薪金收入水平核定其每月應取得的工資、薪金收入額，與其取得的董事費收入合併按照「境內企業董事和高層管理人員納稅義務」的規定確定納稅義務並計算徵收個人所得稅。

內地工作的香港員工，每月申報工資收入時，需要選擇稅款負擔方式，請問「僱主全額負擔」和「部分負擔」有甚麼區別？僱主負擔全部或部分個人所得稅稅款應納稅所得額如何計算？

北上港人出差省錢「知多D」合理標準內的出差補貼免徵個稅

廣東省地方稅務局　陳雲璋、湯丹丹、林偉濤

Legitimate travel allowances can be exempted from individual income tax for Hong Kong employees working in the Mainland

粵

Mainland taxation

46 September 2014

全額負擔和部分負擔計算公式不盡相同。

1)僱主全額為其僱員負擔稅款時，對於僱主全額為其僱員負擔稅款的，將僱員取得的不含稅收入換算成應納稅所得額後，計算企業應代為繳納的個人所得稅稅款。

應納稅所得額=（不含稅收入額－費用扣除標準－速算扣除數）÷（1－不含稅級距對應的稅率）

應納稅款=應納稅所得額×適用稅率－速算扣除數

2)僱主為其僱員負擔部分稅款的處理又分兩種情況：

•僱主為其僱員定額負擔稅款的，應將僱員取得的工資薪金所得換算成應納稅所得額後，計算徵收個人所得稅。工資薪金收入換算成應納稅所得額的計算公式為：

應納稅所得額=僱員取得的工資+僱主代僱員負擔的稅款－費用扣除標準

•僱主為其僱員負擔一定比例的工資應納的稅款或者負擔一定比例的實際應納稅款的，應將不含稅收入額計算應納稅所得額的公式中「不含稅收入額」替換為「未含僱主負擔的稅款的收入額」，同時將速算扣除數和稅率兩項分別乘以上述的「負擔比例」，按此調整後的公式，以其未含僱主負擔稅款的收入額換算成應納稅所得額，並計算應納稅款，公式為：

應納稅所得額 =（未含僱主負擔的稅款的收入額－費用扣除標 準－速算扣除數×負擔比 例）÷（1－稅率× 負擔比例）

應納稅款=應納稅所得額×適用稅率－速算扣除數

級數

1

2

3

4

5

6

7

含稅級距

不超過1,500元

超過1,500至4,500元的部分

超過4,500至9,000元的部分

超過9,000至35,000元的部分

超過35,000至55,000元的部分

超過55,000至80,000元的部分

超過80,000元的部分

不含稅級距

不超過1,455元

超過1,455至4,155元的部分

超過4,155至7,755元的部分

超過7,755至27,255元的部分

超過27,255至41,255元的部分

超過41,255至57,505元的部分

超過57,505元的部分

稅率（%）

3

10

20

25

30

35

45

速算扣除數

0

105

555

1,005

2,755

5,505

13,505

‧含稅級距適用於由納稅人負擔稅款的工資、薪金所得；不含稅級距適用於由他人（單位）代付稅款的 工資、薪金所得。

個人所得稅稅率表（工資、薪金所得適用）

註：‧表中所列含稅級距與不含稅級距，均為按照稅法規定，以每月收入額減除費用3,500元以及附加減除 費用1,300元後的餘額。

This article is contributed by the Guangdong Provincial Local Taxation Bureau.

案例答疑廣東省任職香港員工本月取得基本工資、薪金收入折合為30,000元（人民幣 ， 下同)， 月獎金10,000元，出差10天補助5,000元，報銷通訊費200元，及報銷上下班交通費300元，其本月應納個人所得稅稅額是多少？出差補助合理部分可免徵個人所得稅以及實報實銷通訊費限額內（各地規定有差異，廣東省內企業高層管理人員每月500元，其他員工每月300元）可不作為個人工資薪金應稅所得。納稅人應按規定向主管稅務機關辦理

有關備案類減免稅項目的備案。

應納稅收入額=30,000+10,000+300=40,300(元)應納稅所得額=40,300－4,800=35,500(元)應納稅款= 35,500×30%－2,755 =7,895(元)

港人A每月工資、薪金收入 為 50,800元，納稅義務滿月到期，其個人所得稅由內地企業全額負擔，應如何計算其應納個稅稅款？A應納稅所得額=（50,800－4,800－5,505）÷（1－35%）=62,300（元）應納稅款=62,300×35%－5,505=16,300（元）

港人B每月工資、薪金收入為50,000元，納稅義務滿月到期，僱主每月定額為該僱員負擔稅款5,000元，應如何計算應納個稅稅款？B應納稅所得額=50,000+5,000－4,800=50,200（元）應納稅款=50,200×30%－2,755=12,305（元）

港人C每月工資、薪金收入 為 12,800元，納稅義務滿月到期，僱主負擔其工資、薪金所得的應納稅款30％部分，應如何計算其應納個稅稅款？C應納稅所得額 =（12,800－4,800－1,005×30%)÷（1－25%×30%)=8,322.7(元)應納稅款=8,322.7×20%－555=1,109.54（元）

September 2014 47

The Institute has recently issued several amendments to Hong Kong Financial Reporting Standards to pro-

vide further guidance on accounting for and acquisition of an interest in a joint operation, clarify the acceptable methods of deprecia-tion and amortization and the accounting for bearer plants.

