Financial

Management
www.cimaglobal.com • January/February 2011

Debt
Sea
In Europe alone, $1trn of corporate debt is
set to mature between 2011 and 2014.
Will the world’s companies stay afloat?

8 ways to improve cash management Plus:

Reporting
convergence p54

Is it alive? Artificial intelligence hits business Demographic

trends p14
UK governance

Q&A: Siemens Pakistan’s Murtaza Abbas code explained p44

 Financial Management | January/February 2011
A word from the president
CIMA members
are poised to be at
the cutting edge
I
am delighted that CIMA has started the
year with a revitalised magazine and I
hope that its contents will encourage
members and students to move forward
with fresh insights and ideas. Financial
Management has been given a make-
over to enhance all your favourite pages and add
some new slots to keep you up to date with the
latest developments in business and finance. In
addition, our 172,000 members and students in
168 countries will now be able to access the latest
institute news and features in FM at the click of a
mouse as well as in print.
Looking at the year ahead, it is heartening to
learn that CIMA members are poised to be at the
cutting edge when it comes to business sustain-
ability. My optimism comes after seeing the results
of a new survey of 2,000-plus finance profess­ionals
who are members of CIMA, the American Institute
of Certified Public Accountants and the Canadian
Institute of Chartered Accountants.
The survey found that 89 per cent of the larger
companies employing our respondents currently
have a formal sustainability strategy in place – or
plan to. This figure was lower for SMEs (56 per
cent), but it is encouraging to see that a growing
number of businesses of all sizes are seeing the
Illustration: Masao Yamazaki/Dutch Uncle
bottom-line benefits of making their companies
leaner, greener and more socially responsible.
In a world where our consumption patterns out-
pace the planet’s ability to regenerate resources by
about 30 per cent, businesses that deliver enhanced
value by radically reducing material inputs – and
engaging consumers on product usage – will be
well positioned for long-term success. This is also
good news for CIMA members. The same survey
concluded that, despite the growing appeal of sus-
tainability as a driver for lowering capital costs,
reducing risk and increasing shareholder value,
3
too often the information is not produced and CIMA’s survey
­managed with the necessary rigour. on business and
I’m sure that we would all concur with the sur- sustainability
vey’s assertion that sustainability programmes can be found
can be truly effective only if they are transparent. at www.
This means that companies need to call on their cimaglobal.com/
finance professionals to introduce and oversee sustainability
the necessary measurements, verifications, infor-
mation controls and reporting mechanisms. More-
over, CIMA members are ideally positioned to
ensure that future investment in sustainability
capabilities produces greater returns than simply
meeting compliance requirements or mitigating
threats. This is pure management accounting with
a green cherry on top.
As encouraging as this sounds, there is still
work to be done. CIMA members may be perfectly
placed to develop their business partnering roles
in the area of sustainability, but, if they are to
thrive, one of the soft skills they need to acquire
is the ability to blow their own trumpets.
At the recent CIMA president’s dinner in the
historic Merchant Taylors’ Hall in London, I per-
suaded the company’s master and wardens to
allow our guests to enjoy the traditional ringing
of the old ship’s bell as we gathered in the Great
Hall. Our guest speaker was Tim Jackson, who is
professor of sustainable development at the Uni-
versity of Surrey. He later noted that one of the
main functions of a ship’s bell is to sound out a
vessel’s position when visibility at sea is poor.
With this in mind, he suggested that the bell is a
good metaphor for the role that management
accountants can play in providing the clearest
possible advice, in sometimes foggy surroundings,
to guide companies (and nations) towards sustain-
able solutions for the future. Whether bell or trum-
pet, CIMA members need to ensure that their
voices are heard.
George Glass
CIMA president
 4 Financial Management | January/February 2011

At a glance

Front 3–20
A word from the president
George Glass – p3
Update p9–13 Digest of the latest
developments in management
accountancy and beyond.
Hot potato Your ethical
dilemmas resolved. Book in
brief What Works by Hamish
McRae. App of the Month
Business Card Reader. Learn
from... Bayer’s ideas factory.

I worked on the...
Guizhou Shuibai railway – p6

22
The data
Global demographic shifts – p14
Forum
Letters, polls and debate – p16
Opinion

26
The FT’s Richard Milne – p20

Features 22–39
Q&A: Murtaza Abbas
CFO of Siemens Pakistan – p22

Wall of debt
Trillions-worth of debt is approaching
maturity. Will companies cope? – p26

Machine intelligence
IT systems get minds of their own – p32

8 ways to improve cash management

36
Practical advice on ensuring that your
entire organisation is cash aware – p36

Prime number Olympic funding – p39

CIMA is the President Financial Editorial Director Creative Director

Chartered Institute George Glass FCMA Management Peter Dean Michael Booth
of Management Deputy President is published for CIMA by Editor Group Art Director
Accountants Harold Baird FCMA Seven, Scott Payton Simon Campbell
26 Chapter Street, Vice President 3-7 Herbal Hill, Sub Editor Design Consultant
London SW1P 4NP Gulzari Babber FCMA London EC1R 5EJ. Neil Cole Mark Leeds
020 7663 5441 Chief Executive Tel: 020 7775 7775. Chief Sub Editor Head of Pictures
www.cimaglobal.com Charles Tilley FCA editor@fm-magazine.com Steve McCubbin Martha Gittens
Financial Management | January/February 2011 5

Study notes 41-50

Editor’s note

As the graphics on pages 14 and 15 demonstrate, the

world is undergoing an astonishing socioeconomic
transformation that companies ignore at their peril.
The shift is affecting all areas of business, from the
price of commodities, via demand for new products,
Eight-page study section helping
to the supply of new talent.
students with E1, P3 and F1 papers. What do these and other seismic global trends
Interview with Margaret Anderson.
Exam notices, rules and contacts
mean for management accountants? Over the
coming months and years, we hope that the
Technical 54-56 new-look Financial Management will provide some
answers. What have we changed? First, we’ve
Progress along the road to global expanded our global coverage, sending journalists
reporting harmonisation and the
opportunities the climate change
and photographers to meet CIMA members who
agenda presents to UK businesses are helping to shape the business landscape in
Karachi, Pakistan (page 22) and Guizhou, China
Back 58–66 (page 6), among other locations. Second, we’ve
made the magazine more accessible, with a varied
mix of new bite-sized articles upfront to
accompany the more in-depth features and study
guides in the middle and back sections.
Finally, we’re working hard to ensure that FM is
as interactive as possible, with more opportunities
What you learn on the... for you to shape future content. I hope that you
“Develop into a director”
Mastercourse – p58
enjoy the results of our efforts – and would be
Job of the month delighted to hear your views on the magazine.
Business analyst – p59
CIMA global events
Please send your comments and ideas to editor@
Highlights of the international fm-magazine.com or join the FM feedback group
calendar – p60
The Institute
on CIMAsphere at www.cimasphere.com/groups
CIMA announcements – p62
CIMA CEO column Scott Payton
Charles Tilley – p65
CIMA versus... – p66

Picture Editor Group Advertising Publisher The contents of this publication are subject
Nicola Duffy Manager Mike Bokaie to worldwide copyright protection and
Picture Researcher Tina Hanks Chief Executive reproduction in whole or in part, whether
mechanical or electronic, is expressly
Alex Kelly Advertising Manager Sean King
forbidden without the prior written
Production Manager Matthew Blore Chairman Tim Trotter
consent of CIMA/Seven Squared.
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Account Director sevensquared.co.uk Cover illustration Origination by Wyndenham Pre-Press Ltd.
Jake Cassels Tel: 020 7775 5717 Noma Bar Printed in the UK by Southernprint Ltd.
 6 Financial Management | February 2011
I worked on the…
Guizhou Shuibai railway project, China
Start date February 1998 End date January 2005
“Each project I have worked on at the Asian
Development Bank (ADB) – from new roads in
Mongolia to major transport and infrastructure
projects in China – has brought a unique range
of benefits to the communities and the
environment surrounding them.
“The Guizhou Shuibai railway is designed to
provide a more reliable and efficient means of
transporting passengers and coal to energy-
deficient areas in Guizhou and its neighbouring
provinces. It is also helping to establish related
industries and so create employment and other
income-generating opportunities that reduce
poverty in the area.
“Difficult terrain meant that the construction
was challenging. The total length of the railway
Photography by
Ariana Lindquist
was 119km, but included more than 50
tunnels and 100 bridges – and, to build 100km
of railway line, the contractors first had to
build more than 200km of access roads.
“The project has been a great success:
immediately after completion, the revenue
of local governments in the area increased by
94 per cent and average income per worker
increased by 95 per cent. The proportion of the
population below the poverty line in the area has
decreased by 55 per cent.
“As an operations specialist focusing on
projects in China and Mongolia at ADB, I was
involved in the last stage of implementation
of the railway and wrote the project
completion report.”
Financial Management | February 2011 7

i
Project delivery
company:
Guizhou Shuibai
Railway Corporation
(railway bridge in
Name: Lakshman photograph designed
Athukorala FCMA by the China Railway
Major Bridge
Organisation: Asian Reconnaissance &
Development Bank Design Institute)
Location: Manila, Asian Development
Philippines Bank loan: $105m
CIMA qualified: 1986 Total project cost:
Fellowship: 1987 $392.6m
 Financial Management | January/February 2011
Update
Finance heads
optimistic about
growth in 2011
The fourth quarter of 2010
brought a rebound in
confidence among UK chief
financial officers, according
to a new survey by
accountancy firm Deloitte.
“If 2010 was the year of
balance sheet rebuilding
and cost-cutting, then 2011
looks set to be the year in
which corporates start
spending again,” said
Margaret Ewing, partner and
vice chairman at Deloitte.
The survey indicates that UK
finance chiefs are increasing
their focus on growth
opportunities and becoming
more positive about the
outlook for revenues. More
than one-third of survey
respondents – 34 per cent
– predict that emerging
markets including China,
India and Brazil will make
the most substantial
contribution to growth in
their company’s revenues in
2011. Thirty-nine per cent of
UK finance heads expect that
their home market will make
the largest contribution to
revenue growth. CFOs put
the probability of a double-
dip UK recession at 27 per
cent – down from 38 per cent
six months ago.
Chengdu to host
Global Business
Challenge final
Photography: Getty Images
The Chinese city of Chengdu
has been announced as the
destination for the global
final competition of the 2011
CIMA Global Business
Challenge. The international
business management
IASB issues
narrative
reporting guide
The International
Accounting Standards
Board (IASB) has
published an International
Financial Reporting
Standard (IFRS) Practice
Statement Management
Commentary, which offers
a broad, non-binding
framework for the
presentation of narrative
reporting to accompany
financial statements
prepared under IFRS.
competition, which is being
held in partnership with
Barclays, is created to bring
out the best in the business
leaders of tomorrow. The
competition typically
attracts teams from
hundreds of colleges and
universities around the
world. It is open to
undergraduates – ideally
from a business or finance
The Practice Statement
is not an International
Financial Reporting
Standard, which means
that companies are not
obliged to adhere to it in
order to remain IFRS-
compliant. “Management
commentary is one of the
most interesting parts of
the annual report,” said Sir
David Tweedie (pictured),
chairman of the IASB,
when launching the
Statement on December 8.
“It provides management
with an opportunity to add
context to the published
financial information, and
background – from public
and private institutions.
Teams taking part will
analyse, report and present
on a CIMA case study. The
winning team from each
of the 17 participating
regions will win the chance
to compete in the global
final in Chengdu.
“We sincerely welcome
the selection of Chengdu by
9
to explain their future
strategy and objectives.
It is also becoming
increasingly important
in the reporting of non-
financial metrics such
as sustainability and
environmental reporting.”
The Statement explains
that management
commentaries should
provide context for
financial statements,
communicate integrated
information about a
company’s resources, and
explain the main trends/
factors likely to affect
future performance.
CIMA as the host city for
the 2011 Global Business
Challenge final,” said Fu
Yong Lin, vice mayor of
Chengdu. “It provides a
good opportunity for them
to take a closer look at what
Chengdu can offer.”
www.cimaglobal.com/
Events-and-cpd-courses/
globalbusinesschallenge/
Financial Management | January/February 2011 11

Update

PwC: paying taxes
is getting easier
Since 2006, 60 per cent of
the world’s major economies
have made it easier for firms
to pay taxes, according to
“Paying Taxes 2011”, a new
report from PwC. Over this
period, tax costs have fallen
by an average of five per
cent, with the time needed
to comply falling by a week.
PwC launches
iPhone app
PwC has created an iPhone
app in the UK that gives
users access to the
company’s news and
publications. Users can
personalise the app to filter
content according to their
areas of interest, and access
interactive maps showing
PwC’s locations and local
contact details. Around
3,000 people signed up for
the app in the weeks
following its launch at the
end of 2010. To download
the free app, visit www.pwc.
co.uk/eng/aboutus/pwc_uk_
iphone_app_download.html
Beware of tough Our guide to the best online tools
targets, warns new
CIMA report
A new CIMA-funded report
issues a stark warning to
employers considering
setting stringent targets for Business Card Reader
employees in 2011. The
report, “The use and
Take a photo of a business card
consequences of using your phone – this app will
performance management
and control systems”, is
automatically read the contact details
based on research conducted and create a new file in your digital
by Professor David Otley at
address book. The software even
the University of Lancaster.
Otley found that an knows which fields to use for
excessive focus on objectives
– particularly those related
telephone, email and web addresses.
to financial issues – caused Invaluable for any regular attendee
staff to take undesirable
actions to meet budgetary
of conferences, trade shows or
targets. To view the report, networking events.
visit www.cimaglobal.com/
useandconsequences
i
FRC proposes
pan-European Cost: £2.39 (iTunes Store)
Category: Business
audit reforms Updated: December 3, 2010
Current version: 1.5.1
The UK Financial Reporting Size: 18.1 MB
Council (FRC) has published Languages: English, French,
its submission to the German, Italian, Spanish
European Commission’s Developer: SHAPE Services
consultation, “Audit Policy: Compatible devices: iPhone,
Lessons from the crisis”. The BlackBerry, Windows Mobile
FRC’s proposals focus on (touchscreen)
improving audit quality
across the EU and reducing
the risk associated with the
level of audit market
concentration. For more,
visit www.frc.org.uk

