THE PROPERTYThe committees’ modus operandi was restructured by increasing the number of committees/groups in line with the new realities that we as professional accountants are faced

22. CONSIDERATIONS ON THE TAXATION OF PROPERTY TRANSFERS IN MALTA by Kathleen Busuttil and Steve Gin

12. THE MANY FACETS OF THE RESIDENTIAL REAL ESTATE MARKET by Dr Gordon Cordina and Dr Stephanie Vella

56. GETTING IT RIGHT – GUIDE TO THE DUTIES OF THE MONEY LAUNDERING REPORTING OFFICERby Ariane Azzopardi

Win

ter 20

18

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COVER

Issued quarterly,The Accountant is published by

MBR Publications Ltdon behalf of The Malta Institute of Accountants

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The Institute does not necessarily concur with the views expressed in the articles published in this journal. Articles are published without responsibility on the part of the publishers or authors for loss occasioned in any person acting or refraining from action as a result of any view expressed therein. The Accountant can now be accessed from the website at www.theaccountant.org.mt

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winter 2018 | theaccountant.org.mt p.03

CONTENTS

p.04

PRESIDENT’S ADDRESS

news

FEATURES

p.05

p.12

THE MIA’S NEW COMMITTEES

p.15

IFRS 9, 15 AND 16: NEW CHALLENGES FOR THE CONSTRUCTION AND REAL ESTATE INDUSTRY by Stephania Frendo

TECHNICAL

p.10MIA NEWS AND FORTHCOMING CPE EVENTS

p.39

MIA NEWS – VISIT BY MR CHRISTOPHER ARNOLD

p.62LOCAL NEWS

p.64

THE MIA’S NEW MEMBERS’ CEREMONY FOR 2017

p.14

MODERNIZING THE PLANNING PROCESS by the Planning Authority

THE MANY FACETS OF THE RESIDENTIAL REAL ESTATE MARKETby Dr Gordon Cordina and Dr Stephanie Vella

p.08

MIA’S DELEGATION FAMILIARISATION VISIT AT EU PARLIAMENT

p.19

FINANCING SOURCES IN THE MALTESE CONSTRUCTION INDUSTRY: AN ANALYSIS by Karl Cachia and Ayrton Borg

p.22

CONSIDERATIONS ON THE TAXATION OF PROPERTY TRANSFERS IN MALTA by Kathleen Busuttil and Steve Gingell

p.26

BLOCKCHAIN AND COMMERCIAL REAL ESTATE LEASING by Claudine Cassar

p.29

PROJECT MANAGEMENT IN CONSTRUCTION - THE FINANCIAL ASPECTby Michael Warrington

p.36

p.40

p.42

p.58

p.46

p.52

p.56

p.65

COMMERCIAL LEASE: PRACTICAL ISSUES & THE PLANNING LAW PERSPECTIVE by Dr Victoria Cuschieri

TRANSFORMING CHALLENGES INTO OPPORTUNITIES: REGULATIONS & STANDARDS by Christopher Arnold and Mars Olsson

EU FUNDED PROJECTS: COMMON ERRORS IN PUBLIC PROCUREMENT by Philip Gafa’

PROTECT YOUR CASHFLOW by Josef Busuttil

TRANSPOSITION OF THE ACCOUNTING DIRECTIVE by Monique Micallef and Liana Said

IFRS 9 FOR NON-FINANCIAL INSTITUTIONS – PART 2 by Jonathan Dingli and Georges Xuereb

GETTING IT RIGHT – GUIDE TO THE DUTIES OF THE MONEY LAUNDERING RISK OFFICERby Ariane Azzopardi

THE ARCHITECTURAL HERITAGE OF VALLETTA by Vincent Zammit

p.32

PROJECT MANAGEMENT IN CONSTRUCTION - THE PERSPECTIVE OF AN ARCHITECT by David Xuereb

04 Winter 2018

WILLIAM SPITERI BAILEY PRESIDENT’S ADDRESSVALUE AND VALUES!

PRESIDENT’S ADDRESS

WILLIAM SPITERI BAILEY

Dear Members,

Following my appointment as President of the Malta

Institute of Accountants in July 2017, I set out my plans

to ensure that the Institute responds to the needs of its

members. My vision was and still is to bring the Institute

closer to its members and foster a culture of innovation.

I am glad to say that the plans have been set in motion

and the Institute is buzzing with activity.

Towards the end of last year a number of meetings

were held with the different sectors of the Institute’s

members. Separate meetings were held with

professional accountants in business, Big 4 employees,

small and medium practitioners, sole practitioners,

retired members, the younger members of the Institute

and others. A special word of thanks goes to all the

members who have attended. Their input gave me

insight as to what members would like the Institute

to focus on, some of our deficiencies and also our

achievements. Rest assured that all your views have

been noted and taken into consideration when planning

what needs to be done.

An important part of the Institute’s mission is executed

through its committees and working groups. For this

reason, we reached out to all members to join and

be active in one or more of our committees. We have

restructured the way these work in line with the new

realities that we as Professional Accountants are faced

with and with the Institute’s expanding activities.

We started new committees/ group such as the

Digitalisation/ IT Committee, the iGaming Committee,

the Young Members Group and the Senior Members

Group, amongst others. We also split the taxation

committee into two, the Direct Taxation Committee and

the Indirect Taxation Committee. All these will now run

for two calendar years starting from 1 January 2018 to

31 December 2019, and all have new updated terms of

reference ensuring that each committee/group knows

its remit. At present meetings are being held with the

respective Chairpersons of the different Committees/

Groups to ensure they are in line with the Institute’s

vision.

As a Professional Institute we believe that we must

add value to the profession, therefore we believe

that continuous training is a necessity. Our CPE event

calendar has been launched and a number of new

core and professional sessions have been set. We are

also cognisant of the fact that certain topics are always

relevant and these have been included too.

We also have a number of conferences planned, starting

off with the Anti-Money Laundering conference in

February. Money laundering and terrorist financing can

threaten the country’s economic stability. The Malta

Institute of Accountants believes that this issue should

be addressed immediately, as our ultimate scope is of

promoting financial integrity and growth for the benefit

of all. A conference will be organised on the 20 February

2018, bringing together leading experts to provide the

latest information on the legislation and other related

topics.

We are living an era of a digitized business environment,

with new platforms and technologies such as Blockchain

and crypto currency. Professional accountants have

to embrace this change and we are doing our utmost

to help the members in this respect. A number of CPE

events are presently being organised, addressing the

different aspects of changes in information technology.

Additionally, we will be hosting the MIA Digitalisation

Symposium later on this year, further details of which

will be given in the coming months.

Our activities, communications, events, all focus on

adding value to our members, but also on ensuring that

our members add value. However, let us not forget our

values in the way we offer our services and in our lives

as professional accountants. If values are not given

their due importance we will not be adding value.

William Spiteri Bailey

05theaccountant.org.mt

The MIA’s new committeesThe new remit of the MIA’s committees for the

period 2016-2018 concluded last December and one

of the items on the agenda of the newly appointed

Officers team was to set its strategy and direction

for its current term.

An important part of the Institute’s mission is

executed through the medium of committees and

working groups which will run for the period 2018-

2019. For this reason, the Institute reached out to

all members to be an active member in any of the

Institute’s committees/groups.

The committees’ modus operandi was restructured

by increasing the number of committees/groups in

line with the new realities that we as professional

accountants are faced with and with the Institute’s

expanding activities. Such restructuring now include

the following categories and committees/groups:

Most of the above mentioned committees started

their meetings, and in due course members will

be informed of the committee’s progress through

the Institute’s communication channels. The

following are the details of the composition of

each committee (the Public Sector Committee, CPE

Advisory Group and the Senior Member Networking

Group will be finalised within the next few weeks):

Audit & Assurance Committee

Chairperson: Simon Flynn

Members: Silvio Busuttil, John Debattista, Joseph

Ellul Falzon, Shawn Falzon, Thomas Galea, May

Heng (Ben Scicluna substitute), Lucienne Pace Ross

(Simon Flynn substitute), Ernestino Riolo, Janice Lyn

Schembri, Bernard Scicluna, Sam Spiridonov

AML Committee

Chairperson: Juanita Bencini

Members: Arianne Azzopardi, Alan Craig, Aronne

Debono, Dr Manfred Galdes, Dr Rakele Gauci,

George Gregory, Vanessa Marletta, Lucienne Pace

Ross, Joette Sciortino

MIA NEWS

MIA NEWS

Core CommitteesAML Committee | Audit & Assurance Committee

| Direct Taxation Committee | Ethics Committee

| Financial Reporting Committee | Indirect

Taxation

Committee

Focused CommitteesDigitilisation/IT Committee | Financial

Services Committee | Gaming Committee |

Local Regulatory Committee | Public Sector

Committee

Focused Groups PAIB Advisory Group | SMP Advisory Group |

Young Members Group

Professional Support Groups CPE Advisory Group | Education Advisory Group

Social Groups Senior Members Networking Group

06 Winter 2018

MIA NEWS

Direct Taxation CommitteeChairperson: Craig Schembri

Members: Michael Agius, David Farrugia, Jana

Farrugia, Ruth Farrugia, David Ferry, Jozef Wallace

Galea, Chris Naudi, Paul Pace Ross, Edward Zammit

Digilalisation/IT CommitteeChairperson: Claudine Cassar

Members: Christopher Azzopardi, Franco Borg,

Ramon Cutajar, Robert Debono, Ivan Grech, Gordon

Micallef, Rudolph Mifsud Saydon, Adrian Mizzi

Ethics CommitteeChairperson: Anthony Doublet

Members: Nikolai Camilleri, David Caruana, Marcel

Coppini, Etienne Dalli, Angie Fleri Soler, Mario Galea,

Dunstan Magro, Nicolette Mirabelli, Franz Wirth

Financial Reporting CommitteeChairperson: Fabio Axisa

Members: Conrad Borg, Giselle Cini, Jonathan Dingli,

Stephania Frendo, Dr Ivan Paul Grixti, Monique

Micallef, Ernestino Riolo, Janice Lyn Schembri,

Michelle Vassallo Pulis

Financial Services CommitteeChairperson: Alex Azzopardi

Members: Robert Ancilleri, Michael Bianchi

(Investment Management) / Ian Coppini (Insurance),

Christ Briffa, Luke Calleja, Joseph Camilleri, David

Demarco, Elvia George, Christopher Portelli,

Bertrand Spiteri, Aurelio Theuma, Reuben Zammit

Gaming CommitteeChairperson: Conrad Cassar Torregiani

Members: Chris Azzopardi, Jean Paul Busuttil,

Vladimiro Comodini, Alan Craig, Lara Falzon, Shawn

Falzon, Romina Soler, Audrey Vella

Indirect Taxation CommitteeChairperson: Anthony Pace

Members: Saviour Bezzina, Chris Borg, Jean Paul

Busuttil, Russell Camilleri, David Ferry, Paul Giglio,

Daniel Mifsud, Roderick Muscat, Karen Spiteri Bailey,

Matthew Zampa

Local Regulatory Committee

Chairperson: David Leone Ganado

Members: Chris Balzan, Marcel Coppini, Clifford

Delia, Mario Galea, Roderick Grech, Rolan Micallef

Attard, Karen Voisin

Education Advisory Group

Chairperson: Maria Cauchi Delia

Members: Caroline Cassar Reynaud, Victoria

Darmanin, Simon Flynn, Paul Giglio/ Michael Falzon,

Dunstan Magro, Adrienne McCarthy/ Jonathan

Dingli, Maria Micallef, Stephen L. Muscat, Chris

Naudi, David J. Pace

PAIB and advisory Focus Group

Chairperson: Stephen L. Muscat

Members: Karl Bartolo, Stefan Bonello, Jacqueline

Camilleri, Malcolm Camilleri, Noel Camilleri, Alan

Frendo Jones, Kevin Mallia, Franz Wirth, Charles

Xuereb

SMP Advisory Focus Group

Chairperson: David J. Pace

Members: Paul Bugeja, Silvio Busuttil, Zachary

Cachia, Michael Curmi, John Debattista, Jean

Paul Debono, John Richard Falzon, Jozef Wallace

Galea, Paul Giglio, Roderick Grech, Dunstan Magro,

Roderick Muscat, Franco Privitelli, Mark Scalpello,

Arthur Turner, Carlsten Xuereb, Edward Zammit

Young Members Focus Group

Chairperson: Jean Paul Debono

Members: Giljan Aquilina, Clarence Attard, Christ

Briffa, Zachary Cachia, Reuben Debono, Stephania

Grech Duca, Steve Mamo, Michael Mercieca,

Stefanel Mercieca Zammit, Dean Micallef, Noel

Micallef, Daniel Mifsud, Roderick Muscat, Like

Sammut, Carlsten Xuereb, Matthew Xuereb, Reuben

Zammit


MIA NEWS

08 Winter 2018

MIA NEWS

MIA'S DELEGATION FAMILIARISATION VISIT AT EU PARLIAMENTIn November 2017, a 28 member delegation composed of

members of the Malta Institute of Accountants and staff

attended a familiarisation visit to the European Parliament

in Brussels. The initiative was taken by the MIA and was

partly sponsored by the European Parliament under its

Opinion Multiplier Groups Subsidy Scheme.

The delegation, which was led by the MIA President

William Spiteri Bailey, obtained first-hand experience of

the decision-making processes in Brussels.

During the familiarisation visit the Maltese delegation

had several meetings including a visit to the European

Parliament, where the delegation had the opportunity

to meet Maltese Members of the European Parliament

Miriam Dalli and Roberta Metsola, a meeting with the

Head of Malta’s Permanent Representation to the EU

Marlene Bonnici at Dar Malta and a visit to the offices of

Accountancy Europe.

As part of the visit, the Maltese delegation also went to the

Le Berlaymont, the European Commission Head Quarters,

where they met with Andrew Bianco, a member of cabinet

of the EU Commissioner Karmenu Vella.

The visit, apart from the familiarization with the way the

EU institutions work, also served as an opportunity for the

Institute’s delegation to discuss issues of particular interest

to the Maltese accountancy profession.

BDO Malta, a Maltese civil partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO Consult Limited and BDO Services Limited are companies registered in Malta and form part of the BDO Malta group.

BDO is the brand name for the BDO network and for each of the BDO member firms.

There are many world-class accounting firms. Far fewer that offer a culture so richin professional opportunity, personal fulfillment, and long-term growth. At BDO, we understand that exceptional service to our clients begins – and ends – with exceptional regard for our people. Because at its core, our business is not about numbers or spreadsheets, euros or cents, but about people working with, for, and in service of others. In short, because relationships matter.

Due to its continuous investment and growth, BDO Malta is seeking to recruit for the following roles:

Accountant Junior Accountant IT Auditor Auditor

For a list of benefits offered to BDO staff members and for further information, please visit our website on www.bdo.com.mt/careers

Tower Gate PlaceTal-Qroqq Street,Msida MSD 1703

Telephone: 2131 3060Email: [email protected]

www.bdo.com.mt

LOOKING TO GROW?Career Opportunities at BDO Malta

10 Winter 2018

MIA NEWS

MIA-MACM Joint Event - The Dynamic Business World - Are you Ready for Change?

A joint event was organised between the Malta

Institute of Accountants and the Malta Association

of Credit Management on the 15 November 2017.

Topics discussed during the event included: BREXIT

and its effect on the local economy, administering

big data to manage credit effectively, interpreting

financial statements at a glance and cash handling

and the new Anti-money Laundering Directive.

Notable speakers participating during the event

included Mr Kenneth Farrugia, BOV; Mr Antonio

Gannino, Amagis Capital; Mr Chris Meilak, EY and Dr

Stuart Firman, Ganado Advocates.

IFRS 13 – Fair Value Measurement

15 February 2018

VAT and the Gaming Industry

16 February 2018

Shareholders’ Registration and Tax

Refunds - A Practical Session

21 February 2018

Do you know what it takes to

start your own business? Are

Accountancy Practices any

different?

