ISSUE 11 VOLUME 8 NOVEMBER 2012

PLUS• Theevolutionofconsulting•Appointinganauditcommittee• JennyToofPernodRicardAsia

HK$70.00

Veteran CPAs whoshow no signs of slowing down

SECONDWIND

Connecting withyounger members

COLIN BEERE

Dear members,

A t the last Council meeting, we de-voted a section to meet the rep-resentative of the 25.35 Group because we wanted to understand

more about the needs and expectations of our younger members and to get their views on the work of the Institute. This age group is an impor-tant segment of the profession as more than 11,000 members are now under the age of 36. They make up 32 percent of our membership.

Through the 25.35 young members leadership panel, we aim to engage with younger members, hear their views and ideas, foster a close network among them and between them and the Institute, and support their social and career development.

Another important group of our membership consists of small- and medium-sized practitio-ners. We are organizing an SMP symposium at the end of this month to update them about the Institute’s support for SMPs, the practice review programme, tax issues and important account-ing and auditing standards that affect them. We will also discuss the latest Companies Ordinance reform and have invited the accountancy sec-tor’s LegCo representative to speak.

Turning to our students, we just held an an-nual award and graduation dinner, at which we conferred certificates to QP graduates as well as prizes and scholarships to top students. This celebratory event was for the December 2011 and June 2012 sessions of the programme, which 1,490 students successfully completed. The total number of QP graduates now stands at 10,790.

I extend a warm welcome and congratulations to these new graduates. They are one step closer to gaining their CPA designations and are well on

their way to becoming one of Hong Kong’s suc-cess ingredients.

Another landmark event is our Best Corporate Governance Disclosure Awards, which are now in their 13th year and have become prestigious recognition coveted by Hong Kong businesses in all sectors. The review and judging panels have spent months evaluating the quality of disclo-sure of contesting companies through their an-nual reports.

Winners will be announced on 23 November at the awards presentation ceremony, at which Sir C.K. Chow, chairman of the Hong Kong stock exchange, will be the guest of honour.

Later this month, you will receive information about the Institute’s annual general meeting and a review of our work and finances in the past year. I encourage you to read through it to learn more about what the Institute has done for you. We al-ways welcome your views and participation.

One way you can do your part is by either standing for the Council election or nominating a member who you think can represent you. At our AGM next month, some Council members are re-tiring in line with rules set out in the Professional Accountants Ordinance, and this is an opportu-nity for new ones to join.

Last but not least, with the year drawing to an end, it is time for us to gather, relax and revel. Our annual dinner, taking place on 3 December at the Hong Kong Convention and Exhibition Cen-tre, has adopted the theme “Guys and Dolls” (紅男綠女), borrowing the name of the classic Broad-way musical.

Let’s put on something red (for men) or green (for women) and celebrate with fellow members and friends.

Keith PogsonPresident

“ This age group is an important segment of the profession as more than 11,000 members are now under the age of 36.”

President’s message

November 2012 1

2 November 2012

56 Business travel Honnus Cheung marvels over Madrid

58 After hours Aloysius Tse on wine; Jemelyn Yadao on watches

60 Let’s get fiscal Nury Vittachi gets into bed with an accountant and a lawyer

LIFESTYLE

01 President’s message04 Institute news06 International news10 Greater China news

42 China finance Liu Yuting analyses a new financial model for development

46 Share-based payment Alex Leung and Ross Wang look at options for IFRS 2 Share-

based Payment and how to use them for business purposes

48 TechWatch 120 The latest standards and technical developments

51 Tech Q&A Your questions about standards answered

54 Events A guide to forthcoming courses, workshops and member activities

55 People on the move The latest professional appointments from around the region

14 Giving good advice Alfred Romann asks how consulting firms are coping with the

pressure of China's competitive market

20 Working overtime Many CPAs are hard at work even after retirement. Jemelyn

Yadao meets some of the Institute's pioneering retired members

28 Panels of probity Audit committees are expected to be more active. George W.

Russell asks the experts about how the boards can be improved

34 Staying indie George W. Russell puts independent non-executive directors in

the spotlight and looks at the skills that they are expected to have

38 Success ingredient Jenny To, regional recruitment and talent development director at

Pernod Ricard Asia, tells George W. Russell about her versatility

14 REGULARS

FEATURES

SOURCE

ISSUE 11 VOLUME 8 NOVEMBER 2012

CONTENTS

President: Keith PogsonEmail: president@hkicpa.org.hk

Vice Presidents: Susanna Chiu, Clement Chan

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

Deputy Director of Communications: Stella To

Editorial Advisers: Daniel Lin, Clement Chan, K.M. Wong

Editorial Manager: John So

Editorial Coordinator: Maggie Tam

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

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

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

M&L

Editor: George W. Russell

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

Copy Editors: Jemelyn Yadao, Alisha Haridasani

Production Manager: Jasmine Hu

Design Manager: Jennifer Chung

Contributor: Alfred Romann

Editorial Assistant: Lucid Wong

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

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

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

© Hong Kong Institute of Certified Public Accountants November 2012. Print run: 33,900 copiesSubscription: HK$760 for 12 issues per year.See www.hkicpa.org.hk/aplus for details.

Your chop Your Logo

IL

LUS

TRAT

ION

: HA

RR

Y H

AR

RIS

ON

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

4 November 2012

NEWSTHE INSTITUTE

Disciplinary findingLeung Chi-keung, CPA and Luk Ka-cheung, CPAComplaint: Noncompliance with the Funda-mental Principles of Statement 1.200 “Pro-fessional Ethics – Explanatory Foreword.” In July 2009, Leung and Luk were found by the Market Misconduct Tribunal to be culpable of insider dealing, which is contrary to section 270(1)(e)(i) of the Securities and Futures Ordi-nance (Cap 571). Leung and Luk held non-pub-lic and price sensitive information about the securities of China Overseas Land and Invest-ment Limited, a Hong Kong-listed company. The two accountants admitted the complaint.

Decision and reasons: Leung’s and Luk’s names shall be removed from the register for a period of one year. Each must also pay the Institute a penalty of HK$100,000 and pay costs towards the disciplinary proceedings amounting to HK$34,159 and HK$21,145 for Leung and Luk respectively. The Disciplinary Committee considered this case as a serious one, involving public interest and an element of breach of trust by both accountants.

Chan Kin-hang, Danvil, CPAComplaint: Noncompliance with the Funda-mental Principles of Statement 1.200 "Profes-sional Ethics – Explanatory Foreword" and paragraph 100.4(a) of the Code of Ethics for Professional Accountants; and guilty of pro-fessional misconduct. Chan was director of a company which submitted a tender to the Of-ficial Receiver for appointment as provisional liquidators. After the tender was accepted, the Official Receiver appointed Chan and a non-member as joint and several provisional liqui-dators for a number of companies. In October and December 2009, Chan and the non-mem-ber were removed as the joint and several liquidators/provisional liquidators for seven companies on the grounds that they did not carry out their duties appropriately and that Chan had included misleading information in the tender. Chan admitted the complaints.

The Disciplinary Committee found that Chan breached the above standards of ethics in submitting a declaration form used in the ten-der, which contained incorrect and misleading information. This misled the Official Receiver

Conference discusses CPAs role in Hong Kong’s future

The Institute responded to newspaper reports that questioned the effectiveness of its disciplinary system. On 28 September, several local newspapers reported that since the Financial Reporting Council was set up six years ago, it has completed 14 investigations, but only one disciplinary order has been made by the Institute.

The Institute clarified that by end of September it had received 16 cases re-ferred by the FRC, all of which had been introduced to its complaint assessment process. Of the 16 referred cases, eight had been concluded after completion of due process. Not all cases were sent for consideration by a Disciplinary Commit-tee because the Institute judged that they were more appropriately concluded by other sanctions available. The Institute added that the results of all con-cluded cases were communicated to the FRC, which has the option of pursuing its own prosecution if it was dissatisfied with case outcomes.

Of the eight cases in progress, six were referred to the Institute this year. One of the two pre-2012 cases still in progress was being dealt with by an inde-pendent Disciplinary Committee specifically set up for the case in accordance to the Professional Accountants Ordinance, and the other was being considered by Institute’s Council for referral to a Disciplinary Committee. The Institute advises the FRC of the progress of all referred cases on a quarterly basis.

Institute responds to media on disciplinary concerns

The Institute held a conference last month to discuss business sustainability and the future of the accounting profession. Keynote speakers included Chris-tine Loh, under-secretary for the environment, Paul Druckman, chief executive officer of the International Integrated Reporting Council, and Julia Leung, under-secretary for financial services and the treasury.

The one-day event was divided into two parts. During the morning session, Loh covered why sustainability is important for businesses and Druckman discussed how to communicate and report on it. In the afternoon, Leung talked about Hong Kong’s role as an international financial centre.

In his closing remarks, Clement Chan, vice president of the Institute, noted that the topics discussed were intertwined and impact the future of Hong Kong.

into accepting the tender. He was also found guilty of professional misconduct as a joint and several liquidator/provisional liquidator of three of the seven companies.

Decision and reasons: Chan’s name shall be removed from the register for a period of three years. He must also pay the Institute a penalty of HK$33,333.33 and costs of HK$288,511. The Disciplinary Committee took Chan’s personal circumstances and conduct during the proceedings into consideration when making its decision.

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

Disciplinary finding (continued)

6 November 2012

NEWSINTERNATIONAL

Bank of England policymakers are divided over the future of economy-boosting measures, in particular the quantitative easing programme. The bank’s monetary policy committee agreed to continue purchasing assets totalling £345 billion and keep interest rates at their current record low of 0.5 percent until next month.

However, according to min-utes of the committee’s meeting, the asset purchases will be com-pleted by next month and it is

uncertain if the bank will expand the measure: “There were some differences of view between members about the outlook and the likelihood that further easing in policy would be required.”

Inflation had fallen to 2.5 percent in August although it was still above the central bank’s 2 percent target and is expected to “remain broadly flat over the rest of the year,” according to the minutes. Furthermore, “slowing activity in the rest of the world had been a drag on United King-

dom exports and had hampered the rebalancing process.”

Figures from the Office for National Statistics show a fall in unemployment. The office stated that unemployment for June to August fell 0.2 percentage points to 7.9 percent year-on-year.

However, the bank’s commit-tee said any optimism would be premature. “It was particularly difficult to explain the recent strength of job creation,” it said, adding “it is unclear how long that strength would last.”

Food prices rising to 2008 crisis levels

The Food and Agriculture Organization’s monthly price index has indicated an increase in world food prices, bringing them closer to the levels reached as the global financial crisis unfolded in 2008.

After two months of stabil-ity, the Food Price Index, which measures monthly changes for a food basket of cereals, oilseeds, dairy, meat and sugar, rose by 1.4 percent in September, climbing to 216 points – just nine points short of the peak of 225 points reached in 2008 that some analysts blamed for igniting riots across the world.

The Cereals Price Index hit 263, which is 7 percent higher than the corresponding period last year and just 4 percent lower than 2008 levels when the index hit 274 points.

The price increases are attrib-uted to droughts in key cereal pro-ducing areas, such as the United States and Central Asia.

“Food prices and volatility have increased in recent years. This is expected to continue in the medium term,” said José Grazia-no da Silva, director general of the organization, a United Nations agency, calling for stronger global governance of food security.

Advances have already been made in improving food security, Graziano said, such as the estab-lishment of the High Level Task Force on Global Food Security and the Agricultural Market Information System.

Global economy unlikely to recover until 2018, says IMF chief economistNew report lowers expectations of growth next year

Bank of England uncertain about future measures

Olivier Blanchard AFP

The chief economist of the International Monetary Fund, Olivier Blanchard, says the global economy, dogged by the euro zone crisis, debt problems in Japan and the United States and a slowdown in China, will not recover from the financial crisis until at least 2018.

“It will surely take at least a decade from the beginning of the crisis for the world economy to get back to decent shape,” he was quoted as saying by Agence France-Presse.

Blanchard’s statement coin-cides with the release of an IMF report, World Economic Out-look: Coping with High Debt and Sluggish Growth, which revises forecasts presented by the fund in April this year to accommodate slower rates of growth around the world. Revised projections for 2013 see growth predictions

reduced from 2 percent to 1.5 per-cent for advanced economies and from 6 percent to 5.6 percent for emerging-market and developing economies.

According to the fund, these forecasts rely on two assumptions: that the euro zone will “adopt poli-cies that gradually ease financial conditions further in periphery economies” and that the U.S. will avoid “drastic automatic tax increases and spending cutbacks”

as well as raise the debt ceiling in a “timely manner.”

In addition, Italy and Spain need “not only a continuous process of internal adjustments but also a guarantee of financing on condition that these

countries really implement their plans,” Blanchard told AFP.

Weak growth in Asia is in large part due to reduced activity in China and India, the report states. In China tighter credit conditions to avert a real estate bubble and weaker external demand explain the slowdown, while in India low business confidence, weak structural reforms and flagging external demand have deceler-ated the economy.

November 2012 7

European Union policymakers have agreed to create a supervi-sory board run by the European Central Bank to watch over the banking sector across the euro zone.

The legal framework for the board is likely to be completed by 1 January 2013. The board is expected to become operational over the course of 2013, after which it will oversee 6,000 banks.

Under direction from the board, the EU’s rescue fund – the European Stability Mechanism – can directly funnel financial as-sistance to failing banks without adding to government debt.

“The quicker the mechanism is in place, the sooner recapital-ization can take place,” French President François Hollande said at a press conference after the decision on the initiative was reached on 19 October by euro zone leaders meeting in Brussels.

However, German Chancel-lor Angela Merkel cautioned that it would take time for the new supervisory board to run effectively. “It’s not just a matter of months,” she said.

It is also apparently unde-cided whether Spanish banks can request recapitalization funds from this new mechanism, since Spain was already committed to a rescue package agreed to at a summit in June. A final decision on whether Spain’s banks will be included in the mechanism is expected to be made before the end of 2012.

EU chiefs OK new banking supervisor

Google worries investors with third-quarter report

Google released a disappointing third quarter earnings report that led to a nosedive in the company’s stock price, reflecting the chal-lenges ahead for the Internet giant in an increasingly mobile world.

The report, which was accidentally released before Google approved it, revealed that revenue increased by 45 percent to US$14.10 billion. However, Google’s revenue per click on ads fell by 15 percent, the fourth consecutive quarter that figure has declined.

The fall is attributable to the increased use of smart phones and other mobile gadgets where ads cost less because they don’t translate into purchases as much as ads on desktops.

Larry Page, Google’s chief executive, assured investors and analysts on a conference call that Google can tackle the mobile ads issue. “Monetization on mobile queries right now is a significant fraction of desktop,” he said.

Page added that Google was exploring ways of making more

money from mobile ads and that the firm was “uniquely positioned to get through that transition and to profit from it.”

Additionally, operating costs of Motorola Mobility, the cell-phone maker that Google recently acquired, are increasing.

The report pushed stock prices down by 9 percent, before NASDAQ halted trading in the company.

The report also comes at a time when Google is undergoing pri-vacy and antitrust investigations.

Citigroup CEO resigns abruptlyamid reports of board tensionsBank taps head of European operations as replacement

AFP

The chief executive of Citigroup, Vikram Pandit, resigned abruptly last month amid reports of tensions with Michael O’Neill, the bank’s chairman, and other members of its board.

The bank’s board of directors immediately named Michael Corbat, its head of operations in Europe, the Middle East and Africa, as its new CEO.

Pandit told Reuters that the decision to resign was entirely his own, adding that he had been “thinking about [it] for a while.” According to the news service, sources within and outside Citi stated that Pandit’s decision to step down followed months of tension with O’Neill over a range of issues. Moreover, O’Neill told investors after Pandit’s resigna-tion that he had been planning to replace Pandit with Corbat for

“quite some time.” The bank’s president and

chief operating officer, John Havens, also resigned on the same day. The departures came just a day after Citi announced a third-quarter operating profit of US$3.27 billion, exceeding Wall Street expectations.

In April this year, Pandit clashed with the board over his US$15 million pay package that 55 percent of shareholders had re-jected during an advisory vote. In

March, the Federal Reserve Board, the United State’s central bank, rejected a Citi proposal to return capital to shareholders because Citi was not deemed in a fit enough position – a result that further strained relations between the bank’s management and its

investors. Throughout his tenure, Pandit was adamantly opposed to breaking up Citi despite critics saying the group had become too unwieldy to manage.

Pandit was appointed to the top job in 2007 when the bank was on the brink of collapse and had to turn to the federal govern-ment for a US$45 billion bailout. At the time, Citi was in such a dire position that Pandit had to take a US$1 token annual salary until the bank returned to profitability.

Vikram PanditAFP

8 November 2012

Audit work that accounting firms in the United States outsource to centres in India is not routinely inspected by American regulators, according to Indian accounting officials and employees of large audit firms.