CIMA hosts Strategies – Tomorrow’s

sustainability
roundtable
Senior executives from
a number of the world’s
leading companies met in
London in November for the
CIMA roundtable discussion,
“Integrating and Measuring
Sustainable Business
Balance Sheet”. During the
event, Anant Nadkarni, vice-
president of the Tata Council
for Community Initiatives,
explained how his company
measures its performance in
terms of the long-term
impact of its operations on
human wellbeing. In order to
do this, Nadkarni explained,
Tata has produced the Tata
Index for Sustainable
Human Development.
“Communities and people
are not just other
stakeholders, but the very
purpose of the existence of
enterprise,” he said.
Other participants in the
roundtable discussed the
challenge of developing a set
of comparable sustainability-
related metrics. Indeed,
many executives around the
table favoured an industry-
specific rather than one-size-
fits-all approach to
environmental and other
types of non-financial
reporting standards.
www.cimaglobal.com/
Thought-leadership/
Research-topics/
Sustainability/
 12
Update
Hot potato
This month’s
dilemma:
As a CIMA Fellow, I’ve
recently become a NED
for a retail business. I’ve
attended three board
meetings so far. Before the
first I received papers 10
days in advance, but wasn’t
sure whether they contained
all the data I needed. Since
then I have received the
papers a day or two before
meetings – also incomplete.
The CEO is very dominant
and defensive – and my
fellow board members seem
reluctant to challenge him.
My personal calls to him
have not been returned. I
raised this with the FD, who
informed me that the CEO
has specifically requested
sign-off on what information
to include in board reports.
She seems clearly under
duress. I am struggling to get
backup from the wider board
after I diplomatically raised
the issue at the last meeting.
Our response:
Two fundamental principles
are compromised here –
objectivity and professional
competence and due care
Financial Management | January/February 2011
– arising from the lack of
timely and possibly
inadequate information, as
well as the perceived threats
presented by the CEO’s
behaviour. These issues
need to be understood and
addressed without delay
to ensure that all board
members receive the
information they require
to ensure that the decision-
making process is not
compromised. There is also
a risk of association with
inadequate/misleading
information through the
actions of the CEO and, if
this threat is significant
and/or persistent, it should
be addressed by the board
to ensure that the
information relied upon
describes the true nature of
CIMA prepares to
launch new online
edition of FM
A new, fully interactive
online edition of Financial
Management magazine
will go live in February.
The site will feature all of
the content from the print
edition, as well as
slideshows, blogs and
other exclusive additional
content that makes the
most of the web’s potential.
CIMA members will be able
to use the site to submit
their feedback to articles,
share their views and
suggest ideas for future
content. Over the course of
2011, we will continue to
build an online archive of
Study Notes articles and
other educational content
to ensure that members
can enhance their
knowledge and expertise
anywhere in the world.
The online edition will be
available from February at
www.fm-magazine.com
the company’s transactions
and represents the facts
accurately and completely
in all material respects.
For more information,
visit www.cimaglobal.
com/ethics
Tanya Barman, head of
ethics, CIMA
Disclaimer
CIMA does not provide
legal, investment,
Illustration: Denis Carrier/Dutch Uncle
professional or career advice.
No responsibility or liability
whatsoever is accepted for
any error, omission or
mis-statement (whether
or not arising out of
negligence) or for any loss
or damage sustained as
a result of reliance on
information supplied or
comments made.
 Financial Management | January/February 2011
Update
‘Disengaged
employees’ a
major threat
More than four in five senior
executives across Europe and
the Middle East believe that
“disengaged employees”
present one of the top three
threats to their business,
according to a new survey by
the Economist Intelligence
Unit, the industry and
management research house.
However, 43 per cent of
board directors also concede
that engagement issues
including staff motivation
and identification with the
company are “occasionally”,
“rarely” or “never” discussed
at board level. Just 12 per
cent of executives surveyed
said that their companies
“regularly and often” tackle
staff with “continually low
engagement”.
Illustration: Lucas Varela/Dutch Uncle. Photography: Getty Images, Peter Morning
The report, “Re-engaging
with engagement”, is
available free of charge at
businessresearch.eiu.com
Learn from...
Bayer’s online
ideas factory
Pharmaceuticals giant Bayer
has used an intranet portal to
gather more than 9,000 ideas
from its 108,000 employees
around the world as part of its
“Triple-i: inspiration, ideas,
innovation” programme.
Three of these ideas –
including a transparent
snowboard – have already
made it to market, with a
further 32 in development.
Six global firms
launch Social
Business Trust
Bain & Company, Clifford
Chance, Credit Suisse, Ernst
& Young, Permira and
Thomson Reuters joined
forces in December last year
to launch the Social Business
Trust. The trust is designed
to speed up the growth of
“social enterprises” –
organisations that apply the
principles of the business
world to a social purpose.
The founders of the trust
hope to help 20 UK social
enterprises to grow over the
next two years. The trust’s
ultimate goal is to enable
these enterprises to provide
support to one million more
people in the UK. The
founders are investing £10m
into the project, in cash and
in kind. For more
information, visit www.
socialbusinesstrust.org
Hedge accounting
proposals
unveiled
The International
Accounting Standards
Board (IASB) has published
proposals designed to
improve the way that
hedging activities are
accounted for. The IASB
believes that its proposals,
issued on December 9 last
year as an exposure draft,
will “enable companies
to reflect their risk
management activities
better in their financial
statements, and, in turn,
help investors to understand
the effect of those activities
on future cash flows”. When
launching the exposure
draft, IASB chairman Sir
David Tweedie argued that
the proposals “sweep away
the existing rule-based,
complex and inflexible
hedge accounting
requirements and replace
them with a simple,
principle-based approach”.
If adopted, he added, the
proposals will provide “a
much simpler model that
better reflects risk
management practices while
providing more useful
information to investors”.
13
Book in brief
What Works
by Hamish McRae
HarperPress, £12.99
In writing stories about
20 successful ideas – from
as divergent sources as
Harvard University, the
Shanghai municipal
government, mobile phone
use in Africa, the German
Mittelstand and the
Edinburgh Festival – ten
common factors and
lessons emerged:
1. Optimism, balanced by
realism: pessimism paralyses.
2. Excellence, tempered by
decency: if you neglect your
wider responsibilities, you’re
liable to end up in trouble when
you meet headwinds.
3. Community works, if it is
allowed to: look at things from
the ground level up and mobilise
community.
4. Government works, too:
compare like with like.
5. Become a true magnet for
talent: put out the welcome mat.
6. Be honest about failure: keep
learning, keep making mistakes.
7. The need for humility: be as
sensitive to success as you are
to failure.
8. Be nimble: make sure you are
quick to adapt.
9. Listen to the
market:
remember, it’s
about more than
money.
10. Have a sense of
mission: keep the
long game in view.
 14 Financial Management | February 2011

The Data
Demographic
shifts between
now and 2050

In 1998
over-60s in the
developed world
outnumbered
under-15s for the
first time. In 2047
the same thing
will happen
trend 1 rates in worldwide
THE global developing
population countries
continues to For example,
increase, but although the
THIS growth populations of
is region- Germany and
specific. Ethiopia are
The world’s currently almost
population is equal, annual
on course to births number 471m Africa’s
reach 7 billion 3.3 million 344m population
in Ethiopia is projected
in 2011 and 9.07 to double
billion by 2050 versus 650,000
to more
– an estimated in Germany. than two
62 per cent of billion
which will be trend 4 by 2050
Europe’s North America
living in Africa,
Population
South Asia and demographic mid-2010:
East Asia. importance 344 million
continues Population
trend 2 to decline mid-2050:
471 million
The south Europe accounted
heads nortH for 13.3 per cent
An estimated of the world’s
2.2 million population in 729m
migrants will 1960 but only 585m
arrive in the 7.5 per cent in
developed world 2005. By 2050 it
every year from will have dropped
now until 2050, to 5 per cent.
according to In 1950 there
the UN, driven trend 5
were 12 people of
by economic The world is working age for every
disparities and getting oldeR person 65 and over. Latin America
In 2010 the so-called Population
the effects of In 1950, 8 per cent
elderly support ratio mid-2010:
climate change. of the population 585 million
dropped to 9:1.
was over the age Population
By 2050 it is
trend 3 of 60. By 2050 it
mid-2050:
Illustration: iStockphoto

expected to 729 million

Low birth will be 22 per cent fall to 4:1
rates in – that’s two billion
developed more elderly
countries and people than there
high birth are today.
 Financial Management | January/February
February 2011 2011 15

2,620m Japan’s
population
is projected to
Europe 1,632m decline from
739m Population
127 million in
2010 to 95 million
720m mid-2010:
1,755m by 2050
739 million
Population 1,571m
mid-2050:
720 million

379m
235m
2,084m

South East Asia

Central Asia Population
1,030m Western Asia Population 793m mid-2010:
mid-2010: 1,571 million
Population 1,755 million Population
mid-2010: Population 597m mid-2050:
235 million mid-2050: 1,632 million
Population 2,620 million
mid-2050:
379 million

South East Asia

Population
mid-2010:
Africa 597 million
Population Population
mid-2010: mid-2050:
1,030 million 793 million 58m 37m
Population
mid-2050:
2,084 million

Australasia
Population
mid-2010:
37 million
Population
mid-2050:
Source: 2010 World Sources: Population Research 58 million
Population Data Sheet, Bureau; UN Population
Population Reference Fund, Worldmapper.org;
Bureau: www.prb.org. A T Kearney; Eurostat.
 16
Forum
Letters
Risk-free capitalism?
European Union leaders
have recently issued a
statement in an attempt to
reassure Irish bond holders
that, even in the event of
debt restructuring, they will
not be forced to share the
burden.
I have to confess
that I am really confused
about the logic behind this
21st-century capitalism.
During our CIMA classes
we are constantly reminded
of the role of risk, how to
avoid it, how to reduce it, the
contingency strategies to put
in place and so on.
The main pillar is, of
course, that a higher return
usually corresponds with
a higher risk and vice-versa.
This is what capitalism is
all about: whoever invests
in risky activities has an
expectation of higher
returns, but can also lose
the equity invested due to
the higher risks
incurred.

 facts, maintaining a strictly
Now, in order to protect
the “mood” of investors on a
global level, leaders
of public
and private institutions are
trying to transfer those risks
 high ground, especially when
You asked …
‘Is there any
advice available
on the
recommended
accounting
treatment for the
UK’s new carbon
reduction
commitment
(CRC) scheme?’
to parties other than the
risk-holder. This is regarded
as a wise and reasonable
activity, so that investors can
keep investing – in essence,
risk free.
So the question is: why
has [German Chancellor]
Angela Merkel’s statement
that “we
cannot keep
constantly explaining to
our voters and our citizens
why the taxpayer should
bear the cost of certain risks
and not those people who
have
earned a lot of money
from taking those risks”
spread so much panic
and 
embarrassment? To
me it sounds like common
sense. Am I the only one
with this 
opinion?
Ovidio Graziano,
CIMA student
 published in the October
The straight answer is “yes”,
but the changes in the UK
Comprehensive Spending
Review of 20 October 2010
have made much of this
advice obsolete – and
“officialdom” is slow to issue
new guidance upon which
one can act.
The CRC has
metamorphosed many
times. Originally, a CRC
participant had to buy
allowances for a year and
wait 18 months to get a
return; then, a double
payment was suggested to
help cash flow; then, year
one became “free”; and
finally, via the CSR, we
Financial Management | January/February 2011
Poll of the month
We asked …
Is the global investment community
dangerously short-termist?
Source: FM survey on CIMAsphere, October-November 2010
Faith neutrality
In response to a letter
2010 edition of FM:
Financial Management, a
business magazine written for
a broad spectrum of
members, should stick to the
neutral stance when it comes
to religion. It should not be
used as a preaching platform
by those claiming the moral
have a year’s delay – but no
repayment at all!
Participants in the CRC
will now have to pay the full
cost of their carbon dioxide
emissions, not the net of
purchases less repayments.
Will forthcoming
consultations by the UK
government about further
simplification reveal the CRC
as a “green” tax, alongside
the climate change levy?
Will we still have to go
through the bureaucracy
of making payments,
receiving allowances and
then surrendering them
later; and purchasing
“top-ups” if required?
Yes:
47%
No:
13%
Yes, but it’s not
dangerous:
13%
It was in the past,
but short-termism
is diminishing: 10%
Not sure:
17%
their own sanctimonious
sermons sound as if they may
be more of a reflection
of
problems that exist within
the author’s own society, than
of the world at
large.

D Moore
(FM reserves the right to edit letters for
length and clarity.)
Write to: Financial
Management, Seven
Squared, 3-7 Herbal Hill,
London EC1R 5EJ. Email:
letters@fm-magazine.com
The CRC now seems to
have the appearance of a
tax, but no-one is yet
certain. It really is “watch
this space” over the next
few months. It’s worth
watching closely even if
you are below the current
qualification threshold, as
this may well be lowered to
half the current value.
In any event, it is
important to assess your
current CO2 emissions, draw
Photography: Eyevine
up an action plan to reduce
them and implement it now.
Andrew Jones, director,
EAV Associates and
CRC expert
 20
Opinion
Richard Milne
Capital markets editor, Financial Times
2010 was a year to remember for the bond markets – and a
year to forget for flotations. Will the tables turn in 2011?
F
or companies using the capital mar-
kets, 2010 was a banner year. Week
by week, new records were set. First
Microsoft and then Walmart issued
three-year bonds at less than 1 per
cent, while Colgate-Palmolive did
five-year notes at only 1.375 per cent – all record
low borrowing costs for companies worldwide.
At the same time, businesses rated below invest-
ment-grade level have issued the largest amount
of junk bonds of any year in history.
So what does 2011 have in store for market-
active companies? Assuming that the current
low-growth, low-inflation conditions persist,
debt markets are likely to remain fairly benign
for corporate issuers. Companies should be able
to reduce their borrowing costs significantly and
potentially issue longer-dated debt to help them
ensure that not too many bonds become due at
any one time, even if not all go so far as Rabobank
or Mexico, which both recently conducted 100-
year deals.
Such low rates would give companies real
opportunities to exploit unusual differences in the
cost of various instruments. With debt so cheap
and equity remaining expensive, companies could
have an incentive to play arbitrageurs and issue
debt to buy back their own shares. Or they could
follow dozens of companies and buy back some of
their existing debt, often to replace it with newer,
cheaper bonds.
Cheap borrowing costs could also persuade more
companies to take the plunge into debt markets in
the first place. There have been a good number of
first-time borrowers in both the US and Europe.
Investors’ thirst for a good return – known as the
“search for yield” – has caused absolute borrowing
costs to fall to almost unheard of levels for junk
bond issuers (although the “spread” – the differ-
ence between the yield and a supposed risk-free
rate such as US Treasury bonds – has remained
relatively high).
US companies are already massively biased
in favour of bond finance over bank funding,
Financial Management | January/February 2011
but the picture is different elsewhere. With low
interest rates and banks under pressure over higher
capital requirements, perhaps now is the time to
encourage more European and Asian companies
B
to tap the capital markets.
ut 2011 is also likely to bring market
risks. Overheating, for example,
is a major potential hazard. Some
market observers are already talk-
ing about the risk of a bubble,
especially in junk bonds and some
emerging markets. Any bursting of that bubble
could shut out low-rated companies or those from
the “wrong” country.
But, even among the biggest western compa-
nies, borrowing costs are unlikely to stay so low
forever. And there is the related risk of what hap-
pens when interest rates start to rise in the West or
tighten further in Asia. Once yields start to move
higher, many experts expect them to rise rapidly.
That, in turn, could deter many companies from
the capital markets and place them back in the
hands of the banks.
In equity markets, the world was much more
divided in 2010, with nearly all the big deals taking
place in Asia or Latin America. General Motors’
successful flotation in November could give hope
to western bankers, particularly those trying to
bring numerous private-equity-owned companies
to the market. But 2010 was mostly a year to forget
for IPOs in the US and Europe – and some analysts
remain sceptical for 2011 as well. Things should
be different in Asia, but concerns persist – as in
the debt world – over possible bubbles.
‘Some market A general risk for both debt and equity capital
observers are markets remains that of a new economic shock,
already talking perhaps if the problems of the eurozone intensify.
about the risk Conditions might be benign at present, but com-
of a bubble, panies will need to stay vigilant.
especially in
junk bonds and Coming soon: BBC News correspondent
some emerging Jeremy McDermott writes from Colombia on the
markets’ country’s foreign investment boom
 22

Q&A

Murtaza Abbas
FM travelled to Karachi to
discover how the new CFO of
Siemens Pakistan is steering a
complex global business through
a challenging and fast-changing
local environment
“Project
development
Interview by Rob Crilly is our big
Pakistan correspondent, The Telegraph business here
in Pakistan”
sales and
cost of
What’s the scope of Siemens’ operations sales
in Pakistan? 40,000 36,149