23 February 2018

Duties & liabilities of the board of

directors

27 February 2018

Developing a business plan

7 March 2018

Recent VAT changes

16 March 2018

Consolidations and Related Party

Disclosures under the GAPSME

accounting framework

21 March 2018

Allowable Deductions under the

Income Tax Act with particular

emphasis on Capital Allowances

23 March 2018

Responding to fraud risk and the

importance of analytical procedures

in internal audit

27 March 2018

Auditing an E-Commerce Business –

The role of IT Audit

17 April 2018

Accounting for Foreign Currency

under IAS 21 and IFRIC 22

24 April 2018

Access our website for a continuous

update of events.

MAZARS MALTA32, Sovereign Building,Zaghfran Road, Attard ATD 9012,Malta

Tel: +356 21345 760E-mail: [email protected]

www.mazarscareers.com/mt

MAZARS, HOWEVER YOU PRONOUNCE IT, WE ARE ALL PART OF THE SAME FAMILY.

YOUR YEARS AT MAZARS YEARS THAT COUNT.

MAZARS IS AN INTERNATIONAL, INTEGRATED AND INDIPENDENT ORGANISATION, SPECIALISING IN AUDIT, ACCOUNTANCY, TAX, LEGAL AND ADVISORY SERVICES. AS OF 1ST JANUARY 2018, MAZARS OPERATES THROUGHOUT THE 84 COUNTRIES THAT MAKE UP ITS INTEGRATED PARTNERSHIP. WE DRAW ON THE EXPERTISE OF 20,000 PROFESSIONALS TO ASSIST MAJOR INTERNATIONAL GROUPS, SMEs, PRIVATE INVESTORS AND PUBLIC BODIES AT EVERY STAGE OF THEIR DEVELOPMENT.

www.mazars.com.mt - #LookingForTalent

12 Winter 2018

COVER STORY

DR GORDON CORDINA FOUNDER AND EXECUTIVE DIRECTOR OF E-CUBED CONSULTANTS LTD. GORDON’S WORK FOCUSES PRIMARILY ON MACROECONOMIC MODELLING, RISK ANALYSIS AND BUSINESS STRATEGY.

GORDON CORDINA

DR STEPHANIE VELLA FOUNDER AND EXECUTIVE DIRECTOR OF E-CUBED CONSULTANTS LTD. STEPHANIE’S PRINCIPAL AREAS OF ACTIVITY ARE PUBLIC FINANCE, COST-BENEFIT ANALYSIS AND EU POLICY

STEPHANIE VELLA

Just as money pervades most aspects of economic

life by acting as a medium of exchange, so does the

residential real estate market through its extensive

links across sectors of activity. This market does not

only serve as an indicator of economic conditions,

but has the potential to be an economic driver as

well.

These links engender strong stakeholders with

multiple and conflicting interests. Developers, agents,

consumers of housing services and investors in real

estate assets are the most obvious ones. Government

is also a major stakeholder, relying on turnover in the

residential real estate market to raise revenue and

generate economic growth, while striving to ensure

that no one is deprived of housing. Social NGOs also

have a stake in the market in this regard, together

with environmental organisations which lament

inordinate urban sprawl in equal measure as high-

rise developments.

The residential real estate provides an essential

service. This calls for careful consideration of the

needs of various demographic segments, with

implications spanning from accommodating the

changing dynamics of family size and composition,

to the avoidance of poverty to the attraction of

human capital from abroad and the related foreign

investment. This requires a diversified supply,

affecting in no small way the quality of life of residents

and visitors to the Maltese Islands.

Another way to segment the residential real estate

market is by considering tenure, typically split

between owner-occupied and rental-occupied,

as well as holdings for temporary occupation and

for investment purposes. While the high rate of

housing ownership in Malta, at over 70%, is typically

lauded as a sign of wealth and stability, it could

curtail the dynamism required to meet changing

demands of residents along their life cycles. It is also

a consequence of the pattern of taxation in Malta

which typically impinges burdens upon the transfer

and rental of housing assets, but not on their holding.

The real estate market in Malta must service an

economy whose population is growing at a rapid

rate of 1.4% per year, of which five-sixths is through

net immigration. At this pace, the total population in

the country will be exceeding half a million persons

in around 10 years’ time, of which one-fifth could

possibly be non-Maltese nationals. The indigenous

population will be ageing rapidly, creating specific

needs in terms of real estate demand. The immigrant

population will most probably be younger, but

distributed at opposite ends of lower-skilled workers

in jobs which are not generally amenable to the

Maltese population, and persons with high skills not

easily found in the country.

An early symptom of these changes and related

stresses is the recently-experienced boom in upper

market rental prices driven by demand from relatively

wealthy immigrants which has spilled over to the

rental market in general, affecting persons at risk of

poverty who are living in accommodation rented at

market prices. There are also early indications that

growth in incomes of lower-earning households

is struggling to keep up with the rise in the cost of

housing in the affordable segment.

The need for an orderly development of the real

estate market in Malta also stems from the economic

activity dependent on it. This can be estimated at

some 15,000 to 20,000 jobs, involved in construction

and property development, sales and services

ancillary to real estate activity, corresponding to

around 5% of the country’s GDP. Government

revenue through real estate transactions is estimated

at around €1 out of every €30 the fiscal budget.

Against this background, the key question surrounding

the real estate market is the sustainability of the

present phase of expansion in sales and prices, and

whether this is tantamount to a bubble.

The Many Facets of The current boom in real estate appears to be well-supported by economic fundamentals, but investment in the quality of residential attractiveness is needed to avoid a market bubble in the longer term.


COVER STORY

The Many Facets of Over the past four years, average real estate prices

have been increasing by around 5% per annum,

with the value of assets transacted growing by

an order of around four times that rate. This is

not unprecedented. Similar, and actually more

pronounced rates of growth were observed between

2005 and 2008, when average prices had increased

by more than 10% per year, to be in part reversed

between 2009 and 2012.

This is not to say that a downward correction in real

estate prices is inevitable and to be expected in the

near future, because the current boom is taking place

within the context of two fundamentally important

differences in the economic scenario. The first is

the markedly stronger expansion in the economy,

measured in terms of GDP growth and employment

creation, which is crucially underpinned by a fiscal

surplus, highlighting the fundamentally sustainable

nature of the current upturn. The second factor is

the very limited expansion in credit to the real estate

sector in relation to the growth of the market, which

limits the likelihood of artificial price inflation.

Conditions of a bubble would be present if property

prices were increasing through purchases whose

ultimate intention is to sell at a profit once that prices

exceed a benchmark, or when some other change in

market sentiment takes place. This would typically

be accompanied by property hoarding and credit

expansion to finance such activities. Indications are

that such a scenario is not taking place in Malta. Banks

are prudent in their lending practices, while real

estate is being purchased for the purposes of being

effectively utilised or as a long-term investment,

rather than for short-term speculation.

An eventual slowdown in GDP growth and possibly, in

the influx of migrant population, could be expected

to restrain the growth in real estate activity and

prices. The extent of the future resilience of the

market will strongly depend upon the quality of the

service that it will be offering to local and foreign

investors. Demand for good quality real estate can be

expected to remain strong in a territory where land

is a very scarce resource, provided that its residential

attractiveness is safeguarded and developed.

Therefore, quality should be the fundamental tenet

of policy and business approaches towards the

residential real estate market for the years to come.

Towards this end, architectural practices need to

encompass pleasing and functional design of internal

and external spaces. This must be underpinned

by a land planning approach which rewards the

reaping of social and economic dividends of quality

design, complemented by the provision of sufficient

infrastructural services especially with respect to

transport, energy, water and waste.

It is high time for our country to more effectively

explore the synergies which can be reaped between

the provision of housing and the improvement of

urban environments and services. Absent this, there

will be significant threats to the quality of life in

Malta emanating from excessive and insensitive

development. If properly managed, the real

estate market in Malta has the potential to

be in itself an attractor of investment

from abroad, rather than to just serve

the needs of the population.

Housing is by its very nature a

long term economic commitment

from many aspects. In view of

the smallness of the economy

and territory compounded by

demographic and infrastructural

pressures, Malta can hardly

afford any mistakes in the

proper balancing of the

supply and demand

forces of the

various facets of

the residential real

estate market.

the Residential Real Estate Market

14 Winter 2018

PLANNING LAWS

Modernising the Planning Process

In June 2016, new Planning Authority laws were introduced which made the planning process fairer and faster. These new laws have changed the way planning applications are submitted and processed, enabling the public to have a bigger say on what happens.

The ‘Development Notification Order’ (DNO) has

been re-organised and down-sized into 12 class

types, depending on the amount of development

work proposed. To inform and involve the public

many of the previously classes within the DNO

have been transferred to what is now known as the

‘Summary Procedures’.

Following these changes a notice is now placed at the

site where works are proposed to be carried out and

a 15 day period has been introduced giving the right

to anyone who may want to submit an objection on

the proposed works. The Authority then considers

the submitted objections on planning grounds. The

application has to be decided within 42 days. If an

objection is filed and turned down, an objector has

the right to appeal that decision.

The full development application has also witnessed

some changes. While the objection period has

increased to 30 days, an application must be

determined not more than a 100 days from the date

of its validation. Every application now gets sent

to 10 statutory consultees for their comments and

recommendations. Any person objecting within the

registered timeframe is considered as a registered

objector and has every right at law to appeal a decision

of the Authority. All permits are suspended for 30 days

to allow third parties to appeal and to prepare the

necessary documentation in relation with the Building

Regulations. Any application which does not respect

the 100 day timeframe may claim a refund of the fees

paid. This change in procedure put the onus on the

Planning Authority for any inefficiencies.

The previously used screening process system has

only been retained for major projects unless the

applicant is in possession of an outline development

permit. An applicant can still apply for Outline

development permit.

To ensure more transparency, all planning

applications are accessible from the Authority’s web

portal to architects, Local Councils and any person

who has an e-ID. With a totally paperless planning

process, the Planning Authority boasts of one of the

best online systems around.

Enforcement procedures were also revised through

the amended laws. More importance is being given

to the compulsory notice that has to be submitted

in the commencement of work. This notice needs

to be submitted five days before works at a site

commence. Another very important tool is the

emergency enforcement notice which allows the

Planning Authority to take immediate action if in the

opinion of the Authority there may be an imminent

danger to the environment or public safety.

These above procedures came into force along

with several organisational changes, which include

the setting up of an Executive Council, and the

introduction of the Agricultural Advisory Committee

and the Design Advisory Committee. These

measures ensure that the Council performs an in-

depth analyses of planning policies, scheduling and

decisions with a view to transparency and fairness.

One must also mention that the Environment and

Resources Authority the environmental NGOs and

the Local councils also have a vote on the Planning

Board and therefore have an influence on major

decisions within the planning process.

The Planning Authority received 9,102 and 11,305 development applications in 2016 and 2017 respectively. In 2016, it approved 7,588 and rejected 477 applications while in 2017 it approved 10,785, and rejected 648 applications.


IFRS

In May 2014, the International Accounting

Standards Board (IASB) published IFRS 15:

Revenue from Contracts with Customers. The

publication of IFRS 15 was followed by IFRS 9,

which outlined the new accounting requirements

for financial instruments and IFRS 16: Leases. IFRS

9 and IFRS 15 are applicable for financial periods

beginning on or after 1 January 2018 with IFRS 16

mandatory for financial periods beginning on or

after 1 January 2019. These accounting changes

have created a challenging environment for real

estate and construction entities.

The most significant change as a result of IFRS 9 are

the new impairment rules. This will require evaluating

available qualitative data, data processes used by risk

teams, changes in the macro economic environment

and the like. This will also require the alignment of

key controls within the new processes.

IFRS 16 will mean that substantially all leases will

need to be included on a balance sheet. There are

two exclusions short-term lease agreement of under

12 months and low-value asset - estimated around

just under a $5,000 list price. Considering the amount

of equipment acquired via a lease by construction

entities the standard is expected to have a significant

impact. From a lessor perspective, accounting for

lease revenue will essentially be unchanged under

the new standard, and most real estate leases will

continue to be classified as operating leases.

The revenue standard will replace substantially all

revenue guidance under IFRS, including the industry-

specific guidance for construction-type and production-

type contracts. IFRS 15 does not change the primary

unit of measure which is still a contract or specific

obligation within a contract and the percentage-of-

completion revenue recognition methodology is still

intact. However, this does not mean that this standard

does not come without some impact.

What did result from the implementation of this

standard is a five-step process that will, to varying

degrees, impact all participants in the construction

industry. Whether it will add to comparability

between participants in the construction industry

and participants in other industries remains to be

seen. In this article, we will highlight the impact

that the new standard will have on the construction

industry by process.

STEP 1: IDENTIFY THE CONTRACT

The model in IFRS 15 applies to a contract with a

customer when certain criteria are met. Contracts

may be written, oral or implied by an entity’s

customary business practices, but must be legally

enforceable and meet specified criteria.

IFRS 15 requires an entity to conclude that it is

probable that it will collect the consideration to

determine whether a contract with a customer

exists. The transaction price may differ from the

stated contract price e.g., when an entity intends to

offer a concession. Therefore, significant judgement

is required to determine whether a contract is within

the scope of IFRS 15. If an entity believes that it will

receive partial payment for performance it must

determine whether the amount of consideration that

it does not expect to receive is a price concession

or an amount that the customer does not have the

ability and intention to pay.

In making this determination, an entity will have to

consider its customary business practices, published

policies or specific statements providing the customer

with a valid expectation that the entity will accept an

amount of consideration that is less than the price

stated in the contract.

STEP 2: IDENTIFY THE PERFORMANCE OBLIGATIONS

A performance obligation (PO) is defined as a promise in

a contract. Under the new standard, the performance

obligation, rather than the contract, is the new basis of

measurement for revenue recognition.

Properly identifying performance obligations is critical

to the revenue model since revenue is allocated to

IFRS 9, 15 AND 16New challenges for the construction and real estate industry

STEPHANIA IS A CERTIFIED PUBLIC ACCOUNTANT AND CURRENTLY HOLDS THE POSITION OF A SENIOR MANAGER WITHIN THE EY’S ASSURANCE DEPARTMENT.

STEPHANIA

16 Winter 2018

IFRS

each performance obligation is recognised as the

obligation is satisfied.

Construction entities, particularly those with long-

term construction contracts, should carefully assess

whether applying the new requirements results in

the identification of performance obligations that are

different from the separately identifiable components

assessed under IAS 11 or IAS 18. These differences

may result in a change in the pattern of revenue

recognition and associated profit.Companies will

likely find that evaluating whether a good or service

is distinct within the context of the contract will be a

significant aspect of implementing the new standard.

STEP 3: DETERMINE THE TRANSACTION PRICE

The determination of the transaction price has the

potential for requiring the biggest change from previous

revenue recognition methodology. In determining the

transaction price, the new standard requires an entity

to assess the original contract price plus adjustments

for variable consideration. The contract price is typically

stated in the contract as a fixed price or as a calculated

value from agreed upon time and materials billing rates,

plus fully executed modifications.

When including variable consideration in a transaction

price calculation, the new guidance stipulates that an

entity should use either the estimated value approach

or the most likely amount approach depending on

the type of consideration. While entities may already

estimate the variable consideration, they may need

to change their processes. This could also possibly

change their conclusions about when and how

much variable consideration is to be included in the

transaction price. Variable consideration should only

be included in the transaction price to the extent of

its probability that it will not be reversed.

Entities will be required to adjust the transaction

price if the financing component is significant to

the contract. A significant financing component may

exist in a contract even when this is not explicitly

stated in the contract. Entities will need to evaluate

the payment terms including the timing of billings

to determine whether a significant financing

component exists.

The standard does not include any quantitative

application guidance to determine whether a

financing component is significant to the contract.

Entities are therefore required to use judgement

to determine whether a financing components is

significant.

STEP 4: ALLOCATE THE TRANSACTION PRICE

If there are multiple performance obligations,

then the contractor must allocate the transaction

price between the POs based on the stand alone

selling prices of the various POs. However, in many

situations, stand-alone selling prices will not be

readily observable. Therefore, an entity will be

required to estimate the stand-alone selling price.

The standard discusses three estimation methods:

• An adjusted market assessment of the various

POs

• Extended cost plus margin of the various POs

• A residual approach

If there is variable consideration included in the

contract, and you can determine that it relates

specifically to one PO, then it should be allocated

specifically to that PO.