Accounting for acquisitions of interests in joint operations (amendments to HKFRS 11 Joint Arrangements)The amendment requires that when an entity acquires an interest in a joint operation in which the activity of the joint operation constitutes a business (as defined in HKFRS 3 Business Combinations), it shall apply all of the principles on business combinations ac-counting in HKFRS 3 and other standards and disclose the information required by those standards in relation to business combina-tions. As a result, a joint operator is required to apply the following principles: • Measuringidentifiableassetsandli-

abilities at fair value, other than items for which exceptions are given in HKFRS 3 and other standards;

• Recognizingacquisition-relatedcostsas expenses in the periods in which the costs are incurred and the services are received;

• Recognizingdeferredtaxassetsanddeferred tax liabilities that arise from the initial recognition of assets or liabilities, except for deferred tax liabilities that arise from the initial recognition of goodwill, as required by HKFRS 3 and HKAS 12 Income Taxes for business combinations;

• Recognizingtheexcessoftheconsid-eration transferred over the net of the acquisition-date amounts of the identifi-able assets acquired and the liabilities assumed, if any, as goodwill; and

• Testingforimpairmentacash-generatingunit to which goodwill has been allocated at least annually, and whenever there is an indication that the unit may be impaired, as required by HKAS 36 Impair-

ment of Assets for goodwill acquired in a business combination.

In this connection, a joint operator might increase its interest in a joint operation in which the activity of the joint operation con-stitutes a business by acquiring an additional interest in the joint operation. In such cases, previously held interests in the joint opera-tion are not remeasured if the joint operator retains joint control.

Clarification of acceptable methods of depreciation and amortization (amend-ments to HKAS 16 Property, Plant and Equipment and HKAS 38 Intangible Assets)HKAS 16 and HKAS 38 both establish the principle for the basis of depreciation and amortization as being the expected pattern of consumption of the future economic benefits of an asset. The amendments clarify that the use of revenue-based methods to calculate the depreciation of an asset is not appropri-ate because revenue generated by an activity that includes the use of an asset generally re-flects factors other than the consumption of the economic benefits embodied in the asset.

The amendments also clarify that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. This presumption, however, can be re-butted in the following limited circumstances:• Inwhichtheintangibleassetisexpressed

as a measure of revenue (i.e., the pre-dominant limiting factor that is inherent in an intangible asset is the achievement of a revenue threshold); or

• Whenitcanbedemonstratedthatrevenueand the consumption of the economic benefits of the intangible asset are highly correlated.

Bearer plants (amendments to HKAS 16 and HKAS 41 Agriculture)HKAS 41 currently requires all biological assets related to agricultural activity to be measured at fair value less costs to sell. This is based on the principle that the biological transformation that these assets undergo during their lifespan is best reflected by fair value measurement.

However, there is a subset of biological assets, known as bearer plants, which are used solely to grow produce over several periods. At the end of their productive lives they are usually scrapped. Once a bearer plant is mature, apart from bearing produce, its biological transformation is no longer significant in generating future economic benefits. The only significant future eco-nomic benefits it generates come from the agricultural produce that it creates.

The International Accounting Standards Board received feedback from stakeholders who considered fair value was not appro-priate for mature bearer biological assets such as oil palms and rubber trees because they were no longer undergoing significant biological transformation. The use of mature bearer biological assets such as these is seen by many as similar to that of manufactur-ing and should therefore, be accounted for under the standard on property, plant and equipment.

48 September 2014

Technical update

Amendments to HKFRS issued by the Institute

“ HKAS 16 and HKAS 38 both establish the principle for the basis of depreciation and amortization as being the expected pattern of consumption of the future economic benefits of an asset.”

September 2014 49

As a result, the amendment was issued which states that bearer plants should be accounted for in the same way as property, plant and equipment in HKAS 16. Conse-quently, the amendments include them within the scope of HKAS 16, instead of HKAS 41. The produce growing on bearer plants will remain within the scope of HKAS 41.

In the context of this amendment, a bearer plant is defined as a living plant that:• Isusedintheproductionorsupplyof

agriculture produce;• Isexpectedtobearproduceformore

than one period; and• Hasaremotelikelihoodofbeingsoldas

agricultural produce, except for inciden-tal scrap sales.

The amendments are all effective for an-nual periods beginning on or after 1 January 2016 with earlier application being permitted.

This article is contributed by the Institute’s Standard Setting Department.

A PLUSILLU

STR

ATION

BY M

ARTIN

MEG

INO

Members’ handbook

Handbook updates no. 151 to 154(i) Update no. 151 contains HKFRS 15 Revenue

from Contracts with Customers. The core principle of HKFRS 15 is for entities to recognize revenue to depict the transfer of goods or services to customers at amounts that reflect the contractual consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively and improve guidance for multiple-element arrangements. HKFRS 15 is effective for annual periods beginning on or after 1 January 2017 with earlier application permitted.