Siemens’ presence here is deep-rooted. 35,000 32,165

Rupees in millions

Indeed, it predates the country’s independence. 30,000 26,881

22,851
The company touches the heart and life of 25,000

everyone in Pakistan; Siemens is a household 20,000

name here. Both in Pakistan and worldwide, our 15,000

10,000
business is focused on three sectors: industry,
5,000
energy and healthcare.
0
2008 2009
What’s your most exciting growth area? Net sales and services Cost of sales
We will continue focusing on green technology.
Renewable energy is a key area for the next few years, Working capital
particularly wind power. We are already working on 25,000 1.19
21,148 20,380
two wind farm projects. Pakistan has been thinking
Rupees in millions

20,000 18,381
17,149
about this for the past few years, but has lacked the
resources to make much progress. With the help of 15,000

the government and Siemens’ headquarters, 10,000

alongside agreements with financiers, we are trying
to establish green projects that will help to tackle the 5,000
1.15
energy crisis here in an environmentally safe 0
manner. Water is another focus area. We are now 2008 2009
manufacturing environmentally friendly reverse Current assets Current liabilities
osmosis and ultra filtration plants locally, which are Current ratio
economical, easy to install and service, and can Source: Siemens Pakistan Annual Report 2009
Financial Management | February 2011 23

Photography by
Charla Jones
 24 Financial Management | January/February 2011

Q&A

help to guard against water-borne diseases. We are
also focusing on solutions for smart buildings that
reduce CO2 emissions and conserve energy.
The global media rarely focuses on Pakistan’s
commercial strengths. What are they?
I look at it in two ways. One: this is a country
with a population of more than 200 million people,
career an expanding middle class and continuing
ladder urbanisation, along with huge business potential
in almost all areas of the economy. Two: there
1997-2001 After
studying at Karachi is a core industry infrastructure here and an
University, and gaining abundance of natural resources, which are the
the CIMA qualification fundamental ingredients of economic growth.
in 2000, joined AF
Ferguson & Co, a
member firm of the How has the Pakistan economy in general,
Pricewaterhouse- and your business in particular, fared in the
Coopers network based
in Karachi, as a recent global financial storm?
management trainee. We have seen a lot of ups and downs. Until 2007
2001-03 Appointed there was a period of steady economic growth,
assistant manager in which was evident in investors’ confidence, plus
assurance business and
advisory services group substantial foreign direct investment flowing
of AF Ferguson & Co, into the country, resulting in huge public sector
But there are also good people around. We
recently had a meeting with Transparency
International, and through our business forum we
are working with other multinational and national
companies to create an integrity pact that will
guide our operations. Meanwhile, we see other
global players, such as General Electric, entering
this market, despite the handicaps. In general,
I can confidently say that Siemens in Pakistan is
well geared up to meet the challenges ahead.
How did last year’s devastating floods affect
your business?
The problem the floods posed for Siemens is that
major projects come from government spending,
so, when this spending is shifted or diverted, it
changes the landscape. Consequently, owing to
the flood crisis, a major proportion of the
government’s Public Sector Development
Programme was shifted from funding
infrastructure projects to deal with the flooding,
which has affected a lot of business for Siemens.

‘Be passionate about

involved in planning spending. Siemens benefited from those
and executing audit
assignments, designing positive trends. However, the global recession in

what you do. There is

accounting policies general and local economic downturn in
for companies among particular over the past two years or so has made
other duties.

no place for second best’

a dent in all businesses and we are no exception.
2003-04 Joined
Siemens Pakistan and Pakistan has a very interesting business
was appointed deputy landscape. Take the energy sector: on the one
general manager only hand there is a shortfall of around 6,000
one month into the
six-month company megawatts of electricity in Pakistan; on the
orientation. other, there is enormous power generation
2005-07 General potential in hydel, thermal, wind and solar
manager working as fields. In the industry sector, strong demand in
commercial head of
automation and drives areas such as cement, steel, textiles and
division, responsible fertilisers continue to exert pressure on supply.
for more than 400 What is important is that Pakistan generally has
team members spread
across four of Pakistan’s no scarcity of raw materials – and to cap it all, it
major cities. has a cheap labour force and low cost base. This
2007-09 Appointed may well be the country’s unique selling
divisional director, proposition. It will now depend on the intent
before taking on
responsibilities for and will of policymakers to convert Pakistan’s
corporate finance socioeconomic gaps into opportunities. The
reporting across the micro and macro indicators do not predict a
Middle East for Siemens.
bright 2011; GDP is set to grow by a mere five per
2010 Appointed chief
financial officer of cent. However, this is a resilient nation that
Siemens Pakistan cannot be kept down for long. So I am very
in October. optimistic that things will improve substantially
in the medium term. In any case, Siemens will
play a vital role in the growth and development
of Pakistan.
What hazards does Pakistan’s socioeconomic
environment present to a multinational such
as Siemens?
Pakistan is a young country and there are still, of
course, issues with bureaucracy, red tape and
corruption, which is everywhere in the world.
Murtaza Abbas
CFO, Siemens Pakistan
Karachi is a city known for its strikes and
violence. Are there advantages to doing
business here?
Karachi is the economic capital of the country.
Despite local issues, such as law and order, it is vital
to maintain a strong presence here, because most
key organisations, whether local or international,
are headquartered in the city. What’s more, Karachi
is Pakistan’s key sealink, so it’s a perfect logistics
hub. And with a population of close to 20 million,
the city has tremendous business potential. That’s
the reason why two years ago Siemens declared
Karachi among its top 12 most important global
cities in terms of business focus.
Why did you opt for a career in finance?
I was inspired by my father, who also worked in
audit and finance. Like many children
I aspired to be like my father, but then over the
years I also developed a strong passion for this
field. People working in finance get a more
comprehensive overview of an organisation
– and, if one has a sense of organisational
Financial Management | February 2011
dynamics and adds a bit of leadership, this
becomes a recipe for success.
What benefits has your CIMA qualification
helped you to reap?
It helped me to excel, not only in my educational
field, but also in my professional life, because it
changed my way of thinking. Accounting or
financial degrees generally have a strong focus on
number crunching and analysis. An MBA provides
a broad base of knowledge, but it doesn’t provide
an in-depth knowledge of many topics. CIMA
connects the financial with the management and
marketing world. So, if you have a connection
between finance, management and marketing,
then you can really understand people, and it’s all
about understanding people. Every department
– marketing, sales and finance – has its own
interest. What my CIMA qualification provided me
from the very beginning was an insight into
cross-functional synergies.
What’s in your in-tray?
These are still early days in my new role as CFO of
Siemens Pakistan. Siemens has an extensive
training programme which, coupled with an
effective job rotation system, grooms people for
management assignments. But there are still
some tricks of the trade that you can only learn
on the job. We are engaged in a range of product,
services and project businesses across multiple
sectors, which are inherently highly dynamic in
nature. Every new day has new dimensions and
calls for versatility in management styles. One
principle that I practise as well as preach is quick
and informed decision-making, because in
25
today’s competitive world, we can’t afford to
procrastinate.
How is Pakistan set to change during the years
ahead – and how is Siemens responding?
Pakistan’s past reflects its future. It has bounced
back several times and the country has provided
unprecedented opportunities to investors.
I am confident that this will happen again.
Meanwhile, globalisation continues, providing
limitless possibilities and challenges. The
biggest problem, I predict, will be hanging on to
people. On the one hand, globalisation improves
the business environment but on the other,
global opportunities will continue to entice
skilled, educated people to leave the country.
As far as Siemens Pakistan’s response is
concerned, the world is changing with respect to
green energy, one of our major interests. We
expect a shift in that direction in Pakistan, too –
and are ready with our unmatched portfolio in
this area.
Your advice for CIMA students?
Be passionate about what you do, because if you
do not do that you will never be able to bring out
the best in yourself. And keep in mind that there
is no place for second best.
i Coming soon…
David McMillan, CEO of
UK general insurance, Aviva...
on risk management, the future of the
insurance industry, navigating financial
market uncertainty and more.
 Wall of debt

More than $3trn of corporate debt will

reach maturity between now and 2015.
Is the world heading for a refinancing
crunch? And how can your company head
off the risks? Anousha Sakoui reports

Illustration by
Noma Bar
 27

Finance

Anousha Sakoui
is a markets reporter for the Financial Times

n the wake of the global financial

crisis, companies worldwide had

I to stand by and watch as the fund-

ing pools they had relied upon for
years evaporated.
This has had a profound effect
on treasury teams and CFOs. Fears that banks
would pull credit lines at a time when capital
markets were in turmoil prompted companies to
sell bonds at record rates in the months after the
financial storm broke. Indeed, 2009 was a record
year for bond sales, while 2010 has seen a rush to
refinance bank debt with bonds from speculative-
grade companies.
But funding fears persist. Despite significant
refinancing activity over the past two years, many
bankers and investors remain concerned about
the “wall” of outstanding debt.

Real problems
“Companies should be worried about the refinanc-
ing wall,” says Simon Boadle, head of debt advi-
sory at PwC. “The bank market is still weak and
the high-yield market is not deep enough to meet
full refinancing needs. In addition, this market is
volatile and prone to open and close as a result of
changes in market conditions. Investors could get
a lot more selective and the high yield tap might
turn off.”
So far, inflows into credit funds – particularly
high-yield bond funds – have meant that demand
for bonds from investors searching for yield has
been strong. More than $250bn of junk bonds were
sold globally in 2010 – more than in any other year,
according to Credit Suisse.
“We are seeing investment grade, crossover and
high-yield companies rolling over financing in the
bond and loan markets, meaning that much of the
refinancing ‘time bomb’ is in the process of being
alleviated,” says Mark Lewellen, head of European
corporate origination at Barclays Capital. “Corpo-
rates are resizing revolving credit facilities and
leaving them undrawn and then taking up liquid-
ity from the bond market. If M&A activity picks
up it may trigger more bond issuance.”
But the big question is whether the corporate
bond markets will be able to sustain such demand
and absorb the amount of debt that needs to be
refinanced in the coming years. “If long-term
rates rise, bond markets will become less
 28
Finance
Attractiveness of funding sources
Net % of CFOs reporting the following sources of funding as attractive
60%
Bond
Acttractive
40%
issuance
20%
Bank
0%
borrowing
Unacttractive
Equity
-20% issuance
-40%
-60%
2007 2007 2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 This improvement in pricing over the past
Source: Deloitte CFO survey, Q3 2010
attractive to companies and there may not be
enough bank capital to meet corporate refinanc-
ing needs. That is what companies should be
worried about,” says James Douglas, corporate
finance debt advisory partner at Deloitte. “Refi-
nancing pressure is greatest in 2012 and 2013, and
‘Refinancing this will manifest itself in the form of refinanc-
pressure is ing activity in 2011.”
greatest in 2012
and 2013, and Payback time
this will Standard & Poor’s estimates that about $2.7trn
manifest itself in rated bonds and loans will mature from 2012 to
in the form of 2015 for non-financial US corporate borrowers. In
refinancing Europe, Moody’s estimates that $1trn worth of total
activity in 2011’ debt (both rated and unrated) is due to mature from
James Douglas, 2011 to 2014, of which only 37 per cent is bank debt.
corporate debt Douglas believes it will be smaller corporates and
advisory partner, financial, sponsor-backed leveraged companies
Deloitte that will face the greatest refinancing problems.
Debt demystified
Corporate bonds. Publicly traded securities. Typically used by
companies needing to raise more than €100m. Many investors
in this market require an issuer to have a credit rating to buy
their bonds. A bond issuance programme will require ongoing
disclosure and investor updates.
Junk bonds. Sub-investment grade bonds. They are higher risk
and pay higher coupons – and often have additional features
to protect investors. Junk borrowers are typically less frequent
issuers and do not always have a credit rating.
Hybrid bonds. A form of bond financing that allows companies
to raise debt with a limited impact on their credit rating. The
bonds rank low down in the company’s capital structure, acting
as quasi-equity, and typically pay a higher yield. These issues
can help to finance acquisitions or capex, or bolster a borrower’s
credit rating.
Loans. Unlike a bond, a loan is a private credit line from a bank
or institutional fund. It can either be syndicated among a group
of borrowers or take the form of a bilateral line with one bank.
“Leveraged loans” are also known as “secured loans”, and are
typically used to finance buyouts.
Private placements. These are private notes placed with
one or more institutional investors, typically US pension and
insurance companies. They tend to be small in size – less than
$100m – and open to smaller and unrated companies.
Analysts at Moody’s say risks arise because the
refinancing needs of companies might affect the
future cost of debt and could take place when the
borrowing needs of large sovereign issuers are
still heightened.
In 2010, with interest rates near zero, the bond
markets allowed many companies to secure his-
torically low costs of funding. One example last
summer was information technology group IBM.
In August, it raised $1.5bn from the bond market
at 1 per cent – the lowest ever coupon on a three-
year corporate bond.
year and a half was well illustrated by Sanctuary
Group, a UK-based housing association, which in
the second quarter launched a tap to its £200m
bond issued last year. The tap was priced at 100
basis points, the lowest pricing achieved in the
sector since the credit crunch, and compares to
pricing on the original bond at the height of the
credit crunch in March 2009 of 260 basis points,
according to PwC.
While funding rates have been low, the returns
on cash holdings have been lower still, leading
many companies to use bond tenders to manage
their debt profile during 2010. This process
of exchanging near-dated bonds for longer-
dated bonds allows them to extend the duration
of their debt without the cost of having to hold
cash unnecessarily.
Yet issuing bonds has limitations. “Funding in
the bond markets requires more preparation and
disclosure, not only at the time of issue but also
on an ongoing basis,” says Boadle. “This does not
put off good-quality listed companies, but can be
a negative for private companies. However, more
companies will still use the bond markets because
there are limited other choices.”
The public bond markets are generally limited
to larger companies with credit ratings. As a result,
throughout 2010 “private placements” (see panel
on the left for an explanation of the term) grew
in popularity as a way for smaller companies to
diversify their funding sources.
“For mid-market companies that may or may
not be rated or listed, the private placement
market has been an ideal source of capital from
US- and UK-based insurance companies as a way to
help them diversify funding sources,” says Angus
Whelchel, director of private capital markets
at Barclays Capital, the investment banking
arm of Barclays.
“The demand from dollar investors has been
aggressive this year and borrowers have also
benefited from swapping proceeds into euros
given the difference in basis.” Pricing in this
market has become attractive for more highly
rated borrowers from non-cyclical and defensive
industries, he adds.
 30

Finance

Debt hot spots debt, according to analysts at Morgan Stanley.