STEP 5: RECOGNIZE REVENUE

Entities will either recognise revenue as the PO is

satisfied over time or at a point in time. For many

construction-type contracts, it is likely that entities

will determine that the control of many goods or

services is transferred over time. When making the

determination, entities are required to understand

all contract terms as well as determine whether the

asset has an alternative use and whether the entity

has a right to payment for performance completed

to date.

Entities previously using the percentage-of-

completion revenue recognition methodology will

still use it to recognise revenue on their various

performance obligations.

CONTRACT MODIFICATIONS

Contract modifications impact multiple steps in the

revenue recognition process above. As adjustment to

the contract (Step 1), the scope of a modification may

impact the identification of the performance obligations

(Step 2) and the price of the modification may impact

the determination of the transaction price (Step 3).

Construction entities will need to carefully evaluate

performance obligations at the date of a modification

to determine whether the remaining goods or services

to be transferred are distinct and the prices are

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18 Winter 2018

IFRS

commensurate with their stand-alone selling prices. If

it does create a distinct PO and the price of the change

order reflects the pricing of a stand-alone agreement,

then the modification should be accounted for as a

separate contract and revenue would be recognized

accordingly. This assessment is important because the

accounting treatment can vary significantly depending

on the conclusions reached.

If the goods/services are distinct, but the pricing

is not reflective of a stand-alone sales price, the

contractor should treat the transaction as if the

original contract is terminated and a new contract is in

place. The contractor should determine the revenue

remaining from the original scope of work and add it

to the revenue from the change order, then allocate

accordingly between the remaining performance

obligations using the appropriate allocation method

identified in Step 4 above.

If goods/services are not distinct, the contractor should

use a cumulative catch-up method. The contract amount

and total estimated costs would be increased for the

impact of the change order, and any additional profit

would be recognized to the extent that performance

obligations had been previously satisfied.

The new revenue recognition guidance allows for

claims to be accounted as variable consideration as

described in Step 3, which could allow for the earlier

recognition of profit compared to previous guidance.

DISCLOSURES

Even though for some entities there may be no

change in the timing of revenue recognition, IFRS

15 significantly increases the volume of disclosures

required. The standard does not specify precisely how

revenue is required to be disaggregated, however,

the application guidance suggests categories, as

follows:

• Type of good or service (e.g., major product

lines);

• Geographical region (e.g., country or region);

• Market or type of customer (e.g., government

and non-government customers);

• Type of contract (e.g., fixed price and time-and-

materials contracts);

• Contract duration (e.g., short-term and long-

term contracts)

• Timing of transfer of goods or services (e.g.,

revenue from goods or services transferred to

customers at a point in time and revenue from

goods or services transferred over time); and

• Sales channels (e.g., goods sold directly

to customers and goods sold through

intermediaries).

This article discusses the main challenges being

faced in the implementation of the new standards.

However, there might also be other challenges and

the adoption of the new standards cannot be merely

considered as an accounting exercise. They will

require new judgements, estimates, and potentially

changes to systems, processes and related controls.

They could also potentially also have a significant

impact on key performance indicators. Accordingly,

companies are encouraged to make a comprehensive

assessment on the impact that the new standards will

have on the financial statements. This assessment

may also consider the adoption of GAPSME for

companies meeting the eligibility criteria.


FINANCE

Financing Sources in the Maltese Construction Industry: An Analysis

KARL CACHIA IS FINANCE ASSISTANT MANAGER AT IZOLA BANK PLC. HE IS A CERTIFIED PUBLIC ACCOUNTANT AND IS A VISITING LECTURER WITHIN THE ACCOUNTANCY DEPARTMENT AT THE UNIVERSITY OF MALTA.

KARL CACHIA

AYRTON BORG GRADUATED WITH A MASTER IN ACCOUNTANCY DEGREE FROM THE UNIVERSITY OF MALTA. HE STARTED HIS PROFESSIONAL CAREER IN FINANCIAL AUDITING, HAVING RECENTLY JOINED MGI MALTA.

AYRTON BORG

INTRODUCTIONThe construction industry is considered to be one of the main drivers of the Maltese economy. The core industry employs a substantial amount of the labour force and contributes around 4% towards the local GDP. The wider construction industry contributes approximately 10% towards GDP (NSO,2016). The popular belief that the performance of the construction industry is indicative of the country’s economic well-being may have somewhat lost impetus over the years due to the growth of other economic sectors. But the argument remains relevant when considering that the current economic growth is paralleled by an economic boom in the construction industry.

This article draws upon research findings from

semi-structured interviews conducted with six Chief

Financial Officers representing large construction

companies and five Chief Officers representing local

banks, together with an analysis of the financial

statements of the construction companies under

review.

SOURCES OF FINANCE

Although financial management is usually associated

with long-term financing decisions, a substantial part

deals also with short-term financing sources. (Pike, R.

and Neale, B. 2009). Short-term financing facilitates

the consummation of business transactions that

need to be effected in a timely manner (Business

Finance Guide, 2016). There are several short-term

financing methods available, including trade credit,

factoring, bank overdrafts, short-term bank loans and

revolving credit agreements.

An analysis of the financial statements covering the

four years ended 2011 to 2014 revealed that trade

credit (31%) was the most popular source of finance

amongst the selected companies, underlying the

importance of working capital as a source of finance

for day to day operations. Finance from related

parties (29%) was the second most widely used

source of finance during the periods under review,

meaning that a significant source of finance is tapped

through a group-wide network. Overdrafts (20%)

were the most popular form of bank financing. This

is consistent with the respondents’ predisposition

towards bank overdrafts as opposed to other sources

of bank finance, particulary in relation to run of the

mill operations.

During the four years under review the average

debt ratio for the selected companies stood at 83%.

This is a high ratio and goes to show the industry’s

exposure to external finance. When analysing each of

the four years separately, the debt ratio registered a

decreased of 3% and thus remained relatively stable

across the years.

85%

80%

75%2011 2012 2013 2014

90%

Debt Ratio

1 Debt Ratio (Total Debt)

(Total Assets)

Debt Ratio - Analysis of Financial Statements for the periods 2011 - 2014

20 Winter 2018

An entity can decide to raise long-term funds

internally through retained earnings or by channelling

funds from companies that have a temporary cash

surplus to those that are in deficit. On the other hand,

external finance through the capital market directs

finance from those individuals or organisations that

have a cash surplus to those enterprises that have,

or are expecting to have, a cash deficit. Long-term

financing instruments include ordinary share capital,

preference share capital, accumulated reserves,

public share issues, bond issues, debenture issues,

bank loans and leasing.

All respondents stated that project financing was the

main reason why long-term financing was sought.

Long-term financing was also required to replace

or upgrade high value plant and equipment. The

majority of respondents highlighted that such assets

are quite expensive and hence need specific finance.

Respondents claimed that they turn to banks to

provide the required finance for projects. As expected,

the two main facilities used are overdrafts and short

to medium-term loans. Bank officials confirmed that

construction companies tend to favour overdrafts,

although banks are becoming more stringent and

are moving away from providing revolving facilities in

order to mitigate credit risk.

Two construction companies had bonds issued

publicly through a group-related finance company.

One bond issuer emphasised financing through

bonds was mainly sought to fund specific projects and

not to fund run of the mill operations. Another two

construction companies stated that they would not

opt for share issues mainly to preserve their family

run business. This is symptomatic of most family run

businesses in Malta and is perhaps not limited to the

construction industry.

THE ROLE OF BANKS IN THE MALTESE

CONSTRUCTION INDUSTRY

All CFOs emphasised the pivotal role that bank finance

plays for their organisation. Respondents considered

banks to be a very reliable source of finance and

that it is relatively easy to obtain. Contrastingly, bank

officers did not share this perception. All bank officers

were categorical about their prudent approach when

dealing with construction companies, particularly

due to the lessons learnt from the financial crisis.

The property market in Malta is going through a

period of sustained growth that has led to higher

demand for financing solutions provided by banks.

Bank officials stated that credit institutions have to be

more cautious in times when the economy is thriving.

In their view, the banks’ cautious approach in the

aftermath of the financial crisis was displayed with

all industries and not just the construction industry.

One of the problems pointed out by respondents

is related to a credit concentration risk to the

construction sector especially in terms of the

collateral available to banks. Although this is certainly

not to be overlooked, the local scenario cannot be

compared to that elsewhere in Europe due to the

specifities of the local property market – the value

of land in Malta hardly moves downwards due to its

scarcity. Not to mention that increased regulatory

pressures have obliged banks to set aside additional

capital for credit concentation risk.

The problems highlighted by local bank officials

are related to the modus operandi of construction

companies. One glaring example was the fact that

several construction companies do not file financial

statements in time. The bank officials’ perception

was that construction companies are not investing

enough in terms of professional personnel. Bank

officials also pointed out that companies, particularly

in the construction industry, did not always present a

well-thought, documented proposal to substantiate

their application for credit. Bank officials have

forcefully iterated that they “won’t be a bank for

everyone, everywhere doing everything”.

FINANCE


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CONCLUSION

The main source of finance for the selected construction companies is conventional bank finance. Bank overdrafts are predominantly used for mainstream operations whilst short and medium-term loans are used to finance specific projects. Notwithstanding the proliferation of bank finance in the selected companies, the use of bond issues has picked up especially for funding term-specific projects. The capital market may become a more viable and cheaper option over the medium term given the excess liquidity in the local scenario and the prolonged low interest rate environment.

22 Winter 2018

KATHLEEN IS A SENIOR MANAGER AT PWC WORKING IN THE TAX LINE OF SERVICE

STEVE IS A TAX PARTNER AT PWC AND LECTURES AT THE UNIVERSITY OF MALTA

KAITHLEEN

STEVE

FEATURE: PROPERTY TRANSFERS

The rules have been developed over several years,

often as a response to the prevailing conditions of the

property market, and to an extent, the framework of the

legislation must be understood within the context of its

development.

The purpose of this article is to briefly outline the current

landscape of the provisions regulating the taxation of

property transfers in terms of the Income Tax Act and to

consider some practical implications resulting from the

application of those provisions.

A HIGH-LEVEL OVERVIEW OF THE SYSTEMThe system of taxation on the transfer of immovable

property situated in Malta is somewhat unique within

the context of the Maltese tax system in that it departs

to an extent from the general system of income tax

chargeable on transfers of other types of assets.

The present system of taxation of transfers of property

situated in Malta was adopted in 2006 (generally with

effect from transfers of property taking place from 1

November 2005). Prior to the change, gains arising

on the transfer of property were added to a person's

income and charged to income tax at the normal rates

applicable to the transferor.

With the 2006 changes, the default system of taxation

on transfers of property changed to one which imposes

a final tax charged as a fixed percentage on the higher

Considerations on the taxation of property transfers in Malta

The transfer of immovable property has for many years been

the subject matter of various amendments to Maltese tax

legislation. This has resulted in the taxation of transfers of

immovable property becoming one of the most developed

areas of Maltese tax legislation with some very detailed and

at times complex rules seeking to regulate the tax that should

be paid on a transfer of property.

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24 Winter 2018


of the consideration payable on the transfer of the

property or the market value of the said property.

Currently, the default final rate of tax is 8% of the transfer

value of the property, increasing to 10%, when the

property being transferred was acquired (or deemed, in

terms of the legislation, to have been acquired) by the

transferor before 1st January 2004.

A reduced final rate may apply to certain transfers of

immovable property, which generally are applicable in

the following circumstances:

• 5% when the property is transferred within 5 years from the date of acquisition, and it does not form part of a project;

• 5% on property that has been restored situated in an Urban Conservation Area or if the property is scheduled by the Planning Authority;

• 2% when an individual or two individuals that are co-owners transfer their sole ordinary residence within 3 years from the date of acquisition.

The application of the above rates is subject to the

satisfaction of a number of conditions as set out in the

relative provisions of Article 5A (5) of the Income Tax

Act.

Although the system of final tax applies by default, the

legislation contemplates particular instances where the

transfers of immovable property can be taxed on the

gain made by the transferor taking into account the cost

of acquisition and any applicable deductions.

One instance in which this could occur is when a transfer

is being made by a person who is not resident in Malta

and who is subject to tax in his country of residence on

the profit from the transfer of the property. However,

such transfer remains subject to a minimum taxation in

Malta of 7% of the transfer value of the property.

Another opt out possibility applies when a company

has issued bonds to the public on a stock exchange

recognised under the Financial Markets Act, and,

subject to certain conditions, the bond proceeds are

used specifically to develop a property project. In such

case the company may elect to be taxed on the profits

that it derives from the sale of property subject that a

minimum final tax may also be payable on the transfer

of the property.

When one transfers property which has been acquired

through inheritance on or after 25th November 1992,

such transfer is taxed on the difference between the

value of the property declared when the property was

acquired and the transfer value of the property. The

difference is subject to a final tax rate of 12%.

Profits arising on the transfer of rights acquired under

a promise of sale agreement are also chargeable to tax

at the standard rates applicable to the person deriving

the said gain.

Transfers of property which are situated outside Malta

remain subject to the normal system of taxation of capital

gains, i.e. the difference between the consideration and

the cost of acquisition of such property (adjusted for

deemed maintenance and inflation) is aggregated with

the person’s income from other sources and charged to

income tax at the normal applicable rates.

There are a number of instances where transfers of

property are exempt from the final tax. To a great

extent these replicate similar provisions that apply to

transfers of other types of capital assets. For example,

donations of property by an individual to his or her

spouse, ascendants or descendants (or in the absence

of descendants to his/her siblings or their descendants);

transfers of property between companies forming

part of the same group; property assigned between

spouses as a result of a separation or divorce; and,

transfers of property upon the liquidation of a company

when the shareholder owns at least 95% of the said

company (amongst others) are all exempt subject to the

satisfaction of the applicable conditions.

REFLECTIONS ON THE FINAL TAX SYSTEMThe final tax system arguably has made it simpler for

taxpayers, notaries and the Commissioner for Revenue

to calculate and collect tax on transfers of immovable

property. Given that the tax is paid upon the transfer

of the property (and therefore the signing of the deed)

and is withheld from the total amount received by the

transferor for the sale of the property, its administration

is relatively straightforward.

Indeed, income tax paid on property transfers is in most

cases a ‘final tax’, which means that the full amount of tax

is payable upon the contract of sale and transactions are

not taxed again as part of the tax return. Being a final tax,

it is not subject to a credit or a refund.

This concept also extends to when the transferor is a

company and distributes a dividend out of the profit that

it derived from the sale of the property to the shareholder.

Given that the profit that was derived from the transfer of



the property would have been subject to the final tax, the

company is required to allocate such profits to its Final

Tax Account.

As a result, given that distributions of dividends out of

this tax account are not considered to form part of the

shareholder’s chargeable income, the shareholder is not

exposed to further tax on those profits.

However, this administrative simplicity often belies a more

complex set of rules particularly in view of the number

of different rates that could possibly apply in different

scenarios that one might encounter. Such complexity is

arguably required to take account of different scenarios

in order to provide a more equitable result for a taxpayer.

Indeed, there appears to be some level of correlation

between the rate that applies on a transfer of property

and the time that elapses from when the transferor

acquired the said property. The correlation appears to

indicate that the longer a person owns a property, the

higher the rate of tax that applies on the sale of that

property.

By way of example, when the property is owned for less

than 5 years and does not form part of a project, the final

rate is 5%, whereas if the property was acquired before

1 January 2004 (i.e. at least 14 years ago), then the final

rate that applies is 10%. This correlation appears to be

based on the presumption that the longer one owns a

property, the larger the gain which such person is likely

to make on its transfer and therefore should be subject to

tax at a higher final rate.

The flipside to this is that if a person makes a loss or a

small gain on the transfer of property, such person is

nonetheless subjected to the final tax thereby either

increasing the size of the loss or turning the small gain

into a loss position after tax.

One additional characteristic of the final tax system is

that it has eliminated (to a large extent) the distinction

between profits that are derived from a person trading

in property and capital gains derived from the sale of

property. Indeed, prior to the introduction of income tax

on capital gains in 1992, this distinction was extremely

important given that capital gains on transfers of

immovable property had hitherto not been taxable.