Almost 5 percent of U.S. audit work is now carried out in India, an American ac-counting professor told Reuters. That figure is up from 1 to 2 percent five years ago.

Douglas Carmichael, former chief auditor of the Public Company Account-ing Oversight Board , told Reuters that “the risks are that the work will be offshored that is beyond the training, skills and experience of the people that it is offshored to.”

The lower wages in India – where a junior accountant can earn less than a fifth of the salary of a United States counterpart – have prompted the U.S. arms of the Big Four to open centres across India. In total, Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers now employ 22,000 workers there. Three of the firms replied to Reuters’ requests for comment, stating that work done in India is routine and reviewed to meet the same standards as work done in the U.S.

An executive from PwC, which has transferred 4 percent of its audit work to “alternate delivery centers” outside the U. S., said the work done offshore is “limited to standardized tasks, none of which involves auditor judgment.”

Although work done in India is sent back to the U.S. where the PCAOB can re-view it, there is no formal agreement that allows the board to inspect audit firms in India. In addition, the Institute of Chartered Accountants of India has no way of regulating centres carrying out U.S. work.

World Bank says 600 million new jobs needed by 2020A study by the World Bank states that the global economy needs to produce at least 600 million new jobs by 2020 to absorb a surging workforce and keep current employment levels constant, particularly in Asia and sub-Saharan Africa. The report, 2013 World Development Report, stated that the private sector is the main engine of job creation and urged governments to implement policies that encourage businesses to hire more workers.

India, Australia to increase trade under new pactIndia and Australia have agreed to double bilat-eral trade to US$40 billion by 2015 under a new agreement signed last month. While New Delhi is reforming its aviation, energy and retail indus-tries, Australia has changed its position on ban-ning the sale of uranium to India – changes that will allow greater economic cooperation. Current two-way trade has increased by 13 percent an-nually in the past five years and stands at US$21 billion.

Japan cabinet to draw up fresh stimulus plansYoshihiko Noda, the Japanese prime minister, has ordered his cabinet to draw up a stimulus pack-age by the end of this month in a bid to boost Ja-pan’s subdued economy. Hurt by falling demand for exports and low domestic consumption, Japan’s economy grew by just 0.3 percent in the second quarter of this year. No details of the size of the package have been revealed.

Models sue agencies for fraudulent accountingFashion models are suing several agencies in the United States claiming that they have lost up to US$20 million due to fraudulent accounting methods. The class-action lawsuit accuses the modelling agencies of hiding funds and not pro-viding accurate financial statements. Companies being sued include Wilhelmina Models, Ford Models, Trump Model Management and Elite Models Management, advertising agencies Saat-chi & Saatchi and Leo Burnett, and the cosmetics giants Revlon and Maybelline.

New combined CPA designation to be rolled out in Canada from 1 JanuaryThe Canadian Institute of Chartered Accountants and CMA Canada have announced they will jointly oversee a new Chartered Professional Accountant Canada designation.

The two accounting organizations said they will launch a new combined oversight body for the new designation on 1 January 2013, as part of a larger plan to merge CAs and CMAs across Canada and create a new CPA designation that would streamline regulation.

The new body will create a certification programme for new CPAs and hold the first examinations in 2015.

Accounting is regulated on a provincial level in Canada and accounting organizations in each province must agree to merge and create the new CPA designation before it can actually be adopted. When the new CPA is launched, the CICA and CMA Canada will also continue their separate operations until all member provinces have merged.

CAs and CMAs have agreed to merger talks in seven of Canada’s 10 provinces. Provincial bodies of Canada’s third main accounting body – the Certified General Accountants Association – have opted out of the merger plan.

Concerns mount over U.S. audit work done in IndiaEx-PCAOB official criticizes oversight

NEWSINTERNATIONAL

10 November 2012

NEWSGREATER CHINA

ING Groep, one of Europe’s largest financial companies, has confirmed that it will sell all of its insurance and pension assets in Hong Kong, Macau and Thailand to the high-profile businessman Richard Li for US$2.14 billion.

The acquisition by Pacific Cen-tury Group, which is controlled by Li, is valued at 1.9 times the estimated book value of €865 million, according to a statement from Amsterdam-based ING.

“This acquisition is abso-lutely in line with Pacific Century Group’s strategy as a long-term holder and developer of assets and investments in three areas: financial services; technology, media and telecommunications; and property projects,” Li told the South China Morning Post.

Li’s father, business tycoon Li Ka-shing, promised to financially support his son’s new invest-ments when he detailed his suc-cession plans in May.

“With the money from his dad, it’s sensible for Li to make more of these acquisitions going for-

ward,” Benjamin Tam, an analyst at IG Investment Hong Kong, told Bloomberg before the announce-ment. “He has personal passion for the financial industry and had exposure in the insurance sector.”

The ING acquisition follows Li’s US$68 billion purchase of PineBridge Investments from American International Group in 2010.

The deal with Pacific Cen-tury Group was ING’s second significant sale in a month, after it agreed to sell its Malaysian business to AIA Group for US$1.7 billion.

ING has been selling its insur-ance and investment manage-ment operations in an attempt to repay the bailouts it received from the European Union.

The Hong Kong Monetary Author-ity intervened to weaken the Hong Kong dollar seven times in two weeks after the currency’s value was pushed up by increased inves-tor confidence around the world.

In its latest action, the author-ity sold HK$2.3 billion into the currency market on 1 November as the local currency repeatedly touched the upper limit of a 29- year-old peg to the U.S. dollar.

On 30 October, the HKMA added HK$2.1 billion to the Hong Kong banking system. On the day before, the authority sold HK$2.71 billion.

On 23 October the HKMA sold US$395 million worth of Hong Kong dollars in New York trade. Earlier on the same day, the au-thority, Hong Kong’s de facto cen-tral bank, said it had sold HK$6.63 billion in the foreign-exchange market in two interventions.

This followed a HK$4.67 bil-lion intervention on 19 October, the first time HKMA intervened since December 2009.

The authority said in a state-ment that it expects net inflows into the Hong Kong dollar to per-sist as investors seek investment opportunities in Hong Kong and

the Mainland.“Since the U.S. Federal Re-

serve’s launch of the third round of quantitative easing, demand for Hong Kong dollars has increased and similar rises are also noted in other currencies within the region,” the statement added.

The Hong Kong dollar is pegged at HK$7.80 to one U.S. dol-lar but is allowed to trade between HK$7.75 and HK$7.85. Under the currency board system adopted in 1983, the authority must inter-vene when the Hong Kong dollar hits either the upper or lower limit to keep the band intact.

PricewaterhouseCoopers is imposing a no-pay leave policy and a career-break programme for its Hong Kong staff in a bid to cut costs.

According to a PwC Hong Kong statement, all of the firm’s staff will be granted 12 days of additional leave, eight of which will be unpaid.

Departments in the Big Four firm will have different timelines for staff taking extra leave.

The firm will also launch a voluntary career break programme, which will allow its staff to take an extended break for either professional or personal reasons.

With this programme, staff can take a break, of between two weeks and six months, and will be paid 20 percent of their salaries during that time.

“We believe the approach taken is the most ideal in these challenging circumstances,” PwC said in a statement.

“The measured and bal-anced approach allows our people to spend more time with family and friends, while avoid-ing the unnecessary need for headcount reductions as PwC has no plans to implement any redundancy programmes,” the firm’s statement added.

In 2009, PwC instituted an unpaid leave programme in several of its offices, including the United Kingdom, Australia and Romania.

PwC staff face unpaid leave incost-cutting bid

ING sells its Asian insurance units to Richard Li in US$2 billion dealBusinessman says acquisition fits long-term development

HKMA steps in to weaken Hong Kong currency

Richard Li

AFP

November 2012 11

BDO, the fifth biggest accounting firm in Hong Kong by revenue, plans to merge with other firms in order to diversify its services.

The firm’s past mergers focused primarily on expanding its audit ability, said BDO’s chairman, Albert Au, but future acquisitions will focus on widening its services.

“Looking ahead, we would like to merge with firms with consultancy or other specialized skill sets so as to diversify... and provide more comprehensive services to the customers. The ultimate goal is for us to challenge... the Big Four firms,” the South China Morning Post quoted Au as saying.

According to the paper, Au also said that acquiring more specialists would help attract bigger customers and expand BDO’s client base.

The firm’s change in strategy has been expected by analysts, the SCMP reported, due to the substantial decline of initial public offerings and the low demand for auditing services in 2012.

In the first eight months of this year, the total value of new listings reached just under HK$43 billion, down 77 percent from last year.Hong Kong was the world’s largest IPO market in the last three years.

China’s GDP grew 7.4 percent in the July-September quarter from a year earlier, accord-ing to the National Bureau of Statistics, indicating that the economy had slowed for a seventh consecutive quarter. Annual growth in the second quarter was 7.6 percent.

The figures also marked the slowest growth since the first quarter of 2009, when the economy grew 6.5 percent.

A day before the release of the data, Premier Wen Jiabao gave what observers said was his most optimistic assessment of the economy since the start of the year.

“The economy in the third quarter was quite good. We can now say with confidence

that the growth of the Chinese economy is basically stabiliz-ing... As policies are imple-mented and hit their mark, the Chinese economy will stabilize further,” read Wen’s comments published on a government website.

He added that the govern-ment’s target of 7.5 percent an-nual growth – reduced this year from the previous 8 percent target – was well within reach.

Measures that the Chinese government has implemented include getting the central bank to cut interest rates in

June and July. Last month the government also approved infrastructure projects worth about US$157 billion. However, Beijing has not yet said where the money to fund these proj-ects is coming from.

Despite the weaker GDP data, other information released showed some signs of stabilization. In the year to Sep-tember, fixed asset investment grew 20.5 percent, industrial output grew 9.2 percent and retail sales grew 14.2 percent. Also more than 10 million jobs were created this year.

BDO in merger plans to take onbigger rivals

World trade body upholds ban on steel tariffsThe World Trade Organization last month upheld a ruling that Chinese tariffs on imports of steel from the United States were illegal.

China had imposed anti-dumping and anti-subsidy tariffs on grain-oriented electrical steel imported from the U.S. in response to the “Buy America” provisions of the 2009 U.S. stimulus package, which Beijing said was in effect giving subsidies to U.S. steel manufacturers.

In June, the WTO ruled against the tariffs, saying that China had failed to prove Buy

America’s damaging impact on the Chinese steel industry.

“Today we are again plainly stating that we will continue to take every step necessary to ensure that China plays by the rules and does not unfairly restrict exports of U.S. products,” BBC News quoted U.S. trade representative Ron Kirk as saying.

“The Obama administration will not allow China to break international trade rules,” added Kirk.

China’s Ministry of Commerce had no immediate

comment on the WTO ruling, Reuters reported.

The case is the latest in a series of trade conflicts between the two countries. Last month, the Obama administration filed a complaint accusing China of restricting exports of rare earth metals. In September, China filed a WTO complaint challenging U.S. anti-dumping measures on certain Chinese products exported to the U.S.

The WTO ruling came during the U.S. presidential debates, in which the issue of China came up several times.

Third-quarter GDP growth data reflect slowdown’s persistencePremier says latest figures suggest economy is stabilizing

7.4%Q3

7.6%Q2 growth growth

12 November 2012

NEWSGREATER CHINA

Former KPMG boss appointed SFC chairman The government has appointed Carlson Tong, former chairman of KPMG China and a for-mer vice president of the Institute, as the chairman of the Securities and Futures Com-mission. Tong’s term started on 20 October and ends on 19 October 2015. “The SFC plays a vital role in upholding Hong Kong’s position as a leading international financial centre, and I feel honoured to have been appointed as its chairman,” Tong said. He succeeds Eddy Fong, who retired last month.

Businesses keen for younger workers: report The Grant Thornton International Business Report revealed that at least a quarter of the workforce is under 30 years old in 60 percent of businesses in Hong Kong, up from 52 per-cent six months ago. The report found that 82 percent of responding employers highly value the adaptability of young recruits and 76 per-cent value their better grasp of technology.

Award winning accountant becomes CPC delegate Zhou Mingjue has become the only represen-tative selected from the Mainland’s 250,000 CPAs to attend the 18th National Congress of the Communist Party of China on 8 Novem-ber. Zhou works as the party chief in the Changsha, Hunan province branch of the ac-counting firm ShineWing. During his career in auditing, he has participated in national projects and has won numerous awards for his work.

Hong Kong enforces property tax for non-localsHong Kong’s Chief Executive Leung Chun-ying implemented the city’s first property tax for non-local buyers in order to address fears of a property bubble riding on the backs of low interest rates and monetary easing policies in the United States. Under this new policy, overseas buyers will have to pay a 15 percent tax upon purchase of prop-erty. Additionally, resale tax on property was raised by 5 percent.

Albert Au, chairman of BDO, has supported Ernst & Young’s citing of Chinese laws on state secrets as the reason for withholding audit-related records from the Securities and Futures Commission.

According to Au, his firm – a competitor of E&Y – and many other accounting firms had more than 70 percent of their Hong Kong staff doing auditing work in China. If the firm breached China secrecy laws, staff would be at risk, he added, the South China Morning Post reported.

“How about if such a breach of secrecy law caused all my staff to be banned from going to the Mainland, or what if they were detained as a result?” Au told the SCMP. “I can fully understand why E&Y refused to help the commission.”

While Au acknowledged the importance of accounting firms complying with the SFC’s rules in Hong Kong, he said that firms also need to follow Mainland laws and regulations. “China has clearly defined accounting papers to be a type of state secret,” he added.

The High Court is set to make a ruling in March next year on whether E&Y has to comply with SFC’s request for records related to the audit of the Chinese company Standard Water.

Au said that the court ruling would act as a guideline for all accounting firms in handling requests from the commission.

In August, E&Y declined a request from the SFC to hand over audit papers and accounting documents relating to the listing application of Standard Water. The firm resigned as the company’s auditor in March 2010 after finding inconsisten-cies in company documents. Standard Water subsequently withdrew its listing application.

BDO backs Ernst & Young in state secrets explanation

U.S. regulators reach auditing deal with Beijing PCAOB gains access to Mainland auditsThe Public Company Accounting Oversight Board in the United States an-nounced that it has reached an agreement allowing it to inspect audits in China.

Accounting regulators in the U.S. have long sought access to the audits of U.S.-listed corporations from China in order to address a growing number of business scandals. China previously resisted, citing sovereignty concerns.

The PCAOB and Chinese authorities “have signed an agreement to proceed with observational visits,” Colleen Brennan, spokeswoman for the board, said. “We expect them to take place within the next couple of months.”

James Doty, PCAOB chairman, had repeatedly said that a plan for such inspections had to be in place by the end of this year, reported Reuters.

Before an agreement was reached, the PCAOB and U.S. Securities and Exchange Commission had been working for months with China to try to reach a deal that would allow their inspectors into the Mainland. The two U.S. regula-tors met with their Chinese counterparts in Beijing in July and also in January in Washington to negotiate an agreement.

Consulting

14 November 2012

GIVINGAlfred Romann looks at the state of the consulting business and how pure consulting firms and accounting firms are competing in the Greater China market

THE BUSINESS OF

Illustrations by Harry Harrison

November 2012 15

J ust as schadenfreude had to be borrowed from German to ex-plain the concept of expressing delight at someone else’s mis-ery, there is no pre-cise English expres-

sion for turning challenges and difficulties into opportunity. But that’s what the consult-ing industry has been focusing on for years.

“In the past 10 to 15 years we have seen more problems,” says Joe Ngai, managing director of the Hong Kong office of McKinsey & Company, one of the world’s largest man-agement consulting firms. “Every corpora-tion we go to, we see problems. And problems are good for us because you need someone to solve those problems.”

Ngai’s optimistic candour – expressed at a recent business forum – is all the more re-markable because the consulting business is usually reluctant to talk about itself. While barely a day goes by without a consulting firm issuing an industry survey or business out-look, the firms are surprisingly averse to dis-cussing their own sector’s prospects.

Spokespeople for two of the world’s larg-est consulting firms, Accenture and Bain & Company, said that their staff couldn’t dis-cuss the industry itself, while Boston Con-sulting Group, another global giant, did not respond to a request for comment.

This reticence may be understandable. After all, the jury is still out on whether the  consulting  industry’s problem solving outweighs its problem creation. McKinsey famously advised U.S. telecoms giant AT&T in 1980 that there was little future in mobile phones, forecasting a market in 2000 that was less than 1/120th of its actual size.

Nevertheless, the consulting industry has continued to grow: Plunkett Research fore-casts worldwide consulting revenues in 2012 of US$391 billion, up almost 7 percent over 2011’s total of US$366 billion.

The consulting industry suffered a set-back as the global financial crisis took hold – 2009 saw a 9 percent decline in revenues over the previous year, according to Kennedy Information, an industry data provider.