According to Moody’s, the volume of bond
maturities are well in excess of bank debt matu-
rities, which implies that the capacity to issue
bonds in the near future will remain important for
corporates. The telecoms, energy and automo-
tive sectors have the greatest amount of debt
maturing over the next four years. Telecoms com-
panies represent 15 per cent of the maturities,
energy companies 14 per cent and automotive
manufacturers 12 per cent, according to Moody’s
in Europe.
Looking at the European debt landscape geo-
graphically, Germany accounts for the greatest
proportion of maturities (22 per cent), followed by
France at 17 per cent and the UK at 13 per cent.
Companies have become more open-minded
about their funding sources, says Boadle. “Previ-
ously in the UK, mid-market size companies rais-
Until the end of 2008, on an aggregated level, the
debt mix had held pretty constant, with about
20-25 per cent bonds and 75-80 per cent loans.
Since the crisis, however, the ratio has taken a
dramatic shift, with loans closer to 65 per cent
of total non-financial debt outstanding, the ana-
lysts say. Yet this continues to contrast with US
companies, which have historically found most
of their funding in the bond markets.
Default dangers
The improvement in credit markets means that
default rates have trended below their long-term
averages. Yet Standard & Poor’s has said that it
does not expect default rates in Europe to remain
at such a low level over the next year or two.
Despite the openness of markets to refinanc-

‘The telecoms, energy

ing £200 to £300m would normally have gone
to the bank market and raised syndicated facili-

and automotive sectors

ties. Now, many more are looking at the bond
market. This is born out of necessity and cost.”

have the greatest amount

Many companies flocked to the bond markets for
the first time last year, from Manchester United

of debt maturing over

FC to Thomas Cook.
For its part, the UK government has been keen

the next four years’

to make it easier for companies to access forms of
lending beyond traditional bank loans. In Janu-
Germany ary 2010 it launched a consultation as part of a
accounts for review of how large and medium-sized business-
the greatest es finance themselves. The consultation sought
proportion views on what barriers there were to diverse forms ings, there is concern about the fate of leveraged
of maturities of funding for companies in the UK, with a view companies. For these firms, it is unclear whether
in Europe, to widening funding choices. bond markets will be able to absorb all the new
followed by Although loans still dominate corporate fund- issuance to replace outstanding bank loans.
France and ing in Europe, one obvious phenomenon has been Demand for leveraged loans has been stymied,
the UK the decline in loans’ share of total non-financial not only by reduced lending by banks, but also by
the fall-off of investment in collateralised loan
obligations. These structured vehicles, which
Debt maturities of rated non-financial companies
pool leveraged loans, had provided most of lever-
($m)
aged lending at the height of the credit boom, but
600,000 have been laid low as a result of the crisis.

500,000 Be prepared
The interest costs that companies must pay banks
400,000
for loans have retracted from the height of the
300,000 banking crisis, while the availability of credit
has been improving. But banks remain cautious
200,000 in their approach to lending in the mid-market,
say analysts at PwC.
100,000 Also, rates on loans remain high and compa-
nies have continued to be nervous of relying too
0
much on banks for funding. Boadle advises com-
US

EUROPE

US

US

US

US

US
EUROPE
EUROPE

EUROPE
EUROPE

EUROPE

Investment
grade
panies to plan well ahead of refinancing dates,
“particularly given the fickle nature of bond mar-
Spec grade 2010 2011 2012 2013 2014 2015 kets. A company needs to start thinking about
it two years – or even further – before the
Source: Standard & Poor’s, 2010 refinancing deadline.”
32 Financial Management | January/February 2011

Technology

The rise of
the machines
A new breed of smart IT systems can help
your business to spot trends, fend off
fraud and bolster customer relationships.
Mark Chillingworth explains

Mark Chillingworth
Editor-in-chief, CIO UK magazine
ack in March 1961, Life magazine
B
ran an article titled “The machines
are taking over”. The piece profiled
an Ohio sausage producer that had
installed a room-sized machine
described as a robot, but which
was actually an early mainframe. The contrap-
tion’s role was to analyse all the ingredients avail-
able to the company and provide employees with
the best possible recipe for bologna. The machine
took 36 minutes to compute the information avail-
able and deliver an answer. Artificial intelligence
(AI) had arrived.
The Holy Grail of AI is to create a machine
that can make choices, take decisions, understand
questions and provide answers as well as – or better
than – a human. This is easier said than done,
so over the decades AI has often fallen short of
its early promise. Here in 2011, however, AI tech-
niques and technologies are major forces for
improvement in the IT systems of companies in
all sectors. And, as organisations seek to harness,
monitor and analyse ever-expanding volumes of
information, the role of AI is set to grow further
during the years ahead.
AI today
The increasing ability of artificially intelligent
machines to surpass the human capacity for log-
ical analysis was perhaps most starkly demon-
strated by computing giant IBM in 1997, when the
company’s Deep Blue supercomputer beat chess
grandmaster Garry Kasparov.
Fourteen years on from Kasparov’s defeat, AI
systems can play a key role in any business strat-
egy to stay on top of the rising data tide. So how
can companies make the most of this?
“The nice thing about AI is that it works best
when it is not noticed,” says Mike Lynch, found-
er and CEO of Autonomy, a business software
company based in Cambridge, UK, that has
become world-renowned for its AI technology.
Autonomy customers, including Delta Airlines,
retailer John Lewis and Avis car hire, are using
AI in financial compliance monitoring, customer
relationship management and physical security
systems, among other applications.
Elements of AI are also present throughout the
web. For instance, the technologies behind domi-
nant internet forces Amazon, Facebook, Google,
33
Twitter and Yahoo! all learn about their users
and aim to increase sales and customer satisfac-
tion. Examples include recommendations of books
or music that customers may want to buy, and
suggestions for alternative search engine
keywords – all based on lessons learned from
a customer’s behaviour.
Data mountain
AI has been introduced into a growing number
of business systems over the past decade. As the
internet has become entrenched in every corner of
the commercial world, organisations have required
more help than ever in managing and interrogat-
ing their data. Legal departments and customer
service teams, for example, now frequently have
to sift through thousands of documents to answer
queries and solve problems. That’s where smart
systems can step in, says A Sabarirajan, a manage-
ment and technology expert at the PSNA College
of Engineering and Technology in Dindigul, India.
Today’s AI systems, he explains, can “simulate
numerous innate human skills, such as automatic
programming, case-based reasoning, neural net-
works, decision-making, natural language process-
ing, and pattern and speech recognition” – tasks
that computers have not, until recently, been able
to do as effectively as humans.
John Bates, vice-president of US data man-
agement firm Progress Software, agrees that AI
is coming of age. “We have made tremendous
progress; these systems are helping to make better
decisions, looking for patterns and automating
processes,” he says.
AI: the business benefits
+ Applications that teach themselves.
+ Increased levels of automation.
+ Ability to detect commercially valuable
patterns within vast amounts of data.
+ Automatic provision of answers to
questions, rather than merely the provision
of resources where an answer may be found
(standard internet search engines can only
achieve the latter).
+ Ability to solve problems faster and more
accurately than humans.
 34 Financial Management | January/February 2011

Technology

Bates believes that AI is taking hold Intelligence failures?

A.I. timeline in the corporate world because it aug- As with any technology, using AI in your organi-
ments the benefits of the “business sation is not without its risks. Perhaps the biggest
intelligence” data management systems potential hazard is overestimating the abilities of
1950
Alan Turing’s paper, in which many companies have recent- an intelligent machine. Even today, IBM’s super-
“Computing machinery ly invested. “Organisations want to use computers have 147,456 processors and 144TB of
and intelligence”, their historic data and look for patterns. memory – yet can only equal the brainpower of a
predicts that there will
eventually be no Tie the two together and you have the cat. “The first AI technology failed to realise how
difference between the use of data as a record, and data in real complex the world is,” says Lynch. Indeed, the
answers received from a time. This is possible because AI is now term “AI” is “totally discredited” as a result of this
computer and a human.
using tens of thousands of algorithms failure, says Bates.
1956 at once. There are hedge funds that are In particular, it is crucial to remember that
Cyberneticist William
Ross Ashby predicts that running hundreds of permutations to see humans are still better than machines at learn-
AI will bring about the which one would make the most money,” ing from complex experiences and dealing with
splicing of two software he explains. ambiguity. Computers also still find it difficult to
platforms, one of which
is the human brain. Commercial uptake of AI is a global phe- adapt to new situations, admits Sabarirajan.
nomenon. “In India, telecoms providers
1959

‘The point of all this

The Massachussetts are using AI to retain customers,” says
Institute of Technology Bates. “There is a very high rate of cus-

isn’t to replace humans,

sets up AI lab. tomer churn; there is no customer loyalty
1968 as there are high levels of pre-paid custom.

but to augment them’

First demonstration of a So companies want to anticipate and spot
programme that can
cluster uncategorised a customer they would like to keep.”
information using What else can AI do? For businesses
Bayesian logic. anywhere in the world, it can help to “reduce
1973 latency in making business decisions, mini-
First robot with visual mise fraud and enhance revenue opportu-
perception built.
nities,” says Sabarirajan.
1985 Indeed, AI is already the “preferred
AI market worth $1bn.
method” of fraud detection in the financial
1991 sector, he adds. Again, however, AI systems
AI scheduling software
used in Gulf War by US. are taking off most quickly online; Lynch
at Autonomy has helped clients to develop
retail websites that learn from a customer’s
interactions and design the site to suit the
individual on the fly.
Whatever the specific application
of AI, Bates, Lynch and Sabarira-
jan all believe that it should have
1997 a “decision support” role in a
IBM Deep Blue business, clarifying information,
supercomputer beats
Garry Kasparov at chess. identifying patterns
and highlighting
Grant Ingersoll
Chair of the Apache Lucene Committee
Why these lingering weaknesses? David Ferrucci
from the semantic analysis and integration depart-
ment at IBM, explains that there is no single com-
puter algorithm that can equal the human brain’s
ability to parse language and facts. As a result, AI
systems have to use hundreds of algorithms to gen-
erate a list of possible answers to a question posed
by a human. They then need another set of algo-
rithms to rank these answers to see which one
is the most likely. As Peter Norvig, Google’s
research director, once put it: “The prob-
lem with language is there are lots and
lots of rules – and there are lots and lots
of exceptions to those rules.”
Photography: Getty Images, Kobal Collection, Rex Features

1994
Web crawlers become relationships What we should not worry about,
essential to discovering
information on the net.
that humans
can then
$1bn adds Ingersoll, is the risk that intelli-
AI market gent machines might turn against their
1996 act upon. worth in 1985 creators, in the style of The Terminator.
AI-based company Grant Inger- “The point of all this isn’t to replace
Autonomy founded as a
spin-off from Cambridge soll, chair of humans, but to augment them,”
Neurodynamics. the Apache Lucene he recently explained.
2002 Committee, which develops $2.84bn While they are unlikely to
“Intelligent” Honda open-source search software, Amount Google terminate the human race,
ASIMO robot launched agrees. “The best systems are invests into R&D, AI systems are well placed to
(right). much of it AI
‘humans in the loop’. They do kill many of the problems we
2003 the heavy lifting and the mun- face in our data-flooded organ-
Stuart Russell and Peter
Norvig write standard dane, and we combine it with isations, concludes Lynch: “Look
AI textbook, asserting our qualities to make it worth- at your headcount, then look at these solu-
that AI is concerned while,” he explained in a recent tions and the benefits they offer. AI is worth
with the design of
“rational agents”. blog post. putting to the test. ”
 36 Financial Management | January/February 2011

The list
Keep it simple
1
At its most basic, the message needs
to be: “Cash, not sales or supplier
discounts, is what pays your wages
every month.” Then you’ll need
similarly straightforward sound bites to
drive the right behaviour in each team
(see point seven).
“Don’t use a funds flow format, for
example,” says Paul Hinder, former
financial controller at Cable & Wireless
and now a plural non-executive and
portfolio CFO. “What does the ‘change
in debtors’ in a funds flow mean to
most people? Probably nothing. It’s the
effect of two forces – revenues and cash
collected. So why not measure them
separately in a way that means more to
people within the business?”

Set the
2 right balance
Accountants need to think in terms of
sales and profits as much as working
capital. “Cash is the toughest covenant
our bank uses – every month, we have
to be cashflow-positive on a rolling
12-month basis,” says Frank Eliel, FD

8
of Signs Express and part of the MBO
Illustrations by Shout team at the company. “That means we
need a substantial profit on any new
capex within a year. And it’s a reminder
that cash all starts with the top line. If
that’s not working, no amount of debtor
or stock management will help.”
If you get the balance wrong and
focus too hard on cash with sales and

ways to ...
operational managers who probably
think they’re doing a great job, be
prepared to rename yourself “sales

Improve cash management

prevention officer” or “Scrooge”.
Positive incentives – such as bonuses

across your business

related to cashflow – might work better.

Having a cash culture in the finance Be repetitive

function is useless unless frontline 3
staff understand its importance – and “I always ask people, in any situation:

how they affect it. Here are eight ways

‘…and what’s the effect on cash?’,” says
Hinder. “The way you refer to it can

to get the message across

help. Every time you’re having a
conversation, from the board to the
Financial Management | January/February 2011
shop floor, don’t just refer to ‘stock’ –
talk about the ‘cash tied up in stock’
or ‘cash tied up in debtors’. And state
what amount it is. Refer to break even
in terms of cash – ‘we need £9m of cash
each month just to break even’. It works.”
Process
4 is crucial…
Every business has terms and
conditions and most have a credit
management process in place. But how
many times are they overlooked in
pursuit of a sale or because there’s not
enough time for the admin?
“New technology enables finance to
get at the information about cash much
more quickly,” says CIMA’s financial
reporting specialist, Nick Topazio.
“Real-time data on cash allows them to
communicate with the sales team, for
example, on exactly how they’re
performing day to day.” It also means
you can forecast more accurately and
issue remedial messages promptly.
That said, credit control and order
processing should never be the sales
team’s responsibility, say our experts.
It should sit with finance or customer
services – teams that have an interest
in the proper application of process.
And visibility isn’t the end-game for
a cash culture. “It’s laughable to think
you could work your way out of a
working capital situation by investing
in ERP,” says Malcolm McKenzie at
consultancy Alvarez & Marsal. “You
want simple systems that deliver basic
messages everyone can understand.”
Cash by numbers
Working capital consultancy REL conducts
an annual survey into the cash requirements
of Europe’s 1,000 largest businesses. Its
2010 report makes it clear that getting the
message about cash around your business has
never been more important:
47 — the average Days Working Capital
(a measure of cash tied up), up from 44 days
54.6 — average Days Sales Outstanding
(DSO, your unpaid orders), up 7.7%
39.2 — average Days Inventory On hand
(DIO, your stock), up 5%
The only improvement in this year’s figures
is Days Payable Outstanding (DPO, what you
owe suppliers), which was down nearly 7% to
an average of 47 days. But if you’re relying on
being a late payer to conserve cash, you’re
already in trouble.
‘Get people thinking
about how they’d feel if
it was their money’
Huw O’Connor, former FD and MD,
City Inn (now Mint Hotel)
...but so
5 is influence
“Make sure these processes are
enforced – and then go into battle with
the perpetrators where they are not,”
says Hinder. “Make an example of
them. But pick your battles – you can’t
afford to lose.”
Always get the top people on side, he
adds. They’re a vital ally if you’re taking
on people who are blasé about cash.
“Without the CEO, you are doomed to
failure. If they need it – and some
definitely do – put the effort into
educating them about the drivers of
cash first, then work down and across
the organisation with the messages
that hit home.”
A good way to influence people is to
involve them in the decision-making
around cash. “Determine which
functions or stakeholders have most
impact on the elements that affect cash,
bring them together in a workshop and
ask them how they can improve them –
let them set up their own action plan,”
says Marcel Willems, a former
divisional CFO at Sara Lee.
Create cash
6
heroes
In too many businesses, the credit
control team is invisible – or simply has
a reputation for saying “no” to new
37
customers. “So make it a sales
responsibility to ensure customers pay,
one way or another,” suggests Hinder.
“Salespeople like to be heroes. Make
them real heroes by advertising the fact
they’ve got cash in.”
Once you’ve found the metrics
people can relate to, make them widely
available. Use company whiteboards or
the intranet to show how the cash
position is changing. This will also
accentuate great cash victories – like
clearing a stock log-jam or settling
disputed invoices – that are treated
as menial jobs, but can deliver vital
boosts to cash.
Use obvious
7 metrics
“Our analysis says we collect 30 per
cent of cash within 30 days, but by 45
days it’s up to 70 per cent,” says Paul
Marsland, FD at Lane Clark & Peacock.
“We explained to partners that if they
bill by the middle of the month, we’re
likely to get a majority of the cash in by
the end of the following month, in time
to manage cash outflows such as
salaries, taxes and partner drawings. It’s
a measure everyone can understand.”
Make it
8 personal
Marsland is now introducing a public
“traffic-light” system to show which
fee-earners are billing promptly. “It’s
pure peer pressure,” he says.
“If your pay packet is influenced by
your contribution to cashflow, it’s going
to affect your behaviour,” says Topazio.
Huw O’Connor, former FD then MD at
City Inn, has a simple approach to get
the message home. “Get people thinking
how they’d feel if it was their money,” he
says. “When reviewing debtors’ ledgers
with my general managers, I used to ask
them how they would feel if someone
came into their hotel bar, drank a bottle
of champagne and walked out without
paying. They’d be chasing him down
the street – so let’s apply the same
passion to the ledger.”
Richard Young is a freelance writer and
editor, and co-author of the CIMA guide
to improving cashflow, out in April 2011.
 Financial Management | January/February 2011 39

Prime number

Costs of hosting summer $15bn

Athens
Olympic Games since 1976 2004

$44bn Sydney 2000 $6.5bn

Beijing
2008
Atlanta 1996 $1.8bn
Barcelona 1992 $1.8bn
Various sources.
Figures are
approximate.
$14.9bn Seoul 1988 $4bn
London
2012 Los Angeles 1984 $546m
£9.3bn
Moscow 1980 $2bn
Montreal 1976 $1.5bn

£900m
London (GLA
and LDA)
$1.5bn

London 2012: where the £6.2bn

money is coming from Central
government
$9.8bn

£9.3bn
$14.9bn £2.2bn
National
lottery
$3.6bn

Funding Source: “London 2012

the Olympics
Olympic and Paralympic
games quarterly report”,
UK Department for
Culture, Media and
Sport, July 2010.

