A lot can happen over 365 days…. - 2018 in the Rear-view

Ring in the New Year with Accounting Cheer

-         Avoid the Year End Chaos

The year 2018 is sure to fill reams of paper as people scramble to make sense of the seemingly thawing of relations between the United States and North Korea or the heating up of trade war concerns between China and the United States. Politics came to the fore and yielded significant influence on investor sentiment with the results of the US mid-term elections in November and the key state elections in India in December dominating headlines. Oscillating crude oil prices, a rout in emerging market currencies, a Eurozone turmoil and sell off in emerging markets all kept investors as well as business owners on their toes. Here is a look back at the major developments of the year 2018 and a peek into what 2019 might look like.

The US President Trump continued to dominate headlines

In the first ever meeting between the leaders of the United States and North Korea, US President Donald Trump and North Korean Supreme Leader Kim Jong-Un held a historic meeting in Singapore on June 12, 2018. They signed a joint statement, agreeing to security guarantees for North Korea, new peaceful relations, the denuclearization of the Korean Peninsula, recovery of soldiers' remains, and follow-up negotiations between high-level officials. After a year of exchanging threats, this rapprochement between the United States and North Korea was cheered by markets across the globe. However, leaders on both sides are aware that a lot more needs to be done before any economic of business benefits can come to materialise.

The year started with President Trump placing a 30% tariff on foreign solar panels. China, the world leader in solar panel manufacture, decried the tariffs. And so began a year of one-upmanship with both the United States and China imposing tariffs on products imported from the respective countries. This sprouted a trade war between the two largest economies of the world. It also sparked concerns amongst global investors as the trade war threatened to derail global growth and impacted stock markets across the globe.

Politics & its ramifications

In the United States, mid-term election results announced in November, shed much needed light on the current state of political environment in the country. While the Democrats seized control of House of Representatives, the Republicans maintained their control over Senate.  This coincided with President Trump’s two years since the election victory and put the sentiment of the people to test. It has also been a period marked by broad-based growth for the US economy wherein central bank had quickened its pace of interest rate normalisation. With the mid-terms done, the political risk has somewhat abated.

In May of this year, renewed fears of a Eurozone breakup emerged as the political crisis in Italy worsened and uncertainty arose around the Italian budget. Additionally, the angst around Brexit further exacerbated as Theresa May’s government further delayed the vote for seemingly political motivations. After months of negotiation, the UK and EU agreed to a Brexit deal which comprised a 585-page withdrawal agreement and 26-page statement on future relations. The UK cabinet put their stamp of approval on the withdrawal agreement text on 14 November 2018, in the wake of two resignations, including that of Brexit Secretary Dominic Raab. British MPs have been debating the deal but the PM postponed a Commons vote scheduled for 11 December to seek "further assurances" from the EU for MPs about the post-Brexit plan for the Irish border. Downing Street says the vote will be rescheduled for 21 January at the latest. The delay tactic has not sat down well with the parties and the angst with respect to the deal is mounting as the official date of “exit” draws closer.

Japan – False hopes

At the beginning of the year, the Japanese economy showed signs of modest growth as the labour market and consumer spending showed signs of improvement. However, concerns over growth came to the fore as Japan’s economy shrank more than expected in the third quarter, hit by natural disasters and a decline in exports. Market participants are also worried about the impact on consumption from next year’s scheduled sales tax hike to 10 percent from 8 percent. A tax hike amid a weakening global economy can likely have a negative impact on the Japanese equities market

In a departure from its usual stance on communication, the Bank of Japan gave a forward guidance stating that the central bank will continue with powerful monetary easing and keep interest rates historically low for an extended period of time. One of the biggest risks to the Japanese economy stems from the US–China trade dispute. Japan’s manufacturing and technology sectors could be hurt if the dispute were to cause a significant disruption to Asian supply chains. In a bid to hedge this risk, Prime Minister Shinzo Abe has stated that Japan intends to boost its economic relations with China.

The Macros

So far this year, the Federal Reserve has raised benchmark rates in the United States thrice, with the first such rate hike happening in July. As of 26 September 2018 the target range for the Federal Funds Rate is 2.00–2.25%. Consequently, US 10 Year Treasury yields increased perpetuating a sell-off in emerging markets and their currencies. In September of this year, emerging market currencies witnessed a rout and depreciated sharply against the US Dollar. The Indian rupee was in focus this year as it breached all-time lows to trade at 74.3585 against the US Dollar. Concurrently, turmoil in the Argentinian and Turkish currencies also had a negative impact on global sentiment as investors feared a spill-over effect on other healthier emerging markets and beyond. However, an unexpectedly sharp interest rate hike in crisis-hit Turkey towards the end of September supported the lira and global risk appetite. Turkey's central bank moved to support a tumbling lira ad lifted interest rates by 625 basis points to 24%.