(ii) Update no. 152 contains consequential amendments to various HKFRSs. The

Institute has consolidated amendments applicable from 1 January 2013 (which were previously set out in an appendix to another standard) in the relevant HKFRS.

(iii) Update no. 153 contains redrafted Statement 1.500 Continuing Professional

Development. Statement 1.500 is amended to clarify the existing continuing professional development exemption arrangements since the introduction of the current CPD exemption criteria in August 2010. Since then, members who are directors of any company (listed or unlisted) are not eligible for exemption from the CPD requirements even if they have otherwise retired from work. This is because accounting-related work includes financial accounting, corporate taxation and governance, which are some

of the responsibilities of a director of a company. Hence, a director is involved in accounting-related work and is not eligible for CPD exemption.

(iv) Update no. 154 contains Accounting Bulletin 5 Guidance for the Preparation and Presentation of a Business Review under the Hong Kong Companies Ordinance Cap. 622. AB 5 provides guidance for the preparation of a business review under section 388 of the Companies Ordinance. It complies with the requirements of schedule 5 to the ordinance and provides information that is useful for members of companies. Section 388 (and consequently schedule 5) applies in relation to financial years beginning on or after 3 March 2014. This bulletin is for guidance only and does not introduce additional accounting, disclosure or legal requirements.

Financial reporting

Institute comments on IASB consultation papers(i) Request for information on post-

implementation review: IFRS 3 Business Combinations The Institute continued to support the post-implementation review initiative with the aim of ensuring consistent, high quality financial reporting that provides useful information to investors. The Institute recommended the IASB should consider drawing a clearer dividing line between asset purchases and business acquisitions. The IASB should also reconsider the conceptual basis underlying the different accounting treatments in the two models. The Institute also recommended the

IASB to revisit the accounting treatment of non-amortization of goodwill (with annual impairment testing) and consider whether the alternative of an amortization-based accounting model (with indicator-based impairment testing) would be more appropriate. Conceptually, the Institute considered that the current approach fails to address the fact that over time purchased goodwill in most cases was inevitably replaced by goodwill that was generated internally. In addition, amortization of goodwill would increase comparability between entities that grow their business organically and those that grow primarily through acquisition. From a cost-benefit perspective, the Institute believed an amortization-based model could help to reduce the tension and implementation challenges in identifying and measuring intangibles, which required significant understanding, interaction and cooperation among the accounting and valuation professions. The Institute also had concerns on the recognition of certain intangible assets that were acquired in a typical business combination such as: customer relationship, customer list and brands. The nature of those intangible assets was similar to a sub-classification of goodwill and it may be questionable to recognize such assets separately.

(ii) Exposure draft of Disclosure Initiative The Institute sent a comment letter to the IASB on its exposure draft of Disclosure Initiative (Proposed amendments to IAS 1 Presentation of Financial Statements). The Institute appreciated the efforts of the IASB to initiate the project with a view of improving disclosure

142The latest standards and technical developments

TechWatch

50 September 2014

September 2014 51

Please refer to the full version of TechWatch 142, available as a PDF on the Institute’s website: www.hkicpa.org.hk

requirements contained in IFRS and, in particular, welcomed the proposed narrow-scope amendments contained in this draft to address the significant concerns on disclosure overload as the first step of this project. The Institute broadly agreed with the proposals in the draft so that preparers can apply judgment in disclosing information considered to be relevant. In the long run, the Institute believed more fundamental changes should be proposed by the IASB so as to help avoid the “checklist” approach adopted in many accounting standards, which essentially set out lists of detailed disclosure requirements rather than presenting broad disclosure objectives.

Audit and assurance

Institute comments on IAASB exposure draftThe Institute sent a comment letter to the International Auditing and Assurance Standards Board on its exposure draft on ISA 720 (Revised) The Auditor’s Responsibilities Relating to Other Information and Proposed Consequential and Conforming Amendments to Other ISAs.

The Institute supported in principle the IAASB’s continuing efforts to narrow the expectation gap and to address practitioners’ concerns in the revised exposure draft. However, the Institute noted the board has not fully considered the recommendation in the Institute’s March 2013 submission to undertake a separate project of studying whether a separate assurance engagement on other information would serve the needs of the market.

Corporate finance

Institute comments on open-ended fund companiesAs reported in TechWatch no. 139, the Financial Services and the Treasury Bureau issued a consultation paper on introducing a new open-ended fund company structure to expand Hong Kong’s legal infrastructure

for investment fund vehicles, with an aim to further develop Hong Kong as an international asset management centre of choice.

The Institute's Corporate Finance Committee studied the paper and submitted views on the proposed policy framework, operation and regulatory structure and principles for OFCs. In principle, it is supportive of the key proposals, including: �•� �The�adoption�of�OFCs�as�an�additional�

legal structure for investment funds in Hong Kong.

•� �The�overarching�principles�for�OFCs,�in�particular, that a distinction should be drawn between publicly offered and privately offered OFCs.

•� �The�Securities�and�Futures�Commission�should be appointed as the primary regulator of OFCs, since OFCs are primarily vehicles for investment funds.