Host countries have spent more than $75bn on the summer

Photography: Getty Images

Olympics since 1976. The Beijing games in 2008 were the most
expensive in history – with the organisers spending $423m on
the main stadium alone. The UK is set to spend a relatively
modest $14.9bn on next year’s games in London. The graphics
above illustrate how this compares against previous games –
and which organisations are footing the bill.
Branding cost Budget cuts
The logo for the In May 2010 the UK
London 2012 games coalition government
was unveiled in 2007. reduced the London
Development cost: 2012 budget by:

£400,000 £27m
Financial Management | January/February 2011 41

Notes
Paper E1
Study Enterprise Operations p42
Paper P3
Performance Strategy p44
Paper F1
Finance Operations p48

Student Q&A
Margaret Anderson
Finance and administration manager,
Birmingham Contemporary Music Group

You have a musical background, so what

prompted your change in direction?
If you had told me three years ago that I’d now be
studying to become a chartered management
accountant, I probably wouldn’t have believed
you. I took a roundabout route into finance. My
second job, after graduating from the University
of Birmingham with a music degree, was as an
assistant education project manager with a choir
called Ex Cathedra. It was a new role, which
allowed me to design my own path, and I got inter-
ested in analysing the education department’s
expenditure. But I was improvising at that point,
because I’d had no formal financial training. This
made me realise that I wanted to learn more about
the subject and get the bigger picture.
First, I gained a certificate in bookkeeping with job – especially on various forms of budgeting. ‘I was a little
the Association of Accounting Technicians, which And the business mathematics course has really apprehensive
was a great start. Then I started exploring what helped me to use Excel formulas effectively. about distance
CIMA had to offer, spending evenings looking learning at first
through the syllabus on its website. I was lucky You were highly commended in the “distance – it did take me
that a job came up at Birmingham Contemporary learning student of the year” category of the a couple of
Music Group (BCMG) that involved managing the latest CIMA Annual Awards. How have you weeks to get
company’s finances, as well as helping with con- found the distance learning format? into the rhythm.
cert management. BCMG signed up as a CIMA I was a little apprehensive about doing it this way But since then
training partner, allowing me to begin the certi­ at first – it did take me a couple of weeks to get it’s become
ficate level in February 2010. I have just started into the rhythm of it. But since then it’s become second nature’
on the professional level. second nature. The key is to balance your work,
studies and social life. I’m using BPP Profess­ional
How much have you gained from your Education’s online distance learning classroom
stu­d ies so far? programme, which suits me well.
Coming from a non-financial background, I’ve
learned loads. Everything is new to me. I’m spend- How do you hope to use your CIMA qualifica-
ing a lot of time working out how best to apply tion over the longer term?
what knowledge I’ve gained from my studies to I plan to stay within the arts – particularly music
BCMG. At the moment I’m focusing on overhead – and hope to move up the career ladder gradu-
allocation apportionment and variance analysis. ally. I still have a huge amount to learn, so I am
I’ve also been able to feed in a lot of lessons eager to make the most of this experience and
from the management accounting course into my see where it takes me.
 42 Study notes

Paper E1
Enterprise Operations
Philanthropy is only one face of corporate
social responsibility. CSR also covers ethics,
regulatory compliance and business’s
contribution to economic development

By Tharindu Amarasekere
E1 lecturer at the Wisdom Business
Academy, Colombo

C
orporate social responsibility (CSR)
is included in the E1 syllabus under
the “Global business environment”
heading and covers a key syllabus
objective: “Explain the principles and
purpose of corporate social respon-
sibility and the principles of good corporate gov-
ernance in an international context.”
As companies race to become the most attrac-
tive in the eyes of the global consumer, they no
longer consider CSR to entail little more than, say,
making a one-off donation to some obscure char-
ity. It has taken on far greater meaning in an age
of climate change, recession, sweatshop scandals
etc. Also, given the scale of CSR investment made
by some organisations – Marks and Spencer spent
more than $12m on community projects in
2009-10, for example – it is clear that corporate
social responsibility is not only a buzz phrase; it
is a serious business matter.
CSR encompasses the following four opera-
tional aspects:
l How the company is contributing to the devel- leading financial service providers. For example,
opment of its local economies. Cosmetics com- the Galleon hedge fund scandal of 2009 in the US
pany, The Body Shop, is a good example of a busi- featured a high level of insider trading. This was
ness that is mindful of this aspect. It procures many a clear violation of federal law, which culminated
of the raw materials for its products from poor in the firm’s closure. Also, five years before the
Illustration: Denis Carrier/Dutch Uncle