Crude Oil prices on a rollercoaster 

Crude oil prices in 2018 have been highly volatile, scaling a four-year peak and then subsequently losing over 20% by the end of the year. The price of Brent crude had soared to USD 81.20/ bbl in September 2018, its highest level since November 2014, primarily due to the US President Donald Trump’s decision to withdraw the country from the Iran nuclear deal on May 8 and outages in Venezuela. Concerns over supply heightened which gave a fillip to prices. However, by November of the year, crude oil prices started correcting and were trading closer to USD 60 / bbl. Prices have been supported by the November 30, 2017, OPEC meeting where Iran said that it wants a lower target price of USD 60 / bbl.

2018 was a year of two halves, as global growth clocked at 4% in the first only to decelerate to 3.6% in the second half. 2019 is likely to see global growth moderating in the range of 3-4% and emerging markets (EMs) retaking their lead as drivers of global growth. A Fed pause, weaker USD and softer oil prices are likely to reduce external pressures for EMs – a reversal of 2018. Further, EMs-growth will be supported by a favourable domestic policy mix.

The Englobally Group

The Englobally Team is present across the major regions of the world and is focused on helping firms build as well as expand their businesses, beyond geographical boundaries. Our in-depth local knowledge and expertise and personalised solutions ensure that we become trusted long-term partners to our clients. Contact us to know more about us and understand how we can add value to your business.

Englobally Yours

Englobally Yours

There is something about year ends that makes us extremely emotional. It is a time to reflect upon the year gone by and make commitments with renewed vigour for the year ahead. For businesses, it is also the time to take stock of financial accounts and align all business interests. This, as we all know, is easier said than done.

 

 

The Challenges

 

The challenges are similar for most business across the world and can pertain to both internal land mines as well as compliance with regulatory requirements. Some of the pain points are closely associated with manual oversight while others pertain to complying with the key differences in the approach determined by the GAAP (generally accepted accounting principles) that is being applied, i.e. IFRS (international financial reporting standards) or local GAAP or US GAAP.

 

A close examination would indicate that most of the internal issues start earlier in the financial year and get magnified by year-end. These usually stem from:

 

*      Financial surprises during year-end review

*      Delayed or incorrect data

*      Smaller issues which could have appeared during the monthly or quarterly close, but had not been discovered until year-end

*      Communication gaps amongst teams

 

Companies that operate in multiple jurisdictions have to additionally contend with preparing both group as well as local financial statements. For such companies, the challenges primarily stem from identifying the substance as well as the form of economic transactions. Local rules can vary significantly and what might be in compliance in one jurisdiction might be lacking in another. For example, the scope of provisioning in the Netherlands is different from the provisioning requirements in Germany and Italy. The former allows a provision to be made even if an obligation does not exist, while in the latter countries, the risk areas covered by provision are larger. In China, individual branches of companies are subject to virtually the same level of compliance obligation as a local headquarters, even if they are not separate legal entities. In HongKong, on the other hand, a private company which has applied for a dormant status (i.e. a company that has no relevant accounting transactions during a financial year) under the Companies Ordinance is altogether exempted from filing annual returns.

 

There can also be significant differences in the contents of the financial statements and the level of disclosures required. For example, in France and Germany, cash flow statements are required to be prepared only for consolidated accounts or enterprises listed in capital markets whose financial statements follow the IFRS while other jurisdictions like the Netherlands, Italy and Portugal have done away with the requirement of a cash flow statement.

 

Local rules can vary greatly and such differences combined with internal inefficiencies can have a significant impact on both local as well as group accounts. These issues can mount through the year and cause unwarranted stress at year-end.

 

Solution

 

Navigating the legal and tax quagmire is no easy task. Which is why companies should adopt a proactive and consistent approach that can make the year-end closing process smoother and less edgy. Close communication and coordination amongst teams is fundamental to this. Instead of working in silos, legal, accounting and finance teams should regularly communicate and ensure that local as well as group compliance requirements are being met.

 

The year-end Framework

 

 

The bottom line is that planning and operating proactively for the year-end is a best-practice approach for success. This can help companies save cost as well as time and focus on what they do best i.e. building a business. Looking forward instead of concentrating on the rear-view will ensure a smooth and successful journey ahead.

 

The Englobally Group

 

The Englobally Team is present across the major regions of the world and is focused on helping firms build as well as expand their businesses, beyond geographical boundaries. Our in-depth local knowledge and expertise and personalised solutions ensure that we become trusted long-term partners to our clients. Contact us to know more about us and understand how we can add value to your business.