But growth resumed the following year – McKinsey saw revenues rise 6 per-cent to US$7 billion in 2010 – as companies sought the services of consultants  to over-see restructuring, mergers and acquisitions, turnarounds, corporate regime change and performance improvement. Concerns over complying with ever-tighter regulatory re-quirements also boosted the business.

The market potential did not go unno-ticed by the Big Four accounting firms who have re-entered the market in a big way since the aftermath of the collapse of Enron, when regulator and media pressure forced many to spin off their consulting arms. For instance,

Deloitte’s consulting revenue grew 15 per-cent in 2010, more than twice the pace of the previous year. China sets the paceThe Asia Pacific, with its tight-knit family companies and established connections, has been a harder slog for the  consultants  but slowly doors are opening.  

New York-based Alvarez & Marsal has invested heavily in Asia in recent years, espe-cially in the China market. “Demand in Chi-na is on the rise,” says Olly Stratton, manag-ing director and co-head of the firm’s Asian practice. “I think it will continue to evolve and there will be more opportunities.”

McKinsey, too, sees potential in China. The company is among the leaders in consult-ing for Chinese clients, who seek advice on managing strategy, operations, information technology and human resources. More re-cently, Chinese clients have used consulting firms to advise on restructuring, expansion and foreign investment, brand building, cor-porate governance and long-term growth.

When management consultants entered the Chinese market in the early 1990s, most operated from Hong Kong regional head-quarters, but that has changed. “For most professional services today, there are no more Hong Kong offices – everyone is calling themselves the Greater China office,” says Ngai. “Most consultants today are spending

GOODADVICE

16 November 2012

Consulting

November 2012 17

The Big Four accounting firms might be in a better position than the pure consulting firms to grow their risk and advisory businesses in China because Chinese companies like having more services under one roof.at least 50 percent of their time or more on Mainland projects,” he adds. “Fifteen years ago, Mandarin was not a requirement. Today it is.”

Despite the apparent rush to the China market, some experts are wary about the reality of the Mainland. Fiona Czerniawska, founder of London-based Source for Consult-ing, which researches the consulting indus-try, cites a shortage of experienced Chinese consultants and fees that are often sub-stantially lower than in other, more mature markets as two significant obstacles. “At the moment, they see easier, if not bigger, oppor-tunities in Brazil and India,” she says.

Competing for clientsAccording to Czerniawska, the Big Four ac-counting firms might be in a better position than the pure consulting firms to grow their risk and advisory businesses in China be-cause Chinese companies like having more services under one roof.  Accounting firms agree, citing a combination of their consult-ing  capabilities and traditional strengths such as finance and accounting expertise.

Babak Nikzad, partner in charge at KPMG’s China and Hong Kong consulting practice says Big Four firms possess a “breadth of experi-ence we can bring to the client.” For example, he says, pure consulting firms usually lack experience in tax matters – an area in which accounting firms excel.

Norman Sze, managing partner of  De-loitte Consulting China, cites a Mainland fi-nancial institution that commissioned IBM Global Services to design and implement the first phase of a financial management sys-tem. He says Deloitte was able to leverage its broader services to win the contract to imple-

ment the second phase of the contract.Sze, based in Shanghai, adds that De-

loitte can use its financial acumen to help the Mainland banking and insurance sectors im-plement international compliance standards such as Basel II or localized versions of global standards.

Already the figures are showing that the Big Four are expanding in the China consult-ing market. PwC employs about 1,000 staff in its China consulting practice and plans to grow it this year by about 20 percent. A joint venture between its U.S., China and Austra-lia operations will see an influx of  consul-tants  parachuted into China for three-year engagements. Hong Kong partner Andy Wat-kins, who runs the new joint venture, says the prospects in China are particularly good. “We have experienced rapid growth in the past few years. However, we believe it is still relatively early days in China,” he says.

There are several reasons for the Big Four’s optimism. One is that companies are increasingly looking for consultants who can address industry-specific issues that the Big Four specialize in, rather than general business ones. The complexity of emerging challenges like risk management and regu-latory compliance, both in China and glob-ally, are also areas in which the accounting giants have experience. Finally, there are an increasing number of Chinese companies in need of services outside China, which re-quires global networks.

Like PwC, KPMG’s  consulting  arm has also been growing rapidly and, with 800 members of professional staff in the Main-land, has a much larger presence in China than pure consulting firms. By comparison, Boston Consulting Group, which has been in

China for 30 years, has about 200 profession-al staff. Bain has about 150 consultants in its Greater China team. McKinsey, one of the largest, has about 350  consultants  and 45 global partners in its China and Hong Kong practice.

Regulatory challengesFor a decade, the accounting firms have been playing catch-up in the consulting market. After the collapse of Enron, the Big Four saw their consulting arms in the U.S. restricted by the Sarbanes-Oxley Act. The new rules limit-ed the consulting services that auditors could provide to companies they audit, in order to avoid the conflicts of interest that led to En-ron’s auditor, Arthur Andersen, overlooking accounting misdemeanours.

The subsequent sell-off of two of the Big Four’s  consulting  arms changed the indus-try. IBM absorbed PwC Consulting  in 2002 and turned it into an industry giant, while KPMG’s unit became Bearing Point, now smaller and focused mainly on Europe. Ernst & Young sold its consulting unit in 2000 to what is now Capgemini, while Deloitte Con-sulting  was never spun off. (Arthur Ander-sen’s consulting unit was spun off as Accen-ture prior to the accounting firm’s demise.)

As the spotlight of Enron dimmed, the Big Four started re-launching or re-building their consulting arms. By 2007, all the Big Four firms were once again among the top 10 con-sultants in the world in terms of revenue.

While U.S. regulators don’t appear likely to re-visit the issues, the Big Four’s moves back into the  consulting  business have not gone unnoticed by regulators in Europe. Last year, the European Commission proposed that auditing firms be banned from pro-

November 2012 19

viding consulting  services to companies they audit, or even be banned altogether from consulting.

Big Four firms say a decade of experience has enabled them to put controls into place to avoid conflicts of interest. Sze at Deloitte says avoidance of conflicts of interests is funda-mental to his firm’s culture. 

“We keep lists of audit clients who can-not be pursued as relationship clients and vice versa,” he says. Further checks begin the moment the firm considers a project or new client. The firm also takes into account the rules covering listed companies in China, Hong Kong, the U.S. and any other relevant jurisdiction. OvercrowdingConsultants say they are feeling the pres-sure of a crowded market. The large number of  consulting firms  has led to brutal price competition, especially in China. “My biggest challenge at the moment is the pricing in the market,” says Nikzad at KPMG.

In China particularly, not only are the firms vicious when pricing, but there are double the bidders. Where once four or five firms would bid for a particular mandate in China, the number is now seven or eight, says Nikzad.

Consultants say it also means that firms have to think a little harder about their of-ferings, such as providing better service for lower prices or providing niche services that others don’t have.

“Specialist business advisory firms are increasingly moving... towards event-driv-en  consulting,” adds Mavis Tan, a member of the Hong Kong Institute of CPAs who is senior managing director at FTI Consulting.

By “event-driven” services Tan means areas such as forensic and litigation  con-sulting, regulatory and fraud-risk mitiga-tion, corporate restructuring and strategic communications. “As these firms get more traction in Hong Kong and the region, the markets gets more familiar with them and dependent on their services,” she says.

Fortunately for the crowd of competitors, demand in China is growing for new servic-es, particularly as a result of the international expansion of Chinese companies.

“Much of professional services today is across borders,” says Ngai of McKinsey. “Even in China today, most of the work we are seeing has some element of going abroad, of thinking about the competition that is coming from all over the world.”

“ We keep lists of audit clients who cannot be pursued as relationship clients and vice versa.”

20 November 2012

Veteran members

f all the ornaments, pho-tographs and paintings, one piece stands out in Sanford Yung’s beauti-

fully kept living room. On a dark wood book-stand by the wall sits the

autobiography My Life in China and America by Yung Wing.

“He was the first Chinese to graduate from an American University,” says San-ford Yung, a retired accountant, a member of the Hong Kong Institute of CPAs, founder of Sanford Yung & Co. and a former chair-man of Coopers & Lybrand (now Pricewater-houseCoopers), referring to the man on the cover. “He was my step-grandfather.”

In 1854, Yung Wing graduated from Yale University. After returning to Qing Dynasty China, he headed what was known as the Chinese Educational Mission under which a total of 120 Chinese students aged eight to 11 received education in the U.S.

Sanford Yung shares his step-grandfa-ther’s commitment to education. After retir-ing, he established the Sanford Yung Schol-ars Programme for Excellence in Accounting Studies in 2001, which began in Hong Kong and later expanded to Shanghai and Beijing.

Like Yung, many retired CPAs have had vibrant careers and have witnessed – indeed were involved in – the shaping of the ac-counting profession.

But even in retirement, with the can-do attitude they developed as accountants, many are finding themselves achieving new ambitions.

History makerTwo years after Sanford Yung founded his eponymous accounting firm in 1962, Coopers & Lybrand United Kingdom – then part of the Big Eight – approached Yung, seeking a pres-ence in Hong Kong. “They were big, I was small, and they asked if we would represent them in Hong Kong. I said yes,” Yung remembers.

Coopers & Lybrand originally wanted to work with Yung’s firm for a trial period of five years, but good impressions caused that plan to fall by the wayside. “After only one year, in 1965 they were so satisfied with my practice and professional standards, and perhaps also me personally, they hastened the so-called engagement and said, ‘Let us get into bed. Let’s go into partnership.’

“When I started my firm I had a staff of three. When I first represented Coopers I had a staff of 20. Thirty years later when I retired

Many of the Institute’s senior members have retired as accountants but are showing no signs of slowing down. Jemelyn Yadao looks back on their eventful careers and asks them what they’ve been up to Photography by Samantha Sin

WORKING OVERTIME

November 2012 21

“I said, ‘I’m the only partner and you allow my staff below me, an Englishman, to look at the minute books and not me? I don’t want the job.’ So I thanked him and left.”

Sanford Yung

22 November 2012

from practice I had a staff of 750. So the ex-pansion was quite rapid and quite gratify-ing,” recalls Yung, who became chairman of Coopers & Lybrand Hong Kong in 1965.

Of course, the rapid growth of the firm meant Yung had to deal with many challenges.

He recalls one in particular involving the 1959 purchase of Mercantile Bank by the Hongkong and Shanghai Banking Corpo-ration. In 1965, Mercantile moved its head office from the U.K. to Hong Kong and was jointly audited by Peat Marwick Mitchell (now known as KPMG) and Coopers & Ly-brand. An invitation to meet with a man named Freddie Knightly from Mercantile Bank in Hong Kong led to Yung sitting in an uncomfortable meeting.

Knightly reminded Yung that Mercan-tile was now a subsidiary of Hongkong and Shanghai Banking Corporation, alluding to the parent bank’s policy of allowing only ex-patriates into the secrets of its financial re-cords. “I said, ‘I’m the only partner and you allow my staff below me, an Englishman, to look at the minute books and not me? I don’t want the job.’ So I thanked him and left.”

Half an hour after Yung got back to his office, he received a call from Knightly. “Knightly said: ‘You win. You can certainly look at our private books.’

“I accepted it on those terms and became the first Chinese in the then 75-year histo-ry of Mercantile Bank to sign their secrecy book – a book directors and auditors must sign vouching that you would not divulge anything you see,” says Yung. “I stood up for the Chinese in my profession of which I am extremely proud. I made it a point to raise the standard of my profession.”

Although the Sanford Yung Scholars Pro-gramme is now fully sponsored by PwC, his interest in the charity’s work remains strong. “The main purpose of the scholarship is to recognize and encourage good students [in accounting],” Yung explains. “We send stu-dents from Hong Kong to do internships in PwC London. And those from Shanghai and Beijing we second to New York for intern-ship. This is very meaningful.”

Yung is also chief donor to the Sir Ed-ward Youde Memorial Fund, which was established in 1987 in memory of the gover-nor of Hong Kong between 1982 and 1986, who died suddenly on a visit to Beijing. “Two days after his death I sent HK$1 mil-lion to start the memorial fund and now ev-ery year I contribute money,” he says.

The fund, which bestows fellowships,

scholarships and education awards to out-standing students in Hong Kong, has contrib-uted about HK$21 million to nearly 600,000 students over 25 years, says Yung. “The par-ents of those young awardees are so grateful they come with their son or daughter with tears in their eyes to collect the prize.”

Getting China on track Nellie Fong remembers her education in ac-counting being somewhat different to the

programmes students experience today.As part of her training, the now retired Insti-tute member and former chairman of PwC’s China operations, did two things: adding all the numbers in a telephone directory and going to the supermarket to calculate total costs at the till using mental arithmetic.

“At that time in England, 12 pence equalled one shilling and 20 shillings equalled one pound… I would stand by the screen and add in my head and at the end I

Veteran members

November 2012 23

A PLUS

should know exactly how much it would say on the receipt. I was as good as that.”

While doing long additions became second nature to Fong, a trip to newly opened China wasn’t as easy. Fong, who joined Arthur An-dersen in 1973, volunteered to go to the Main-land in the 1980s to set up an office for the firm and was faced with a list of difficulties.

“The laws and rules were not in order and you couldn’t hire your own people because the Chinese government controlled employ-

ment agencies. Everything was very dif-ficult,” Fong remembers. “The hardest part was we were losing money because there were no jobs and no work. Every year I had to explain to management why we were not making money and appear before the board to explain that it wasn’t an expense, it was an investment.”

Eventually, the firm built up a roster of clients made up of foreign multinational companies investing in China.

Fong’s decision to pursue her career in the Mainland changed her life in more ways than one. After being a member of the Hong Kong Legislative Council from 1988 to 1991, Fong was appointed by the Chinese govern-ment as a Hong Kong adviser for the prepara-tory committee on the territory’s transfer of sovereignty to China. It was during this time that Fong devised a project that she holds dear to her heart to this very day. “Provinces in China were planning on giving us a gift to mark the occasion so I felt that Hong Kong should give back to China,” she recalls. “I came up with a hospital built on a train.”

Fong founded the charity project Lifeline Express – a train-mounted eye hospital that travels to remote areas of China to provide free operations to blind cataract patients. It launched on 1 July 1997, the day Hong Kong returned to Chinese sovereignty.

With around five million cataract pa-tients in China and an increase of 500,000 patients each year, Fong is working to ex-pand the reach of her trains. “We are now training local doctors to do cataract opera-tions and setting up cataract centres in local hospitals. We call it a Lifeline Express train that never leaves,” she says.

Fong, who in 2008 received a Global Initiative Award from former U.S. Presi-dent Bill Clinton for her charity work, now has four trains, 15 training facilities and 17 cataract centres. Rather than using her time in retirement to wind down, she is fully en-gaged with the charity’s work, addressing issues such as the lack of senior eye doctors in China. “I went all over the world, ap-pealed to international experts to come to China and help... That’s why I’m very busy. I’m retired from my accounting career yet found something very worthwhile.”

Man of the match Taking orders for tea, coffee and sandwich-es was just one of T. Brian Stevenson’s duties while working for an audit group, fresh out of university in Scotland. “It was a master-servant relationship, that’s how it was,” re-

“We are now training local doctors to do cataract operations and setting up cataract centres in local hospitals.”

Nellie Fong

Veteran members

24 November 2012

calls Stevenson, a past Institute president, a veteran tax accountant and the chairman of the Hong Kong Jockey Club. “Maybe we had a longer learning path,” he ponders. “Nowa-days you might be thrown straight into the deep end.”

When Stevenson first moved to Hong Kong in 1970, he brought with him his love for a game he played often as a schoolboy – rugby. After holding nearly every office in the Hong Kong Rugby Union, he is now presi-dent. “Rugby has really developed in Hong Kong and I’ve been involved in the Hong Kong Sevens. It’s been fortunate being in-volved in things that have turned out quite successfully.”

Rugby is of course not the only sport he has a passion for. The Scotsman was elected

chairman of the Jockey Club in 2010 and takes great pride in the club’s charity work. “The club’s charity trust is just an amaz-ing organization. Our donations last year reached a record high of HK$1.73 billion in one year. To be involved in it, I regard it as a serious privilege,” he said.

Stevenson, who also serves on the boards of HSBC and the Mass Transit Railway Cor-poration, looks back fondly at an eventful four decades in Hong Kong.

He helped set up the accounting firm Tur-quands Barton Mayhew in the city in 1974.

“There were two of us and we had 2,000 empty square feet in the Pedder Building. I was actually involved with engaging staff to start a business, buying second-hand furni-ture to put into the office and ended up with

one of Hong Kong’s largest accounting firms. It was a marvellous experience,” he says.

The firm grew with mergers including, those with Whinney Murray Ernst & Ernst that formed Turquands Ernst & Whinney in 1979, until the merger of Ernst & Whinney and Arthur Young created Ernst & Young.