­villages in Africa. Rather than exploiting these sup-
pliers by paying them a miserly rate, it gives them
healthy returns and assistance with developing
facilities such as schools and water wells. This
approach contrasts starkly that of certain interna-
tional ­jewellers, which have been accused of obtain-
ing so-called blood diamonds from Africa at low
cost using armed mercenaries.
l How the company is restricting its operations
to the given regulatory boundaries. Consider
the recent frauds committed by some of the world’s
Deepwater Horizon oil platform exploded in the
Gulf of Mexico, a fire at a BP refinery in Texas
‘The Body Shop killed 15 people and injured more than 100. The
recently ran a company was fined a record $87m after the US
campaign Occupational Safety and Health Administration
encouraging cited several hundred violations. It was also fined
customers $50m by the US Department of Justice to settle
worldwide to criminal char­ges arising from the disaster.
sign a petition l How ethically acceptable the company’s oper-
against human ations are to society. This aspect does not have
trafficking’ to relate directly to a business’s operations. For
Study notes
example, Nike was accused of acting unethically
when an Australian news service found that one
of its contractors in Malaysia was using forced
labour. Immigrant workers from poverty-stricken
countries such as Vietnam and Bangladesh were
living in a virtual prison. Their passports had been
confiscated on arrival and they were being forced
to buy them back with their wages. This was not
Nike’s legal responsibility, as it could not be blamed
for that contractor’s practices, but the public expec­
ted it to resolve the situation. After investigating
the matter, Nike ordered the contractor to take cor-
rective action, giving the workers their passports
back and even buying them flights home – actions
for which it was widely commended. On a differ-
ent tack, The Body Shop recently ran a campaign
encouraging customers in its stores worldwide to
sign a petition against human trafficking.
l How the company is making philanthropic
contributions to society. This aspect focuses on
charitable donations. For example, according to
Marks and Spencer’s “How we do business” report,
the M&S and Oxfam clothes exchange scheme has
been running since January 2008 and has already
raised £2.5m for the charity. Anyone donating an
item of M&S clothing to Oxfam receives a £5
voucher to use on their next store purchase of £35
or more. In a similar vein, Johnson & Johnson
gave $10m to aid countries affected by the 2004
Indian Ocean tsunami, while it has also made sig-
nificant donations to the Haiti earthquake relief
effort. Such largesse should generate good PR for
the company and boost its revenues.
CSR has faced stiff resistance from some com-
panies’ board members and other shareholders,
because investments designed to make a business
look good could reduce profits in the short term
– and the amount of dividends payable to them.
But this resistance seems to be diminishing stead-
ily as concepts such as “the triple bottom line”
emerge, along with the growing belief that organ-
isations need to contribute towards the wellbeing
of ­society. Also, research continues to suggest that
consumers prefer organisations that they believe
are good corporate citizens.
Businesses expect to gain the following main
benefits from CSR:
l A strong brand image.
l Customer approval.
l A lower risk of failure as a result of misconduct.
Further reading Marks & Spencer, “How we do business report 2009”: http://corporate.marksandspencer.com.
American Express’s “Members project”: www.takepart.com/membersproject.
The Body Shop’s “Against animal testing” campaign: www.snipurl.com/1mapny.
43
‘Clothing l Improved relationships with community groups,
manufacturers governments and other stakeholders.
in Sri Lanka In an era where the media are omnipresent,
still attract a businesses should aim to create an organisa­tional
significant culture of “doing the right thing from the heart”,
number of which can help them to gain a competitive advan-
orders from tage. Despite having a high cost base compared
retailers such as with their rivals in India and other emerging
M&S largely ­economies, clothing manufacturers in Sri Lanka
because of their still attract a significant number of orders from
CSR practices’ iconic retailers such as Marks and Spencer and
Victoria’s Secret, largely because of their CSR
­p ractices, which are promoted under the “Gar-
ments without guilt” banner. This indicates an
operational style free of the sweatshop practices
that have been so common in that industry.
C
ompanies will change their
marketing mix in order to be seen to
be acting ethically by giving
­c onsumers more information on
which to base their purchasing
­d ecisions. For example, food com-
panies such as McDonald’s, which have been
­accused of contributing to high rates of heart dis-
ease, now provide nutritional details such as the
fat content of their products on the packaging.
Other firms have used ­m arketing to campaign
against what they see as unethical practice – The
Body Shop versus animal testing, for example –
and ­encourage customers to buy their products
to ­support the cause. In ­another example of CSR
­marketing, American ­Express asked its customers
to vote for their favourites from a list of selected
charities and distributed $1m among the organi-
sations that received the most votes.
In order to comply with environmental laws
and follow the principles of sustainability, an
organisation may work to cut its waste emissions
and use less raw material to retain more resour­
ces for future consumption. In such cases it might
focus on implementing lean production methods
and using more efficient technologies, such as
­computer-aided manufacturing.
E1 students need to develop a sound knowledge
of CSR and its significance in today’s business
environment. Crucially, you should gain a good
understanding of the four different elements of
CSR and be able to apply this to any given scen­
ario in the exam.
 44
Paper P3
Performance Strategy
The UK’s corporate governance code has been
revised – and it features a number of significant
changes of emphasis that are relevant to P3
By the examiner for P3
T
he UK’s revised guidance on corp­orate
governance matters came into force
for accounting periods starting on or
after 29 June 2010. The most obvious
revision is that the document’s full
title is now “The UK corporate gov-
ernance code”. Previously it was called “The
combined code on corporate governance”. This
change is probably intended as a reminder to
non-UK companies listed on the London Stock
Exchange that some provisions apply to them.
The P3 syllabus is not country-­s pecific. Most of
the issues arising in corporate governance are
common to any setting where shareholders
delegate the management of their investments
to a board of directors, so the content of the new
code should be treated as a credible guide to
good governance generally.
The P3 paper may include questions that are
inspired by the code, while suggested answers
may refer to it in support of any assertions made.
This does not mean that you should memorise the
document. Exam questions will not test your abil-
ity to reproduce chunks of text. The code offers
advice on specific matters and is not intended as
a detailed check list. Questions at this level should
reflect the real world and the code is only one
source of guidance. But it is worth reading in
detail, of course, and it can be downloaded free
from the Financial Reporting Council (FRC)
website (www.frc.org.uk). Although it covers 35
pages, the document is laid out in such a way that
there’s a lot of blank space, so getting through it
is not a major task.
There is another document on the FRC’s site
that’s well worth reading: a report entitled “Rev­
isions to the UK corporate governance code”
highlights the changes that have been introduced.
Most interestingly, it covers areas where problems
have arisen in practice, thereby providing an idea
of the most important and contested issues. The
Study notes
code, which was written as a response to the cor-
porate scandals that occurred in the 1980s and
1990s, is fundamentally a practical document
designed to deal with the tensions that have been
shown to create problems. Its name has changed
over the years (it was originally the Cadbury
report) and it has been supplemented by parallel
documents such as the Turnbull guidance on risk
management and internal control, the FRC’s
­g uidance on audit committees and the Higgs
report (under review at the time of writing), which
provides advice for non-executive directors.
The code has five main sections, covering lead-
ership, effectiveness, accountability, remuneration
and relations with shareholders. There are two
new principles dealing with leadership:
l The chairman is responsible for leadership of
the board and ensuring its effectiveness in all
aspects of its role.
l As part of their role as members of a unitary
board, non-executive directors should construc-
tively challenge and help to develop proposals
on strategy.
There are also two new principles in the section
on effectiveness:
l The board and its committees should have the
appropriate balance of skills, experience, inde-
pendence and knowledge of the company to enable
them to discharge their respective responsibili-
ties effectively.
‘The code is l All directors should be able to allocate sufficient
not intended time to the company to discharge their responsi-
as a detailed bilities effectively.
check list. The addition of these four principles suggests
Exam questions that achieving good governance requires guidance
at this level in areas such as ensuring that the board provides
should reflect sound leadership and that its members work effec-
the real world tively. It shouldn’t be a huge surprise, therefore,
and the code is if an exam question were to require you to discuss,
only one source say, a scenario in which the board structure might
of guidance’ be changed in order to enhance its leadership
 46
Paper P3
Performance Strategy
of the company. The insertion of these new prin-
ciples indicates that concerns have been raised
that some directors do not have the required bal-
ance of skills to discharge their duties properly.
But it also underlines the fact that the code is not
intended to be a prescriptive set of detailed rules.
It should, for example, have been obvious before
its publication that the non-executive directors
have a role to play in challenging the ­s trategic
direction being proposed by their executive col-
leagues. The new principle in question has clearly
been designed to remind the non-executives of
that responsibility and to stress its importance.
T
he spirit of the code is more impor-
tant than the letter, so the new
principle that all directors should be
able to allocate enough time to the
company is not reinforced by a state-
ment that the job will entail, say, 40
hours’ work a week. Instead, it is supported by
guidance that reflects the differing respon­sibilities
of the chairman, the other non-executive direc-
tors and the executive directors.
Several of the code’s existing principles have
been revised. The most significant changes are
as follows:
l The board is responsible for the long-term suc-
cess of the company. Previously there was no
reference to sustainability.
l The chairman has an added duty to achieve a
culture of openness and debate, and to ensure that
adequate time is given to discussion.
l Boards must now also consider the benefits of
diversity – eg, improving the gender balance –
when making appointments.
l Boards are now responsible for maintaining risk
management systems, as well as sound internal
control systems.
l The chairman must ensure that all directors are
made aware of shareholders’ concerns.
The best way to use this material when study-
ing is to consider how it might affect companies
in practice. This is partly because it’s always useful
to think in those terms – the requirements in exam
questions are designed to make you do exactly that.
It’s also possible that a question will be inspired
by such revisions. If you have already considered
Further reading P Collier and S Agyei-Ampomah, CIMA Official Learning System – Performance Strategy, CIMA Publishing 2009.
Study notes
their implications, you will have an advantage if
that issue is ever examined.
You need to remember that corporate govern-
ance is a complex area and there will never really
be a “correct” answer to a question on it. For exam-
ple, suppose a question describes a scenario in
which a company’s board lacks diversity and has
an exclusively male membership. Say it asks about
the pros and cons of correcting that bias. It would
be easy to argue that gender bias is ­discriminatory,
morally repugnant and unlawful in many coun-
tries. Such arguments would be valid, but you
would be unlikely to gain many marks by using
them alone. It would be necessary to think beyond
the most obvious and emotive issues.
D
eveloping an argument on a corporate
governance issue could involve think-
ing through the implications of the
problem for the company. For exam-
ple, the biggest cost to the business
may be reputational rather than any
statutory penalty directly associated with the
unlawful restriction of board places to men. It
would almost certainly be difficult to prove that
a female candidate had been rejected because of
her gender, since the nomination and selection
committee could simply argue that she wasn’t
the best candidate. If her claim is successful,
the company may be fined, but that financial
damage is unlikely to be mater­i al. Yet there
could be a significant cost if the company’s
employment practices demotivate its female
employees and alienates its female customers.
Identifying an appropriate remedy will also require
some care. For example, how should the board
respond if the female applicants for a particular
vacancy are less capable than their male compet-
‘You need to itors? Should the selection decision put diversity
remember before competence?
that corporate Drawing on ideas you have obtained from read-
governance is a ing the code may help you to answer a question
complex area on governance but, as the above example shows,
and there will it may be hard for you to reach a clear-cut conclu-
never really be sion. This underpins the idea that the key to
a “correct” successful exam preparation is to think through
answer to a challenging problems and rehearse the practi­
question on it’ calities of supporting a position.
 48
Paper F1
Finance Operations
The secret to answering questions requiring you to
produce cash flow statements is to take a methodical
approach to taking out the non-cash items
By Richard Clarke
CIMA training provider in Belfast, Edinburgh and
Aberdeen (www.richardclarkeacademy.com)
A
ll that a cash flow question actu­ally
asks you to do is to take the state-
ment of comprehensive income and
the statement of financial ­position
(the balance sheet to you and me)
and turn this into cash. That entails
getting rid of the non-cash stuff – depreciation
and receivables and so on. Here’s a step-by-step
guide to doing it.
Step one: take your operating profit fig­
ure and add back all non-cash items.
The first task is to add back all non-cash expenses
to the operating profit (PBIT) and take off all non-
cash receipts. Magically, you’ll be left with cash.
There are seven non-cash items to consider: depre-
ciation; amortisation; impairment; profit/loss on
sale of non-current assets; increase/decrease in
inventory; increase/decrease in receivables; and
increase/decrease in payables. For the last three of
these, if it’s an increase in receivables or inventory,
you take off from operating profit; if it’s a decrease,
you add back. The opposite applies to payables. All
of this goes into the “Cash flow from operating
activities” section of the cash flow statement.
Step two: continue down the income
statement after PBIT: calculate the cash
and put it into the cash flow statement.
Let’s assume that the next item in the income
statement is interest and that it says interest
expense ($200). The question to consider is
whether this $200 is all cash or not. Before we look
at that, let me give you a scenario: at the start of
year you owed me £100. During the year you
bought more things from me (on credit) worth
£40. At the end of the year you should owe me
£140, obviously. But, if I were to tell you that you
owed me only £120, what must have happened?
You must have paid me £20 in cash – and it’s this
cash that goes into the cash flow statement.
Study notes
Let’s use the principles of this scenario in a cash
flow question. You need three figures:
l What you owe or are owed at the start of the year
(opening receivable/payable): £100.
l What was bought or sold in the year (income state-
ment figure): £40.
l What you owe or are owed at the end of the year
(closing receivable/ payable): £120.
Using our scenario, we therefore have a cash paid
of: £100 + £40 – £120 = £20.
Let’s get back to the question where I said that
the interest figure in the income statement was $200.
Now let me tell you that the interest payable at the
start of the year was $1,000 and the payable at the
end of the year was $900. How much
interest cash has been paid out during the year?
$1,000 + $200 – $900 = $300. This figure goes into
the “Cash flow from operating activities” section of
the cash flow statement.
Let’s assume that the income statement next
shows a taxation expense of $400. There is an open-
ing payable of $90 and a closing payable of $120.
What is the tax cash paid that goes into the “Cash
flow from operating activities” section of the cash
flow statement? $90 + $400 – $120 = $370.
Lastly, let’s assume there are dividends in the
statement of changes in equity of $300 and no div-
idends payable. As there’s nothing payable, this is
all cash and goes into the cash flow statement in the
“Cash flow from financing activities” section.
You simply follow this procedure for all items in
the income statement after operating profit, putting
the cash amounts into the cash flow statement as
you go along.
Step three: go down the statement of
financial position (SFP), find the cash and
put it into the cash flow statement.
The first item you will encounter is non-current
assets. These can be tricky, so let’s leave them until
‘There are seven the end. Many of the SFP items we have already
non-cash items sorted out – payables, receivables etc – so let’s look
to consider: at four items we haven’t yet dealt with:
depreciation, l Shares. Consider the following illustration:
amortisation, SFP X2 X1
impairment, Share capital ($) 200 140
sale of non- Share premium ($) 150 80
current assets,
inventory, Opening ($) 140 + 80
receivables Cash received ($) 130 (balancing figure)
and payables’ Closing payable ($) 200 + 150
Study notes
Statement of
you can derive your own
comprehensive income
Sales ($) 1,000
Cost of sales ($) (400)
panels before turning to
Admin ($) (100)
Distribution ($) (100)
Finance costs ($) (80)
Tax ($) (50)
Profit after tax ($) 270
Other comprehensive income
Revaluation gain ($) 1,000
The proceeds from share issue – ie, the $130
– go to the “Financing activities” section of the
statement of cash flows.
l Loans. Consider the following illustration:
SFP X2 X1
10% loan ($) 100 140
Opening ($) 140
Cash paid ($) (40) (balancing figure)
Closing payable ($) 100
Loan repayments go to the “Financing activi-
ties” section of the statement of cash flows.
l Bank. Consider the following illustration:
SFP X2 X1
Cash at bank ($) 200 140
Here you simply take the increase in cash
of $60 and put it at the bottom of the cash flow
statement in the “Increase in cash and cash equiv-
alents” section. Note that this is the total of your
statement of cash flows, so you should check the
addition of your statement results in this figure
also.
l Property, plant and equipment. This needs
to be handled slightly differently: first you write
down the property, plant and equipment (PPE)
figures per the accounts and then you work out
the cash element of each item (if any). Consider
the following illustration:
SFP X2 X1
PPE ($) 200 140
Notes to the exam question: depreciation in year =
$50; revaluation = $100; disposal = asset sold for $100,
making $20 profit.
The key here is to try to find the balanc-
ing figure, which will be additions in the year.
Note that we are dealing with net book values
(NBV).
49
Self-test: see whether Statement of financial position
statement of cash flows X1 X2
from the sample Non-current assets ($) ($)
statements in these two Property, plant and equipment 10,000 12,000
the solution on page 50 Current assets
Cash 400 600
Receivables 1,000 2,000
Inventory 1,000 900
Total assets 12,400 15,500
Equity and liabilities
Equity shares of $1 each 5,000 6,630
Share premium 500 800
Retained earnings 4,000 4,270
Revaluation reserve 1,000 2,000
Equity 10,500 13,700
Non-current liabilities
Loan 1,000 800
Current liabilities
Trade payables 700 810
Interest payable 100 80
Tax payable 100 110
Total equity and liabilities 12,400 15,500
Notes: the depreciation charged to cost of sales in the year was $200 and
there was a disposal of PPE for $600, making a profit of $100.
First, we write down the PPE figures per the
accounts as follows:
Opening ($) 140
Depreciation ($) (50)
Revaluation ($) 100
Disposal ($) (80) (NBV = $100 – $20)
Closing ($) 200
The balancing figure is $90, therefore, and this
is additions. Next, we work out the cash element
of each item (if any) as follows:
Cash
Opening ($) 140
Depreciation ($) (50) Add back to operating activities
Revaluation ($) 100
Disposal ($) (80) 100
Additions ($) 90 (90)
Closing ($) 200
All PPE items go the investing activities section
of the statement of cash flows.
Now, let’s put this all together in a worked exam-
ple using the statements in the two panels at the
top of the page. We start with PBIT and add back
or take away all non-cash items as follows:
 50
Paper F1
Finance Operations
Profit before interest and tax ($) 400
Depreciation ($) 200
Profit on sale of asset ($) (100)
Decrease in inventory ($) 100
Increase in receivables ($) (1,000)
Increase in payables ($) 110
All of this goes to the “Cash flow from operating
activities” section of the statement of cash flows.
Next we continue with the rest of the state-
ment of comprehensive income, calculating the
cash and putting it into the statement of cash
flows as follows.
l Finance costs. The opening payable is $100,
the figure on the income statement is £80 and
the closing payable is £80, meaning that $100 +
$80 – $80 = $100 in cash must have been paid.
This figure goes to the “Cash flow from operating
activities” section of the statement of cash
flows.
l Taxation. The opening payable is $100, the
figure on the income statement is $50 and the
closing payable is $110, meaning that $100 + $50
– $110 = $40 in cash must have been paid.
This figure also goes to the “Cash flow from oper-
ating activities” section of the statement of
cash flows.
Now we go through the SFP to deal with all
remaining items, find the cash and put it into the
statement of cash flows.
l PPE. First we write down the relevant figures
per the accounts as follows:
Opening ($) 10,000
Depreciation ($) (200)
Revaluation ($) 1,000
(the increase in the revaluation reserve)
Disposal ($) (500) (NBV = 600 – 100)
Closing ($) 12,000
The balancing figure is $1,700 and this is addi-
tions. This goes to the “Cash flow from investing
activities” section of the statement of cash flows.
The disposal cash of $600 goes there as well.
l Cash at bank. Looking at the SFP, we can see
that the cash at bank has increased by $600 – $400
= $200. This figure goes into the “Net increase in
cash and cash equivalents” section of the state-
ment of cash flows.
l Loans. Again, looking at the SFP, we can see
that the cash paid on the loan in the year is $1,000
– $800 = $200. This figure goes to the “Cash flow
from financing activities” section of the statement
of cash flows.
Further reading J Watkins, CIMA Official Learning System – Finance Operations, CIMA Publishing 2009.
Study notes
l Shares. Looking at the SFP, we can see the fol-
lowing picture:
X1 X2
Share capital ($) 5,000 6,630
Share premium ($) 500 800
Opening ($) 5,000 + 500
Cash received ($) 1,930 (balancing figure)
Closing payable ($) 6,630 + 800
The share proceeds of $1,930 go to the “Cash
flow from financing activities” section.
So now we can compile the statement of cash
flows for the year 20X2 (see panel below).
Statement of cash flows
for the year ended 20X2
$ $
Cash flow from operating activities
Profit before interest and tax 400
Adjustments for:
Depreciation 200
Profit on sale of asset (100) 100
Working capital adjustments:
Decrease in inventory 100
Increase in trade receivables (1,000)
Increase in payables 110 (790)
Cash generated from operations (290)
Interest paid (100)
Tax paid (40) (140)
Net cash used in operating activities (430)
Cash flow from investing activities
Purchase of PPE (1,700)
Sale of PPE 600
Net cash from investing activities (1,100)
Cash flow from financing activities
Loan repayment (200)
Share issue 1,930
Net cash from financing activities 1,730
Net increase in cash and cash equivalents 200
Cash and cash equivalents at beginning of period 400
Cash and cash equivalents at end of period 600
 52

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 54
Complex harmonic
motion
This will be a crucial year in the convergence
process for international financial reporting
standards. The initiative has made impressive
progress, but key challenges remain
By Nick Topazio
Financial reporting specialist at CIMA
S
ir David Tweedie’s term as chairman of
the International Accounting Standards
Board (IASB) comes to an end in June.
Having led the board since its inception
in 2001, he has overseen a dramatic
growth in the relevance of interna­tional
financial reporting standards (IFRS), especially since
the European Commission decided to adopt them
for listed-entity reporting from 2005.
The commission’s move significantly boosted
global acceptance of the new standards. Up to that
point fewer than 20 countries had required IFRS
compliance; today about 120 reporting jurisdictions
allow or require listed companies to use IFRS. But
some big markets remain unsubscribed, including
Canada, India, Japan and the US. Research into why
some countries have adopted IFRS and some haven’t
Technical notes
has concluded that the quality of international
standards and their comparability with local
accounting practices are not the only decisive fac-
tors. In a 2009 paper entitled “Why do countries
adopt international financial reporting standards?”,
Karthik Ramanna of Harvard Business School and
Ewa Sletten of MIT Sloan School of Management
observe that a nation is more likely to adopt IFRS if
its trade partners or nearby countries are also adop-
ters. They also report that more powerful countries
are less likely to accept IFRS, because they are gen-
erally less willing to surrender standard-setting
authority to an international body.
Although some nations seem reticent about join-
ing the IFRS club, there is a clear mandate from the
world’s leading economies, in the form of the G20,
to create a global reporting framework. At their 2009
meeting in Pittsburgh the G20 members called
on international accounting bodies to redouble
their efforts to achieve a converged system by June
2011. Several members have already adopted
IFRS and, as can be seen from the timeline on the
opposite page, this number is set to increase over
the next few years.
The timeline shows that two of the biggest G20
economies have yet to commit to adoption: Japan
and the US. National standard-setters from both
nations are working with the IASB to establish con-
verged standards by June. Japan’s position seems
clear: both its accounting standards body and the
IASB are confident that convergence will be achieved
in accordance with a plan agreed in 2007. Japan’s
Business Accounting Council has proposed allow-
ing the early voluntary adoption of IFRS by listed
companies and deciding next year on whether to
make adoption mandatory in 2015 or 2016.
The US’s stance seems less clear. Its Securities
and Exchange Commission (SEC), which is oversee-
ing the issue, is focusing on three areas:
Illustration: Dmitry Litvin/Dutch Uncle
l Converged standards. The SEC and IASB have
committed to converge nine critical standards by
this June, including those covering financial instru-
ments, statement presentation, leases and revenue
recognition. Much work remains, but there seems
to be a firm commitment by both parties to do it.
l The financial stability of the IFRS Foundation.
The IASB’s parent organisation is the IFRS Foun­
dation. The SEC has stressed the importance of a
financially stable standard-setter with a governance
structure designed to support the independent
Technical notes 55

Timeline FOR IFRS harmonisation/convergence AMONG the G20

2005
Australia: IFRS required for all
private-sector reporting entities
and as the basis for reporting in the
public sector.
European Union: all member
states required to use IFRS as adopted
by the EU for listed companies.
France, Germany, Italy and
UK: IFRS required via the EU’s
adoption process.
South Africa: IFRS required for
all listed entities.
2007
US: IFRS allowed for foreign issuers.
2008
Brazil: IFRS required for individual
company accounts.
Turkey: required for listed entities.
2010
China: national standards
substantially converged with IFRS.
Japan: IFRS permitted for a number
of international companies.
Russia: IFRS required for banking
institutions and some other securities
issuers; permitted for other firms.
2011
Argentina: IFRS required for
listed companies.
Brazil: IFRS required for
consolidated financial statements
of banks and listed companies.
Canada: IFRS required for all
listed entities and permitted for
private-sector entities and
not-for-profit organisations.
India: phased convergence with
IFRS starting in April.
South Korea: IFRS required for
listed companies.
US: this is the target year for the
substantial convergence of US
Gaap with IFRS. A decision about
the possible adoption of IFRS for
domestic companies is expected in
2011, with an effective date no earlier
than 2015.
2012
Indonesia: a decision about a
target date for full IFRS compliance
is expected next year.
Japan: a decision about the
mandatory adoption of IFRS by 2016
is expected next year.
Mexico: IFRS required for
listed companies.
NB: Saudi Arabia does not permit the
use of IFRS and has no published
adoption or convergence plans.