The distinction remained important even after the

introduction of tax on capital gains in 1992, given that

a capital gain on a transfer of property was calculated

differently to trading profit on the sale of property.

With the final tax system, this dichotomy has been

largely removed, although the current system preserves

some distinctions between transfers of property forming

part of a project (which can be assimilated to profits

derived from a trading operation) and property which

does not form part of a project. By way of example, the

reduced rate of 5% does not apply where the property

transferred was held by the transferor for less than 5

years, when the property forms part of a project. In such

a case, the transferor should typically be chargeable at

the default rate of 8%.

Similarly, when a person receives property through a

donation, and transfers that property after 5 years, such

person should be taxable on the excess of the transfer

value over the value of the property at the point of

donation at a rate of 12%. This said, if the transferor

develops the property that he/she received into a

project, the general final tax rules apply.

Concluding comments

The performance of the Maltese economy

has continued to be inexorably linked to the

property market. As a result, the taxation of

immovable property has been and continues

to be a key component of national fiscal policy.

The final tax system appears to be a system that

is favoured given that since its introduction, it

has been retained and amended by successive

governments. Nonetheless, as with each

system of taxation, there are winners and losers

since the legislation might not cater for every

particular scenario and thus could in certain

instances give rise to unequitable results.

The challenge thus remains that of striking

the right balance between the simplicity of

the system and the ease with which it can be

administered, and the sophistication of the

system for it to ensure an equitable tax burden

on property transfers. Arguably, finding that

balance is something of a never-ending process

in itself, given the ever-changing economic

and social environment within which the tax

system operates.

26 Winter 2018

MLS

CLAUDINE CASSAR IS THE LEADER OF DELOITTE DIGITAL MALTA.

CLAUDINE CASSAR

A s is often the case in Malta, many commercial real estate (CRE)

operators go to great lengths to keep several aspects of their operations confidential, particularly when it comes to their lease rates. The goal is, of course, to retain the upper hand when it comes to negotiations, increasing their chances of maximising revenues and not leaving any money on the table.

However, we are now operating in the

digital economy, where information is hard

to keep under wraps. Clients are demanding

more transparency and the move towards

technologies such as the blockchain, which

enable “trustless” transactions through the

use of digital identities and transparent

records, is ramping up at an inexorable

rate. It is clear that this will impact many

industries, not just the CRE sector.

The use of blockchain in CRE lease

transactions is set to transform and

facilitate the process, both through the

initial stages up to the signing of the lease

and the lease payments, and also after,

when it comes to property management.

The diagram shows the various stages

of the lease process, starting with the

initial property search by the client.

Various blockchain-enabled multiple-listings

services (MLS) are being launched in a bid to improve

on the current fragmented property search process

which makes it very difficult for customers to find

the property that best matches their needs (refer

to this articlei for more on this topic). Instead of

trawling through multiple real estate databases and

comparing information, clients are expected to start

opting for services such as the one offered by REX

MLSii , which enables CRE operators to upload their

property listings on an Ethereum-based blockchain.

Owners and brokers would benefit from having

their property information freely available across

the peer-to-peer network, increasing their reach

and maximising the number of potential clients who

would be able to find their property. Clients, on the

other hand, would benefit from having full and up-

to-date information about each property, including

property location, comparable rents in the area,

age and maintenance history of the property and

other information that is useful when making a lease

decision. Such property listing services are poised to

enable the provision of much more reliable data at a

lower cost, resulting in easier access to international

Blockchain and Commercial Real Estate Leasing

i https://www2.deloitte.com/mt/en/pages/thought-leadership/mt-tl1705-blockchain-enabling-the-democritisation-of-real-estate-property-listings.htmlii http://rexmls.com/

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28 Winter 2018

MLS

listings, enhanced accuracy, lower transaction costs

and improved transparency.

Once the client has identified their preferred property

and inspected it, initial negotiations would begin. The

process then moves on to due diligence from both

sides. As things stand, going through due diligence

requires several administration-heavy processes

that increases the risk of potential errors (or loss of

documentation). There is also a dependency on third

parties, which can lead to delays and increased costs.

Blockchain makes it possible for CRE operators to

create digital identities for their properties, which

would then be validated by other parties such as

financial institutions and previous tenants. Each

property would have a digital identifier that links

users to the correct information about the property

on the blockchain, giving easy access to data such

as architectural plans, planning permission, energy

performance certifications, repairs and maintenance

records, history of ownership, access rights and

other pertinent details. There is currently also a lot

of investment going into the creation of validated

digital identities for companies and individuals,

which are another important element in closing the

circle. Using digital identities and blockchain-based

records it will be possible for the lessor to conduct

a background check on the lessee, while the lessee

will be able to check information regarding previous

leases on the property and any hypothecs or other

problems that could hamper their use of the building

in question.

Once all the checks are complete and the terms

agreed, the lease agreement would be formalised as

a smart contract on the blockchain. This means that all

aspects of the agreement would then be managed by

the smart contract, with payments of security deposits,

rents and eventually utilities and maintenance costs (or

other services) happening automatically throughout

the lifetime of the lease. When the term is over the

smart contract would also initiate the transfer of the

security deposit back to the lessor, subject of course

to certain checks and confirmations.

The transparent and automatic nature of the

transaction and related payments obviously increases

peace of mind for both parties. The owner of the CRE

can rest assured that lease payments and other costs

will be settled on time by the lessee, without the

need to chase or go hinder business continuation.

The lessor, on the other hand, would be able to have

confidence regarding transparency on utility or other

costs, and the return of the security deposit.

The process as described so far obviously pertains

mainly to the CRE operators and their tenants.

However, the use of blockchain and the availability

of the information and smart contracts described

in the article so far opens up opportunities for

other efficiencies and the automation of other

transactions. One of the most obvious examples

would be the linking of the CRE’s banking facilities

to the smart contracts in place with tenants,

essentially guaranteeing monthly repayments on

financing facilities and reducing risks for the banks

(empowering CREs to negotiate better terms).

The opportunities for blockchain to revolutionise

the CRE sector are many, and consequently there

are many start-ups looking at ways of disrupting

the status quo. Examples include REX MLS which,

as already mentioned, is aiming at transforming the

property listing and search process, and Midasiumiii,

which is targeting the improvement of property

management and cash flows.

As always, such technological advances take their

time to impact the local economy, but that does not

mean that local CRE operators can afford to ignore

the developments in this area. It is fundamental

that, as the technology evolves, and customer

expectations with it (particularly when it comes to

international clients), Maltese CRE companies invest

the time and effort required to better understand the

implications of these blockchain-based products and

how they will impact their existing business model,

strategy and processes.

REFERENCES:

https://www2.deloitte.com/us/en/pages/financial-

services/articles/blockchain-in-commercial-real-

estate.html

Blockchain in commercial real estate, Deloitte Center

for Financial Services, 2017

Blockchain in commercial real estate, Deloitte Center

for Financial Services, 2017

iiihttp://midasium.herokuapp.com/


PROJECT MANAGEMENT

MICHAEL WARRINGTON IS THE CHIEF EXECUTIVE OFFICER OF THE AX GROUP OF COMPANIES. HE IS A DIRECTOR OF COMPANIES INVOLVED IN THE BANKING, INSURANCE, INVESTMENT, TELECOMMUNICATIONS, HOSPITALITY AND PROPERTY INDUSTRIES AMONG OTHERS.

MICHAEL WARRINGTON

The construction industry in Malta is adapting to meet

these challenges which need new skills and resources

which had not been prevalent in the islands before.

As construction projects have become larger and

more ambitious and with the ever present challenges

of managing costs and time lines, the industry has

responded by adopting a more structured and focused

project management approach. A project is generally

considered as a successful one, when both the physical

product and the financial goals are achieved.

The Project Management Institute defines project

management as:

“The art of directing and coordinating human and material resources throughout the life of a project by using modern management techniques to achieve predetermined objectives of scope, cost, time, quality, and participating objectives.”

All construction projects comprise a set of activities that

need to be managed in order to produce unique products.

The construction industry faces challenges in managing

project costs which are consequent to many other factors

including but not limited to the availability of a suitably

experienced workforce, site safety, environmental

concerns, material resource, logistical challenges and

quality management among others. The approach to

manage this is for the Project Manager to create a project

management plan (PMP) that will guide the execution

and control of the project. The PMP defines the project

scope and sets out the activities that will take place to

meet that objective. It is a critical document as the PMP

should identify opportunities to improve the use of

resources, the time for execution, key project milestones

and cost baselines.

In today's legalistic environment the need for proper

record keeping, contract management and cost effective

procurement are key to ensuring that a project achieves

its objectives and at the same time leaves the construction

company a fair profit. There are so many variables in

each and every construction contract that it requires a

significant degree of management and expertise to do all

these things.

A construction project can be identified into a number of

separate and distinct phases.

At tendering stage a construction company needs to

study and evaluate carefully all the above factors in order

to properly price its bid and the commercial terms and

conditions that will bind the developer and contractor

during the project. The budget estimate will take into

account the time, materials, plant and equipment, labour,

sub-contractors, managerial and professional people

that will need to work on the realisation of the project.

It is critical that this assessment is accurate and done to

sufficient detail relative to the project that will enable the

contractor to submit a competitive bid yet leave enough

profit to give a suitable return for the effort and resources

that would be deployed on the project. A well managed

Project management in Construction - The financial Aspect

Post mortem - profitability and operational e ectiveness evaluation

Contract award, contractual agreement phase

Site mobilisation and resource management phase

Tender/bid phase

Ongoing site management, cost management and project delivery

A TYPICAL PROJECT CYCLE

Malta is experiencing an unprecedented rate of economic growth much of which is the result of property development projects. Developers are challenging architects to design more exciting and challenging

projects in terms of their scale, architectural and functional objectives. The development landscape is changing as people are seeking to own and live in high rise developments and large scale high end residential complexes.

30 Summer 2017

PROJECT MANAGEMENT

construction company will develop a high level project

plan for all major projects even before it submits a bid

for a project.

Following contract award it is important to ensure that

a suitable contract often based on a standard such as

FIDIC (International Federation of Consulting Engineers)

is drawn up and incorporates all the financial and

commercial terms agreed between the parties. The

FIDIC contract model caters for all aspects of managing

the contract including processes to manage changes to

the contract scope, design changes, cost variations and

dispute resolution procedures.

For many the most exciting phase of a construction

project is when site mobilisation commences as it is

at this point that the skill of the contractor is evident.

The logistical challenges require the co-ordination

of manpower, equipment, tools and materials,

environment and planning regulations, health and safety

considerations, site management and implementing

effective cost management processes. Getting this right

will often determine the success or otherwise of the

project in terms of quality, timely execution and will in

most cases define whether the project will make a profit

or otherwise.

Once the right systems and processes are in place, it

should be possible to keep track of the financial aspects

of the contract without difficulty. A regular report on the

profitability of the project will depend on regular and

timely estimation of costs by a qualified and experienced

quantity surveyor. Likewise the construction company

must have a proper recording system for resources going

into the project whether these are labour, materials,

equipment and the administrative overheads for

managing the project. Today one will find many software

applications that assist construction companies to

manage project timeframes and resources as well as cost

management.

On completion of the project it is advisable to undertake

a post mortem evaluation of the project to determine

opportunities to improve performance for future

projects.

There can be many obstacles to successful project

completion. Quite often unforeseen site considerations

require changes to the initial plans and designs. Such

changes in scope can have material impacts on timely

execution and profitability. Likewise the availability of an

inadequately skilled workforce, a change in the project

management team, improper risk management on site,

inadequate professional support from the architects

or possibly financial constraints can all lead to an

unsuccessful project.

It goes without saying that no construction project can

be successful without a strong financial team that will

ensure proper funding for the duration of the project,

ensure that stage payments are estimated and received

regularly, ensure effective cost and material control

systems are in place.

“The art of directing and coordinating human and material resources throughout the life of a project by using modern management techniques to achieve predetermined objectives of scope, cost, time, quality, and participating objectives.”

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32 Winter 2018

PROJECT MANAGEMENT

All building projects come with their own specific

requirements and expectations. Over time, building

projects are becoming increasingly complex and

demanding, while technologies change and adapt

on a day-to-day basis. This is the new era for the building industry in Malta. This is the challenge and

this is where the opportunity lies.

Gone are the days when architects and designers set

about providing form to a building or public space and

then delegate the engineering and construction to

others with limited buildability discussion happening

during the design development phase. Today

architects, engineers, interior designers and other

specialists need to work together in a coordinated

manner to ensure effective, complete and buildable

design that respects the project expectations (brief)

and can be built in a realistic and safe manner within

a budget and a period of time that is acceptable to

the developer.

This is where the role of the project manager is

essential. All projects start with a dream. Then

the priorities or constraints kick in. The clearer the

project expectations are at this point, the higher is

the expected probability of success in delivery and

use of the asset. An architect will work closely with

a project manager and an advisory arm of a financial

team to carry out a development management service and advise a property owner on the best

possible development option for the real estate asset

being considered.

A project manager is a person who has the overall responsibility for the successful initiation, planning,

design, execution, monitoring, controlling and

closure of a project. The project manager must have

a combination of skills including an ability to assemble

and manage a project team which includes design,

engineering and management skill sets, ensure

effective and clear communication at all times, ask

demanding questions, detect unstated assumptions

and resolve conflicts.

Key among a project manager's duties is risk management and the recognition that it directly

impacts the likelihood of success and that which,

therefore, must be both formally and informally

measured throughout the lifetime of a project.

The coordination of design by the various project

design consultants is an essential role played by the

project manager during the pre-contract phase of the

project. Value management and value engineering

during this time is considered essential to the success

of any project and the project manager’s role in

guiding this function is very important.

The drafting of Contracts (normally FIDIC) and

eventual management of these contracts for all

service and product providers to a project is another

important responsibility bestowed on the project

manager. Project relationships by all contracted

parties could be complex and this is best managed

through consistent and strong international contract

drafting.

During the life of the project the Senior Project

Manager will need support by trade specialist

project managers, health and safety managers, cost managers, quality assurance managers, planners and document controllers. For large projects these

will, in fact, be teams of people performing each and

every one of these functions.

Project management teams make use of state-of-the-

art IT systems to support their personal knowledge

of the project team and this will, in turn, support

the experience and intelligence developed over the

period of the team’s involvement on projects of a

CHIEF EXECUTIVE OFFICER AT QP MANAGEMENT

DAVID XUEREB

Project Management in Construction The Perspective of an Architect

During a career spanning over 25 years, I have witnessed changes to the Maltese

construction industry that are fascinating to interpret. This enables me to

get excited when projecting its future of this industry. Having graduated

as an architect and worked on many projects to a diverse range of clients both in

Malta and abroad, I consider myself lucky to lead a team of design, engineering and

management professionals working together to maximise on coordination, through

effective communication and coordinated expertise.

YOUR CAREER, OUR PROMISE.

Alter Domus is strengthening its management team. Do you have what it takes?

We are looking for a talented, experienced, appropriately skilled and qualified compliance professional who will ensure and understand compliance with the relevant Maltese regimes. You will report directly to the Head of Compliance for Europe. Amongst others, responisbilities will include:

• Acting as the registered MLRO and Compliance Officer of Alter Domus Malta entities and for Alter Domus clients

• Create and maintain compliance plans, procedures, systems and practices and ensure these are followed by other compliance professionals and junior staff

• Work with the Global Client Acceptance Committee and Group Risk Function

• Manage and develop an internal compliance team

• Manage and lead regulatory requests and visits

Visit www.alterdomus.jobs to apply online and to know more about this vacancy or send your CV together with a cover letter to the HR Senior Manager Amanda Cini on [email protected]

TIME TO REACH YOUR POTENTIALWe are looking for a COMPLIANCE MANAGER

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34 Winter 2018

PROJECT MANAGEMENT

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similar nature or otherwise. There are many planning

software options but the most common platforms

used are Microsoft Project® and Primavera®. There

are many document control systems that are used

today to ensure (i) quality assurance of project systems and (ii) coordinated communication between all parties – client, consultants and contractors alike.