•� �Detailed�regulation�of�OFCs�should�be�set�out in subsidiary legislation and the SFC code to facilitate future modifications.

Given that the proposed OFC legal regime, including the corporate filing and registration and the termination and winding up requirements, appeared to overlap with the Companies Ordinance (Cap. 622) and the Companies Ordinance/Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), which contain their own enforcement provisions, and that details of the OFC legal framework were not clear at this stage, the practical interface between

the OFC framework and the Companies Ordinance and Cap. 32 was highlighted.

The importance of providing a clear segregation of roles between the regulators so as to avoid any regulatory gaps, on the one hand, and overlapping regulatory functions on the other, was emphasized.

Also, to be in line with the existing unit trust regime, it was proposed that the investment functions of OFCs should be permitted to be delegated to overseas managers based in jurisdictions with an acceptable inspection regime, and that the trustees or custodians should be permitted to be banking institutions or trust companies incorporated outside Hong Kong and acceptable to the SFC.

Taxation

Announcements by the Inland Revenue DepartmentMembers may wish to be aware of the following matters:•� �New�Departmental�Interpretation�and�

Practice�Notes�No.�50�on�alternative�bond�schemes (Islamic finance).

•� �Tax�treaty�with�South�Korea�signed.•� �Community�service�order�and�fine�for�a�

former senior manager over tax evasion, and for a taxpayer convicted of falsely claiming deductions of expenses for self-education and approved charitable donations.

•� �The�gazetting�of�the�Stamp�Duty�(Amendment)�(No.�2)�Ordinance�2014.�Please refer to stamping circular nos. 05/2014, 06/2014 and 07/2014 for the new stamping arrangements. The frequently asked questions and the illustrative examples have also been updated.

A PLUS

BDO

Frank LuiDirector, Assurance ServicesLui has extensive experience in auditing companies listed in Hong Kong and China in various

industries, including manufacturing, con-struction, apparel and property investment. He also specializes in transaction support assignments, such as initial public offerings and financial due diligence.

Peter PakDirector, Assurance ServicesPak has a wide range of experience in audit services, due diligence review, business

advisory, IPOs and merger and acquisitions. He serves clients from various industries, including publishing, manufacturing, infrastructure, Internet services and financial institutions.

EY

Harvey CoeReal Estate Advisory Leader, Transaction Advisory Services Coe has held senior roles in a number of China-based

real estate fund advisory and services organizations and has extensive experience in advising clients on both China inbound and outbound real estate investment deals. Prior to joining EY, he was senior director, capital markets and investment services, Asia at Colliers International.

KPMG

Kenneth PangPartner, Transactions and RestructuringPang has almost a decade of experience in handling both

inbound and outbound transaction projects for different private equity funds as well as multinational and state-owned enterprises.

Cherie CaoPartner, Transactions and Restructuring Cao is based in Beijing and has 17 years of experience in audit,

transaction services, valuation and restruc-turing. She rejoins the firm after previously being an associate director at Pricewater-houseCoopers.

Sanel TomlinsonPartner, Technical AccountingTomlinson has more than 19 years of experience in assurance, corporate

accounting and advising on financial reporting matters, focusing particularly on International Financial Reporting Standards.

Vivian ChenPartner, TaxChen has more than 12 years of experience in China tax consulting and particularly

specializes in assisting Japanese clients in southern China.

Desmond LaiDirector, Management Consulting Lai specializes in finance function optimization, shared

services and outsourcing, working capital management, pre-IPO planning and post-deal integration. He has extensive experience in the media and retail sectors across Asia.

Martin ZhangDirector, Business DevelopmentZhang has more than 16 years of experience in information technology service manage-

ment, web 2.0, mobile Internet and sales management advisory.

Anthony LeeDirector, Business Development Lee focuses on promoting services to insurance companies and related financial services

companies. He has more than 15 years of industry experience in dealing with life, prop-erty and casualty insurance in the United States and China.

Kevin JinDirector, Forensic AccountingJin has more than 13 years of forensic accounting experience in financial, fraud and mis-

conduct investigations as well as regulatory, compliance and risk management matters.

Melody LiDirector, Supply Chain and Logistics Advisory Services Li has more than 13 years of experience in supply chain

management and specializes in strategic sourcing, supply and demand planning, per-formance measurement and benchmarking, vendor and channel partner management.

Lixin ZengDirector, TaxZeng specializes in transfer pricing, advance pricing advisory and anti-tax avoidance

cases. He was previously a deputy director of the Shenzhen Tax Bureau.

People on the moveThe latest professional appointments from around the region

Email your announcements to Jasmine Huat jasmine.hu@mandl.asia

September 2014 53

Your guide to courses, workshops and member activities

Visit the Institute’s website for other programmes and to enrol and pay online: www.hkicpa.org.hk

Accounting and financial reporting

Quality assurance forum will look at the practice review outcome, common findings and topical issues such as group audits, inventories and revenue as well as quality control and audit checklists. CPD hours: 1.5Language: EnglishDate: 23 SeptemberTime: 6:30 – 8:00 p.m.