Just a week before that merger was an-nounced, Stevenson was appointed senior partner of Ernst & Whinney for Asia. “I was dealing with people older than me, more se-nior than me from across the world in pull-ing the firm together.”

While managing the rapid growth of the firm was a challenge, Stevenson says man-aging the insolvency of the Carrian Group while he was at Ernst & Whinney in 1983 was one of the hardest tasks in his career.

Carrian’s reach was so broad that it had been a client of many accounting firms, which eliminated them from the role of liquidator. “Most major firms were out and we came in. It was a major case for the firm globally.”

Despite the firm’s lack of insolvency ex-perience they won the engagement.

“I’m a very competitive person, which comes from sports, and I apply that to busi-

“The club’s charity trust is just an amazing organization. Our donations last year reached a record high of HK$1.73 billion in one year. To be involved in it, I regard it as a serious privilege.”

T. Brian Stevenson

November 2012 25

ness as well,” says Stevenson. “I do want to try and win.”

Right time, right placeWhen Marina Wong first joined Coopers & Lybrand in 1968, she was one of the few female auditors in the company. Her then boss Sanford Yung encouraged her to move departments and expand her skills even fur-ther. “He asked me whether I was interested in joining another department: corporate services and accounting. So I was able to do a bit of tax, secretarial, accounting and also liquidation work there,” recalls Wong, an Institute member and an independent non-executive director of Kerry Properties and Hong Kong Ferry Holdings.

Wong’s career at PwC spanned more than 30 years before she retired as partner in

2004. During her time at the firm, she volun-teered to help spearhead the development of the firm’s business in China, just as the Main-land was opening to the outside world.

“To be able to witness the development of the firm, especially in China, and also the development of China, I consider myself re-ally lucky,” she says. “My timing was just perfect.”

She helped set up the firm’s first office in Guangzhou in 1979, followed by offices in Shanghai, Beijing and Shenzhen in the 1980s. And she was there to grapple with the effects of the Tiananmen Square crackdown in 1989. “I had to convince my partners, es-pecially those overseas, that China was still a great market for the firm. It cast a lot of doubt,” she remembers.

Retiring at the age of 55, she found that

slowing down was not for her. “I guess I’m still energetic. I think it’s important to keep yourself to date with what’s going on in the society, in the world and also the business sector,” she said.

Like many of her retired peers, Wong is applying her expertise and experience to help companies as a director. As well as her engagements at Kerry Properties and Hong Kong Ferry, she was a director and consul-tant of Tricor Services, a business consul-tancy, from 2004 to 2006. In 2010, she took up another independent non-executive di-rector position at China World Trade Center Company, based in Beijing.

“If there is anything I can help with and contribute, I certainly would like to.”

Bottling successAs chairman and self-professed “chief talker” of Wan Corporate Services, a brand-building and distribution business of con-sumer products in the Asia Pacific, Vincent Wan considers himself semi-retired. “I don’t do any real work but I still keep busy. If there are strategic things for me to take on, then I’ll do it,” he says.

“To be able to witness the development of the firm, especially in China, and also the development of China, I consider myself really lucky. My timing was just perfect.”

Marina Wong

November 2012 27

Wan is talkative, a trait he developed from years of working in a broad range of industries. Wan was trained both as an ac-countant and an industrial engineer and went from founding his own consultancy firm in 1979 to serving as the Asia Pacific di-rector of manufacturing for American jeans- maker Levi Strauss & Co.

Then Wan decided to go into the world of marketing. “I felt I should use the skills I learned from accounting and from industri-al engineering to go on to communicate with people,” he recalls.

“At the end of the day, as head of manu-facturing of a jeans company, I am not the person who sits behind the sewing ma-chine... Levi’s is a very people-oriented orga-nization that was kind enough to give me the opportunity.”

Shortly after his career at Levi’s, he es-tablished Wan Corporate Services and has since been engaged in the marketing and distribution of consumer products including Perrier.

The versatile Wan recalls feeling unim-pressed when a friend offered him his first sip of the bottled fizzy water.

“Back in 1978, Perrier wasn’t known in Hong Kong. I tasted it and said, ‘What’s so special?’ My friend said, ‘Time [magazine] called it the marketing miracle of the de-cade.’ In New York in those years there was a power drink – the martini. This was the new definition of a power drink.”

Wan successfully launched Perrier throughout the Asia Pacific and was equal-ly successful in handling a blow to the product’s reputation in 1990, when small amounts of benzene – a carcinogenic solvent – were found in several bottles in the U.S.

“The press were very surprised that I was the first to answer the phone, but because of this crisis I made it a rule that nobody else apart from me should answer incoming calls,” he recalls. “I said: ‘If it’s a journalist calling, let me handle it.’ ” The subsequent

worldwide recall by Perrier made the French company seem responsible and Wan’s open-ness made the brand name far more recog-nizable in Hong Kong. “At that time I can-not tell you I enjoyed it, but now thinking back, it was a very good experience,” Wan recalls.

Today, the products Wan’s company dis-tributes are mostly natural. “When I passed the age of 50, I became less materialistic so the way I look at life has changed. I don’t believe in pharmaceutical products, I like herbal, natural things and I believe in doing exercise even at my age.”

Wan plays table tennis and squash twice a week. “I don’t play all the four corners. I play the back two corners and make sure I don’t overstretch myself,” he says with a laugh.

“The press were very surprised that I was the first to answer the phone, but because of this crisis I made it a rule that nobody else apart from me should answer incoming calls.”

Vincent Wan

Corporate governance

28 November 2012

November 2012 29

PANELS OF

PROBITY

When Enron collapsed in 2002, the United States Senate com-mittee that led the post-mortem accused

the company’s audit committee of sitting idly by and carelessly overlooking risky ac-counting practices, conflicts of interest and hidden debt.

Ten years later, audit committees remain in the spotlight.

In the European Union, moves are afoot to tighten audit committee accountability, including making all audit-related services subject to the prior approval of the audit committee, while regulators in the U.S. say

they will examine final EU legislation for possible adaptation.

In the U.S., audit committee documents are reported to have spurred a probe into bribery allegations concerning Sands China, the casino operator. Meanwhile, a regulator in Canada recently barred the chairman and chief executive of a controversial Toronto-listed Chinese shoemaker, Zungui Haixi, from securities trading for not properly maintaining an audit committee.

An audit committee forms a vital lynch-pin of effective corporate governance. Po-sitioned between senior management and the external auditor, a good audit commit-tee monitors the management’s judgment

on financial reporting matters and suggests improvements that can be made to internal controls.

In the past seen as more of a passive over-seer, audit committees are increasingly be-ing asked to step up to a more active role.

“They should have a good understanding of the business,” says Nancy Tse, director of finance and information technology servic-es of the Hospital Authority and formerly a member of the Hong Kong Institute of CPAs’ audit committee guide review task force. “They should study the reports they receive and spend time preparing for meetings.”

While many experts agree that audit committees need to demonstrate more in-

Audit committees are being required to take on a more active role in monitoring companies, as

George W. Russell reportsIllustrations by Vivian Ho

volvement in the companies they serve, there is still some uncertainty surrounding precisely how they should do it and the skills needed by committee members to achieve it.

Fresh eyesIndependence, most agree, is one of the cornerstones of an audit committee’s effec-tiveness, particularly as they are charged with overseeing areas where judgments and estimates are significant. “A commit-tee composed only of independent directors is a leading practice and in many countries is a requirement,” says Paul Ngai, a risk and control solutions partner with Pricewater-houseCoopers in Beijing.

An audit committee is supposed to give a fresh point of view, and their views should be precisely that: independent. “The board should have a strong understanding of the relevant definitions of independence and how a lack of independence occurs and is in-terpreted in practice,” says Tim Copnell, an associate partner at KPMG and director of the firm’s audit committee institute in London.

In Hong Kong, the stock exchange List-ing Rules were amended in 2004 to mandate that all audit committee members have to be non-executive directors and that at least one of them must have appropriate financial ex-perience.

From 1 April this year, the Listing Rules were further amended. The recommended best practice that an audit committee’s terms of reference should include arrangements for employees to raise concerns, in confi-dence, about financial reporting impropri-eties was upgraded to a code provision – meaning issuers must comply or explain why they are not.

A new recommended best practice rec-ommending the audit committee establish a whistleblowing policy for other matters was also introduced in the amendments.

“We consider the audit committee the most appropriate committee to be respon-sible for an issuer’s whistleblowing policy,” an HKEx spokesman says. “We believe that an issuer should be able to define a whistle-blowing policy that is appropriate to its own circumstances, so we do not propose to de-fine in detail the contents of its policy.”

The new changes include a recommend-ed best practice that the audit committee should meet with the external auditor at least twice a year so that the performance and progress of the audit is discussed. This is also a recommendation in the audit commit-tee guidelines published by the Hong Kong

Institute of CPAs.Audit committee relations with exter-

nal auditors are an international concern. “There has been increasing focus on the im-portance of a strong relationship between the audit committee and the external audi-tor, and the need for candid, ongoing com-munication,” says Catherine Bromilow, a PwC partner in New York who leads the firm’s U.S. corporate governance practice.

However, parts of the HKEx rules, espe-cially those to do with the skills that audit committee members should possess, are open to interpretation. “While the Listing

Rules provide for specific requirements on what constitutes ‘independence,’ the defini-tion of ‘appropriate financial experience’ is seen as too general,” says Randy Hung, ex-ecutive director and chief financial officer of China Fiber Optic Network System Group and an Institute member. “For example I have seen non-accountants or junior accoun-tants named as independent non-executive directors.”

Peter Tisman, the Institute’s director of specialist practices, says the Institute sup-ports the stock exchange’s efforts to incre-mentally strengthen the requirements for audit committees under the Listing Rules and Corporate Governance Code. “It is now a mandatory requirement under the Listing Rules that listed companies form an audit committee, with a majority of independent non-executive directors,” he says. “The com-position is specified and the minimum scope of the terms of reference is set out.”

However, he adds that more could be done to strengthen audit committees, such as stipulating a minimum number of audit committee meetings to be held annually and introducing clearer requirements for evalu-ations of individual directors’ performance.

“Given the fundamental importance of the accounting and finance-related over-sight role of an audit committee, the effec-tiveness of the committee could be improved

by specifying that there should be a quali-fied accountant as an independent non-executive director among its membership,” says Tisman.

Becoming more activeAs well as independent oversight, experts say audit committees need to demonstrate leadership and actively ascertain informa-tion. At present, some observers view audit committees as mere box-tickers. “Audit com-mittees often play a very passive role in a company,” notes Julian Russell, managing director of Pacific Risk, a Hong Kong-based consultancy. “They are sometimes merely shown the accounts and asked for comments on them.”

After the collapse of Enron and World-Com, the Sarbanes-Oxley Act in the U.S. forced audit committees into a more active role. New requirements forced audit com-mittees to be more probing, for example de-manding reports from external auditors on the principles used and the effects of alterna-tive choices.

“Once a simple board committee with few specific duties, the audit committee is now a key element of corporate governance,” says Tom Gorman, a securities lawyer with the Dorsey & Whitney firm in Washington with wide Sarbanes-Oxley experience. “The post Sarbanes-Oxley audit committee is more than the supervisor of the issuer’s financial functions,” he adds. “The committee has been transformed into an in-house monitor, which at times appears to be virtually a sepa-rate entity from the company.”

In Hong Kong, the direct effects of Sar-banes-Oxley were more muted. While it cre-ated few new obligations, it has ultimately led to more thorough documentation of in-ternal controls such as information technol-ogy systems that support financial report-ing, and governance controls such as ethics and standards, anti-fraud and whistleblow-er guidelines. “Its main impact was on moni-toring the effectiveness of internal financial controls at companies with U.S. connec-tions,” says Tisman at the Institute.

In Hong Kong, local business culture and customs can present problems, corporate governance advisers say. Family companies, especially, can present higher obstacles for audit committees. “[You need a] willing-ness to challenge family members who typi-cally will disagree with your perspective,” adds Peter Nixon, an Institute member and managing director of the Potential Dialogue business consultancy.

30 November 2012

Corporate governance

“ Once a simple board committee with few specific duties, the audit committee is now a key element of corporate governance.”

Opaque documentation can also be a handicap to audit committees in Hong Kong. “I have seen a contract that committed the company to paying several million U.S. dol-lars even though no individual could be found responsible for the document on ei-ther side of the contract,” says Russell. De-spite that shortcoming, the audit committee was persuaded to accept the contract, Rus-sell adds with dismay.

Communicating concernsOn top of complying with the rules, audit committees should be actively interested in the business of the company in which they serve, says Tse. “They should have an inquiring attitude.” That, she says, is the only way they can make constructive rec-ommendations.

An effective audit committee, she adds, has to communicate with other elements of the audit process within the company, in-cluding the internal auditors and manage-

ment. “Internal auditors should have a very close relationship with the audit committee and in particular the audit committee chair-man,” says Tse. “The audit committee should also have access to the chief executive and

management.” Regular communication, she advises, gives audit committee members an opportunity to test that the company’s cor-porate governance and internal control sys-tems are working.

When questions arise, the audit commit-tee mustn’t hesitate to dig deeper. “The audit committee chairman must be ready to chal-lenge and ask probing questions about the company’s risk management and control systems, accounting and corporate report-ing,” says Copnell at KPMG.

Inevitably, such challenges can lead to confrontations. But, says Nixon at Potential Dialogue, these confrontations are healthy and necessary. “The committee’s primary role is spotting an overly optimistic estimate or assessment of risk and then being willing to challenge the leaders’ view of it, persis-

November 2012 31

“ It is important that at least one of the members of an audit committee has a financial background.”

November 2012 33

tently enough, so that the estimate is justi-fied, supported or changed.”

Filling the seatsEstablishing the role of the audit committee is one thing; filling its seats is another chal-lenge. “Audit committee members should be experienced in the industry being audited,” says Russell at Pacific Risk. “This is not a post for junior staff.”

As well as fulfilling the criteria of being independent, audit committee members should score high marks in a number of skill sets. “Professional qualifications, listed com-pany experience, knowledge of risk manage-ment and corporate governance,” are just a few of the talents ticked off by Ricky Cheng,

director of risk advisory services at BDO in Hong Kong and an Institute member.

Cheng adds that candidates should also be scrutinized for their directorships of other organizations, possess a record of im-peccable ethics and integrity and have expe-rience and qualifications that round out the skills of the audit committee and the board as a whole.

Agreeing with the Hong Kong stock ex-change rules, experts say it is imperative that the audit committee has proficiency in a financial field – such as accounting and auditing. “It is important that at least one of the members of an audit committee has a financial background and it is essential that all audit committee members have a basic understanding of financial matters,” says David Doughty, a corporate governance spe-cialist in the United Kingdom who serves as an independent non-executive director in the British healthcare sector.

The reason is that audit committee mem-bers need to engage with financial executives. “It is quite common for the finance director to regularly attend audit committee meetings as well as the chairman of the organization, the

chief executive, other executive directors and senior managers,” says Doughty.

There are numerous practical ways that companies can improve the quality of audit committees, according to Doughty. They include:• issuing guidance on the role, responsi-

bilities and duties of audit committee members;

• issuingguidanceontheselectioncriteriafor audit committee members and work-ing with recruiters and search and selec-tion providers;

• lobbyingfortheadoptionofarecognizedqualification as a prerequisite for audit committee members;

• providingtrainingandon-goingsupport

for audit committee members.Cheng at BDO says audit committee

members will continue to face ever-increas-ing demands to better monitor the interests of stakeholders. “They should keep them-selves abreast of the latest financial report-ing developments, rules and regulations af-fecting their organizations,” he says.

In the light of the increased expectations of the audit committee, another issue that needs to be explored is the level of remu-neration for its members and whether this is adequate to reflect the work and potential li-abilities. “There must be a balance of risk and reward if good people are to continue to be willing to take up these quite onerous respon-sibilities,” says Tisman at the Institute.

“ There must be a balance of risk and reward if good people are to continue to be willing to take up these quite onerous responsibilities.”

34 November 2012

Independent directors

A t the end of September, CF Tang, Li Zhangrui, Ma Hong-ming, Wang Herong and Lu Guoqing opened a new chapter in the history of inde-

pendent non-executive directors in Hong Kong – for all the wrong reasons.

The five men – all directors of Zhejiang Prospect Company – were among the first independent non-executive directors to be censured by the Hong Kong stock exchange after being accused of breaching several rules of the Growth Enterprise Market, such as failing to report significant transactions to the exchange and shareholders.

It marks a sea change in official attitudes towards the role of an independent non-executive director, a job once considered a part-time sinecure for the semi-retired. “The days of turning up for a quick hour and a long lunch are long gone,” Sir Bryan Nicholson, former chairman of the United Kingdom’s Financial Reporting Council, told a recent PricewaterhouseCoopers survey.