During the life of any project, architects like myself,

usually take on the role of lead consultants and our

role would be to take responsibility and ownership

of the project design and coordinate this with the

required engineering details such as structure,

mechanical and electrical systems to deliver a

functional building and associated infrastructure.

The design to high sustainability standards, typically

in the forms of LEED or BREAM certification

also forms part of this design development and

coordination responsibility. The project management

team is considered essential to the development and

delivery of projects since this role induces order and

sequence to all development activities.

The specific responsibilities of the project

management team when operating within agreed

reporting structures may be listed as follows:

designing and applying appropriate project

management standards for incorporation in the

project delivery gateway process – RIBA workplan

2015 is the more commonly used system in Malta;

managing the production of the required deliverables;

planning and monitoring the project;

adopting any delegation and use of project assurance

roles within agreed reporting structures;

preparing and maintaining project, stage and

exception plans as required;

• managing project risks, including the development of contingency plans;

• liaison with program management (if the project is part of a program) and related projects to ensure that work is neither overlooked nor duplicated;

• monitoring overall progress and use of resources and initiating corrective action where necessary;

• applying change control processes;• reporting through agreed lines on project

progress through highlight reports and end-stage assessments;

• liaison with appointed project assurance representatives to assure the overall direction and integrity of the project;

• maintaining an awareness of potential interdependencies with other projects and their impact;

• adopting and applying appropriate technical and quality strategies and standards;

• identifying and obtaining support and advice required for the management, planning and control of the project;

• managing project administration;• conducting a project evaluation review to assess

how well the project was managed;• preparing any follow-on action recommendations.

Project management importantly provides the

interface between the project sponsor (the

developer) and the supply side (consultants and

contractors) of the project team.

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36 Winter 2018

COMMERCIAL LEASE

DR. VICTORIA CUSCHIERI PRACTISES PLANNING LAW AT SPITERI BAILEY ADVOCATES

DR. VICTORIA CUSCHIERI

A. When is a lease contract deemed ‘commercial’

in nature?

The nature of the lease contract and the legal

provisions applicable to the same are determined

by identification of the tenement to be leased as

‘commercial’ or otherwise. Maltese law clearly

defines a ‘commercial tenement’ for the purpose

of lease as ‘an urban tenement which is not a

residence and which is leased to house an activity

primarily intended to generate profit and includes,

but is not limited to, an office, a clinic, a tenement

leased out for the sale of merchandise by wholesale

or retail, a market stall, a warehouse, a storage used

for commercial purposes as well as any tenement

licensed to sell things, wines, spirits or foodstuff or

drinks, theatre, or tenement mainly used for any art,

trade or profession’ (Art. 1525 Civil Code).

Reference is further made in this regard to the

considerations of the First Hall (Civil Court) in the

case Joseph Briffa et vs. Setra Trading Limited

(701/2014MC – 16th March 2017) to the effect that

the above-cited definition provides a non-exhaustive

list of activities which may be deemed ‘commercial’

for the purposes of a lease contract. The determining

factor in this context is not the activity per se, but

rather whether the said activity is intended to be

carried out for the purpose of generating profit.

It would appear that the civil definition of activity

considered ‘commercial’ in the context of lease is

wider than the definition attributed to those uses

deemed specifically ‘commercial’ in terms of planning

law. Subsidiary Legislation 552.15 ‘Development

Planning (Use Classes) Order’ establishes the various

classes of development and identifies the type of

permit required in each case. Schedule 1 (Category

D) of the said legislation which classifies particular

activities as ‘Commercial Uses’ contains the following

sub-division – 4A (Financial, Professional and Other

Offices); 4B (Retail); 4c (Food & Drink Establishments

where no cooking is allowed); and 4D (Food & Drink

Establishments where cooking is allowed).

In vew of the above – and particularly consequent to

the broad interpretation attributed to a ‘commercial’

lease from a civil law perspective – the use of a leased

tenement for the carrying out of activities which are

not classified as strictly commercial for the purposes

of planning law [including ‘tourism and leisure

uses’ (Category C); ‘industrial uses’ (Category E);

and ‘storage and boathouse uses’ (Category F) may

nonetheless attract the applicability of the particular

provisions contained in the Civil Code designed to

regulate the lease of ‘commercial tenements’. In this

context, the identification of the intended use of

the tenement to be leased is significant and ought

to be clearly and specifially stipulated in the relative

contract together with the other elements required

by law as discussed below.

B. What constitutes a valid commercial lease contract?Maltese law defines a contract of ‘letting and hiring’

as a ‘contract whereby one of the contracting parties

binds himself to grant to the other the enjoyment of

a thing for a specified time and for a specified rent

which the latter binds himself to pay to the former’

(Art. 1526 – Civil Code). No distinction subsists

between commercial and other types of lease in

terms of the elements which are required in order

for a lease contract to be deemed valid at law.

Commercial Lease: Practical Issues & the Planning Law Perspective

The contractual relationship between lessee and lessor and the myriad of issues which inevitably arise in this regard has after a number of years once again found itself at the forefront of proposed reform. This article shall focus specifically on the commercial aspect of the lease contract and particularly upon related matters of interest from a planning law perspective.

38 Winter 2018

(i) Lease Contract in Writing Ad ValiditatemReference is made in this regard to Article 1531A of

the Civil Code [introduced by virtue of Act X 20091]

which stipulates that contracts of lease entered into

after the 1 January 2010 shall be made in writing - this

as recently affirmed by the First Hall (Civil Court) in

its decision dated 27th April 2016 in the case Maria

Caruana pen vs. Carmel Mifsud (57/2016JPG).

This rule is applicable irrespective of whether any

verbal agreement subsists between the parties

in question and whether by agreement between

the parties – prior to the conclusion of the written

contract –– the future lessor or lessee shall have

taken concrete steps and possibly incurred expenses

in relation to the proposed lease. At this stage no

valid contract of lease subsists between the parties

and therefore, in the event that either party shall

eventually refuse to enter into the contract as agreed

(or shall default in performance of some other

condition verbally agreed upon) the agreement is not

deemed enforceable as a contract of lease before the

Rent Regulation Board.

(ii) Agreed Use of the PropertyThe above-cited Article 1531A further stipulates that

a valid lease contract entered into after the 1 January

2010 must indicate: (a) the property to be leased;

(b) the agreed use of the property; (c) the period

for which that property will be let; (d) whether such

lease may be extended and in what manner; (e) the

amount of rent to be paid and the manner in which

such payment is to be made. In the absence of any

one of these ‘essential requirements’ the contract

shall be considered null and for all intents and

purposes of law no lease shall be deemed to have

been entered into by the parties.

It is pertinent in this context to once again specifically

refer to the stipulated ‘agreed use’ of the property.

This requirement merits careful consideration in the

commercial context particularly in the event that

planning permits shall be required in relation to the

business activity intended to be conducted from the

tenement in question. Reference must necessarily

be made in this regard to (a) the category of activity proposed – according to the content of SL.552.15; and (b) the location of the ‘commercial tenement’. The latter element is especially relevant in terms of

evaluating the applicable planning policies and the

likelihood of granting of the relative permission on

the part of the Planning Authority.

In this regard Article 72 of the recently promulgated

Development Planning Act (Cap. 552)2 provides

that in determining an application for development

permission the Authority shall have regard to

various factors including plans, policies and other

material considerations (eg. existing commitment on

site). In its recent decision in the case Planet Court

Owners Association vs. L-Awtorita’ tal-Ippjanar et

(154/16MS)3 the Environment and Planning Review

Tribunal evaluated an application for change of use

from Class 4B to Class 4D in relation to a tenement

situated on the Sliema seafront in Sliema. In brief,

the Tribunal considered that – notwithstanding the

degree of commitment in particular areas – the

application concerned a specific site located in a

zone categorized as ‘Residential’ in the relative Local

Plan. The proposed change of use could therefore

not be deemed compatible with the same and the

permission previously granted by the Planning

Authority was revoked.

In the context of a commercial lease therefore,

pertinent questions which may be discussed prior

to the conclusion of the lease contract include (i) what type of permission is required?; (ii) who will be filing the relative application?; (iii) who will bear the expenses involved at application stage and possible at appeal stage in the event of refusal?; and (iv) will the lease be terminated if permission is not granted?

The above serves to highlight the importance of

identifying those issues which may arise throughout

the course of the proposed lease and of seeking to

address the same in the relative contract. Whilst a

valid lease contract must necessarily contain those

elements established by law as discussed earlier,

the content of the contract is certainly not limited

to the same and may be drafted on an ad hoc basis.

With specific reference to contracts concerning

‘commercial tenements’ and the conducting of

business activity therefrom, it is particularly important

to clearly regulate the contractual relationship

between lessor and lessee to avoid disputes and the

incurring of damages and/or expenses in connection

with the same.

1 Civil Code (Amendment) Act promulgated on the 19th June 2009 introduced wide-ranging reform in the field of lease.2 Legislation which regulated the MEPA de-merger and came into force in April 2016.

3 Currently subject to appeal before the Court of Appeal (Inferior Jurisdiction).

COMMERCIAL LEASE


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Mr Arnold detailed the scope of the IFAC SMP

Committee. He explained that IFAC’s SMP activities are

supported by the Small and Medium Practices (SMP)

Committee, which was established in in 2005. As a

strategic advisory body of professional accountants,

the SMP Committee supports IFAC’s work in three

main activity areas in:

Providing regular and timely input to the international

standard-setting process in order to help ensure the

stability, relevance, and proportionality of international

standards to SMEs/SMPs;

• Developing and sharing practical guidance with a focus on implementation of international standards, practice management, and business advisory services; and

• Promoting the visibility and recognition of SMPs and representing and advocating on behalf of SMPs and SMEs worldwide.

The IFAC SMP Committee is comprised of 18 volunteers

and 18 technical advisors, from 22 countries with

diverse professional backgrounds. It actively engages

in IFAC’s regulatory dialogue on matters of relevance

to SMPs/SMEs. The committee also regularly provides

input on international standards, including those on

auditing, assurance, and ethics at all stages of their

development to help ensure their relevance and

proportionality to SMEs and SMPs, and to moderate

the pace of change.

Mr Arnold then proceeded to describe the 2016 SMP

Survey undertaken by the SMP Committee. Responses

received identified that that the top 3 challenges for

Maltese SMPs were ‘personnel and staffing issues’,

‘differentiating from competition’ and ‘keeping up

with new regulations and standards’. Also highlighting

that the next survey is due to be performed in 2018.

He then concluded that a number of IFAC resources

and tools are available to support SMPs which include

discussions and resources in the Global Knowledge

Gateway, in particular, on Audit & Assurance, Ethics,

and Practice Management.

MIA NEWS

Malta Visit by the head of SME/ SMP and research at IFAC

Mr Christopher Arnold, Head of SME/ SMP and research at International Federation of Accountants (IFAC) visited the

Malta Institute of Accountants’ Office on the 6 November 2017 to meet the Institute’s Small and Medium Practitioners.

40 Winter 2018

REGULATIONS

CHRISTOPHER ARNOLD IS THE HEAD OF SME/SMP AND RESEARCH AT IFAC. HE WAS PREVIOUSLY AN AUDIT MANAGER FOR DELOITTE AND QUALIFIED AS AN ACCOUNTANT IN A MID-TIER ACCOUNTANCY PRACTICE IN LONDON (NOW CALLED PKF-LITTLEJOHN). CHRISTOPHER STARTED HIS CAREER AS A SMALL BUSINESS POLICY ADVISER AT THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS (ACCA).

MATS OLSSON IS PARTNER AND ONE OF THE FOUNDERS OF ADRIAN & PARTNERS AB. ADRIAN & PARTNERS IS A MEDIUM-SIZED PRACTICE IN GOTHENBURG, SWEDEN, THAT WORKS PRIMARILY WITH SMALL- AND MEDIUM-SIZED OWNER-LED CLIENT COMPANIES. HE HAS HIGHER EDUCATION IN ACCOUNTING AS WELL AS BUSINESS LAW. MR. OLSSON IS ALSO THE DEPUTY CHAIR OF THE IFAC SMPC AND CHAIR OF ITS TASK FORCE FOR SMALL BUSINESS SUPPORT.

CHRISTOPHER ARNOLD

MATS OLSSON

The recent IFAC Global SMP Survey identified key challenges many small- and medium-sized practices (SMPs) face. This article is one in a series that breaks down the data from the survey and provides information, ideas, and tips to help SMPs address these challenges as well as best practice examples from IFAC SMP Committee members, together with the range of other tools and resources available.

KEEPING UP WITH NEW REGULATIONS AND STANDARDS

The IFAC publication, From Crisis to Confidence: Good Regulation, Governance, and Culture, identified the

principles of good regulation, which include that new

regulations should be subject to impact evaluations as

well as systematic reviews of how new regulations are

performing, including sunset clauses and mechanisms.

It is clear that regulations should be proportionate and

structured to scale for different sizes of organizations.

Despite such well-established principles, there

continues to be an increase in the amount of regulation

under which the accountancy profession operates.

These regulations come from both government and

non-government regulators and show no sign of

slowing down.

On one hand, this means there will be a continued

strong demand for accountants and business advisers.

On the other hand, many practitioners wonder how

they can stay abreast of all the changes. Keeping up

with new regulations and standards was the second

most significant challenge facing SMPs globally, and

the top challenge in Central and South America/

Caribbean, Europe, Australasia/ Oceania, and North

America regions.

INTERNAL STRATEGIES

The key internal strategy is regular training for your

team. This training can be done in-house or with a

third-party training organization. For example, annual

seminars could be organized to update on the news

and changes since the year before. This could involve

different partners presenting on accounting, audit, tax,

legal issues, and other relevant topics.

Increasing numbers of firms are also joining together

for training sessions, thus sharing the costs. This also

allows the training to focus more tightly on the needs

of the group, rather than the broad-based style used in

lecture-type situations.

Many professional accountancy organizations provide

training, and some provide the option of training on-

site or lecture style at another venue. Staff attendance

should be encouraged, as should information sharing

with other team members after the event.

Online learning, where the information is streamed or

downloaded and staff can learn at their own pace and

at a time that suits them, is another in-house training

strategy.

Staff should be encouraged to set aside time (e.g., two

hours a week) to read up on new legislation. Practices

could start reading groups for relevant standards and

organize discussions, which can be over an informal

lunch. This is a great way of learning from each other.

One advantage of providing many different training

opportunities is highlighting the range available from

your practice when recruiting new staff. With talent

recruitment and retention also a key issue, outlining

the benefits provided by your firm to employees can

really help.

Transforming Challenges into Opportunities: Regulations & Standards


REGULATIONS

EXTERNAL STRATEGIES

Firms should utilize their professional accountancy

organization, as many issue technical briefing papers

on most regulations. Staff should maximize their

membership and take advantage of the resources

available.

Your practice can also form alliances with specialists

and build close relationships with other professionals

who have technical knowledge in certain areas. These

professionals can be called on to assist with specific

client matters as they arise. Typically, specialists

invoice your firm, which can choose to pass the fee on

to clients or absorb it.

Your firm can also consider joining a professional

network. The 2015 Global SMP Survey found that

training, conferences, and workshops was one of

the top four benefits of joining a network, as the

information networks provide is usually of a very high

standard.

Small firms can build “buddy networks” and check with

each other on issues before escalating client matters

to the higher level, and costs, of specialist advisers.

These types of informal network tend to be based

on relationships established through professional

associations. They may meet regularly or not at all,

depending on the needs of the group.

Your practice could join a local business association,

which can provide information and support in other

business-related areas, such as human resources or

occupational health and safety. Examples include

chambers of commerce and industry organizations.

They also provide an opportunity to network and

become known in another circle of business people.

STANDARD-SETTING BOARDS

The international standard-setting boards provide

helpful information covering changes to standards,

which includes Basis for Conclusions, At a Glance, and

Question and Answer publications. Practitioners can

also keep up-to-date with future developments by

following their respective work plans.

The International Auditing and Assurance Standards

Board (IAASB) and International Ethics Standards

Board for Accountants (IESBA) launched dedicated

websites as a source for understanding and effective

implementation of the new and revised Auditor Reporting standards and Responding to Non-compliance with Laws and Regulations (NOCLAR), respectively.