Corporate finance

Shanghai-Hong Kong Stock Connect will explain the key features of this cross-border initiative and how it is expected to work from an investor perspective, including eligibility, trading, clearing, settlement and depository arrangements and how Hong Kong investors can participate. CPD hours: 1.5Language: EnglishDate: 17 SeptemberTime: 6:30 – 8:00 p.m.

Corporate governance

The ever-changing corporate governance landscape and the role of INEDs in company boards will discuss recent corporate governance changes and their impact on listed companies in Hong Kong. The seminar will also explore the role played by independent non-executive directors in improving corporate governance performance under increasingly stringent regulatory requirements.CPD hour: 1Language: EnglishDate: 12 SeptemberTime: 12:30 – 1:30 p.m.

September 2014 55

EventsManagement, leadership and soft skills

The accountant’s role in mediation will define mediation and explain the concepts and procedures of mediation, mediation skill and its practical approach. There will also be case sharing, by means of role playing, to illustrate how mediation can handle disputes.CPD hours: 2Language: CantoneseDate: 10 SeptemberTime: 6:30 – 8:30 p.m.

Wellbeing and stress management in the workplace (interactive workshop) will explore the impact of stress on professional accountants, discuss the difference between stress and pressure, and identify causes of stress at work and at home and appropriate mitigation strategies.CPD hours: 3Language: CantoneseDate: 13 SeptemberTime: 9:30 a.m. – 12:30 p.m.

Taxation

The new Canada-Hong Kong tax treaty will examine the provisions of the new double tax avoidance agreement between Hong Kong and Canada, which came into effect this year. CPD hours: 2Language: EnglishDate: 15 SeptemberTime: 6:30 – 8:30 p.m.

Ethics and regulation

Common questions by SMPs when applying Code of Ethics for Professional Accountants is part of the Technical Update Evenings programme and will examine fundamental principles and current developments in ethics standard setting as well as answer common questions.CPD hours: 1.5Language: EnglishDate: 11 SeptemberTime: 7:00 – 8:30 p.m.

Industry knowledge

Cyber security: what’s new? will look at the latest developments in cybercrime and counter-measures and will discuss what business priorities should be and how commercial security concerns relate to wider discussions on privacy and intellectual property in a digital world.CPD hour: 1Language: EnglishDate: 11 SeptemberTime: 1:00 – 2:00 p.m.

56 September 2014

For many visitors, Hangzhou is seen as a destination for a day trip from Shanghai, especially since

2010, when bullet trains began to cover the 150-kilometre distance between the two cities in an hour or so.

Yet the capital of Zhejiang province is one of China’s most scenic metropolitan areas in its own right and worthy of a longer stay. Hang-zhou is located at the southern end of the Grand Canal, which extends to Beijing, and as a result, the city has been a significant maritime centre for centuries.

To be sure, modern downtown Hangzhou has little to attract visitors, but the city’s jewel is West Lake – a 6.5 square kilometre body of fresh wa-ter lined with temples, bridges and pagodas and named a UNESCO world heritage site in 2011.

West Lake abuts urban Hangzhou to the east but is surrounded by hills in the other di-rections. It is divided into five bodies of water, the Li, Wai, Yue, Xili and Xiaonan lakes, each of which possesses its own beauty and charm.

West Lake gives its name to Hangzhou’s central district – Xihu. The city’s main tourist attractions are, for the most part, located in Xihu and neighbouring Shangcheng district, although adventurous visitors might wish to expand their horizons to include the four other urban districts: Xiacheng to the north, Gongshu and Jianggan to the northeast and Binjiang to the east.

More than 40 percent of Hangzhou metro-politan area’s 8.15 million people live in those six districts, while another three million in-habitants are found in two rapidly growing

suburban districts to the east and west.Hangzhou is easily traversable by its short

but efficient underground rail network, which opened in November 2012. Hangzhou East Railway Station opened in July 2013 and is the largest rail transport hub in China.

Given its location on the Grand Canal, Hangzhou also has an extensive water trans-port system. Boats will take visitors on the lake and along the canal, allowing scenic views of towering temples and pagodas, ancient stone-arch bridges and the bustle of riverside life.

The damming of local rivers that would eventually form West Lake began about 2,000 years ago and Hangzhou still has ves-tiges of ancient habitation. The Mid-Lake Pa-vilion was built in the mid-1500s and the Su

Hangzhou highlightsHonnus Cheung, Institute member and Travelzoo Asia Pacific CFO, heads to the famed city in China that is one of the country’s top tourist destinations

Business travel

September 2014 57

Business travel

Causeway, though often repaved, follows the same route as it did in the 12th century.

Other sites are recent reconstructions. The Leifeng Pagoda was originally erected in 975, during the latter part of the Five Dynas-ties and Ten Kingdoms period. However it has been rebuilt many times since then and the present building was completed only in 2002.

The history of the area is detailed at the West Lake Museum, situated in Shangcheng district. The lake is close to several other important cultural collections, such as the Hangzhou Museum of History (closed for ren-ovations) and the Zhejiang Art Museum, the largest public gallery in China. It is featuring the works of Lu Chakwan, a Hangzhou-born artist who died 20 years ago after a career spent in Europe.