“Lately, we have seen the Securities and Futures Commission suing [execu-

tive] directors for breaches of their duties and the judiciary handing out heavy penal-ties against those directors found guilty,” says Belinda Wong, a director at Leader Corporate Services and author of The Hong Kong Company Secretary’s Practice Manual. “Although independent non-executive di-rectors have not yet been taken to court, it would not be a surprise that in future some of them will,” she adds.

In Hong Kong, tighter listing rules have put the role of independent non-executive directors in the spotlight. In December 2011, the exchange amended its rules to require that at least one-third of a board be inde-pendent non-executive directors. This rule becomes effective on 31 December this year and brings Hong Kong more into line with international practices. In the United States, the New York Stock Exchange and NASDAQ listing rules require that independent direc-tors comprise a majority of the board.

Other HKEx changes include requiring independent non-executive directors who have been with a company for more than nine years to receive shareholders’ approval to continue to serve, and remuneration com-

mittees to be chaired by an independent non-executive director.

Such reform is aligned with a consensus that independent non-executive directors need to become more proactive (See Charac-ter of independent directors on page 36). “The role of the independent non-executive direc-tor has changed over the years from just be-ing a presence in the board in order to fulfil the requirements of the listing rules to pro-viding value to the company in terms of en-suring good corporate governance,” says Pat-rick Lo, a partner and head of risk advisory services at RSM Nelson Wheeler and a mem-ber of the Hong Kong Institute of CPAs.

Wong at Leader Corporate Services adds that although independent non-executive directors are not required to be involved in the daily management of the company, “they should show sufficient interest in its man-agement and should spend sufficient time in understanding the business scope and man-agement of the company.”

Basic principlesThe specific duties of a director, whether executive or non-executive, are not leg-

STAYING INDIEThe set of hard and soft skills that independent non-executive directors are expected to have is becoming broader, as George W. Russell reportsPhoto illustrations by Jamie Wu

November 2012 35

STAYING INDIE

islated in Hong Kong. Instead, they are largely interpreted from case law and by the memorandum and articles of association of a company.

In addition, the Securities and Futures Commission recommends that every inde-pendent non-executive director become familiar with the Code of Corporate Gover-nance Practices in the HKEx Listing Rules, the Non-statutory Guidelines on Directors’ Duties published by the Companies Reg-istrar and Guidelines for Directors and the Guide for Independent Non-executive Direc-tors published by the Hong Kong Institute of Directors.

According to the Institute of Directors, an independent non-executive directors’ role is to supervise management, advise on the strategic direction of the company and speak out objectively and firmly on issues that come before the board.

In addition, directors, whether executive or non-executive, are expected to uphold two common law principles, often referred to as their fiduciary duties: a duty of care – that their acts do not cause others to suffer any unreasonable harm or loss – and a duty

of good faith – acting honestly and keeping one’s promises without taking unfair advan-tage of others.

To be sure, everyone agrees that the in-dependence of independent non-executive directors is paramount. This is to ensure that they can fulfill their role of true oversight of management and for a separation between the board and management to exist.

Hong Kong law, like that of many similar common law jurisdictions such as the U.K., Australia and Ireland, doesn’t differenti-ate between executive directors and non-executive directors. (South Africa is one of the few such jurisdictions that has codified, since 2009, which posts independent non-executive directors should hold.)

However, HKEx Listing Rules offer guide-lines as to what constitutes independence. Among several other factors, independence is more likely to be questioned if the director:• holds more than 1 percent of the total is-

sued share capital of the listed issuer;• has received an interest in any securities

of the listed issuer as a gift, or by means of other financial assistance, from a con-nected person;

• is a director, partner or principal of a pro-fessional adviser that currently provides or has within one year immediately prior to the date of his proposed appointment provided services;

• is financially dependent on the listed issuer.

“ The general investment public has placed their trust in and reliance on the independent non-executive directors as the outsiders who can monitor operations and internal control systems for stakeholders.”

36 November 2012

“Independence is generally defined in material terms such as ensuring that there is a period of time between a chief executive officer stepping down from the role before he or she becomes a member of the board,” says Ann-Maree Moodie, managing director of The Boardroom Consulting Group, a corpo-rate governance consultancy in Sydney.

“Advisers to the company, such as part-ners in accounting and law firms, must also wait for several years before they are eligible to join the board of the company which their firm has been advising,” she adds.

Essential traits As well as independence, independent non-executive directors must meet the other cri-

teria of a director as defined in the HKEx List-ing Rules.

“Every director of a listed issuer must sat-isfy the exchange that he has the character, experience and integrity and is able to dem-onstrate a standard of competence commen-surate with his position,” says Randy Hung, executive director and chief financial officer of China Fiber Optic Network System Group and an Institute member. Hung himself is an independent non-executive director of HKEx-listed Zhongyu Gas Holdings as well as a Hong Kong Institute of Directors council member.

The exchange may request further infor-mation regarding the background, experi-ence, other business interests or character of

any director or proposed director of a listed issuer, he adds.

Ricky Cheng, director of risk advisory services at BDO in Hong Kong, says indepen-dent non-executive directors should also be comfortable with numbers. “They should also possess the necessary financial knowl-edge so as to discharge their oversight duty,” he says. “To be effective, independent non-executive directors should challenge the ap-propriateness of the decisions made by the executive management and drive the board in committing to a higher standard of corpo-rate governance practices.

“One thing that must be emphasized is that the general investment public has placed their trust in and reliance on the in-

Independent directors

Character of independent directors

AccordingtoastudybytheKorn/FerryInstitute,theresearcharmofoneoftheworld’slargestexecutiverecruitmentfirms,essentialcharacteristicsofindependentnon-executivedirectorscanbedividedintothosethatarecore,thosethatarenowemergingandthosethatarelikelytoincreaseinsignificanceinthefuture.

Core: •Awealthofvariedexperiencethatallowsthemtounderstandandadviseonarangeofissues.•Aninquisitive,analyticalandindependentmindthatdrivesthemtoasktherightquestions,makeimpartial

judgmentsandofferintelligentadvice.•Excellentinterpersonalandcommunicationskillsnotonlytoexpresstheirjudgmentsbutalsotobuildtrust

withcolleagues.•Theintegritytoactethicallyandinthebestinterestsofthecompany.

Emerging: •Adetailedunderstandingoftheoperationalproceduresofthecompanyatalllevels.•Anintimateunderstandingofeveryaspectofthecompany,fromitsculturetoitscustomerbase.•Willingtocommitmoretime.Previouslyattendingboardmeetingswasenough,butnowadaysalmost36

daysperyearisaminimumexpectationbecausetheymustbefullyengagedandworkbetweenmeetingsinordertogettoknowthebusiness,understandtheissuesandbuildrelationships.

Future: •Anexpertunderstandingoffinance,particularlyastheworldemergesfromtheglobalfinancialcrisis.•Anunderstandingandknowledgeofhowtomitigateallriskfactors,fromoperationalriskstofinancialrisks.•Notonlytechnologysavvy,butalsoafirmgraspofhowtechnologycantransformbusinessandoperations.

November 2012 37

A PLUS

dependent non-executive directors as the outsiders who can monitor operations and internal control systems for stakeholders,” adds Cheng.

Many directors in Hong Kong serve on multiple boards and experts have mixed views on whether it is a good thing. “Serv-ing on multiple companies may appear to [create] a conflict of time,” says Hung, “But it is the quality of their work that should matter.”

A career in itselfSome argue that with the more specialized skills now being demanded, the role of non-executive director can turn into a career, and multiple directorships should be encouraged

for the right people. “Directors with multiple mandates can profit from their experience they have gained while serving in differ-ent companies with different types of busi-nesses,” says Jasmin Reinart of Dehmen, a Dusseldorf law firm that specializes in cor-porate governance matters in the U.S. and Europe.

Indeed, specialist recruitment agencies have emerged to find placement for non-ex-ecutive directors, such as ProNed in Austra-lia and The NED Exchange in the U.K. The Financial Times, meanwhile, is planning to launch an Asian adaptation of its Non-Exec-utive Director’s Certificate programme, for which the Hong Kong Institute of CPAs will act as an external reviewer of documenta-tion for the auditing and accounting module in Hong Kong.

Programmes such as the FT’s are de-signed to prepare independent non-execu-tive directors for more rigorous obligations. From the U.S. to the EU, legislators, regula-tors and advisers have been pondering the mandatory establishment of risk commit-tees by listed companies, expanding the definition of fiduciary duty and calling for independent non-executive directors to be more aware of technology, privacy and other considerations.

International experts agree that in-

creased responsibility means increased risk for independent non-executive directors.

“While the principal duties of the inde-pendent non-executive directors have re-mained broadly unchanged, this increased focus has resulted in the role becoming more complex, carrying considerable reputation-al risk,” notes Sean O’Hare, a partner at PwC in London. “Many feel challenged by the complexity of the business and the demands associated with the increased involvement, influence and responsibility the role now brings.”

Cheng at BDO says the experience of be-ing an independent non-executive director could improve with the help of training pro-grammes. He suggests undertaking courses that could include:• understanding the duties and responsi-

bilities of being a director;• understanding the difference in duties

and responsibilities between different types of directors;

• how to effectively discharge the specific du-ties required of an independent non-execu-tive director;

• how to deal with disputes involving di-rectors and executive management;

• how to avoid being a rubber stamp;• which tactics to use in challenging the

decisions of executives.

“ While the principal duties of the independent non-executive directors have remained broadly unchanged, this increased focus has resulted in the role becoming more complex, carrying considerable reputational risk.”

38 November 2012

Jenny To, regional recruitment and talent development director, Pernod Ricard Asia

Success ingredient

hen Jenny To was growing up in a traditional Chinese family in Hong Kong not too long ago, there was still a limit to how far a girl would be ex-pected to develop her career. While still in high school, To’s mother suggested that per-haps it was time she earned a living.

She decided to pursue nursing, a fairly traditional field of work for young women at the time. Her choice would unsuspect-ingly help propel her towards an accounting degree and membership of the Hong Kong Institute of CPAs.

To was working in a hospital in Hong Kong when she heard that the United Kingdom was experiencing a severe shortage of qualified nurses. It was when she got to London that she decided to further her education.

“I did part-time study for my A levels be-cause I didn’t finish them in Hong Kong,” To recalls. Then she went to City of London Polytechnic, now London Metropolitan Uni-versity, and did her accounting degree.

“I’d been pretty good all along with my mathematics subjects in my high school,” she remembers. “I subsequently did my A levels in the U.K. in maths and did my other course in accounting, so it was kind of natu-ral for me to do accountancy in university.”

After graduation, To became a trainee at a small accounting firm in Staines-upon-Thames, a suburban town near Heathrow airport. “We had about 50 people in the

firm,” she recalls. “We didn’t really have to work long hours – almost every day we could finish at about six o’clock.” She was living far across town in Plaistow, east London, at the time.

Two years later, To returned to Hong Kong to follow her husband, whom she married in Britain soon after graduation and who had been made redundant when the British economy faltered in the early 1990s. “I worked for Kwan Wong Tan & Fong, the largest local audit firm in Hong Kong, with quite a lot of major listed com-panies on its books,” she says. (The firm merged into Deloitte Touche Tohmatsu in 1997.)

Once she began working in Hong Kong, finishing at 6 p.m. became a thing of the past. “I had to work long hours,” To recalls. “When you were chasing dead-lines you could not sleep, you worked overnight. It was tough.”

To began to look for opportunities in Hong Kong’s corporate sector, without having a particular sector in mind. “I wasn’t choosing an industry,” she says. “As accoun-tants we were quite diversified.” A small but ambitious beverage distribution company called Casella Far East appealed to her. “The main reason was the friendly attitude of the human resources manager. She was open and persuasive.” Almost 20 years later, To herself is in charge of human resources at

GET TING IN THE SPIRIT

the company, in her role as regional recruit-ment and talent development director.

Building brandsWhen To started at Casella in 1993 as chief accountant, she was surprised by the primi-tive systems in place. “Everything was quite basic,” she explains. “There was no accoun-tancy system as such. The clerks were still

November 2012 39

Jenny To tells George W. Russell how switching to accounting opened up a whole new business worldto her and showcased her versatile talents

GET TING IN THE SPIRIT

Photography by Samantha Sin

she says. “I’m quite outgoing and also quite diplomatic. I had to look after more of the sales and marketing sides and the people side as well. It was a nice challenge.”

She acknowledges that the skill sets she acquired as a CPA enabled her to excel at her management role. “I think the accountancy background helps because you know ev-erything that goes on in the company – not exactly in terms of how they close a deal but you know what business is being concluded in terms of contracts,” she says.

Ebbs and flowsThe alcoholic beverage industry is complex, and much of it centres around the pricing of contracts between manufacturers such as Pernod Ricard and its two separate groups of customers: the so-called “off-trade” – su-permarkets, convenience stores and wine retailers – and the “on-trade” of pubs, res-taurants and clubs.

These contracts or agreements cover not only the selling price of beverages but also complicated volume discounting and re-bates. Pernod Ricard spends a considerable sum on ancillary items associated with its products – such as merchandise, gifts and prizes – and helps retail outlets with spon-sorship and promotional budgets for sport-ing, cultural and other events, ranging from the Asian Film Awards to individual hotel parties. “The big cost for us is those contracts and the investment we have with our out-lets,” To says.

In times of economic uncertainty, the on-trade tends to decline as consumers curb discretionary expenditure. In response, manufacturers scale down their promo-tional budgets. The off-trade often rises in tighter times as consumers buy more of their liquor from supermarkets, but rarely does it offset the on-trade’s decline.

The effects of the global financial crisis has been less marked in the Asia Pacific than in Europe and North America, prompting Pernod Ricard to concentrate its marketing in this region, especially for its premium la-bels. “We are spending more on brand build-ing [in Asia],” says To.

This strategy is paying off, she adds. “We’re thankful we’ve been quite strong in the region: number one in the wine and spirit market and leading the Asian region with double-digit growth,” she says. “We have to be cautious about how Europe could affect us but I think we have a plan in place in Asia.”

40 November 2012

using the old type of bookkeeping, writing in ledgers and only the invoicing was com-puterized.”

Casella soon became Pernod Ricard Hong Kong as part of a uniform rebranding exer-cise by the French-owned producer of dis-tilled beverages that had acquired Casella in 1990. “In the beginning, I was looking after the Hong Kong market, and then the China market, and then both Hong Kong and China became my responsibilities,” recalls To.

The company had upped its focus on Asia and, despite hiccups caused by the Asian fi-nancial crisis of 1997-1998 and the dot-com bust of 1999-2000, had increased its market share. “It had grown bigger with acquisi-tions over the years,” recalls To.

Not long after the economic turbulence hit, Pernod Ricard boosted its presence in the region by spending US$8.15 billion to purchase the spirits business of the Cana-dian company Seagram, adding Martell and Chivas Regal to its existing brands such as Jameson, Jacob’s Creek and, of course, the Pernod and Ricard aniseed-flavoured aperi-tifs. “The acquisition of Seagram in 2001 made a lot of changes to my career and my life, and to the group,” To recalls.

“We split the responsibility [between Hong Kong and China] so I didn’t do the

China financials any more. I looked after Hong Kong, but we had a lot more business in Hong Kong.”

In 2002, the Asian headquarters of the two companies (Pernod Ricard was based in Tokyo and Seagram in Singapore) were combined and relocated to Hong Kong. “We had the Indonesia and Philippines markets to look after as well as the headquarters,” To remembers.

Then in 2004, To became finance direc-tor of Pernod Ricard China, a role that meant she had to live away from her children. “I was based in Shanghai but my children were in their early teens so we decided not to move as a family.”

To came back to Hong Kong three years later. “I was doing special projects and lo-gistics for the group. Then in 2007, I became managing director of the Hong Kong market.”

The managing director post was yet anoth-er significant change for the versatile To. It was her first appointment outside the finance de-partment. “Being the managing director was quite different. As an accountant, you were always in the back office, although even in a finance role you do go out to meet customers.”

To reflects that her extroverted nature contributed to her elevation. “I’d say it’s probably a bit [related to] my personality,”

Success ingredient

November 2012 41

A PLUS

In times of economic uncertainty, theon-trade tends to decline as consumerscurb discretionary expenditure. The off-trade often rises in tighter times asconsumers buy more of their liquor fromsupermarkets, but rarely does it offsetthe on-trade’s decline.

After five years as managing director of the company in Hong Kong, To has taken on yet another role. As regional recruitment and talent development director of Pernod Ricard Asia, To sees her new challenge as putting more emphasis on a task that Pernod Ricard has been pursuing for years: develop-ing talent in Asia.

“This role is not purely human resourc-es,” she says. “Pernod Ricard has been evolv-ing and is now putting more emphasis on people and talent development.”

Organizing, acquiring and retaining talent has never been a more pressing task for Pernod Ricard, since the company has been busy growing horizontally. Most re-cently the company acquired U.K.-listed company Allied Domecq – including the Ballantine, Beefeater and Kahlua brands – in 2005 and Absolut from the Swedish gov-ernment in 2008.