Additional information is available in the Guide to Practice Management for Small- and Medium-Sized Practices, which includes a section on internal

and external strategies for coping with increased

regulation.

The Global Knowledge Gateway also includes a number

of articles, videos, and resources on these topics.

REGULATIONS & STANDARDS

• Doing the Right Thing Even When No One Is Looking Part II: Compliance with Rules and Regulations

• Factsheets on the EU Audit Directive and Regulation

• Member States’ Implementation of New EU Audit Rules

• The New Auditor’s Report: Questions and Answers• Determining and Communicating Key Audit

Matters• Auditor Reporting—Illustrative Key Audit Matters• Responding to Non-Compliance with Laws and

Regulations Fact Sheet• IESBA Staff Questions and Answers—Responding

to Non-Compliance with Laws & Regulations

Please see previous article on attracting new clients for further information and guidance.

This article originally appeared on the IFAC Global Knowledge Gateway: www.ifac.org/Gateway. Visit the Gateway to find additional content on a variety of topics related to the accountancy profession.

Copyright July 2017 by the International Federation of Accountants (IFAC). All rights reserved. Used with permission of IFAC. Contact [email protected] for permission to reproduce, store, or transmit this document.

42 Winter 2018

PROCUREMENT

For the 2007-2013 programming period, 349 billion

euro was allocated in the area of cohesion policy.

It is estimated that around 48% of the European

Structural and Investment Funds was spent through

public procurement. Failure to comply with public

procurement rules has been a significant source of

error. Serious areas resulted in a lack, or complete

absence of fair competition and/or in the award of

contracts to those who were not the best bidders. The

next section will focus on the procurement process

and includes examples of common errors and ways

how to mitigate them. The content was taken from

guidance published by the European Commission

as part of its priority action to help Member States

strengthen their administrative capacity in managing

EU funds.

Procurement Process

From a practical perspective, the procurement

process is broken down into six stages as highlighted

in the above diagram

1. Preparation and Planning Planning is crucial. If the Contracting Authority gets

this part of the process wrong, then mistakes and

problems will inevitably follow. Many errors can be

traced back to inadequate planning.

2. PublicationA fundamental tenet of EU public procurement law

is that all contracts above a certain threshold value

should be published in a standard format at the EU

level in the Official Journal, so that all economic

operators in Member States have equal possibility to

tender for contracts for which they consider they can

meet the requirements.

EU FUNDED PROJECTSCommon errors in Public Procurement

Public procurement is a key aspect of public investment: it stimulates economic development in Europe and represents an important element of boosting the Single Market. Public procurement matters – it represents around 19% of the EU’s GDP and is part of our everyday life. Public procurement offers opportunities to enterprises, thereby fostering private investment and contributing growth and jobs on the ground. Finally, public procurement plays an important role in channelling European Structural and Investment Funds.

CHRISTOPHER ARNOLD IS THE HEAD OF SME/SMP AND RESEARCH AT IFAC. HE WAS PREVIOUSLY AN AUDIT MANAGER FOR DELOITTE AND QUALIFIED AS AN ACCOUNTANT IN A MID-TIER ACCOUNTANCY PRACTICE IN LONDON (NOW CALLED PKF-LITTLEJOHN). CHRISTOPHER STARTED HIS CAREER AS A SMALL BUSINESS POLICY ADVISER AT THE ASSOCIATION OF CHARTERED CERTIFIED ACCOUNTANTS (ACCA).

CHRISTOPHER ARNOLD

contractimplementationAwardEvalutation

of tenders Submission and selectionof bids

Preparation & planning Publication

Common mistakes leading to a financial correction at planning stage

Ways to avoid such errors

Direct award of a contract with inadequate justification for non-publication of a contract notice.

(i) Setting discriminatory selection criteria such as requiring registration of experts with a national body without recognising equivalent qualifications; and(ii) Setting criteria that are disproportionate to the subject matter such as setting financial criteria at too high a level creating unjustified barriers for prospective bidders.

Carrying out adequate market testing and calculating the contract value based on a genuine estimate to determine which procurement procedure to adopt.

It is vital that prior to the publication of the contract notice, the criteria are adequately screened in line with regulations to ensure that they are proportionate and non-discrimantory.


3. Submission and selection of bidsThis phase is to ensure that compliant bids are received

and selected according to the rules and criteria

established in the tender dossier. Communication

with the tenderer before submission of the offer must

only be in writing, with the same information sent to

all tenderers. The answers to any questions asked by

the tenderer must be anonymised and circulated to

all tenderers with clear cut-off dates. Communication

with the tenderers after the deadline of submission of

offers is limited to clarification of the offer only in Open

and Restricted procedures. Any dialogue relating to the

substance of an offer is not acceptable.

4. Evaluation of bidsThe purpose of this stage is to determine the winning

bidder by strictly applying the published award criteria.

During evaluation, never amend the award or evaluation

methodology midway through the procurement process.

PROCUREMENT



Insufficient definition of the subject matter of the contract leading to subsequent irregular modifications of the contract.

Non-compliance with minimum time limits for receipt of tenders and requests to participate

Failure to state selection and award criteria (and weighting) in the contract notice/tender.

The CA must take note of the time limits stipulated in the Directive prior to issuing contract notice and set realistic timetables at this stage.

Use of checklists and/or pro forma contract notices and tender documents.

(i)Staff drafting the tender specifications should be adequately skilled and proficient in the subject matter; and(ii)The requirements must be explained clearly without referring to branding.



Elimination of candidates/tenderers using unlawful selection/award criteria.

Modification of selection criteria after opening of tenders, resulting in incorrect rejection of tenderer.

Unclear objective selection criteria used in reducing the number of applicants.

The CA must design transparent and objective selection criteria to avoid room for different interpretations.

Issue clear guidelines to the evaluation committee to ensure that such instances do not occur.



Modification of award criteria after the opening of tenders resulting in the incorrect acceptance of tenders.

Lack of transparency/equal treatment during evaluation such as unclear or unjustified scoring given to each tenderer.

Undisclosed conflict of interest by members of the evaluation committee.

A conflict of interest declaration is to be signed by all members of the evaluation committee and other experts prior to their participation in the evaluation process.

(i) If the award criteria need to be modified after publication, the Contracting Authority is to either cancel the tender and reissue or issue an erratum and possibly extend deadline for submission of tenders; and(ii)Evaluation Committee are to be clearly instructed through guidelines that amending award criteria after tenders submission is a violation of the Directive and strictly prohibited.

The Chairperson of the evaluation committee is to ensure that there is written justifications for each decision taken which need to be included in the evaluation report.

44 Winter 2018

FEATURE: EU FUNDS

5. AwardWhen the contracting authority has decided to

whom the contract should be awarded, all bidders

must be informed of the result. After the standstill

period, the contract can be signed. Within 48

days after the contract signature, the Contracting

Authority has to send a Contract Award Notice to the

Official Journal for publication. Failure to publish the

Contract Award Notice is a relatively common error

that can be eliminated through the use of checklists

and key stage controls. As soon as it is noticed that

a Contract Award Notice has not been published,

even after the 48 day period, Contracting Authorities

should nonetheless take immediate action to ensure

that it is published. This will be taken into account in

deciding on any financial correction.

6. Contract ImplementationThe purpose of this stage of the process is to ensure

that the contract is satisfactorily implemented in

accordance with the outcome of the tender process.

For a balanced relationship, the staff administering

the contract on behalf of the Contracting Authority

should be as experienced and competent as those of

the Contractor. Modifications of contracts and award

of additional works to an existing contractor is one of

the most common and serious errors as noted below.

Conclusion

According to the European Commission and

European Court of Auditors reports, during

the 2007-2013 programming period, errors

mentioned-above contributed significantly

to the overall estimated error rate in the

Cohesion policy area, primarily to the error

rates for the ERDF and the CF. Serious errors

led to a lack, or complete absence, of fair

competition and/or to the award of contracts

to those who were not the best bidders. Public

procurement is still a significant source of

errors and there is a long way to go in terms

of analysing the problem and implementing

actions. Moreover, for the 2014-2020

programming period, the rules have been

changed where Member States could face

net corrections if expenditure which has

been declared as legal and regular by the

managing, certifying and audit authorities, is

subsequently found to be effected by error.



Negotiating with the successful tenderer on the scope agreeing to extend or reduce scope and price.

If the Contracting Authority notes prior to the signing of the contract that the scope needs amending, the tender procedure has to be cancelled and tender re-issued.



Award of additional contracts without competition in the absence of justified urgency brought about by unforeseeable events.

Reduction in the scope of the contract during contract implementation resulting in reduction in contract price.

(i) This could be avoided by involving all stakeholders at planning stage; and(ii) If the reduction in scope is material, the contract has to be rescoped and the Contracting Authority must cancel the contract and retender.

If additional works/services are essential then a new contract should be tendered other than in very specific circumstances and with strict limits on the additional value.

FEATURE: EU FUNDS

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46 Winter 2018

ACCOUNTING DIRECTIVES

Transposition of the Accounting Directive

T he Fourth and Seventh Accounting

Directives failed to reach the desired

comparability of financial statements in

the EU, as member states had been provided

with too many member state options (MSOs)

to transpose in their national laws (Burggraaff,

1981). The adoption of these MSOs varies

across the member states and this, together with

the fact that all options under the Fourth and

Seventh Accounting Directives had been used

by at least one member state (EC, 2009), makes

comparisons of financial statements in different

member states difficult. Among other objectives,

Directive 2013/34/EU (hereafter, ‘Accounting

Directive’), sought to address this issue but later

stage political negotiations at European Council

and European Parliament level resulted in 'new

MSOs being introduced or existing MSOs being

maintained’ (EFAA, 2014, p.6) leading to over one

hundred options (EFAA, 2014).

OBJECTIVES

Many of the MSOs found in the Fourth and Seventh

Accounting Directives remained. The literature on

international classification of accounting systems

could predict that most of the MSOs available under

the Accounting Directive could have been transposed

in a manner similar to those provided under the

superseded accounting directives. This article,

which is based on a 2017 Master in Accountancy

dissertation, investigates this with a focus on small

entities. It also seeks to classify accounting systems,

in accordance with selected MSOs, to provide insight

into the extent of their similarity. The transposition

details in the following nine member states were

collected through the use of a questionnaire:

Bulgaria, Czech Republic, Estonia, Germany, Ireland,

Italy, Malta, Slovakia and Spain.

CLASSIFICATION OF ACCOUNTING

SYSTEMS

‘Classification can help to structure data and

understand phenomena’ (André, 2017, p. 2). There

is a large body of literature focusing on international

classifications of accounting systems. Papers with a

specific coverage of Malta are looked at in this article.

Malta first featured in the work conducted by

Sellhorn and Gornik-Tomaszewski (2006), who

propose a classification of accounting systems based

on the choices available to member states in the

IAS Regulation. Their study results in three groups.

Looking at the implementation option related to for

example, the individual financial statements of non-

listed companies, Malta is classified as ‘Level 1 - IFRS

required for individual accounts - all types of firms’,

together with Cyprus. At that time, all companies in

Malta were required to adhere with IFRS. The second

group, ‘Level 2 - IFRS permitted for individual accounts’

includes countries were IFRS are permitted for all

types of firms, such as Denmark, Finland, Germany,

Greece, Hungary, Iceland, Ireland, Italy, Liechtenstein,

Luxemburg, Netherlands, Norway, Portugal, and the

UK. ‘Level 3 - IFRS prohibited for individual accounts

of all types of firms’ includes Austria, Belgium, Czech

Republic, France, Spain, and Sweden.

Malta then features in the related literature in the

study conducted by Nobes (2008) who proposes a

two-group accounting classification based on the

strengths of the equity markets and the degree of

cultural dominance. Malta features in ‘Class A (strong

equity, commercially driven)’ together with seven

other countries/ system: Cyprus, Denmark, Ireland,

Netherlands, Norway, the United Kingdom and IFRS.

The other twenty-one countries are included in ‘Class

B (weak equity, government driven, tax-dominated)’.

Malta is then included in the study conducted by

Forst (2014) who proposes a hierarchy based on

the implementation choices in the IAS Regulation.

Forst’s (2014) findings suggest that ‘the macro-

economic, political, and legal factors which gave

rise to earlier classifications of accounting systems

survive into the IFRS era…’ (Forst, 2014, p.193).

Hierarchical cluster analysis of the options provided

in the IAS Regulation results in three clusters. Malta

forms part of the ‘IFRS integrated countries’ cluster

together with Bulgaria, Cyprus, Estonia, Greece, Italy,

Latvia, Lithuania, and Slovakia. The ‘IFRS leaning’

group is comprised mainly of UK-influenced and

Scandinavian countries: Czech Republic, Denmark,

Finland, Iceland, Ireland, Leichtenstein, Luxembourg,

Netherlands, Norway, Slovenia, and the United

Kingdom. The ‘IFRS antagonistic’ group is comprised

mostly of Continental European countries influenced

by German and French accounting practice: Austria,

LIANA SAID IS AN ASSISTANT ADVISOR AT KPMG MALTA.

MONIQUE MICALLEF LECTURES ON FINANCIAL ACCOUNTING AND REPORTING-RELATED TOPICS AT THE UNIVERSITY OF MALTA.

LIANA SAID

MONIQUE MICALLEF

48 Winter 2018

ACCOUNTING DIRECTIVES

Belgium, France, Germany, Hungary, Poland, Portugal,

Romania, Spain, and Sweden.

Following the transposition of the Accounting

Directive across the member states, André (2017)

classifies the accounting systems in twenty-five

member states, based on the extent of convergence

between IFRS and national GAAP of large, non-listed,

non-financial entities. Five groupings are identified:

(i) ‘Full IFRS’: Cyprus; (ii) ‘Generally aligned with IFRS

and referenced/acknowledged’: Croatia, Denmark,

Finland, Greece, Malta, Poland, Portugal and

Slovenia; (iii) ‘Generally aligned with IFRS for SMEs’:

Estonia, Ireland, Netherlands, Norway, Sweden,

and the United Kingdom. The other countries are

classified within the remaining two categories being

(iv) ‘Generally aligned with IFRS yet not referenced/

not acknowledged’ and (v) ‘Some alignment but

single accounts have other focus’.

THE INFLUENCE OF PREVIOUS GAAP A brief analysis of a number of selected MSOs

common to both the Fourth Accounting Directive

(FAD) and the Accounting Directive follows.

(i) The majority of the MSOs selected saw no

resulting change in accounting treatment on the

transposition of the Accounting Directive:

• Art 31(1)(a) of the FAD; art 6(5) of the

Accounting Directive: Member states can

permit or require the recognition of all

foreseeable liabilities and potential losses

arising in the course of the financial year or a

previous financial year, even if such liabilities

or losses become apparent only between

balance sheet date and the date on which the

balance sheet is drawn up.

• Art 4(2) of the FAD; art 9(3) of the Accounting

Directive: Member states can permit entities

to adapt the format of the balance sheet and

profit and loss account.


Directive: Member states can define cases

of departure from the provisions of the

directive in exceptional cases and lay down

the applicable relevant special rules.

• Art 42(e) of the FAD; art 8(1)(b) of the


permit or require entities to value specific

categories of assets other than financial

instruments by referring to their fair value.

• Art 42(a)(5a) of the FAD; art (8)(6) of the

Accounting Directive: Member states have the

option to permit or require the recognition,

measurement and disclosure of financial

instruments in conformity with international

accounting standards as adopted by the EU.

• Art 20(2) of the FAD; art 12(12) of the


permit the creation of provisions intended to

cover expenses which at the balance sheet

date are either likely to be incurred, or certain

to be incurred but uncertain as to amount or

as to the date on which they will arise.

(ii) Other MSOs saw only one member state (the

member state varies depending on the MSO) change

its accounting treatment:

• Art 6 of the FAD; art 9(6) of the Accounting

Directive: Member states can allow or require

adaptation of the layout of the balance sheet

and profit and loss account in order to include

the appropriation of profit or the treatment

of loss.