On the southeast side of the lake is the China National Silk Museum, which docu-ments the role of silk in China since Neolithic times and explains its cultural importance as well as the raising, weaving and dyeing tech-niques. Southwest of the lake, and surround-ed by tea plantations, is the China National Tea Museum, which showcases the beverage through the ages and features a priceless col-lection of porcelain artifacts. The exhibition centre offers tea-tasting sessions and tea ceremonies.

South of West Lake, overlooking the Qi-antang River, is the Six Harmonies Pagoda. A temple has been located on the site since the fourth century and a fifth century brick pagoda was destroyed in a battle in 1121. The current building dates from the Ming period

Previous page: An ancient pavilion in West Lake. This page (Clockwise from above): Hangzhou East Railway Station; The Leifeng Pagoda; a traditional Chinese pharmacy store in Shangcheng district.

Where to eat• Grandma’s Kitchen Popular chain serving local cuisine. 218 Tiyuchang Road, Xiachen. 8515-7979.

• Green Tea Restaurant Innovative twists on local cuisine. 83 Longjing Road, Xihu. 8788-8022.

• Jin Sha Classic Hangzhou and Shanghai cuisine in Four Seasons Hotel. 5 Lingyin Road, Xihu. 8829-8888.

• Louwailou Famous for West Lake seafood since 1848. 30 Gushan Road, Xihu. 8796-9682.

• Qing Yi Yuan (Chin Chin) Highly regarded Buddhist vegetarian fare.

21 Qing Chun Lu, Shangcheng. 8723-8095.

Where to stay• Chaptel Hotel All-suite boutique. 57 Changsheng Road, Shangcheng. 8788-2999.• The East Hotel Luxury hotel famed for service. 198 Hushu South Road, Gongshu. 8809-9999.

• Four Seasons Hotel Hangzhou at West Lake Opulence with a view.

5 Lingyin Road, Xihu. 8829-8888.• Shangri-La Hotel Hangzhou Elegant grace. 78 Beishan Road, Xihu.

8797-7951.• Tea Boutique Hotel Understated luxury with accent on national beverage. 124 Shuguang Road, Xihu, 8799-9888.

What to do• China National Silk Museum History of sought-after textile. 73-1 Yuhuangshan Road, Xihu. 8703-5150.

• China National Tea Museum Millennia of hot beverages. 88 Longjing Road, Xihu. 8796-4221.

• Six Harmonies Pagoda Striking architectural gem. 84 Zhijiang Road, Xihu. 8659-1364.

• West Lake Museum A physical and cultural guide. 89 Nanshan Road, Shangcheng. 8788-2333.

• Zhejiang Art Museum Largest collection in the nation. 138 Nanshan Road, Xihu. 8707-8700.

though it was remodelled and extended dur-ing the Qing Dynasty. An exhibition centre is nearby which explains the history of pagodas in China and the various architectural styles.

Another historical relic worth visit-ing is the Qinghefang Pedestrian Street in Shangcheng district. This street, which might have been visited by the Venetian trader and traveller Marco Polo 750 years ago, is lined with Ming and Qing buildings and some shops have been in business continuously for nearly four centuries. The street caters to tourists and offers handicrafts such as silk, sandalwood fans and traditional Chinese pharmaceuticals.

Qinghefang is also a popular dining-out area. Freshwater fish dominates Hangzhou cuisine – famous recipes include West Lake Fish in Vinegar Gravy and Quick-Boiled Cru-cian Carp with Clam – although other signa-ture dishes include Dongpo Pork and a ver-sion of Beggar’s Chicken.

of charred oak. Once upon a time, the only mixer with

Kentucky Bourbon considered worthwhile by gentlemen of character was “branch water.” One notable recent fan was J.R. Ewing, the late Larry Hagman’s fictional oilman in Dallas, the popular television series. (A branch is a creek or tributary river in Southern U.S. dialect.)

Now the frontiers of American whiskey manufacture have moved and exciting young distillers have emerged all over the country. Instead of Mississippi River branch water, they are sourcing from nearer the Buffalo Bayou in Texas or even from the Hudson River, upstream from New York.

Brothers Travis and Chris Whitmeyer, for example, make whiskey from their distillery in the northwestern suburbs of Houston. Whit-meyer’s Texas Single Barrel Cask Strength Straight Bourbon Whiskey is particularly smooth, with rich, grainy overtones reminis-cent of lucerne and alfalfa.

Although Prohibition ended in 1933, the commercial manufacture of spirits remained illegal in New York state until 2007. One pio-neer is Tuthilltown Distilling, located in the Hudson Valley town of Gardiner. Its Hudson Four Grain Bourbon Whiskey is made with corn, rye, wheat and barley.

The sweetness of the corn and barley are offset by the sharpness of rye and wheat to make a remarkably balanced combination. Tuthilltown expects to launch its Bourbon in Asia-Pacific markets, including Hong Kong, by 2016.