To is the first Pernod Ricard executive to hold this position. “It’s a new post that came along and I have a management trainee programme that I plan to roll out.” This aca-demic year, she will recruit 10 students from universities in Hong Kong, the mainland, India, Korea and Singapore. “I’m going to recruit graduates from top universities in the region for a very structured programme for 18 months.”

The long-term aim of the management trainee programme is succession planning. This means potential recruits will be expect-ed to serve in a broad range of positions such as sales, marketing and finance. Another goal is to instill company loyalty in an era of short-term employment goals. “Asia is going so fast and there is always attraction from other companies,” she says of the difficulty in retaining talent.

Today’s potential employees are demand-ing, says To, and often don’t look beyond the immediate rewards of salaries and benefits. “It’s important to give [recruits] a value-added proposition,” she says. “They need to know there’s a future, there’s development, there’s mobility in terms of career opportu-nities. That’s my main challenge.”

To says she remains an accountant at heart. However, she believes she could be the ideal person to sell talented candidates a career at Pernod Ricard, a company that has familiar brands but is largely unknown as a corporate entity in Asia. “I’m confident be-cause people know me and I think I’m a good example,” she says. “And I can orchestrate different things.”

構建市場經濟下財政支持企業發展的全新模式

Liu Yuting analyses how a new financial model will support the development of enterprises in a market economy

財政部企業司司長 劉玉廷

企業是經濟的細胞，是創造社會財富和財政收入的泉源，是國民經濟發展的主導和各項事業的保證。關

注、支持和促進各類企業改革發展是我們的歷史責任。在市場經濟條件下，財政與企業的關係已經發生了根本性變革。我們必須認清形勢，加快轉變思想觀念，調整工作思路，改進工作方法。只有這樣，才能適應新時期的工作要求，這是轉型時期財政支持企業工作的必然規律。

支持重點產業調整和轉型升級 財政部門是國家重要的宏觀調控部門。煤、電、油、運等國民經濟重點行業和關鍵領域的健康穩定運行，歷來是財政工作關注的重點。煤炭是不可再生的重要資源，其生產、運輸、供應等很多問題都值得研究；石油是國民經濟的重要物資基礎，對外依存度過高，涉及國家戰略安全；電力是國民經濟的先行產業，電力生產涉及上下游產業鏈，需要從根本上解決火電企業的突出矛盾和困難；航運需要貫徹落實「國貨國運」戰略，關注三大航空集團的歷史債務，增強自身發展能力。

重點產業涉及國家核心競爭力，結構調整和轉型升級是「十二五」規劃確定的主攻方向。裝備製造業是國民經濟的「母機」工業，戰略性新興產業代表當今世界經濟轉型升級的方向。產業結構調整和轉型升級屬於國家戰略。在市場經濟下，財政如何支持產業結構調整和轉型升級，是擺在我們面前的核心問題。為此，我們啟動了重點產業優化結構調整和優化佈局的重大課題研究，全面梳理我國傳統製造業和戰略性新興產業中的薄

弱環節，重視核心技術的研究與開發，關注市場失靈領域，研究全新的支持政策。財政將着力引導市場機制發揮配置資源的基礎性作用，支持國民經濟重點產業結構調整和轉型升級，增強國家經濟發展的核心競爭力。

深化國有企業改革應當提上議程上個世紀90年代後期到2000年左右，全國性的國有企業改革對建立現代企業制度和社會主義市場經濟體制發揮了至關重要的作用。可以說，沒有那次全國性大範圍的國企改革，我國的市場經濟、現代企業制度等都無從談起，也正是那次國企改革帶動了相關

領域的改革，實現了社會財富和財政收入的大幅增長。

近些年來，國有企業一股過大、機制不活、投入產出效率低下、發展質量不高等問題，應當引起足夠的重視。2011年，國務院領導在我部上報的《財政部關於我國國有企業十年發展的報告》明確批示，要求深化國有企業改革。為此，我們啟動了國有企業產權改革重大課題研究。在我國，公有制經濟為主體、多種所有制經濟共同發展的基本經濟制度是不可動搖的。但是，國有企業不能

一股過大，更不能發展成全資企業。「一股過大」運行機制不活，不符合現代企業制度要求，實行董事會制度也沒有實際意義。這也是導致中小企業不活、非公經濟發展受阻的重要原因之一。大型國有企業可以國有控股，但要多元化，地市縣級的競爭性國有企業完全可以放開。江浙、上海、廣東等發達地區之所以發展較快，關鍵就在於他們觀念轉得快，把握了市場經濟發展的規律。

深化國有企業改革不僅有助於建立和完善現代企業制度，而且能夠盤活國有資本存量，增加國有資本收益，擴大國有資本經營預算的規模，有效解決財政支持企業改革發展資金不足的問題。這既是財政宏觀層面的資本運作，也是新時期正確處理財政與企業分配關係的創新。國有企業從2007年開始收取稅後紅利，最高為20%，超過80%留在企業自行投資，企業很難從國家宏觀層面考慮結構調整、轉型升級和解決核心技術的研發問題。因此，我們需要統籌考慮國有企業稅後利潤，發揮財政的二次分配功能。我國的國有企業包括央企和地方國企。央企除了國資委監管的117家以外，其他部門管理的企業有7,000多家，地方國有控股企業近10萬家。我們最近下發了《關於開展全國地方國有及國有控股企業基本情況統計調查工作的通知》，並擬加快研究國企改革的思路和方案，積極推動國有企業改革。

大力支持中小企業特別是小微型企業健康發展 支持和促進中小企業健康發展，已經成為推動市場經濟、促進國民經濟平穩運行和改善民生的重大戰略任務。從去年上半年開始，針對國際金融危機蔓延對我國中小企業特

大型國有企業可以國有控股，但要多元化，地市縣級的競爭性國有企業完全可以放開。

China finance

42 November 2012

別是小微型企業的影響，我們深入多個省區和基層企業，開展了大量調查研究，向國務院上報了《關於支持和促進我國中小企業特別是小微型企業發展的政策建議》，得到國務院領導的高度肯定。國務院多次召開會議，研究並確定了支持中小企業發展的一攬子政策措施，明確了要在2012年依法設立國家中小企業發展基金。基金來源包括中央財政預算安排、基金收益、捐贈等，其中中央財政共安排資金150億元，分五年到位。基金將充分引導社會資金投向，形成全方位、多層次、大力度支持中小企業特別是小微型企業健康發展的長效機制。

我們正在抓緊研究國家中小型企業基金設立方案。這是一項較為複雜的系統工程，要總結相關基金實際做法，借鑒國際通行慣例，形成國家層面的引導基金。在基金的管理體制、運行機制、市場化運作方式以及構建嚴格的全過程監控體系等諸多方面將實現重大創新，以確保實現政策目標。

上述基金的設立屬於增量安排，同時還要完善現有中小企業專項資金政策，不斷擴大資金規模，更多運用間接手段支持中小企業技術創新和產業升級。改善公共服務，培育

地方特色產業集群，鼓勵信用擔保機構、創業投資機構以加大融資服務。現有政策要體現國家政策導向性，增強針對性、連續性和可操作性，向小微型企業和中西部地區適當傾斜。繼續落實國有股轉持豁免政策，鼓勵創業投資機構加大對早中期中小企業的支持。

支持進出口貿易平衡和「走出去」戰略進出口貿易直接關係國民經濟發展，充分利用「兩個市場、兩種資源」，實施「走出去」戰略，是中央確定的方針政策。我國出口規模世界第一，進口位居世界第二，要在符合WTO（國際貿易組織）規則的前提下，調整

外貿結構，促進貿易平衡。在出口方面，要鼓勵高附加值產品出口；在進口方面，要支持先進設備、關鍵零部件以及能源、資源和原材料進口。要支持國有骨幹企業在境外進行能源資源開發，加強國際經濟技術合作、對外承包工程、勞務合作以及境外經濟合作區建設等，促進我國企業集群式「走出去」。財政部從2012年起建立並實施境外企業財務巡查機制，擬通過政府購買服務方式，聘請資產評估等中介機構開展境外企業財務實地巡查工作，加強境外企業財務管理，保障國家利益不受損失。

構建新型企業財務管理模式 財務管理是現代企業管理的核心，也是國家財政工作的重要組成部分。傳統的企業財務管理模式已不適應現代企業發展要求，所以迫切需要構建新模式。為此，我們開展了「企業首席財務官制度」等重大課題研究。發達國家的企業和跨國公司大都設立有企業首席財務官，稱之為CFO。CFO參與企業重大決策，在企業決策層佔有十分重要的地位，僅次於首席執行官CEO，其職責權限非常廣泛。我國企業的總會計師或財務總監，與發達國家的CFO還相差甚遠，很多總會計師進不了決策層，在管理層也排在副總之後，這與我國企業強化內部管理、防範財務風險、實施「走出去」的戰略不相適宜，急需研究解決。

我們開展了「企業財務管理評價」重大課題研究，基本思路是要全面提升現代企業財務管理能力。初步考慮，體現企業財務管理能力的關鍵要素應當包括：產權結構的合理性、市場化運行機制、財務高管人員的地位和作用、財務管理信息化水平、全面預算、財務風險管控、產融結合、財務成果等。這些關鍵要素確定後，我們可對評價標準、程序、方法及評價結果應用等做出制度安排，以此為紐帶，確立市場經濟條件下新型企業財務管理模式，實現管理創新。開展企業財務管理評價工作是一項系統工程，對企業財務管理的評價結果將作為財政和有關部門支持企業相關政策的必備要件之一。企業財務管理評價也是一種評估制度，可以委託資產評估等專業機構開展企業管理能力的評價工作，充分發揮中國資產評估協會的作用，確保評價工作的客觀性、獨立性和公正性。管理與技術同等重要，同樣體現核心競爭

現有政策要體現國家政策導向性，增強針對性、連續性和可操作性，向小微型企業和中西部地區適當傾斜。

November 2012 43

力，搞好企業財務管理就抓住了「牛鼻子」，對我國企業尤其如此，通過這一制度安排，能夠全面提升我國企業管理水平。

充分發揮資產評估等專業機構作用 我國的資產評估立法工作有了新的進展，全國人大審議資產評估法草案進入了「一讀」。財政部今年3月印發的《中國資產評估行業發展規劃（2011-2015年）》（徵求意見稿）明確指出：加快發展資產評估行業，是完善社會主義市場經濟體制的制度安排，是促進經濟結構調整、轉變發展方式的客觀需要，是支持企業參與國際競爭的重要舉措。在社會主義市場經濟條件下，要轉變政府職能，強化社會管理和公共服務。資產評估涉及的範圍非常廣泛，貫穿新時期企業改革與發展的各個領域，如國民經濟重點行業產業結構調整和產業升級、深化國有企業改革、支持中小微企業健康發展、促進外貿平衡和實施「走出去」戰略、構建新型企業管理模式等，都需要充分發揮資產評估等專業機構的作用。

積極探索改進財政資金支持方式 現行支持各類企業改革與發展的財政資金，

涉及公共財政預算、國有資本經營預算和政府性基金預算，其中國有資本經營預算是重中之重。我們開展了國有資金經營預算重大課題研究，旨在全面總結國資預算制度實施四年來的運行情況，系統分析其存在的主要問題，提出完善國資預算制度的一攬子政策建議。在市場經濟條件下，財政支持企業要

根據市場規則和公共財政原則，發揮財政資金的槓桿功能，更多地採用國家引導基金等市場化間接支持方式，撬動社會資源，支持市場失靈領域，包括增強國民經濟核心競爭力和綜合國力，促進產業結構調整和轉型

升級中關鍵技術的研發，初創期中小企業的培育和貫徹「走出去」戰略等。

設立國家中小企業發展基金，通過參股創業投資機構，支持中小企業健康發展，是典型的通過市場配置資源、間接支持企業的方式，也是國際通行慣例。財政資金支持擔保機構，通過擔保機構促進商業銀行向中小企業發放貸款，解決眾多中小企業特別是小微型企業「融資難」和「融資貴」的問題，支持國民經濟重點產業結構調整和轉型升級。

在市場經濟條件下，應當儘可能減少財政直接對企業或項目的支持方式，因為這種方式會影響市場經濟的公平競爭，引起國外反傾銷，還可能引發尋租和腐敗行為。當然，改革需要一個過程，在現階段，對於戰略性、國家性、全局性的重大項目支出，直接支持還是必要的，但要在陽光下運行，加強資金的跟蹤問效。

Liu Yuting is director-general of the Ministry of Finance’s state equity and corporate finance department.

設立國家中小企業發展基金，通過參股創業投資機構，支持中小企業健康發展，是典型的通過市場配置資源、間接支持企業的方式。

November 2012 45

A n option is a derivative financial instrument that specifies a contract between two parties for a future

transaction on an underlying asset at a pre-determined strike price. The value of an option is primarily derived from the intrinsic value difference between the strike price and the value of the underlying asset, plus a premium based on the time remaining until the expiration of the option.

Share options are important to today’s financial market and businesses. Not only because share options are widely listed in stock exchanges as investment vehicles, but also because companies use options for business purposes such as currency hedging and employee remuneration.

This article focuses specifically on the valuation of share options for IFRS 2 Share-based Payment and covers pricing models, valuation practices and relevant accounting requirements.

Impact of IFRS 2In 2005, the International Accounting Standards Board introduced IFRS 2 to address the issue of accounting for remuneration paid to employees in the form of equity or derivatives of equity.

Before IFRS 2, employee stock options affected only a company’s profit and loss if options were exercised, and the impact was solely based on the options’ intrinsic values.

Under IFRS 2, in order to correctly recognize employee stock options on a company’s financial statement, both a valuation exercise and accounting exercise are required.

The valuation exercise is required in respect of the fair value of the employee stock options at the date they were granted, and an accounting exercise is required in respect of the extent to which the grant-date fair value is

charged to the company’s profit and loss.

Employee stock optionAn employee stock option is a call option on the common stock of a company, granted by the company to employees as part of an employee’s remuneration package.

The primary objective is to align employee interests with the company and give employees an incentive to behave in ways that will boost the company’s stock price.

Two key advantages of employee stock option schemes are (1) they provide an incentive to employees without any cash flow implications to the company, and (2) there is no upfront cost of participation and employees only exercise when there is an appreciation in the value of the company.

Option pricing modelA number of well established valuation models are available to estimate the fair value of share options. While no particular option pricing model is regarded as theoretically superior to others, the Black-Scholes-Merton model and the binomial tree model are the two most widely used.

Black-Scholes-Merton modelThe Black-Scholes-Merton model is an example of a closed-form model, which is characterized by the use of an equation to produce an estimated fair value.

In 1973, Fischer Black and Myron Scholes achieved a significant breakthrough when they determined the premium for a stock option in terms of parameters that are directly observable or may be estimated using historical data. The ideas were groundbreaking and eventually led to Scholes and Robert Merton winning the 1997 Nobel economics prize.

While the theory behind the Black-

Scholes-Merton formula is complex, applying the formula is relatively straightforward. Typically, the Black-Scholes-Merton model is better suited to value short-term, exchange-traded share options than long-term, tailor-made share options.

Binomial tree model In contrast to the Black-Scholes-Merton closed-form model, the binomial tree model is a lattice, producing an estimated fair value based on the assumed changes in prices of a financial instrument over successive periods of time.

First developed in 1979, the binomial tree model uses an iterative procedure, allowing for the specification of nodes, or points in time, during the time span between the valuation date and the instrument’s expiration date.

The model reduces possibilities of price changes, removes the possibility for arbitrage, assumes a perfectly efficient market and shortens the duration of the instrument. Under these assumptions, it is able to provide a mathematical valuation of the instrument at each point in time specified.

The key difference between a lattice model and a closed-form model is flexibility. A lattice model can explicitly use dynamic assumptions regarding the term structure of volatility, dividend yields and interest rates.

Furthermore, a lattice model can incorporate market conditions that may be part of an options’ design. Thus valuation specialists believe that the binomial tree model provides a more accurate estimate of a share option’s fair value.

Valuation inputsIn the process of estimating the fair value of a share option, despite the valuation model adopted, a minimum of six inputs (expected life, current share value, exercise price,

Unveiling valuation of options for IFRS 2 Share-based PaymentAlex Leung and Ross Wang examine models, practices and accounting requirements in the use of share options for remuneration

IFRS 2

46 November 2012

Alex Leung is senior director of business and financial instruments and Ross Wang is manager of business and financial instruments in the valuation and advisory services unit of CBRE.

A PLUS

November 2012 47

Change in fair value

Incr

ease

Dec

reas

e

Exercise price

Expected life

Current share value

Expected volatility

Increase in parameter

Table 1 - Relationship between value of parameters and value of share options Table 2 - Expense amortization table

Tranche Vesting Period

expected volatility, expected dividend yield and risk-free interest rate) have to be taken into consideration (see Table 1).