• Art 33(1)(c) of the FAD; art 7(1) of the

Accounting Directive: Member states may

permit or require entities to measure

and present fixed assets at their revalued

amounts.

• Art 59(1) of the FAD; art 9(7)(a) of the

Accounting Directive: Member States can

permit or require participating interests to be

accounted for using the equity method.

• Art 59(1) of the FAD; art 9(7)(a) of the

Accounting Directive: Member States can

permit or require that the proportion of the

profit or loss attributable to the participating

interest be recognised only to the extent

of the amount corresponding to dividends

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50 Winter 2018

FEATURE: TECHNOLOGY

already received or the payment of which can

be claimed.

(iii) Minimal MSOs saw several member states

change their accounting treatment:

• Art 11 and art 27 of the FAD; art 14(1) and

14(2) of the Accounting Directive: Member

states can allow entities to draw up abridged

balance sheets and/or abridged profit and

loss accounts. Bulgaria, Czech Republic and

Estonia previously disallowed the drawing up

of an abridged balance sheet and/or profit

and loss account, but are now permitting

them under the Accounting Directive. Both

Malta and Ireland previously allowed the

drawing up of the abridged profit and loss

account but this is now disallowed.


Directive: Member states can exempt small

entities from preparing management reports

in certain circumstances. Several member

states have now taken up the option including

Czech Republic, Estonia, Ireland and Malta.

Therefore, apart from the latter MSOs, overall small

entities in different jurisdictions can still adhere to the

same accounting treatment that they had adhered to

prior to the transposition of the Accounting Directive.

This suggests that the way options were transposed

by member states under the FAD influenced the way

the options were transposed under the Accounting

Directive. Based on the options selected and on the

participant member states, the Accounting Directive

seems to have had a minimal effect on enhancing

comparability between member states in relation to

small entities.

CLASSIFICATION OF ACCOUNTING SYSTEMS The Two-Step Clustering Classification procedure

was utilised to classify the accounting systems

relating to small entities in the nine member

states. The clustering is carried out based on the

similarities and differences in the options taken up

or not, available in the Accounting Directive. Table

1 reveals the existence of two clusters with the two

main determinant clustering variables relating to

the MSOs on the abridged balance sheet and the

abridged profit and loss account.

Most of the classifications reviewed earlier have

a different focus such as the accounting systems

related to large, listed entities or the IAS Regulation.

Nobes (2008) classifies Ireland and Malta as Class

A (strong equity and commercially driven) but

Slovakia as Class B (weak equity, government driven,

tax-dominated). Forst (2014) classifies Malta and

Slovakia as IFRS integrated whilst Ireland is classified

in the IFRS leaning group. André (2017) classifies

Malta and Ireland as being generally aligned with

IFRS and IFRS for SMEs respectively. Interestingly,

other countries classified together with Malta in

previous literature are, in this study, classified in

cluster 1. Such different classifications result due to

the different focus of the various research, with this

particular study being the first to cluster accounting

systems with a focus on small entities. Such a

focus brings along important considerations into

the equation, including the extent of relief of the

administrative burden of financial reporting on small

entities – entities which play an important role in the

economies of the various member states. In view of

this, some member states sought to maximise the

benefits flowing to small entities as can be seen in the

options relating to the preparation of management

reports, the abridged balance sheet and the abridged

profit and loss account.

CONCLUDING NOTE

This article suggests that previous national

GAAPs continue through the new national

GAAPs, even following the transposition of the

Accounting Directive, such that international

comparability remains in doubt. Two clusters in

fact result. This suggests that harmonisation has

not been fully achieved perhaps to the extent

originally expected, due to the numerous MSOs

provided. These might be however, considered

to be inevitable, as the needs and circumstances

across the different member states vary.

Cluster 1 Cluster 2

Bulgaria

Table 1. Cluster Analysis

IrelandCzech Republic Malta

Estonia SlovakiaGermany

ItalySpain

52 Winter 20185252

IFRS

IFRS 9for Non-Financial Institutions

Although the new impairment model is expected to

hit banks and other financial services companies the

hardest, Non-Financial Institutions (NFIs) will also

be impacted by larger and more volatile bad debt

provisions on trade, lease receivables and contract

assets, and the impact of expected credit losses on

financial investments. The following high-level impact

assessment is thus made mainly with reference to

financial instruments commonly held by NFIs.

IMPAIRMENT

The new impairment model revolves around

‘expected credit losses’ (ECLs) and replaces IAS 39’s

backwards looking ‘incurred loss’ model. ECLs are

a probability-weighted estimate of credit losses i.e.

they are calculated as the present value of cash

shortfalls (the difference between the cash flows

due under the contract and those expected to be

received) over the expected life of the financial asset.

These requirements apply to debt assets measured

at amortised cost or FVOCI, contract assets under

IFRS 15 Revenue from Contracts with Customers,

lease receivables, and certain financial guarantees

and loan commitments. The impairment model does

not apply to financial assets measured at FVTPL and

equity instruments however, as these are outside the

scope of the impairment requirements.

The ECL model has a dual measurement approach:

• Lifetime ECLs, which are defined as ECLs

resulting from all possible default events over

the life of a financial asset, and

• 12-month ECLs, which are defined as the portion

of lifetime ECLs that represent the ECLs resulting

from those default events on the financial asset

that are possible within the 12 months after the

reporting date.

Hence, a financial instrument which is measured

under lifetime ECLs will command a larger loss

allowance than an identical financial instrument

which is measured under 12-month ECLs.

SIGNIFICANT INCREASE IN CREDIT RISKAt each reporting date, an entity assesses whether

the credit risk on a financial asset has increased

significantly since initial recognition. IFRS 9 does not

define this term, instead, an NFI has to define it in

the context of its type of financial instruments. The

consequence of credit risk increasing significantly

since initial recognition is that a loss allowance, equal

to lifetime ECLs, must be recognised.

To illustrate this assessment in practice, consider two

financial assets which have the same risk grading at

reporting date. Despite having the same risk-grading,

the analysis is made relative to initial recognition and

thus only the financial asset which had the largest drop

in credit rating, consistent with the NFI’s definition of a

significant increase, will recognise lifetime ECLs.

Financialasset

A

B

1

2

3

3

yes

no

Lifetime

12-month

Credit rating atinitial recognition

Credit rating atreporting date

Significant increase in creditrisk sine initial recognition? ECL

IFRS 9 Financial Instruments is replacing IAS 39 Financial Instruments: Recognition and Measurement with effect from annual periods beginning on or after 1 January 2018. IFRS 9 brings about major changes to the classification and measurement of an entity’s financial assets, reviewed in the first part of this article published in the autumn edition of the Accountant, and the calculation of impairment thereon, and is expected to have a major impact across all organisations, particularly financial institutions.

GEORGES XUEREB IS AN ASSISTANT MANAGER AT KPMG MALTA AND FORMS PART OF THE FIRM’S ACCOUNTING ADVISORY SERVICES.

JONATHAN DINGLI IS A DIRECTOR IN ADVISORY SERVICES AT KPMG IN MALTA. HE LECTURES ADVANCED FINANCIAL REPORTING IN THE MASTER IN ACCOUNTANCY POST-GRADUATE DEGREE AT THE UNIVERSITY OF MALTA AND IS A MIA COUNCIL MEMBER.

GEORGES XUEREB

JONATHAN DINGLI

54 Winter 2018

IFRS

There is however an exception in this assessment if

credit risk is low at the reporting date. This is the case

when:

1. the financial asset has a low risk of default;

2. the borrower has a strong capacity to meet

contractual cash flow obligations in the near term,

and

3. adverse changes in economic and business

conditions in the longer term may, but will not

necessarily, reduce ability of the borrower to fulfil

its contractual cash flow obligations.

The key impact of this exception is for externally rated

investment grade bonds. It is important to note that,

just because an instrument is no longer of investment

grade, it does not necessarily mean that there has been

a significant increase in credit risk. Similarly, a financial

asset of investment grade does not automatically meet

the low credit risk exception because the credit rating

may be out of date.

The standard also includes a rebuttable presumption

that credit risk on a financial asset has increased

significantly when payments are more than 30 days

overdue, and this is the latest point at which lifetime

ECLs should start to be recognised. As the delinquency

of a debtor is a lagging indicator and thus normally

information would have been available to identify a

significant increase well before the 30 days indicator,

an NFI should seek to obtain this more forward-looking

information, if available, without undue cost or effort.

There are instances when this presumption may be

rebutted, such as if non-payment by the borrower was

only due to a technical or administrative oversight rather

than resulting from the borrower’s financial difficulties.

IMPACT OF IMPAIRMENT REQUIREMENTS ON NFISThe magnitude of the ECL model will depend on the

extent and nature of an entity’s financial assets. Under

IAS 39, impairment losses would only be recognised once

objective evidence exists that a loss event happened

after initial recognition, such as missed contractual

payments by a debtor. Under IFRS 9, impairment losses

will be pre-emptively recognised before actual losses

occur and thus the scope of impairment has now

increased significantly.

Applying the new ECL model to the same broad asset categories identified earlier will allow NFIs to better understand how to approach the new impairment

requirements.

LOANS, TRADE AND LEASE RECEIVABLES AND CONTRACT ASSETSBad debt provisions are likely to be larger and more

volatile. Impairment of trade receivables and contract

assets without a significant financing component

will always carry a loss allowance equal to lifetime

ECLs, whilst for those with a significant financing

component, and lease receivables, an accounting

policy choice is available to either recognise lifetime

ECLs or apply the general impairment model. This

is known as the ‘simplified approach’ for trade

receivables, contract assets and lease receivables.

DEBT SECURITIESImpairment losses must be recognised for

investments in debt securities not classified at FVTPL.

These reflect probability-weighted estimates of ECLs

based on historical experience and forward-looking

information: 12-month ECLs for assets that have not

suffered a significant increase in credit risk; lifetime

ECLs for those that have.

NFIs should thus review the contractual terms and

redesign impairment methodology to comply with

IFRS 9. They should review credit risk management

processes and data available, and assess whether

credit risk management systems can record

changes in credit risk since initial recognition. They

will also have to design and test new impairment

methodologies.

DISCLOSURESThe standard brings with it extensive qualitative and

quantitative disclosures generally by class of financial

instruments, including:

• a description of credit risk management

practices, including how an entity determined

whether credit risk has increased significantly;

• an explanation of inputs, assumptions and

techniques used when applying the impairment

requirements; and

• a reconciliation of loss allowances and

explanation of significant changes in the gross

carrying amount.

NFIs should assess current systems to identify data

gaps that must be filled to meet the new disclosure

requirements. The general financial instrument

disclosure requirements covered by IFRS 7 Financial

Instruments: Disclosures are of course applicable –

NFIs should provide enough disclosures to enable

users to understand (i) the significance of financial


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IFRS

instruments, (ii) the credit, liquidity and market risk

exposures resulting from said instruments, and (iii)

how they manage these risks.

TRANSITIONIFRS 9 allows various transition options. NFIs shall

apply IFRS 9 retrospectively, in accordance with IAS 8

Accounting Policies, Changes in Accounting Estimates

and Errors, with significant exemptions on transition

with respect to classification, measurement

and impairment requirements. A robust impact

assessment phase to transition to IFRS 9 is imperative

to ensure a successful implementation project.

CONCLUSIONTransitioning to the new standard will consume energy and resources over the next few months. Post-implementation reviews following adoption of this standard will be high on the agenda in years to come as entities have to demonstrate adherence to their business models and test the validity of assumptions applied in the ECL model.

56 Summer 2017

The role of the Money Laundering Reporting Officer (“MLRO”) carries significant responsibility and can be very challenging and lonely at times. It should therefore only be undertaken by an appropriately experienced individual.

All subject persons are required to appoint an officer to carry

out the function of the MLRO. The said individual has the

responsibility to ensure the subject person complies with the

Prevention of Money Laundering and Funding of Terrorism

Regulations (“PMLFTR”) and the relative guidance. The

MLRO should be “of sufficient seniority and command as

the reporting officer…” 1 of the subject person.

The following are the main duties and responsibilities of the

MLRO:

1. Ensuring the subject person has the

Prevention of Money Laundering and

Financing of Terrorism (“PMLFT”) policies and

procedures in place including the exercise of

effective influence on the said policies.

These need to include the following:

• The legal and regulatory obligations;• The due diligence procedures it expects staff

to undertake when conducting business, in particular customer identification and verification and the purpose an intended nature of the business relationship;

• The training in relation to PMLFT all members of staff are expected to carry out;

• Set the subject person’s objectives and what it intends to do in order to prevent itself from being used for the purposes of laundering money; and

• Process regarding internal and external reporting.

These should be set out in a clear and accessible form

and reviewed on a frequent basis to ensure they are

kept up to date with the regulatory and legislative

changes. The MLRO should monitor the effectiveness

of the policies and processes and the risks in order to

make changes where applicable.

When changes are made to policies, procedures or

processes, the MLRO should communicate this to all

members of staff and relevant training provided.

2. Knowing the subject person’s clients and

ensuring Customer Due Diligence (“CDD”) is

being carried out

CDD measures are a key part of the PMLFT

requirements. It enables the subject person to know

who their clients are and ensure they do not accept

clients outside their risk appetite. It is imperative that

the subject person understands its clients’ regular

business pattern of activity in order to be able to

identify any abnormal business patterns or activities.

The MLRO is responsible to determine the degree

of CDD to apply and assist in adopting a risk-based

approach, taking into account the types of customers,

business relationships, geography and products in

order to target the risks of money laundering and

terrorist financing.

1 Article 15(1)(a) of the Prevention of Money Laundering and Financing of Terrorism Regulations

TipSubject persons (other than sole practitioners) should have an independent AML review to ensure the adequacy and effectiveness of their processes and any weaknesses are identified and addressed. In larger firms this can be carried out by the internal auditor function.

GETTING IT RIGHT

Guide to the Duties of the Money Laundering Reporting Officer

GETTING IT RIGHT

ARIANE AZZOPARDI IS AN ASSOCIATE DIRECTOR WITH KPMG MALTA WITHIN THE QUALITY AND RISK MANAGEMENT FUNCTION.

ARIANE AZZOPARDI


GETTING IT RIGHT

3. Reporting Obligations

It is the MLRO’s responsibility to consider internal

reports of money laundering and decide if there is

sufficient grounds for suspicion to file a suspicion

transaction report (“STR”). The MLRO is also

responsible for deciding whether consent is required

from the FIAU for provision of service to continue,

and how to conduct the business relationship while

a consent decision is awaited. It is imperative that

the MLRO has access to all the information and

resources in order to enable the MLRO to carry out

that responsibility. Following the receipt of an internal

STR, the MLRO may conclude, for justifiable reasons

that the report does not give rise to knowledge or

suspicion of money laundering. In such cases, the

MLRO should keep a copy of the internal STR together

with the rationale of why the report did not warrant a

submission to the FIAU. It is important that the MLRO

keeps record of all internal reports, together with

details of the following:

• Requests for information/documentation;• The rationale for deciding whether or not to

submit a STR; and• Any advice given to engagement teams about

continued working and any consent requests made.

4. Training

To ensure that the correct procedures are being

followed, all relevant employees of the subject person

must be made aware of their obligations under the

Regulations. The MLRO should develop and implement

a training programme which is applicable to the subject

person in terms of PMLFT. Training can be delivered in

several different ways: classroom training, e-learning,

external training or a combination of them all. Records

indicating who has received training should be kept

identifying the areas covered. The training programme

itself should include:

• The legal and regulatory duties of the employees;• The risk of money laundering and terrorist

financing;• The identity of the MLRO and designated

employee (if applicable);• ‘Red flags’ of which staff should be aware when

conducting business in order to identify suspicion of money laundering;

• How to deal with transactions which might be related to money laundering and financing of terrorism; and

• The process with respect to internal reporting

The MLRO should be the first point of contact within the

subject person with respect to any issues related to PMLFT.

In addition, the MLRO should have sufficient resources and

time in order to undertake the role effectively.