development of global standards. The foundation
says that it expects to have suffered an operating
deficit for 2010 and there are concerns with its fund-
ing model. Only a quarter of the jurisdictions that
use IFRS as part of their financial reporting systems
actually contribute funds to the foundation.
l The future scope of the US Financial Account-
ing Standards Board. The SEC is studying the
responsibilities of national standard-setters in juris-
dictions using IFRS in part to identify potential
future roles for the board.
To a large extent, the IASB’s achievements can
be attributed to Tweedie’s tireless leadership.
Although he used to be a technical partner with a
big-four auditor (KPMG), his success in this role has
been as much to do with his political awareness as
his specialist knowledge. European politicians
remain wary of what they see as the undue influ-
ence of the US’s drive towards IFRS acceptance on
the board’s decision-making. US authorities are sim-
ilarly concerned about the interests of a standard-
setting body based in Europe. And the rest of the
world fears being led down a route that fails to
account adequately for the requirements of their
own economies, and which risks imposing a frame-
work that patently failed to prevent the recent
­economic collapse.
Tweedie’s replacement will be Hans Hoogervorst.
As a former finance minister in the Netherlands and
the current head of the Dutch financial markets reg-
ulator, he should have the political nous required.
Hoogervorst is not a professional accountant, but
he does have extensive high-level financial exp­
erience, including co-chairing the IASB financial
crisis advisory board – a role he shared with Harvey
Goldschmid, a former commissioner at the SEC.
‘Several G20 Having studied and worked in the US, he has excel-
countries have lent relationships in Washington and Wall Street,
already adopted but he will have to steer a careful course through a
IFRS and, as changing global political landscape, with Argentina,
illustrated Brazil, Canada, India and South Korea all due to
above, this switch to IFRS this year.
number is set to The domain of IFRS is, unsurprisingly, mainly
increase over the financial reporting. The IASB has issued guidance
next few years’ on management commentaries accompanying
financial reports, but this is non-mandatory. CIMA
has been a staunch supporter of effective, engaging
narrative reporting for years, via its responses to
consultations on operating and financial reviews/
management commentaries and its membership
of Report Leadership (www.reportleadership.com).
Effective narrative reporting can clearly explain the
context within which the financial figures should
be interpreted. It should describe the strategies that
companies pursue, the business models they adopt
– and their material associated risks.
The institute has been working for some time
with members of the International Integrated
Reporting Committee to create a framework to aid
the development of more comprehensive and com-
prehensible information about an organisation’s
total performance, prospects and ability to meet the
needs of a more sustainable economic model.
Progress has not been without its challenges, includ-
ing the question of directors’ liability and the level
of assurance provided by auditors. But the harmo-
nisation of standards is one of the main building
blocks of an internationally recognised integrated
reporting system. So we wait with bated breath for
various adoption decisions to be made in the coming
months by Japan, the US and other jurisdictions –
and seek continued leadership from the G20.

Further reading K Ramanna and E Sletten, “Why do countries adopt international financial reporting standards?”, Harvard
Business School, 2009: www.snipurl.com/1mabz3.
PricewaterhouseCoopers’ interactive map of IFRS adoption by country: www.snipurl.com/1lmd2m.
 56
Adding TLC
to UK plc
Two government ministers explain why they think
that British business is perfectly placed to lead
the world’s transition to a low-carbon economy
By Greg Barker and Lord Henley
Minister of state at the Department of Energy and
Climate Change, and under-secretary of state at the
Department for Environment, Food and Rural Affairs
C
limate change is not all about vul-
nerability and exposure. There are
massive opportunities for UK busi-
ness, both in cutting carbon and in
building resilience. They present a
chance for the private sector to lead
a new industrial revolution and be part of a green,
low-carbon and resilient economy that meets the
nation’s ambitious climate-change targets.
UK business must grab the first-mover advan-
tage, therefore, and not sit on the sidelines. It
needs to lead the way in building resilience to the
effects of a changing climate. We’ve made a great
start in cutting our greenhouse gas emissions, but
under the Climate Change Act 2008 the UK’s emis-
sions must fall by at least 34 per cent on 1990 levels
by 2020 – and by at least 80 per cent by 2050.
This will entail a profound change in the way
that energy is supplied and used. It means that
virtually every form of economic activity will have
to cut its carbon impact significantly. And, while
we’re moving towards a low-carbon economy, we
will also need to accommodate the impacts of the
climate change that we have already caused.
Tens of billions of pounds of investment are
already heading for the low-carbon sector, so tens
of thousands of green jobs are ripe for creation
over the coming decade. We estimate that the
global market for low-carbon and environmental
goods and services is worth £3.2trn now and will
exceed £4trn by 2015. But the green economy isn’t
only about producing energy more cleanly; it’s also
about growing the market for products that con-
sume less energy. Indeed, energy efficiency will
be the mark of a globally competitive company.
The government is committed to providing the
transparency, longevity and certainty that busi-
nesses need in order to invest in the low-carbon
future. To this end, our comprehensive spending
Further reading A CIMA research paper entitled “Accounting for climate change” outlines how management accountants can
help their organisations to mitigate climate change and adapt to it. The report has been nominated for a Globe Sustainability
Award. The institute has also published wide-ranging case studies on sustainability to help businesses start tackling climate
change. All of these documents can be accessed at www.cimaglobal.com/thought-leadership/research-topics/sustainability.
Technical notes
review has earmarked up to £1bn for the world’s
first carbon capture and storage demonstration
plant. It has also provided extra investment in off-
shore wind farms, in which the UK has a first-class
research capability.
We will create a green investment bank to help
boost low-carbon investment. And we will be con-
sulting on reforms to the climate-change levy with
the aim of providing more certainty and support
to the carbon price. In Europe we are lobbying for
an increase in the EU emissions reduction target
from 20 per cent by 2020 to 30 per cent and press-
ing for further energy market reforms to promote
low-carbon generation. We are also introducing
legislation for the “green deal”, which will enable
businesses to make energy-efficiency investments,
open a huge market opportunity for private-sector
finance and create tens of thousands of jobs.
The private sector will feel the impact of cli-
mate change both directly and indirectly. But the
challenge for business is not only about building
resilience to climate change into its own opera-
tions; it’s also about gaining a first-mover advan-
tage in new domestic and foreign markets. We
must also move away from short-termism in our
planning to ensure that the country’s infrastruc-
ture remains climate-resilient. The Stern review
estimated that the extra costs of making new infra-
structure and buildings resilient to climate change
in OECD nations could be anywhere between
£9.5bn and £94.8bn a year. Firms that are already
starting to invest in this area include Anglian
Water (£95m on asset-protection measures) and
Network Rail (£160m on upgrading drainage).
Many consultancies have recognised the grow-
ing need among businesses for information, advice
or analysis on adapting to climate change. For
example, Acclimatise is a UK-based consultancy
that focuses specifically on adaptation. Larger
consultancies such as PwC and AEA Technology
‘Under the are also starting to enter this market. Meanwhile,
Climate Change the IT industry is working on risk management
Act 2008 the systems designed to perform tasks ranging from
UK’s emissions monitoring the vulnerability of structures to keep-
must fall by at ing transport networks running.
least 34 per cent One way or another, climate change is likely to
on 1990 levels by affect every organisation and every community.
2020 – and by at We all need to understand this and ensure that we
least 80 per cent can rise to the challenges, reduce the risks and
by 2050’ reap the benefits.
 58
What you learn on the…
‘Develop into a director’
CIMA Mastercourse
Course director: Steve Berry FCMA,
former FD, international MBA lecturer
in business strategy, executive trainer,
author and conference speaker
M
oving from number
two to number one
in an organisa-
tion is the biggest
step in anybody’s
career. My course
offers a range of tools to facilitate the leap
from senior management into director-
ship and unpicks the differences between
the two roles. For example, the top job has
a much greater emphasis on, and respon-
sibility for, business strategy. The course
includes a section on strategy, therefore,
and provides a practical tool for strategic
evaluation (see diagram).
Corporate governance will be a big
new responsibility for a first-time direc-
tor. Bearing in mind the recent string of
high-profile corporate failures, directors’
governance duties have become more
important than ever. I will provide the
big picture on governance and focus on
why it is so crucial. I’ll give an overview of
stakeholder management, the core areas
of governance and the CIMA Strategic
Scorecard. The scorecard is an excellent
tool to help boards to focus on strategic
aspects and not be distracted by opera-
tional issues. To find answers to the more
detailed “what” questions about govern-
ance, you would, of course, need to go on
a more specialised course.
I’ll also stress how the behaviour of
a successful director is not the behav-
iour that made you successful in previ-
ous roles. Understanding the context of
how other board members behave is a
key aspect for successful communication.
As children we were told to “treat other
people as you would like to be treated
yourself”. This is nonsense: you need to
treat other people as they would like to be
treated. An HR director, for instance, has
a different approach from that of a sales
building blocks of business
Strategy
Processes
Finance
Technology
People
Marketing
Product
A key part of
strategy:
getting your
house in order
director. I give delegates a framework
to help them address these differences.
They can try an online evaluation in this
area via www.evaluationstore.com.
The last section of the course is all
about communicating effectively to non-
financial people. All too often, finance
professionals tend to talk in technical
terms that they expect others to under-
stand. Yet, without explanation, there is
no reason why they should. This course
helps delegates to “declutter” and clarify
the communication of financial matters
in a way that everyone can grasp.
Visit www.cimamastercourses.
i com for more details about
this and all other CIMA
Mastercourses.
Financial Management | January/February 2011
A delegate’s view
Samantha Matthews, financial
planning and analysis manager,
Pitney Bowes
I took this course because I want to
develop into an FD – this year, I hope. It
was the best course I’ve taken. It has
given me the tools I need in order to
rehearse being an FD before taking the
plunge. The most useful aspect was the
advice on how to behave as an effective
FD – and how you need to handle the
behaviour of others. I deal with a lot of
directors in my current role, so I’ve
already been able to put what I’ve
learned on the course into practice.
The course also enabled me to
understand how non-finance people
prefer to recieve information, and
helped me to communicate in a way
that people in all departments can
comprehend.
In particular, the course has helped
me to tailor the information I provide
to people according to their interest in
either the “big picture” or the detail. It’s
all too easy to get this wrong when
preparing reports and presentations.
Finally, the course provided
invaluable advice on forward planning.
After all, to be an effective FD, you need
to be one step ahead of everyone else in
the finance team.
I would recommend the course to
anyone in a number-two position who
aspires to take on the number-one
finance role. As the course explains,
people at this stage of their career need
to make the challenging transition
from being a strategy executor to
become a strategy creator.
 Financial Management | January/February 2011 59

Job of the month

Business analyst
Josiah Pradhan, finance
lead, Europe, at One HSBC,
explains the qualities you’ll
need to succeed in this
position – and why it’s a
role worth striving for

T
he role of a business
analyst may vary from
company to company,
but in each case the
main task is to provide
information that helps
senior managers to make key decisions.
Business analysts need to differenti-
ate between financial reporting and
management information. It’s crucial
not to get too bogged down in recon-
ciling numbers to the nth degree, so
you shouldn’t be afraid of forecasting.
For example, if a forecast is 90 per cent
right but timely, it will add more value
than 100 per cent accurate data provid-
ed 10 days later.
The ability to communicate effective-
ly is also vital. You must ensure that all
stakeholders understand the informa-
tion you’re providing – and that they
trust you to give them the right infor-
mation at the right time. Indeed, softer provide useful comparators. This is role because it doesn’t focus on one
skills are just as important as your grasp probably the most difficult aspect of the area, such as financial accounting,
of the numbers. role, but also perhaps the most valuable alone. It gives you a wider perspective
I joined HSBC in 2007 as a senior to senior decision-makers. on the relationship between the num-
business analyst in its European man- If you aspire to become a business bers and the rest of the business – and
agement information function. The analyst, try to build up as wide a com- an understanding of the commercial
role included analysing financial data mercial knowledge as possible and be stories behind the numbers. You’ll find
and drawing out the key messages from inquisitive. Don’t assume anything. that you’ll be applying what you’ve
it. Senior managers don’t have much The CIMA qualification is a great learned from CIMA, either directly or
time, so giving them clear summaries preparation for the business analyst indirectly, on a daily basis.
by month, by quarter and so on – with-
out any waffle – is crucial. There is noth- Pradhan’s job interview tips Job highlights
Illustration: Noma Bar/Dutch Uncle

ing more boring than looking through

+ Analyse the job specification + Your tasks will vary widely –
tables of numbers, so the judicious use
thoroughly and focus your research you’ll never get bored.
of graphs and other visual tools to high-
accordingly. + You’ll work with people across
light trends is also important.
+ The interview is your chance to the organisation and thereby
Business analysts should avoid spend-
interrogate your potential employer gain a wider perspective of
ing too much time looking at the past.
as much as it is their chance to grill the business.
You need to give insights about where
you, so ask lots of questions. + You’ll make a tangible contribution
the business is heading and its progress
+ Be enthusiastic. Make it clear that to the strategy development
towards targets. You’ll also have to check
you really want the job. process.
out what the competition is doing and
 60 Financial Management | January/February 2011

CIMA global events

Past events Joint seminar on

“reputation – why
CIMA cements new partnerships it matters and
in the Philippines how accountants
can manage it”
Derek Page, director of UK Trade and Investment in the Philippines 5 November 2010,
(centre in picture below), congratulated CIMA during the recent Hong Kong
In a joint seminar with CMA
signing of a Memorandum of Understanding with De La Salle Canada and CPA Australia,
University in Manila to offer the CIMA Masters Gateway Assessment Ray Perry, executive
director at CIMA, analysed
(CMGA), the CIMA Certificate in Business Accounting and the CIMA the importance of an
Professional Qualification (Diploma and Advanced Diploma). CIMA organisation’s reputation
and how it can be managed.
has also inked a deal with the Makati City based Asian Institute of Perry illustrated how
Management (AIM) to offer its international qualifications to AIM corporate reputation is
quantified and explored
MBA students and MBA graduates from other universities. how reputation could be
integrated into business
strategy. He also discussed
CIMA’s report on corporate
reputation, based on case
studies, and explained how
reputational analysis can be
integrated into the CIMA
Strategic Scorecard.