After hours

Bourbon of proofGeorge W. Russell sees the emergence of a newera for American whiskey

One relief from the intense sunlight beaming down in high summer on the vibrant and crowded French

Quarter in New Orleans is to seek refuge in one of Bourbon Street’s many taverns, club and lounges.

Inside Johnny White’s Hole in the Wall, a small and dim yet welcoming bar on Bourbon Street, famous for never closing (not even in 2005 during Hurricane Katrina and its terrible aftermath), an order of “Bourbon and branch” is met with bemused understanding by the twenty-something barkeep.

New Orleans played an important part in creating American whiskey, according to Dickie Brennan of the New Orleans Bourbon Society. After all, Bourbon whiskey has quite a history along here. The legendary New Orleans street is one reputed source of the term Bourbon, an etymology attributed to its warehouses that once stored barrels of whiskey sent down the Ohio and Mississippi rivers by riverboat and barge for export. The river trip of three to six months and subsequent storage in oak casks turned the clear distillate into the amber colour we know today.

However, the more likely origin of the term is the old Bourbon County in Kentucky, where Irish immigrants set up stills in the 18th cen-tury. The county was named to honour the sup-portive French regime during the War of Inde-pendence and was subsequently subdivided (the present Bourbon County is dry) but the name stuck.

Kentucky remains the spiritual home of Bourbon whiskey. Most of the major producers, such as Beam Suntory (Jim Beam and Mak-er’s Mark), Brown-Forman (Jack Daniel’s and Woodford Reserve) and Campari Group’s Aus-tin Nichols (Wild Turkey) are based there and independent high-end marques have started in recent years, such as Buffalo Trace in 1999.

58 September 2014

To make Bourbon, corn (maize) grown in the American Midwest is ground into fine flour. By United States law, at least 51 percent corn must be used, to which rye and malted barley are added, and, occasionally, other grains: Buf-falo Trace makes WL Weller Wheated Bourbon using red winter wheat.

The grains are cooked separately – they require different temperatures – with iron-free water (for which central Kentucky is known) and the resultant mash is blended. A yeast and malt culture is added and the mixture is left to ferment.

The liquid that is formed is, confusingly, known as “beer,” which is heated to evapora-tion and condensed in a distillery to form what is known as “low wine.” Another distillation is conducted to refine the liquid, which is then known as “high wine.”

This is matured in new white oak barrels that have been heated to caramelize the sug-ars in the wood and char the inside of the staves. The whiskey is matured for at least two years to be called “Straight Bourbon” and many are left for longer. Bourbon whiskey is between 80 and 125 degrees proof on the U.S. scale (40 to 62.5 percent alcohol by volume).

Bourbon is generally regarded as sweeter than other whiskies, due to the use of corn as the base and the caramelization of the oak bar-rels. (The Wheated Bourbon has floral notes reminiscent of honeysuckle.) Other flavours that emerge include fruits, honey and vanilla. Hints of tobacco and pepper can emerge in older Bourbons, as can the almost umami tone

The Wild Turkey Distillery in Lawrenceburg, Kentucky can produce 40 million litres of bourbon annually.

tional standard for diving watches. Like the Seamaster, there’s a helium escape valve to ensure the consistency of air pressure in the watch’s movement and balance the exterior after diving. The Sea Hawk has a subtle satin finish with rich beveled edges and is carried off with a sea-friendly rubber strap.

Rolex’s Oyster Perpetual Submariner was first introduced in 1953 during the pioneer-ing era of scuba diving, and has been a main-stay of the diving scene ever since.

The 40mm piece has a monobloc middle case, screw-down caseback and winding crown with a triple waterproofing system to ensure its durability at depths of up to 300 metres.

The mechanical movement is Rolex’s in-house Calibre 3135, which is an officially certified Swiss chronometer with self-wind-ing mechanism, perpetual calendar, a para-magnetic blue parachrom hairspring and bidirectional self-winding via a perpetual rotor. Fully wound, the power reserve should last for two days.

The striking green dial has a highly legi-ble, luminescent chromalight display, which glows blue in the dark and at depths. The piece is finished with a stainless steel strap with flat three-piece links and Rolex’s trade-mark Oysterlock safety clasp with Glidelock extension system.

Dive watches pack enough technology, rugged durability and security to be attrac-tive enough to the avid watch collector, whether they descend the murky depths themselves or prefer the dryness of land.

The Seamaster has a 45.5mm stainless steel case on a matching stainless steel brace-let, fitted with a helium escape valve, and is water-resistant to up to 600 metres. The cer-tified chronometer is powered by an Omega Calibre 9300, visible through the attractively transparent caseback. The chronograph movement is self-winding with a column wheel mechanism and co-axial escapement that ensure its precision. Also inside the movement is a silicon balance-spring with two barrels that allow automatic winding in both directions. The Seamaster has a rho-dium plate finish with arabesque Geneva waves.

Girard-Perregaux pitches in with the Sea Hawk, featuring cobalt blue and coral

orange colours unified to reflect the timepiece’s nautical inspiration. On

the dial, the three-dimensional hours markers are coated in a

special luminescent substance to allow visibility even at deep depths where light is minimal. There’s a power

reserve indicator at 6 o’clock with an orange display that

shows when the movement must be rewound, while at 2 o’clock is a polished date window.