Expected life of the option: The expected life of an option is largely determined by its remaining contractual life to maturity: the longer the remaining contractual life, the more chance that the intrinsic value of the option will increase and, thus, the more valuable the option. Nevertheless, the expected life of an option is also influenced by a number of factors such as the length of the vesting period, past exercise history, the employee’s position within the organization and expected volatility of the underlying shares.

Current share value: If the underlying company is listed in an active market, the public quoted price is the price indicator of the current share value. In general practice, the closing price of the underlying shares as at valuation date is adopted as the current share value. For an unlisted company, however, a separate valuation on the underlying company is required. Typically, a full-scale business valuation on the equity interest of the company has to be performed before the valuation specialist determines other option pricing model inputs. Such a situation is common for the valuation of pre-IPO share options.

Expected volatility: Share price volatility measures the level of share price fluctuation during a given period. As much of the value of a share option is sourced from its potential for appreciation, share price volatility has a significant impact on the estimation of the share option’s fair value. Expected share price volatility can usually be determined with reference to the historical volatility of the underlying share price over the same as the

expected life of the option. In addition, the time range adopted for the historical volatility must be consistent with the expected option life. If long-term historical volatility is adopted, valuation specialists must make appropriate adjustment to price observations for normalization to avoid any outlier effect.

Expected dividend yield: If the holder of a share option is not entitled to a dividend on the underlying shares, the expected dividend will have a negative impact on the value of the option. Other things being equal, the higher the dividend yield, the less valuable the option. This parameter usually can be determined with reference to the firm’s prevailing dividend policy, dividend payout history, industry peers’ practice or management’s reasonable estimation.

Risk-free interest rate: The risk-free interest rate affects the price of an option in a less intuitive way than expected volatility or expected dividends. IFRS 2 specifically states that the risk-free interest rate should be the implied yield available at the date of grant on zero-coupon government issues. However, it may also be necessary to use an appropriate substitute in some special circumstances, if there are no comparable government issues or the overall economy has high inflation.

Expensing the employee stock optionUnder IFRS 2, for an employee stock option without any vesting conditions, the expense shall be recognized at the grant date. If a vesting condition is attached to the employee stock option, the expense shall be spread over the relevant vesting period.

It is worth mentioning that for employee stock options that mature over several financial reporting periods, a valuation is required only at the grant date. Subsequent

corrections to the annual expense figure may normally be caused by a change in the number of options, but not by a change in the fair value of the options.

Example: A company granted an employee stock option scheme to its employees on 30 June 2012. Four tranches of employee stock options with different vesting periods were granted. The assessed fair value of each tranche was $10,000 as at the grant date. The financial year of the company is from 1 January to 31 December. The expense of the employee stock option could be allocated in the way as shown in Table 2 (see above).

ConclusionTraditionally, share options are represented by standard European and American options. Nevertheless, along with the development of financial markets, a series of new options, such as Bermudan options, Asian options, barrier options and other exotic products have become more common.

The growing complexity of share options calls for more advanced valuation models and techniques. Besides the Black-Scholes-Merton and binomial tree models, valuation specialists have also adopted the trinomial tree model, finite difference method and Monte Carlo simulation method to tackle heavily structured share options.

As issuing employee stock options could result in significant profit and loss impact, companies are advised to assess the fair value of options at an early stage.

1

2

3

4

Total

Nil

1 year

2 years

3 years

$10,000

$5,000

$2,500

$1,667

$19,167

$5,000

$5,000

$3,333

$13,333

$2,500

$3,333

$5,833

$1,667

$1,667

Risk-free interest rate

Expected dividend

yield

Financial year

2012 2013 2014 2015

Members’ handbook

Handbook update Update no. 121 contains an update to the Glossary of Terms contained in HKFRSs issued as at 31 December 2011.

Financial reporting

Exposure draft of Proposed Improvements to IFRSs (fifth set)The Institute made a submission to the IASB’s exposure draft Proposed Improve-ments to IFRSs (fifth set) and Institute expressed concerns over a number of proposed amendments including those to the following standards:

• IFRS 3 Business Combinations• IFRS 8 Operating Segments• IAS 1 Presentation of Financial

Statements• IAS 7 Statement of Cash Flows

With regard to a number of proposed amendments such as those to IFRS 3 and IFRS 8, the Institute believed that these amendments should be addressed through the IASB’s post-implementation review process.

The Institute noted that the IASB started the post-implementation review of IFRS 8 and issued a request for informa-tion in July.

The Institute also noted from the IASB’s latest project update that the board will start the post-implementation review of IFRS 3 in early 2013.

IFRS Foundation’s due process handbookThe Institute made a submission to the IFRS Foundation on its invitation to comment on the Foundation Due Process Handbook.

The Institute appreciated the efforts

that the IFRS Foundation and its Due Process Oversight Committee have made to improve the due process of the IASB and the IFRS Interpretations Committee. IFRSs are widely adopted internationally and proper adherence to due process is of paramount importance to maintain the quality and credibility of the standards.

The Institute noted that the IFRS Foun-dation Trustees have addressed some, but not all, issues that the Institute raised in a response to the trustees’ strategy review in 2011. The Institute took the opportunity to highlight com-ments on matters that it consid-ered unresolved and that relate to this consultation for further consideration by the trustees.

Comments on exposure draft of IFRS Interpretations CommitteeThe Institute made a submission to the IFRS Interpretations Com-mittee on its exposure draft Levies Charged by Public Authorities on Entities that Operate in a Specific Market.

The Institute supported the IFRS Interpretations Committee in providing guidance on the accounting for levies in financial statements, to address diverse practices in how entities account for the obligation to pay such a levy. The Institute agreed with the consensus in the draft interpreta-tion, which is consistent with the principles in IAS 37 Provisions, Contingent Liabilities and Contin-gent Assets.

However, the Institute sug-gested that the IFRS Interpreta-tions Committee clarify the scope of the draft interpretation and ad-

dress whether accounting for levies should be due only if a minimum revenue threshold is achieved.

Corporate finance

Institute’s views on trading halts proposalAs reported in TechWatch 119, Hong Kong Exchanges and Clearing consulted the market on its trading halts proposal.

120The latest standards and technical developments

TechWatch

48 November 2012

In its submission to HKEx, the Institute indicated agreement in principle with the proposal, while noting that in practice it may not result in a significant reduction in the duration of suspensions.

As the proposed changes to the current trading arrangements may have a bigger impact on retail investors, the Institute emphasized the need for adequate inves-tor education and publicity to alert retail investors, in particular to the implications of the new arrangements.

Report on SFC’s adherence to operational proceduresThe Process Review Panel for the Securi-ties and Futures Commission is an inde-pendent, non-statutory body established by the Chief Executive of Hong Kong in November 2000. The panel reviews and

November 2012 49

A PLUS

advises the SFC on the adequacy of the commission’s internal operational pro-cedures and decisions, and ensures that the commission’s regulatory powers are exercised in a fair and consistent manner.

The panel recently published its 2011-2012 report. From the 55 cases reviewed, the panel concluded that the commission’s decisions and actions had generally ad-hered to established internal procedures. The panel also made further observations and recommendations to the commission for improvement.

Legislation and other initiatives

Consultation on subsidiary legislation in Companies Ordinance On 28 September, the government

Please refer to the full version of TechWatch 120, available as a PDF on the Institute’s website: www.hkicpa.org.hk

launched the first stage of a two-phase public consultation on subsidiary legisla-tion for the implementation of the new Companies Ordinance.

The first consultation phase, with com-ments requested by 9 November, covers the following seven pieces of subsidiary legislation:

• Companies (Summary Financial Reports) Regulation

• Companies (Directors’ Report) Regulation

• Companies (Specification of Names) Order

• Companies (Non-Hong Kong Companies) Regulation

• Company Records (Inspection and Provision of Copies) Regulation

• Companies (Model Articles) Notice• Companies (Accounting Standards

(Prescribed Body)) Regulation

The second consultation phase, to be launched later this year, will cover the fol-lowing subsidiary legislation:

• Companies (Trading Disclosures) Regulation

• Companies (Revision of Financial Statements and Reports) Regulation

• Companies (Disclosure of Informa-tion about Benefits of Directors) Regulation

• Companies (Residential Addresses and Identification Numbers)Regulation

• Companies (Unfair Prejudice Proceedings) Rules

It is expected that the legislative pro-cess will be completed by July 2013 and the new Companies Ordinance and the subsidiary legislation will be brought into operation tentatively in 2014.

T he Institute’s amendment maintains international convergence arising from the IASB finalizing its Annual

Improvements 2009-2011 Cycle. The IASB uses the annual improvements process as a method of making necessary, but non-urgent, amendments to IFRSs that will not be included as part of any other project.

The Annual Improvements 2009-2011 Cycle includes requirements for providing compara-tive information. Paragraphs 40A and 40B have been added to HKAS 1 Presentation of Financial Statements:• 40A–Anentityshallpresentathird

statement of financial position as at the beginning of the preceding period in addi-tion to the minimum comparative financial statements if:

a. It applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements or reclassifies items in its financial statements; and

b. The retrospective application, retrospective restatement or the reclassification has a material effect on the information in the statement of financial position at the beginning of the preceding period.

• 40B–Inthecircumstancesdescribedinparagraph 40A, an entity shall present three statements of financial position at:

a. The end of the current period; b. The end of the preceding period; and c. The beginning of the preceding period.

The Annual Improvements 2009-2011 Cycle amends the current requirements in HKAS 1 that relate to circumstances described in paragraph 40A to clarify that the appropriate date for the opening statement

of financial position is the beginning of the preceding period.

The amendment also changes the previ-ous requirements so that notes relating to the opening statement of financial position are no longer required to be presented. This relief was given because the circumstances in which an entity changes an accounting policy, or makes a retrospective restatement or a reclassifica-tion in accordance with

HKAS 8 Account-ing Policies, Changes in Accounting Esti-mates and Errors are considered narrow, specific and limited. This relief is not available when additional financial state-ments are provided on a voluntary basis.

Guidance has been added in para-graph 40A(a) to clarify when an opening statement of financial position should be required. Paragraph 40A(b) is a reminder that the concept of materiality should be considered in applying the guidance in paragraph 40A(a). The entity would still be required to disclose the information required by HKAS 8 for changes in account-

ing policies and retrospective restatements. The amendment also clarifies whether

an entity should be required to present a complete set of financial statements when it provides financial statements beyond the minimum comparative information require-ments (i.e. additional comparative informa-tion). For example, an entity may present a third statement of profit or loss and other comprehensive income (thereby presenting the current period, the preceding period and one additional comparative period).

Having said that, additional financial statement information need not be presented in the form of a complete set of financial statements for periods beyond the minimum requirements. Additional comparative infor-mation might include: a. Information that is presented voluntarily,

beyond the information that is included within a complete set of financial state-ments; or

b. Comparative information that is required by law or other regulations but that is not required by HKFRSs.

The Basis for Conclusions, which relates to the amendment, states that requiring full notes for additional information is neces-sary to ensure the information that the entity provides is balanced and results in financial statements that offer a true and fair view.

The amendment to HKAS 1 is effective on or after 1 January 2013, with earlier application being permitted.

Tech Q&AThe Institute recently issued an amendment to HKAS 1 Presentation of Financial Statements contained in the IASB’s Annual Improvements 2009-2011 Cycle. Could you provide details of the amendment?

Send your questions and comments tocommentletters@hkicpa.org.hk. The standard setting team will answer these questions in accordance with its policy, posted on the Institute's website.

November 2012 51

Your guide to courses, workshops and member activitiesEvents

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

Business skills

How to choose the best KPIs will explore performance measures that are useful in driving an enterprise forward, explaining the main differences between indicators that measure and those that monitor performance. CPD hours: 3Language: EnglishDate: 14 NovemberTime: 6:30 – 9:30 p.m.

Anti-money laundering and counter-terrorist financing issues will examine the prevailing laws that combat the concealment of illicit money and the consequences for financial institutions that fail to comply with the requirements. CPD hours: 1.5Language: EnglishDate: 16 NovemberTime: 6:30 – 8:00 p.m.

Business productivity in managing cost and its effectiveness will focus on cost control strategies with case studies and help participants identify areas within their own organizations that could be more effective. CPD hours: 3Language: EnglishDate: 16 NovemberTime: 6:30 – 9:30 p.m.

Financial reporting

Financial reporting seminar on property valuation will give an overview of the property market in Hong Kong and China, highlighting common

property valuation issues affecting financial reporting and valuation methodologies for building a successful practice.CPD hours: 1.5Language: EnglishDate: 13 NovemberTime: 7:00 – 8:30 p.m.

Personal and interpersonal skills

How to negotiate fees, disclosure and management letter points will explain what it takes to be a star negotiator and enable participants to test and develop their own negotiating skills. CPD hours: 3Language: EnglishDate: 21 NovemberTime: 6:30 – 9:30 p.m.

The art of communication for connection will explore the benefits of good interpersonal skills and how they lead to improved work productivity.CPD hours: 3Language: EnglishDate: 28 NovemberTime: 6:30 – 9:30 p.m.

How to better understand and resolve conflicts will provide an opportunity for participants to share examples of disagreements that they encounter at work and then explore methods to manage these situations.CPD hours: 3Language: EnglishDate: 29 NovemberTime: 6:30 – 9:30 p.m.

Professional knowledge

IT conference 2012: mobile revolution in the workplace – encompassing risks and opportunities will feature various speakers discussing the role mobile technologies play in business.CPD hours: 3.5Language: EnglishDate: 17 NovemberTime: 9:00 a.m. – 1:00 p.m.

An introduction to LEAN costing techniques will show participants how to maximize returns by applying accurate costing and how to use costing data to minimize waste and improve productivity and efficiency.CPD hours: 3Language: EnglishDate: 21 NovemberTime: 6:30 – 9:30 p.m.

54 November 2012

Dave WongDirector Wong has extensive experience in China tax and cross-border tax planning. He has assisted

multinational companies by providing ser-vices such as tax and structure planning, due diligence and representing clients in deal-ing with China tax issues.

Gilbert ChanDirectorChan has more than a decade of experience in auditing listed firms operating in trading,

manufacturing and telecommunications. He has considerable experience in due dili-gence, reverse takeovers, mergers and ac-quisitions and financial investigations.

Ivan ChanDirectorChan has more than 10 years of experience in providing auditing and business advisory services

to corporations listed in both Hong Kong and overseas. He has assisted local and overseas clients operating in retail, manufacturing, trad-ing and computer software development.

RSM Nelson Wheeler

Aron LeungDirector, transaction advisory Leung has more than 13 years of experience in transaction ad-visory and assurance for listed

and private companies. He specializes in pro-viding transaction support, financial due dili-gence reviews and pre-IPO reviews to private companies seeking a listing in Hong Kong.

Email your announcements to Lucid Wong at lucid.wong@mandl.asia

programme in New York for four years, advis-ing a number of clients on Italian tax issues.

Ivan StruninManaging director, taxStrunin has experience advis-ing businesses on both U.S. and international tax issues. He

has worked with clients from a wide range of industries such as financial services, textiles, manufacturing and high technology.

Ernst & Young

Ami KM CheungPartnerCheung has more than 15 years of expatriate mobility tax expe-rience, helping multinationals

organize cross-border assignments. She as-sists clients with implementing employee eq-uity and long-term incentive plans for senior executives.

Mazars

Kenneth MorrisonChairman, Greater China boardPreviously managing director of the Hong Kong office, Mor-rison has more than 35 years

of accounting experience and has been cli-ent or engagement partner on a number of international audit accounts. He has extensive experience in litigation support. Morrison also serves on the Institute’s regulatory reform working group.

Stephen WeatherseedManaging directorWeatherseed has more than 30 years of experience in financial services in Asia and Europe, in-

cluding advising multinational clients on cor-porate finance, audit, risk management and cross-border transactions.

BDO

Johnson KongChief executive Kong has nearly 30 years of expe-rience handling financial investi-gations, due diligence, litigation

support, restructuring, receivership and insol-vency. He is a member of the Institute’s profes-sional qualifications accountability board.

Kenneth Yeo Director, specialist advisory Yeo has more than 25 years of experience in providing advisory services to multinational corpo-

rations in the region. His experience includes advising clients on due diligence, financial reviews, initial public offerings and non-per-forming loans.

Wilfred Wu Director, specialist advisory Wu has more than 15 years of experience in specialist advisory including valuation, litigation

support, due diligence and corporate restruc-turing. He has performed numerous valuation and expert reports for litigation and commer-cial evaluation purposes.

Joseph HongDirector, payroll Hong has been with the firm for more than 10 years. He has sig-nificant experience in account-

ing and payroll outsourcing services.