Tip What information should the MLRO request when assessing an internal STR?Should you know, suspect or have reasonable grounds to suspect that someone is engaged in money laundering:• Do you have information/documentation on the

suspect? • The duration of the business relationship.• Did the internal report identify the laundered

property? What is the underlying criminal activity?• Do you have access to all the transactions/activity

carried out by the client for which you received a report?

TipTo ensure that the client-facing staff are carrying out the correct Customer Due Diligence, the MLRO should ensure they are made aware of the subject persons procedures and that they are given appropriate training in relation to the application of CDD.

Tip PMLFT Training programme• A formal training plan would assist in ensuring that

the right staff receive the right training to enable them to comply with their AML obligations.

• Organise tailor made training for the different roles in each business area within the subject person and address the different risks posed by the specific services they provide.

Tips• Identify which areas of the business are subject to the

most risk from an AML perspective.• Maintain links with business areas and keep informed

on all the new products and services the subject person is providing.

• Understand the concerns members’ staff have in relation to ML/FT.

• Monitor staff compliance with the firm’s money laundering policies.

• Ensure members of staff are aware of the ML/FT risks.

58 Winter 2018

CASH FLOW

DIRECTOR GENERALMALTA ASSOCIATION OF CREDIT MANAGEMENT

JOSEF BUSUTTIL

Working directly in the field of credit management for the past seventeen years both in Malta and overseas, I reckon that a number of businesses, especially SME’s, do not distinguish the salient difference between cash flow and profit. Hence, they do not appreciate the importance of having sound cash flow at all times and the significance of securing long-term profit to sustain competitive advantage in the market whilst maintaining the necessary business growth.

Very often, poor cash flow is related to a business

experiencing declining sales. But poor cash flow can

happen to a business with sales bursting through the

roof. The number of bankruptcies in the supermarket

sector in Malta are all good examples of high sales

turnover with an inability to pay their debts and to

meet their day-to-day bills.

In the current economic boom, where the construction

industry in Malta is thriving, lessons should be

learnt from what happened in other sectors. It is

commendable for the construction firms to refrain

from barter trading practices as much as possible in

order to protect their cash flow. The advantages that

bartering may bring to construction companies are

acknowledged and understood but such practice may

well lead to operational difficulties, including poor cash

flow.

Unless a business has adequate cash reserves to meet

all the costs regularly and on time, it will be unable

to deliver its side of the bargain, receive payments,

and make a profit. Irrespective of the profit potential,

unless the business has sufficient cash flow to operate

with, it will not trade effectively. Businesses should also

keep in mind that cash flow is not just the cash inflows

and outflows, but is also dependent on the timing of

these cash movements to prevent late payment.

It is also unfortunate to note that in Malta many

businesses are acting as bankers to their customers

to an extent that they may be limiting themselves to

develop further - due to lack of adequate cash flow, or

they may be even sacrificing their resources to collect

dues from their customers rather than maximising

their resource utilisation in other profitable business

activities. This is hindering further growth to the

businesses concerned and to the economy at large.

Late payment is also a big issue for all those involved

in selling on credit. To appreciate the real cost of late

payments, just imagine what will be the effect on

a business if all the money owed for over 30 days

(Overdue Account Receivables) was in the business’

bank account!

One should be reminded that late payment interest

together with late payment fees can be charged by the

creditor in accordance to the Late Payment Directive

2011/7/EU which was transposed to Maltese law by

Legal Notice 272/2012.

By this Legal Notice, local suppliers of goods and

services (trade creditors) should note that:

1. Suppliers of goods and services have the right to charge interest on late payment equivalent to 8% plus the ECB reference rate from the day following the date or the end of term for payment agreed in the contract of sale.

When the payment terms are not specified in the

contract of sale, the supplier of goods and services is

entitled to interest on late payment following thirty

calendar days from the date of receipt of goods or

services, or thirty days from the date of invoice.

PROTECT YOUR

A4 + Bleed Advert for The Accountant PRINT.indd 1 22/01/2018 21:01

60 Winter 2018

2. The period for payment agreed by the parties in the contract of sale may not exceed 60 calendar days. However, the parties may expressly agree for a longer period as long as the extension of time is not grossly unfair to the supplier of goods and services.

3. The Supplier of goods and services may proceed with the claim for late payment against the client (debtor) without reminding the client that the amount is due.

4. In the case of transactions between undertakings and public authorities, the period for payment shall be thirty calendar days if not expressly agreed in the contract and may not exceed sixty calendar days if fixed in the contract.

However, in case the client is a public authority which

carries out economic activities of an industrial or

commercial nature and if the public authority provides

health care, and the payment period is not expressly fixed

in the contract, the payment period shall not exceed sixty

calendar days.

5. Agreement between the supplier of goods and services and client to extend the date of receipt of invoice is null and void.

6. In addition to the interest charges on late payment, the supplier of goods and services is entitled to reasonable compensation for the supplier’s own recovery costs at a minimum of €40.

7. When the contract of sale provides for the retention of title between the seller and the buyer, the seller is entitled to retain title over the goods until the price has been paid in full by the buyer.

Having such legislation in place is surely suitable for the

businesses selling on credit. Nevertheless, suppliers of

goods and services should act proactively to avoid late

payment which will negatively affect their cash flow.

They should always analyse the credit worthiness of

the customer prior to granting credit and also monitor

continuously the account once credit has been granted

and until it has been paid in full and as agreed by the two

parties.

This is one of the roles of The Malta Association of Credit

Management (MACM) in Malta. MACM provides early

warning signs and indications of payment performance

of various traders coming from all sectors of the Maltese

economy, thus, helping its members, Maltese creditors

and businesses, to identify potential payment pitfalls in

prospective and existing customers.

It is indeed believed that trade credit improves customer

long-term relationship, and can also be used intelligently

to gain competitive advantage, but it should be properly

and professionally granted and managed.

Unfortunately, our competitive market and trade

culture do not help much to keep up with proper cash

flow management. The small size, fragmented and

generally saturated Maltese market tends to force

suppliers to oversell - to gain a bigger share of the market

- and sometimes suppliers go beyond their means

when granting credit to their customers. More often

than not, trade credit is still being done verbally with

no documented credit terms and conditions, let alone

signed credit agreements.

This culture should definitely change. Businesses selling

on credit should be more proactive and professional

when granting credit, to the benefit of the business

organisation itself which would then reflect on the wider

economy it operates in.

It should be understood by everyone involved that trade

credit is not a right of the customer, but should be given

only to those customers who are committed and able to

honour the trade credit terms and conditions. Businesses

should never allow their clients to dictate credit amounts

and terms by threatening of doing business with the

competitors, but should strictly adhere to the Credit

Policy of the organisation.

Effective cash management is indeed imperative for

every business organisation, now more than ever

before. Our current economic boom stimulates sales

and competition and businesses may be carried away by

the high sales turnover and overlook proper cash flow

management.

Needless to say, effective cash management implies

accuracy, completeness, authorisation whenever

needed, disclosure and a well reporting system of all cash

movements within the organisation. Management can

only forecast, plan and implement business activities if

the cash flow is controlled, monitored, and forecasted.

So, find ways to defend your cash flow - Poor cash flow

can be the death of an otherwise healthy business!

CASH FLOW

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The Accountant Jan 2018 A4 v2.pdf 1 15/01/2018 12:08:37

62 Winter 2018

LOCAL NEWS

LOCAL NEWSKPMG APPOINTS TWO DIRECTORSKPMG has appointed Thomas Galea and Adrian Mizzi

as Directors, with effect from 1 October 2017 and 1

January 2018 respectively. This reflects the continued

growth that the firm has achieved in 2017 and which is

expected to be sustained in the coming years.

THOMAS GALEAThomas joined KPMG in 2005 as an audit team member

and successfully completed his ACCA qualification in

December 2006. He is an accountant by profession,

holds a Practising Certificate in Auditing and is also

a Fellow of the Malta Institute of Accountants and a

member of the Malta Institute of Management. During

the past 12 years, other than in Malta, Thomas has

also worked within the audit function of the Irish and

US KPMG offices gaining experience in a number of

industries, particularly Banking and Middle Markets.

He is also active in training delivery at KPMG, regularly

contributing to staff’s professional education and

performance development.

ADRIAN MIZZIAdrian is a seasoned professional who has worked

extensively in the strategy formulation and

management of information technology in various

industries, including telco, financial services,

manufacturing and logistics. Adrian has over 20 years’

experience working in various senior Information

Technology functions covering the entire spectrum

of the systems development lifecycle, IT project

management, IT strategy, IT service management,

selection and implementation of IT solutions, process

reengineering, data and analytics, IT risk management

and change management.

40320 PIECES FOR PUTTINUBy Steven Galea, accountant

They say life is one big puzzle. In my case it is that,

and a lot of “smaller” ones. I have been doing jigsaw

puzzles since I was five. Fast forward nearly 50 years,

and puzzling is ideal for my lifestyle, a hobby I can

enjoy, abandon, and return to at will. Regardless of

work deadlines, travel, family and little time to relax

– the puzzle board is always there, laid out, waiting -

eventually the puzzle will be completed.

I am not alone in this hobby, so my latest project,

40320 PIECES FOR PUTTINU, is a team effort and a

combination of puzzling with a fundraising campaign

for PUTTINU CARES.

I purchased the world’s largest fully interlocking

jigsaw puzzle, the 40320 piece Memorable Disney

Moments. This is a monster puzzle, 22ft x 6ft, with

a picture of 10 different Disney cartoons, ideal for a

children’s hospital. 10 volunteers offered to build a

frame each.

I would like to collect €40,320, symbolically €1 for

each piece of the puzzle. This will go towards the €17

million UK housing project for Maltese children and

families. A meeting with Puttinu Cares CEO Rennie

Zerafa left me speechless at the shocking statistics.

The number of cancer patients continues to grow,

but thankfully also the number of patients who are

cured.

Donations are easy, a simple blank SMS to the following designated numbers: 50617380/ €2.33, 50618939/ €6.99, 50619225/ €11.65.

The campaign runs from January to May 2018,

and hopefully, a team effort involving the puzzle

assemblers, sponsors and the public, will result in the

presentation of the completed puzzle and a donation

of €40,320 during the PUTTINU CARES NATIONAL

FUNDRAISING MARATHON in May 2018.

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64 Winter 2018

AWARD CEREMONY

The MIA’s New Members’ Ceremony for 2017

On the 18 October 2017, the Malta Institute of Accountants welcomed 257 new members. The following are some of the photos of the event.


VALLETTA

The Architectural Heritage of

VALLETTAAlthough more than four centuries have passed since

that fateful day, Valletta still provides one with a

unique opportunity to walk the streets, enjoying the

architectural styles that are second to none. Built by

the Knights of the Order of St John, the city can be

divided into a number of different sections. There

were the official buildings that the Order needed for

its administration. National hostels, locally referred

to as auberges, and churches were also erected;

the various Religious Orders that were already

established in Malta acquired properties in Valletta

and also had their own churches and convents built;

a number of other small religious communities

were established within their own buildings; private

Knights erected their own palaces, while the rest of

the city was given over to the local population. This

was to be maintained throughout the next 450 years

of the existence of Valletta.

The auberges are part of the architectural heritage

of Valletta. Originally built in the second half of the

16th century, the majority of them were either added

to, or even rebuilt in the following centuries. Yet, the

auberge of Aragon retained its original structure.

This is the largest building to retain the architectural

concept of Gerolamo Cassar, the Maltese architect,

who had been responsible for the building of the main

structures that were commissioned by the Order.

The plain façade is a reflection of how 16th century

buildings were like. The other auberges reflect the

changing architectural styles. Most impressive of

them all is the Auberge of Castile, a mid-18th century

building. Another important architectural treasure

On 28 March 1566, the ceremony of the laying of the first stone of Valletta was held amidst great rejoicings and anticipation, on still unbuilt ground, on the peninsula flanked by two naturally deep harbours. This was a few months after the successful end to the Great Siege of 1565, and finally the realisation of a dream for the Knights of the Order of St John. Yet, this was not a decision that had been taken lightly and only taken after the successful end of the Great Siege. Before the Order had taken possession of Malta in 1530, a delegation that was sent by the Order in 1524 to report about the suitability of the island as a base for the Order had already suggested the building of such a fortified city. In the years preceding the Great Siege, a number of military architects visited Malta, and suggested the building of such a fortified city; some of them had also provided initial plans. Yet, it had to be the intrepid Grand Master Jean de Valette who finally made sure that this long-awaited project would see the light of the day.

VINCENT ZAMMIT MA (BAROQUE STUDIES), BA (MEDITERRANEAN STUDIES) IS A VISITING LECTURER AT THE INSTITUTE OF TOURISM STUDIES (MALTA) AND AT THE UNIVERSITY OF MALTA.

VINCENT ZAMMIT

66 Winter 2018

VALLETTA

that we find in Valletta is the former Grand Master’s

palace, today the Presidential Palace. The palace

passed through various changes, and its façade

reflects this. Other important buildings dating to the

time of the Order are the present day Mediterranean

Conference Centre (16th to 17th centuries), originally

built as the hospital of the Order; the Castellania,

originally built in the 16th century, but completely

rebuilt in the 18th century; and the Municipal Palace,

another 18th century building.

Various members of the Order of St John built their

own private residences. One of the most visited

is Casa Rocca Piccola, which dates to the 16th

century, although it continued to be added to in the

following centuries. Another interesting building is

Hostel de Verdelin, recently restored. A mid-17th

century building, this is reputed to be amongst the

first Roman baroque buildings that were erected in

Valletta.

The rich religious architectural heritage that one

meets with in Valletta is extraordinary. The present

Co-Cathedral of St John, originally built as the

Conventual Church of the Order, dates to the 16th

century. It has retained its façade, but the interior

passed through a number of architectural and artistic

changes. There are other churches in Valletta, built by

the Langues, reflecting an interesting heritage dating

from the 16th to the 18th century. The church of Our

Lady of Victory is reputed to be amongst the first of

such churches built in Valletta. Yet, it was added to

throughout the centuries following the Order’s stay

in Malta. Other churches reflect the baroque style

that became popular from the second half of the

17th century onwards.

With the departure of the Order from Malta, and

after the very short two-year stint by the French

Republican troops, Malta passed onto the British.

This was to herald a different period, a different style

of architecture. Some of the last buildings built by

the Knights in the 18th century indicate that there

already was a tendency to abandon the baroque. Yet,

the arrival of the British was to bring this change on

to a permanent basis. Amongst the first neo-classical

buildings that were built in Valletta were the portico

facing the Grand Master’s Palace, commonly known

as the Main Guard; the portico at Auberge of Aragon;

and the monument to Sir Alexander Ball at the Lower

Barrakka Gardens. Soon after, the Pro-Cathedral of

St Paul was built, a neo-classical building in a mainly

baroque city. Yet, the church dedicated to St Andrew

was built in another different architectural style, the

Gothic Revival.

Several buildings were erected during the 19th

century, making use of different styles of architecture.

The Palazzo Buttigieg-Francia, built to the designs of

Giuseppe Bonavia, is said to have made use of hybrid

styles. Facing the building was the Royal Opera

House, with its Neo-Classical style of architecture.

The Chamber of Commerce was another built in the

same style, while the Valletta Market Hall made use

of metalwork.

The 20th century was to see the introduction of new

styles, and the eventual rebuilding programme after

the devastating air-attacks during the Second World

War. The massive block of apartments, Vincenti

buildings, was erected in Valletta in the 1930s. The

aftermath of the war was to lead to the building of

new housing apartments, new Law Courts, and the

restoration of a number of old buildings. Although

in the 1960s the 19th century entrance to Valletta

was pulled down for a new entrance to be erected,

by the beginning of the 21st century this was also to

be replaced with a modern entrance concept, built

to the designs of the world-famous Renzo Piano. The

last major building erected in Valletta is Parliament

House.

On entering the city, pause for a few minutes at the

corner of the Parliament and the ruins of the Royal

Opera House, and look around you. From here

one can easily identify buildings that were erected

throughout the last 450 years.

Valletta, a UNESCO World Heritage City, a living city of

various architectural styles and treasures.

Image source: www.peterktravels.com

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THE PROPERTYThe committees’ modus operandi was restructured by increasing the number of committees/groups in line with the new realities that we as professional accountants are faced