Encircling the dial is the rotat-ing unidirectional bezel, this one

with a rugged and ergonomic edge, which allows for easy adjustment. The case is manufactured from stainless steel and boasts extra

protection through a black rubber crown set at 4 o’clock, effectively reinforcing against impact.

The Sea Hawk is water-resistant up to 1,000 metres, which surpasses the interna-

September 2014 59

Af

Deep thoughtsDive watches contain a plethora of rugged technology, as Joe Wu finds out

Hard hat divers in their giant underwater suits were the first to walk along the sea floor.

Mounted inside their giant helmets were ticking pocketwatches, the first thing they saw as they put their last piece of equipment on – timepieces that hopefully would not get wet.

It was the rise of the frogmen that first led to the mass production of watches spe-cifically designed for deeper depths. Under-water warfare broke out during World War II and created the need for timepieces that could operate externally and further down into the ocean.

In modern times, scuba diving is a hob-byist’s pursuit and an industry in itself, taking in building, salvage, ship repairs, aquaculture and beyond. Such is the popularity and usefulness of underwater diving that luxury watch-making maisons manufac-ture a range of high-end options suitable for anyone from the novice diver to the professional frogman.

Omega’s Seamaster Planet Ocean 600M was launched with the watchmaker’s maritime legacy in mind. The piece features a scratch-resistant sapphire crys-tal mounted inside a unidirectional rotating bezel – typically found on all divers’ watches – which allows the diver to keep track of both the time and how long he has been underwater. The black dial has a central chronograph hand, and 60-minute and 12-hour counters are located at 3 o’clock, allowing for the easy reading of elapsed time.

OmegaSeamaster Planet

Ocean 600M

Girard-PerregauxSea Hawk

I hated school. In mathematics class they told me that one and one are two and two and two are four. In art class

they told me “less is more.”Come on, guys, both can’t be true!Eventually the art teacher backtracked.

This was after I told her that if less was more, I was clearly doing more homework than my classmates. When it comes to homework, she said, less was less. Perfidy!

Once I emerged from school into the “real” world, things were clearer. More was always more and less was always less.

Until the week before writing this. That’s when I met a financial writer who explained that the “less is more” principle had now invaded the technology business – and was making entrepreneurs rich and accountants confused.

He gave me some examples.Adobe Photoshop was a program that

gave you a million choices of adjustments you could make to photographs. Someone used the less is more principle and launched Instagram, which gives you only 10 choices – and that guy became a billionaire.

Email was a program that you could use to send millions of words to other people. Someone used the less is more principle to launch Twitter, which let you send only one sentence – and he became super-rich.

More recently, someone else used the less is more principle and launched Yo, a messaging service that only sends the word “Yo” to people. Now that guy is making big bucks.

So I hereby launch “No,” a service that doesn’t send anything to anybody. True

minimalism, and the ultimate expression of the less is more principle. Now where’s MY billion dollars?

Nowhere. The world is totally biased against lazy wastrels, and that’s not right. It’s not my fault I’m a lazy wastrel. Well, maybe it is, but it’s still not fair. I may well have been born this way, in which case I surely deserve hefty compensation at public expense.

Now, there is a serious point to all this. The unnamed financial writer told me that the less is more principle is making it very difficult for accountants to do valuations – because of the exact contradiction that I had discovered many years ago at school.

The less is more principle may work bril-liantly as a maxim for artists and entrepre-neurs, but only the more is more principle works when it comes to financial profes-sionals trying to value things.

To try to remedy this, accountants are valuing Internet companies on projected earnings, also known as “pipe dreams.”

This is somewhat risky. For example, a few years ago, this system was used to value a website called MySpace.com as being worth all the money in the world. A year or two later, it was worth a dollar fifty, if you were feeling generous.

This is known as “a correction.” Financial professionals use this word when every-thing goes wrong but they want it to sound right. “Good morning, John. I’m calling to tell you that your life savings have undergone a correction and are now worth a dollar fifty. Congratulations! Your investment portfolio is now entirely correct!”

Ever since technology stocks invaded the financial world, earnings estimates have been tough. Fortunately, specialized termi-nology can help.

CEO: So, is our share price going up or down?

CFO: Since the correction it has been mov-ing sideways.

CEO: Sideways? But our factory is next door to a landfill.

CFO: That sounds about right.And if your board of directors does com-

plain that revenue has disappeared, investors are fleeing and profits are negative, you know what to say.

“That may be true, Mr. Chairman, but let’s not forget: less is more.”

Get your daily dose of Nury’s humour at www.mrjam.org

Let’s get fiscal

Less is more, but only sometimesNury Vittachi finds that things don’t add up, especially when you’re trying to make an easy billion dollars

Nury Vittachi is a bestselling author, columnist, lecturer and TV host. He wrote three storybooks for the Institute, May Moon and the Secrets of the CPAs, May Moon Rescues the World Economy and May Moon’s Book of Choices.

“ The world is totally biased against lazy wastrels, and that’s not right. It’s not my fault I’m a lazy wastrel.”

60 September 2014