The finance
professional’s
role in risk
management
The National Award for the non-listed category; and by TEX Cycle 13 December 2010,
Management Accounting Sdn Bhd in the SME category. Hong Kong
Certificates of Merit were also presented to As guest speaker at this
(NAfMA) 2010 award two other companies – Malaysia Airports event, CIMA’s immediate
presentation and dinner Holdings Berhad and KPJ Seremban Specialist past president, Aubrey
15 December 2010, Petaling Jaya, Malaysia Hospital Sdn Bhd – for commendable Joachim, explored the
Maxis Berhad emerged as the Excellence practices in management accounting. widening role of
Award winner at Malaysia’s National Award management accountants
for Management Accounting (NAfMA) 2010. in today’s fast-changing
In the SME category, Century Software global business
(Malaysia) Sdn Bhd won the SME Star Award. environment. The
Photography: Getty Images

Malaysia Airlines System Bhd took the Best discussion attracted more
Practice Award in the publicly listed than 50 attendees, who also
category, while Digi Communications Sdn enjoyed a networking
Bhd won in the non-listed category. The session at the Mariners Club
Practice Solution Award was won by Plus in Tsim Sha Tsui, Hong
Expressways Bhd in the publicly listed Kong, before the event.
category; by The New Straits Times Press in
Financial Management | January/February 2011 61

Coming
UK Mastering business St David’s day lecture –
Bank of England – view forecasting managing the challenges

events
of the economy 2011 15 February of Welsh rugby (joint event
27 January 6.30pm for 7pm with CMI)
6.30pm for 7pm Hatherton Country House 3 March
Hong Kong Hotel Novotel Nottingham Hotel, Pinfold Lane, 6pm
CIMA-supported forum on East Midlands, Long Eaton, Penkridge, Stafford ST19 5QP Swansea Metropolitan
treasury for corporate Nottingham NG10 4EP Cost: No charge University, Business School,
treasurers, by ACT Cost: No charge www.cimaglobal.com/ Mount Pleasant, Swansea
25 January www.cimaglobal.com/ westmidlands SA1 6ED
Grand Hyatt, Harbour Road, eastmidlandsandeastanglia Cost: No charge
Hong Kong Data mining – joint event www.cimaglobal.com/
8.30am to 2pm Entry into CIMA with BCS southwestengland
Cost: No charge membership – practical 16 February andsouthwales
hongkong@cimaglobal.com experience requirements 6.30pm for 7pm
1 February Westley Hotel, Westley Road, This is a man’s world –
Ireland 6pm to 7.30pm Acocks Green, Birmingham or is it?
South East branch - BPP Professional Education, B27 7UJ 3 March
annual dinner 32-34 Colmore Circus, Cost: No charge 6.30pm for 7pm
29 January Queensway, Birmingham www.cimaglobal.com/ Room HUO.08, Hugh Aston
7.30pm B4 6BN westmidlands Building, De Montfort
Faithlegg, Waterford Cost: No charge University, Leicester
Cost: €45 www.cimaglobal.com/ Capturing value through LE2 7BQ
nicola.glynn westmidlands intelligent cost reduction Cost: No charge
@cimaglobal.com 16 February www.cimaglobal.com/
IFRS for SMEs 6.30pm for 7pm eastmidlandsandeastanglia
Releasing your true 7 February Bedford Heights
potential ‘performance 9am to 1pm Conference Centre, Performance
management’ London (venue tba) Manton Lane, Bedford measurement and
8 March Cost: £299 plus VAT (£269 MK41 7PH benchmarking
9am to 5pm plus VAT for CIMA members) Cost: No charge 8 March
CIMA Offices, 45/47 www.cimaglobal.com/ www.cimaglobal.com/ 9am to 5pm
Pembroke Road, Ballsbridge, mastercourses/IFSI eastmidlandsandeastanglia London (venue tba)
Dublin 4 Cost: £599+VAT (£539+VAT
nicola.glynn Management accounting Corporation tax refresher for CIMA members)
@cimaglobal.com in the performing arts and update www.cimaglobal.com/
10 February 18 February mastercourses/PMCI
Cork and Kerry branch 7pm for 7.30pm 9am to 5pm
annual dinner Bristol Old Vic Theatre Glasgow (venue tba) CPD Spring Academy
29 March School, Bristol BS8 2XF Cost: £599+VAT (£539+VAT 17 to 18 March
Maryborough House Hotel , Cost: No charge for CIMA members) 9am to 5pm (both days)
Douglas, Cork www.cimaglobal.com/ www.cimaglobal.com/ 26 Chapter Street, London,
Cost: €50 southwestengland mastercourses/CTRU SW1P 4NP
nicola.glynn andsouthwales Cost: £749 plus VAT. (Early
@cimaglobal.com Essential annual tax booker rate of £649 plus VAT
CFO of the future – update on all bookings placed on or
Malaysia finance leadership 24 February before 16 May.)
CIMA membership 15 February 9am to 5pm www.cimaglobal.com/spring
graduation 9am to 5pm Birmingham (Birmingham
ceremony Manchester (venue tba) venue tba)
5 March (tentative) Cost: £599 plus VAT (£539 Cost: £599+VAT (£539+VAT
Time and venue tbc plus VAT for CIMA members) for CIMA members)
Please contact your local www.cimaglobal.com/ www.cimaglobal.com/
CIMA office for more details mastercourses/FINL mastercourses/EATU

Visit www.cimaglobal.com/events for updates and a full list of events.

CIMA Mastercourses – your catalyst for business change: www.cimamastercourses.com
To submit an event for this page, email michaela.lambert-beresford@cimaglobal.com
 62
The Institute
T
Disciplinary committee
he disciplinary com-
mittee found Sumaiya
Patel, registered stu-
dent, guilty of miscon-
duct. In February 2009
the disciplinary com-
mittee of the Association of Chartered
Certified Accountants (ACCA) found
Patel guilty of misconduct for engag-
ing in unprofessional conduct designed
to assist her in an exam, contrary to
the ACCA’s fundamental principle of
integrity, which resulted in her remov-
al from its student register. This was
conduct resulting in an adverse finding
relevant to Patel’s CIMA student reg-
istration. Patel failed to notify CIMA
of this adverse finding, contrary to the
CIMA Council regulation 13 then cur-
rent, thereby failing to comply with the
laws of the institute.
Taking into account that Patel’s
actions had brought the profession into
disrepute, the committee decided that
her student registration should be can-
celled and required her to contribute
£500 towards costs.
The disciplinary committee found
Furqan Saleem, registered student,
guilty of misconduct. He had failed
to notify CIMA of an adverse finding
against him by the disciplinary com-
mittee of the ACCA in September 2008,
contrary to the CIMA Council regula-
tion 13 then current, thereby failing to
comply with the laws of the institute.
The committee referred to the ongo-
ing burden to inform CIMA of matters
relevant to becoming and remaining
a registered student. The fact that he
was unaware of the regulations was
not a mitigating circumstance. The
committee considered that the sanc-
Presidential
engagements
1-14 January It was an isolated incident and the com-
Visit to India, including the national convention
of the Institute of Cost and Works Accountants of
India, Chennai.
January 25 gravity of the situation. Ahmed was not
Bank of England governor’s dinner, London.
tion of a reprimand and a fine of £200
was appropriate, and required Saleem
to pay a nominal contribution (£100)
towards costs.
The disciplinary committee found
Nisar Ahmed ACMA guilty of mis-
conduct. He had described himself as
a “registered member in practice” of
CIMA on his company’s website while
not registered and had also provided
accounting services to clients, thereby
failing to comply with the laws of the
institute, including the requirements
to register as a member in practice, and
the principles of integrity and profes-
sional behaviour in the code of ethics.
Ahmed admitted the complaint and the
committee imposed the sanctions of
admonishments for both actions. It did
not require Ahmed to pay costs.
The committee also found Ahmed
guilty of misconduct for his failure to
respond within a reasonable time to a
superseding accountant’s requests for
professional clearance to act for one of
his clients, and a failure to supply docu-
ments and information, thereby failing
to comply with the laws of the institute,
including the principles of profession-
al competence and due care, and of
professional behaviour in the code of
ethics. Ahmed admitted the complaint.
mittee imposed the sanction of a repri-
mand and a fine of £500 to reflect the
required to pay costs.
Financial Management | January/February 2011
Research down the line
CIMA has become the sole sponsor
of Double Entries, an accounting
news wire. All institute research
news will now be delivered via
this fortnightly service. Visit
www.accountingeducation.com/
newsletter.cfm to subscribe.
CIMA appoints
regional director
Irene Teng is to join the institute’s
global management team as regional
director, covering South East Asia and
Australasia. She will be based at the
institute’s Malaysian office in the
country’s capital city, Kuala Lumpur.
Teng, previously regional director at
Teesside University, will be responsible
for increasing the number of CIMA
students in the region and will also take
charge of all related institute alliances
and partnerships.
Ghanaian
office opens
In response to rising demand for CIMA
courses and workshops from members,
students and prospective students in
Ghana, the institute has set up an office
in the capital, Accra. The launch event
was attended by a range of high-profile
CIMA members, business leaders and
heads of government departments and
not-for-profit organisations.
Illustration: Dmitry Litvin/Dutch Uncle
Left to right: Jonas Quaye (FCMA), CIMA director
Andrew Harding, Prince Kofi Amoabeng (FCMA)
 Financial Management | January/February 2011
CIMA CEO column
Now, more than ever,
organisations need
corporate navigators
W
herever I am in the world,
I find those who have just
passed the qualification
to be among the best and
most persuasive advocates
for CIMA. Whether it is in
Leeds, Johannesburg or Shanghai, I am always
struck by how enthusiastic young people are about
the way the syllabus opens up opportunities.
I come across new managers who find that as man-
agement accountants they are welcome in any unit
of the business. Others, especially in places such
as China, are bombarded weekly with calls from
headhunters. (Most of these overtures, I am glad
to say, are declined politely.) And I meet auditors
who feel that studying the CIMA qualification has
been vital to gaining a rounded view of clients.
On the face of it, it’s a bit hard to explain just
why people in such different circumstances can
all value a single qualification quite so strong-
ly. The answer, I suspect, lies in the fact that
being a management accountant does not quali-
fy you to do one thing, but rather it equips you to
perform an entire range of tasks. Where and how
the individual uses those skills is up to them.
Hence you will find a CIMA professional working
Illustration: Masao Yamazaki/Dutch Uncle
in audit, finance or maybe not as an accountant at
all. Perhaps they will be an entrepreneur or part
of a not-for-profit organisation.
The CIMA qualification never, in my expe-
rience, lacks relevance. This relevance is so
important at a time when so much is changing glo-
bally, with the rise of China and India, and signs
that Africa, too, may be on the road to greater
prosperity. Management accountancy was born
of change. The roles played by management
accountants have evolved continuously to meet
organisations’ needs. Management accountants
65
are equipped to take on broad roles, still inform-
ing stakeholders and business managers, but also
applying their professional objectivity to strategic
and operational decision-making.
And it’s an immense help that ethics is in
CIMA’s DNA. Now, more than ever, organisations
need “custodians of the business model” and “cor-
porate navigators”, who can guard the sustaina-
bility of the business and challenge managers to
ensure risk and performance are managed in the
long-term interests of stakeholders.
It is remarkable how many of the topics that are
being most hotly debated in business are aligned
precisely with CIMA’s long-standing agenda. This
was clear at last November’s World Congress of
Accountants in Kuala Lumpur, where many of the
technical aspects of accounting were discussed
alongside global issues, such as sustainability. And
the same will be true of the CIMA World Confer-
ence 2011 in Cape Town in October. This is being
staged before a G20 summit that will consider
adopting a new holistic model of reporting. Our
South Africa event will be an opportunity to show-
case the arguments for a quiet revolution in cor-
porate reporting, with a far greater emphasis on
narrative reporting.
Nor is it a one-way process. CIMA, too, has
changed, with a global presence and an attitude
informed by the needs of business and the public
sector worldwide as it adapts to new technology and
a power shift from West to East (and South), and as
best practice becomes more entrenched in emerg-
ing economies. At a time when the relevance of the
qualification is patently clear and where its adapt-
ability stands it in good stead whatever the global
challenges, adapting is not only worthwhile, but sur-
prisingly stimulating. The feedback from new CIMA
people shows just how much we can contribute.
Charles Tilley
Chief executive, CIMA
 66
The Question
‘My chief executive relies on me to supply him with very brief overviews
of complex situations. Recently, I prepared a spreadsheet with 40 tabs
and crunched 20 complex KPIs – and he wanted it all summarised on one
side of A4. Am I right to think he’s being lazy?’
CIMA versus
Ben White
A. Ben
Lazy? In a word: no. If
someone just handed me a
load of raw data I’d throw it
in the bin. I don’t want a
load of numbers. Frankly, an
intelligent monkey can
crunch the numbers; that is
not what a management
accountant is paid to do.
What your boss wants is
for you to take that data and
analyse it. You need to
identify trends and patterns
and work out which ones are
the relevant ones. You ought
to know what information
your boss is going to find
interesting – and it won’t
always be the same. Chief
executives go through
periods of focusing on
certain things. When you’ve
worked out what the
important headline trends
are, you need to convert
those numbers into a story.
Don’t just hand over figures.
A picture can speak a
thousand words. Use graphs
that demonstrate a truth
at a glance.
Chief executives often
have short attention spans.
They are impatient. Pictures
can communicate
information rapidly.
Personally, I have a visual
bias. I prefer images to
numbers. A great graph
will tell me in a few
seconds precisely what
I need to know.
CIMA’s Louise Ross
is an expert on
technical issues
So how do you improve
your performance? I think it
starts by understanding both
your boss and the business
you work in. You need to
find out what is keeping him
awake at night. As your
relationship develops you’ll
get a better idea. But take the
initiative. Become an expert
on your company. Learn
where the numbers come
from; what the challenges
are. Hone your
entrepreneurial instincts by
reading the financial and
trade press. Then you’ll spot
areas of concern before your
boss is aware of them. He’ll
come to rely on you. You’ll
become a strategic asset.
And you’ll get a real thrill
from adding value, not just
playing with numbers.
Ben White is a serial
entrepreneur. With
brother Jos, he founded
Star Internet, MessageLabs
and Notion Capital.
A. CIMA
Accountants love
spreadsheets. They are one
of our most used and useful
tools. It is immensely
satisfying to convert a mass
of data into a rational
structure and reveal the
underlying relationships.
But spreadsheets are
merely a tool to covert data
Financial Management | January/February 2011
into knowledge, and it
sounds like you haven’t
quite completed that
process. You can roam
through your spreadsheet,
highlighting trends and
patterns, spotting which
issues need attention and
identifying risks or
weaknesses, but your chief
executive doesn’t want to
take that journey. He’s not
being lazy.
In fact, as you point out,
he relies on you. He wants
only the tip of the
information iceberg,
accompanied by a lot of
analysis. Think of this not as
omitting information, but as
adding value to it.
Management accountants
combine technical expertise,
soft skills and understanding
their businesses. It sounds
like you’ve got good
technical skills as far as
spreadsheets and KPIs go.
But you also need to use
your analytical ability – not
only on the data, but to
anticipate your chief
executive’s information
needs. And you need to use
your soft skills to find out his
perspective, concerns and
ambitions for your
organisation, and to present
with conviction your
analysis. What gives you
confidence in your analysis?
A good instinctive
understanding of how your
organisation behaves – the
Ben White is
co-founder of
MessageLabs, which
he sold to Symantec
for $700m in 2008
cause and effect
relationships; the factors
that drive costs; where and
how revenue is created.
With the exception of
poker players and chess
grandmasters, our capacity
to pay attention to multiple
issues is limited.
Interviewers make up their
mind about candidates
within seconds. Witness
statements are notoriously
unreliable. Management
theory suggests that we can’t
effectively supervise more
than eight people. And,
when making a presentation
or writing an article, we can
probably get only three main
points across. With that in
mind, here’s my advice:
• Employ all your
management accounting
talents – technical expertise,
soft skills and understanding
of the business.
• Have confidence in your
ability to highlight what
is important.
• Imagine you can give only
your chief executive eight
indicators. Which ones
would you choose?
Louise Ross is a technical
specialist at CIMA
Do you have a question
you’d like to pose to CIMA
and a top entrepreneur?
Tell us at questions@
fm-magazine.com