Deloitte

Olderigo FantacciManaging director, tax Fantacci has more than 20 years of experience in international and domestic tax. He led the Ital-

ian desk of the International Core of Excellence

People on the moveThe latest professional appointments from around the region

November 2012 55

56 November 2012

M adrid might not be as beauti-ful as Seville, as romantic as Barcelona or as historical as Valencia, but it’s the hippest

city in Spain as well as the country’s arts and culture capital and a paradise for foodies.

The landlocked capital is notorious for its dry, baking summer heat. By Novem-ber, however, the autumn chill (by Spanish standards) has set in and visitors will need at least one layer of warm clothing such as a jacket or pullover.

Fortunately, Madrid has plenty of cosy at-tractions for the off-season tourist. The capi-tal is laid out in an accessible way for walking

and public transport, such as the 300 kilome-tre Metro de Madrid underground rail sys-tem, which is excellent.

Central Madrid lies roughly between two notable pieces of parkland: Campo de Moro in the west and the much larger Parque del Buen Retiro in the east. Two key arteries – Gran Vía in the north and the Manzanares River in the south – form the remaining boundaries.

Much of the city’s cultural life is centered on its plazas, or squares. Deserted during the traditional daytime siesta period, Madrid’s open spaces come alive with activities as evening draws.

In the centre of the city is Puerta del Sol,

one of Madrid’s key meeting places (recent anti-austerity protests have been held there) and an ideal landmark from which to begin walking tours.

East of Puerta del Sol is the museum dis-trict. The Museo Nacional del Prado is one of the world’s greatest repositories of art. Its treasures include masterpieces by Ve-lázquez, El Greco, Goya, Raphael, Rubens and Bosch.

Nearby is the Museo Thyssen-Bornemisza, Spain’s premier privately owned museum. This month, the museum highlights works by Paul Gauguin, Wassily Kandinsky, Henri Matisse, Paul Klee and August Macke.

The magic of Madrid

The Spanish capital abounds in history, heritage and artistic treasures, as Travelzoo Asia-Pacific CFO and Institute member Honnus Cheung discovers

Business travel

Where to eat• Botín Serving old world culinary charm

since 1725. Calle de Cuchilleros 17. 366-42-17.

• Cerveceria La Campana Best bocadillo de calamares (squid sandwich) in town. Calle Botoneras 6. 364-29-84.

• El Brillante Hectic café with unforgettable pinchos morunos (spiced lamb). Plaza del Emperador Carlos V 8. 539-28-06.

• La Venenci Iconic 1950s bar with sherry and tapas. Calle de Echegaray 7. 429-73-13.

• Marisquería Ribeira do Miño Galician-style seafood. Calle Santa Brígida 1. 521-98-54.

• Puerta 57 Tapas inside the Real Madrid stadium. Calle de Padre Damián 4. 457-33-61.

Where to stay• Hotel Intur Palacio de San Martin

Cheerful comfort in great location. Plaza de San Martín 5. 701-50-00.

• Hotel Urban Trendy high-concept luxury with fab rooftop bar. Carrera de San Jerónimo 34. 787-77-70.

• InterContinental Madrid Sophisticated business elegance. Paseo de la Castellana 49. 700-73-00.

• ME Madrid Reina Victoria Renovated 1920s landmark. Calle de Santa Ana 14. 701-60-00.

What to see • Mercado de San Miguel Cast-iron

temple to retail gastronomy. Plaza de San Miguel. 542-49-36.

• Museo Nacional Centro de Arte Reina Sofía Home of Guernica and other great artworks. Calle de Santa Isabel 52. 774-10-00.

• Museo Nacional del Prado Impressive collection of masterpieces. Paseo del Prado 1. 330-28-00.

• Museo Thyssen-Bornemisza Glorious art collection in historic building. Paseo del Prado 8. 276-05-11.

• Real Jardín Botánico de Madrid Terraces, greenhouses and a herbarium amid eight hectares. Plaza de Murillo 2. 420-30-17.

November 2012 57

Previous page: Locals and tourists throng Puerta del Sol, Madrid's historic central squareThis page (from top): The Manzanares River; Plaza de Toros de Las Ventas; Plaza Mayor; Museo Nacional del Prado

Business travel

Further south is Museo Nacional Centro de Arte Reina Sofía, Spain’s national museum of 20th century art, which turned 20 years old in September. It is home to Guernica (1937), Pablo Picasso’s expression of the brutality of the Span-ish Civil War.

All three museums can be accessed using a single Paseo del Arte (Art Walk) ticket that enables visitors to bypass the sometimes for-midable queues. Other world-class museums in the area include the CaixaForum modern art museum and the Museo Nacional de Artes Decorativas.

The western side of Puerta del Sol is not without its charm. Just to the southwest lies the even larger Plaza Mayor, which echoes with Spanish history: everything from bullfights to executions have been held there. Today there are street performers, open-air markets and res-taurants and cafés of varied quality.

Further west lies Palacio Real, the official home of King Juan Carlos and his family. It is open to the public when the king is not in resi-dence and also houses The Royal Armoury, which this month features a collection of weap-ons and armour from members of royalty and the nobility in the 13th century.

For a more modern attraction, visit Madrid Río, an area of parkland featuring sports, leisure and cultural facilities opened in 2011, along an old motorway beside the Manzanares River.

There are worthwhile sights outside the central area. To the north is Plaza de Toros de Las Ventas, site of a museum of the history of bullfighting. Not far away from there is Esta-dio Santiago Bernabéu, where the venerated Real Madrid football team plays. Forthcom-ing Primera Liga home matches will usually be held on Sundays.

All that activity will work up an appetite and, fortunately, Madrid caters to wide-ranging tastes.

Try traditional Madrileño dishes such as be-sugo (baked sea bream), callos (ox tripe) and cocido (chickpea stew) as well as sweet treats like huesos de santo (made with egg yolks and marzipan) and torrijas (bread pudding). Ma-drid’s classic street snack is bocadillo de cala-mares, a fried squid sandwich.

Don’t forget that Spaniards eat dinner late – even at midnight or beyond – and many Madrid clubs and bars are open until the early hours, so business visitors shouldn’t schedule too many breakfast meetings.

PHOTO

: GEO

RGE W

. RUSSELL

58 November 2012

Hearts of oak

Spanish wines are grouped according to their ageing process, writes Aloysius Tse

S pain is one of the most important wine producing countries in Europe. Its long wine history dates back to

the ancient times, when what were then the Roman provinces of Hispania were major sup-pliers to Rome itself. Today, Spain ranks as the world’s third largest wine producer after France and Italy.

Although Spain can be divided geographi-cally and climatically into a number of wine producing regions, the most prestigious are Rioja and Prioratio. Both regions are at the top of the five-tier classification system adminis-trated by the regional authorities. On top of these, there is the designation of Vino de Pago, which can apply to only 13 individual estates with an international reputation.

Rioja, in northern Spain, is dominated by plantings of Tempranillo and Gar nacha from which the region’s most prestigious red wines are made. The character of a traditional style Rioja is widely known to be the result of ageing in oak barrels. In Spain, American oak rather than the European species is predominantly used. American oak has a pronounced aroma that softens tannins and, with the appropriate level of toasting, imparts sweet coconut and vanilla flavours to the wine.

Under Spanish law, minimum periods of ageing in barrels are imposed. It is also manda-tory that the ageing takes place in the winery warehouse, or bodega in Spanish. So when you purchase a bottle of Rioja, be sure to under-stand what the label tells you to ensure you choose the right product to suit your palate.

Ageing requirements are briefly classified as follows:• Joven: These wines are made for immedi-ate consumption and have spent none or very little time in cask.• Crianza: Red wines must be aged for at least two full years after the vintage, of which a minimum period of at least six months to a year must be in oak casks. White and rosé

After hours

wines must spend at least a year in the winery with a minimum period of six months in oak.• Reserva: Reds must be aged for at least three years with a minimum period of 12 months in oak. White and rosé wines must be aged for a minimum of two years, of which at least six months should be in oak.• Gran Reserva: These wines are only allowed to be made in good vintages and must be aged for a minimum of five years with 18 months in oak. Whites and rosé wines require four years ageing with six months in oak.

These rules are very important and specific to the wine industry in Spain.

With its dry, warm climate, Spain has been traditionally known for the production of qual-ity red wines. However, the country’s most planted variety is a white grape, Airén, which can be found in abundance in the region of La Mancha in the Meseta Central, the large pla-teau in the middle of the country. Airén can be vinified into a simple, dry white wine widely consumed locally and is used in the production of a local brandy.

Albariño and Verdejo are the other popu-lar white grapes grown in Spain, and both have gained much recognition in recent years. Albariño produces light to medium bodied white wines while Verdejo, which is highly sus-ceptible to oxidation, can be made into a richer and fuller bodied wine and is derived from skin contact and barrel fermentation.

Another famous product is Sherry, a forti-fied white wine made largely from the Palo-mino grape, grown in the town of Jerez de la Frontera in Andalusia, southwestern Spain. Sherry can be dry, medium or sweet. Palomino grapes are used to make dry Sherry while the Pedro Ximénez variety is added in the produc-tion of sweet Sherry.

Made from the local grapes of Macabeo, Parellada and the rustic Xarel-lo, the sparkling white Cava wine is seen as Spain’s answer to Champagne. It is produced in the same man-ner as the traditional method of production for Champagne and has become the most popular and commercially successful wine produced in the Catalonia region.

There has been a general perception, par-ticularly in Asia, that Spanish wines are less expensive and of a lesser quality than wines from France and Italy. However, one only has to look at wines from Bodegas Vega Sicilia, produced in Valbuena de Duero, near Val-ladolid in northern Spain, to realize that they are as expensive and well regarded as any first growth vintages from Bordeaux.

A bottle of value-for-money, quality red wine from other Spanish regions can be easily obtained for around HK$200 in Hong Kong’s wine shops.

Aloysius Tse is chairman of Bacchus Fine Wines Group and a past president of the Hong Kong Institute of CPAs.

A grape picker works at a vineyard in the O Rosal region of northwestern Spain. The Albariño grape variety harvested in the region produces light to medium bodied white wine.

AFP

November 2012 59

Bejewelled beauty

Watches set with precious gems do more than shine, writes Jemelyn Yadao

Af

watch’s simple aesthetic. The 36 mm case and bracelet is avail-able in rose gold, yellow gold and platinum.

Meanwhile, the new fem-inine Lady Datejust and Datejust Lady 31 also use precious stones to underline their subtle beauty. Both feature distinctive roman or arabic numerals and are set with rubies or blue sapphires that add a

delicate elegance to their designs. The Datejust Lady 31 also incorporates a bezel set with 48 bril-liant-cut diamonds.

Of course, the discreet use of pre-

cious stones is not the brand’s only approach. With a bezel entirely set with sapphires in a spectrum of colours, the new Rolex Cos-

mograph Daytona Rainbow makes a statement. The 40

mm model, initially designed for professional race car driv-ers, also bears three counters in unique yellow-gold crystals, a stark contrast against the black dial. The colours of the sapphires dazzle, juxtaposed against a 18-karat yellow gold case and bracelet.

Other luxury watchmakers use precious gems in a similar way

to evoke brilliance and stylish ele-gance. The Exceptional Pieces line by Piaget

M ore than 30 years ago, the allure of precious stones led to the creation of floating

diamonds. Ronald Kurowski, Chopard’s house designer, came up with the brand’s first Happy Diamonds watch – within which diamonds move freely between two sap-phire crystals.

Chopard’s craftsmen covered the dia-monds with a delicate film of gold to stop them from scratching the surfaces they touched. The watch, created for gentle-men, was so successful that the Swiss watchmaker decided to patent the design internationally.

Precious stones such as diamonds, rubies, sapphires and emeralds can command steep prices depending on factors such as colour and rarity. Despite this, Kurows-ki’s love for radiant gems is still shared by many watch enthusiasts.

Luxury watch-makers have main-tained and developed their ranges of gem-decorated models and combined them with an array of tech-nological movements.

Rolex’s approach to the use of precious stones in watchmaking emphasizes simplicity. This year, the brand released a handful of new models including the Day-Date, fitted with a chocolate-coloured dial and eight diamond hour markers. Baguette-cut rubies or emeralds are positioned at six o’clock and nine o’clock to complement the

goes beyond this and lives up to its name with its use of bold designs and magnificent stones.

The collection includes the Limelight Garden Party watch,

a decorative piece of jewel-lery with 10 leaf-like, mar-

quise-cut emeralds that match its case shape. It takes 60 hours of gem-setting to create each piece, Piaget says. The green stones are

illuminated with bursts of brilliant-cut diamonds

in between them. The dial, set entirely with diamonds, is a

striking feature against the black satin strap.

Cartier, whose long his-tory has been associated with quality diamonds, has a range

of watches set completely with the most popular gemstone. Its Ballon Bleu de Cartier collection

includes the intricate 36 mm Diamond River, which features a case, dial and bracelet in 18-karat white gold set with baguette-cut diamonds. It also features a fluted crown set with a sapphire cabo-chon, sword-shaped blue steel hands and is available in pink gold set with round diamonds.

The Flying Tourbillon, part of the same collection, is a perfect marriage of techno-logical innovation and classic design. The watch owes half its allure to a flying tour-billon complication with a C-shaped index indicating the seconds, a manual winding calibre and a power reserve of about 50 hours. It is its diamond decorated case and bracelet, however, that elevates the time-piece to a lustrous level.

Piaget Limelight Garden Party

Ballon Bleu de Cartier

60 November 2012

D early beloved, we are gathered in this place today to recognize the coming together in holy matrimo-

ny of two parties known to us all: account-ing and law. Since their inception as key professions in the modern world, they have worked tirelessly to keep society running as it should.

But in recent years, it has been increas-ingly recognized that they have much in com-mon. Both parties are problem-solvers, are good at paperwork, like to charge clients by the hour and like to wear white Van Heusen shirts under Armani suits in exactly the same shade of dark grey.

Now the time has come for two to become one. If you, accounting, take law as your law-ful wedded partner till death do you part, say: “One-stop shop.” Thank you. Now if you, law, take accounting as your lawful wedded partner till death do you part, say: “One-stop shop.” Thank you. I now declare you a joint professional services firm. Now turn and face the camera. Smile and say: “Fees.”

Their honeymoon was spent in the Cay-man Islands and then the pair returned home to begin working together. At first, every-thing seemed to go very smoothly. They both wore black Bally shoes, carried the same briefcases, shared the same clients and went to work in the same type of office in the same district. But before long, the cracks began to show. It wasn’t the jobs that were the prob-lem. It was the personalities. Experts identi-fied four key differences:1. Comprehensiveness versus selectivity:

At the first client meeting, the accountant says: “Naturally I want access to all the rel-evant facts and figures before I can start to build up a complete picture of the situa-tion.” The lawyer says: “ARE YOU CRAZY? The only information we want is the an-swers to these particular questions that I have written out. No elaboration or back-ground. It’s better that we don’t know what we don’t need to know.”

2. Clarity versus emotion: At the second meeting, the accountant says: “It’s impor-tant that you answer questions in language that is as clear, dry and unemotional as you can.” The lawyer says: “ARE YOU CRAZY? Unless we feel your pain, share your emo-tional distress and experience the trauma and humiliation, how are we going to de-liver the story and come out on top?”

3. Integrity versus flexibility: At the third meeting, the accountant says to the client: “Accountants have been obsessed with li-ability issues for decades, so we prefer to deal with clients of peerless integrity.” The lawyer says: “ARE YOU CRAZY? Defend-ing clients who are in trouble is far more profitable. I don’t even want to know if you’re guilty of fraud or not. Look, I’m put-ting my fingers in my ears and singing. La la la la la, I CAN’T HEAR YOU.”

4. Straight versus dramatic delivery: At the fourth meeting, the accountant says: “Af-ter having gone through the paperwork, we will conclude our contribution by ap-plying the term ‘approved’ or ‘approved with qualifications.’ If we are unable to

do either of these, we will withdraw.” The lawyer says: “ARE YOU CRAZY? We have to close with a long statement that moves everyone in the room to tears. Something like this: These people had a dream. It has been taken away from them. Are you go-ing to just stand by and let this happen? Or are you going to do something about it? Ladies and gentlemen, look into the inno-cent faces of —”

At this point, the accountant will roll her eyes to the ceiling. The lawyer will say: “What?”

Fade to black. Roll credits. Voice-over: “Will accounting and law stay together? Or are the differences just too big to get over? Join us in the next episode of Strange Bedfellows to find out.”

Nury Vittachi is a bestselling author, columnist, lecturer and TV host. He wrote the Institute’s first two storybooks, May Moon and the Secrets of the CPAs and May Moon Rescues the World Economy. A third, May Moon’s Book of Choices, was published in August.

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

Let’s get fiscal

The odd coupleAccountants and lawyers are climbing into bed together, sometimes literally, observes Nury Vittachi

If you, accounting, take law as your lawful wedded partner till death do you part, say: “One-stop shop.”