Contributors from Peru were asked three questions: What were the highlights/trends in your market last year? (i.e. important mergers, regulatory changes, economic situation etc.); What are the opportunities and challenges for accounting firms in the market?; What are the expectations for the future short/medium/long term?
By Karl Matson, country manager, Biz Latin Hub, 3E Accounting
According to the Inter-American Development Bank, Peru is one of the most important and fastest growing economies in Latin America.
Peru is a key player in the region, flaunting diverse characteristics such as a variety of climates, a large territorial area, significant natural resources and long-lasting macroeconomic and political stability. It has a remarkable annual growth rate with a low inflation rate of 2.9% as well as a growing middle class and dynamic rates of GDP growth.
Since 2016, Peru has had an ambitious new president, Pedro Pablo Kuczynski, who has been highly committed to keeping the country open to foreign trade and investment and encouraging economic diversification. Because its economic base facilitates investment and bond issuance, Peru’s GDP is forecasted to grow by 3.7% this year, placing it at the forefront of South America’s economic expansion.
One of the main changes in Peru this year was the introduction of an immigration law, which came into effect on the 27 March. This new legislation involves a number of changes with the key objective of simplifying the immigration law and protecting fundamental rights of foreigners and nationals. Another regulatory change this year was the enactment of tax reform, effective since 1 January. The main changes within this include increasing the corporate tax rate from 28% to 29.5% and reducing the dividends withholding tax rate from 6.8% to 5%.
As the Peruvian economy and foreign direct investment grows, more opportunities are presented to the accounting sector. Peruvian companies have started to gain interest in professional accounting services, in order to focus on main business activities.
The main challenges of accounting firms in Peru is attracting and developing new business, as it is getting more and more difficult to generate new clients, due to high competition in the market from major international consulting firms. Apart from that, technology keeps accounting firms on their toes as they try to keep up with fast-paced changes to meet ever-changing customer expectations and demands.
Therefore, marketing for accounting firms is getting more and more important to attract clients as well as building a positive customer experience for clients. The demand for consulting services within the country is increasing and, at the moment, the most requested of these services in the country is tax consultancy.
Peru’s economy will be growing, but it also faces weaknesses because it depends on natural resources and the mining industry. Trade and foreign investment is very important to Peru’s president and, if Peru deepens its structural reforms to improve competitiveness, there is no doubt that Peru will continue on its road to success.
Regarding professional business services, accounting’s importance in the public sector grows as public investment increases in Peru. As for the private sector, consulting on taxes will continue gaining traction, since income tax has now become the main tax of the Peruvian government.
By David Eyzaguirre Q, audit manager, Baker Tilly Peru
In the economic scenario of the Latin American region, Peru is the third country with the lowest rate of inflation in 2016, so this article is limited to the Peruvian case, in that particular year.
Its GDP grew by 3.9 percent during 2016, which was driven by the activity of the primary sectors and mainly by the mining sector registering an increase of 21.2 percent. This was not reflected in the non-primary sectors, which reached its lowest growth in the past seven years.
For the third consecutive year, this was affected by the decline in the private investment, decrease in the public spending in some sectors such as construction and non-primary manufacturing and also by the domestic demand declining to 0.9 percent from 2.9 percent in 2015.
In addition, the inflation rate has decreased from 4.4 percent in December 2015 to 3.2 percent in December 2016. Local currency appreciated by 1.7% primarily due to the recovery of the prices of commodities, capital inflows to the region, the favourable development of its economy relative to their peers, less uncertainty regarding global economic growth and the certain normalisation of the financial markets.
Under this situation, those responsible for the preparation of financial statements will face some challenges, one of which is related to the registration, control and compliance of tax obligations, considering the complexity of their nature.
In 2016, there were growing expectations for the application of IFRS 9 financial instruments which will be required on annual basis across the world effective from early January 2018.
In response to the new standard IFRS 15, there has been an increasing interest in revenue recognition. This regards revenue from ordinary activities in client contracts, for which they have to apply estimates and professional judgement in the development of assumptions. It is important to note that this rule will come into force for annual periods beginning on or after 1 January 2018.
Another rule that attracts much attention is IFRS 16 leases whose application will greatly change the accounting model with no distinction between finance and operating leases. This will consider the recognition for each leased asset of an asset for the right use of the goods, and of a liability, on the occasion that future payments are made in instalments.
This also takes into account the new ISA 701 "communication of key audit issues in the report of the independent auditor" which came into effect from December 15, 2016. This requires the inclusion of important information called as the key issues in the audit report which will improve the auditor's communication. This is a situation that has generated reactions and controversies, including many questions that require thorough analysis in order to get answers about the proper application of that rule.
In this sense, those who prepare financial statements should provide what they are requested by the auditors and they have to ensure what they provide is sufficient and solid and supported by relevant evidences, particularly when they are emphasised as important by auditors.
Based on the provisions of ISA 701, key issues need to be identified and properly documented and will have to provide greater transparency on the audit.
The quality of accounting information is also important for the market demand which is referred as to IAS 1 which sets the stages for the presentation of general purpose financial statements.
Similarly, audit firms establish and maintain a quality assurance system within the framework of NICC1, to provide reasonable assurance meaning that reports issued by the firm or the engagement partner are appropriate under the circumstances they are provided.
Therefore, quality of information is one of the key aspects which guides an entity to adopt a quality management system as a strategic decision to improve its overall performance and to provide a solid foundation for sustainable development initiatives.
With this orientation toward excellence, Baker Tilly Peru has recently obtained ISO 9001 – 2015 certification, together with the potential benefits of implementing a quality management system based on the International Standard.
These benefits, among others, are related to the ability to provide services that meet client requirements regularly, as well as legal and regulatory requirements. In addition to facilitating opportunities to increase client satisfaction, and adequately address the risks and opportunities associated with their context and objectives, and the ability to demonstrate compliance with system requirements specified quality management.
By Luis Acosta Peche, Partner SMS Lima
The Peruvian mergers and acquisitions market will grow an estimated 20%-30% on the previous year.
There were some 60 deals, and 31 between public and private organisations, including those in the middle tier transactions (below US $ 300 million).
On the other hand, the Peruvian economy grew 3.90% in 2016, slightly higher than the 3.8% expected by the market, according to the National Institute of Statistics and Informatics (INEI).
The increase of 3.90% in 2016 was mostly due to higher production in the mining, oil and gas, telecommunications, commerce and transportation and warehousing sectors, which accounted for around 69% of the year’s variation.
The highlights are: mining exports including gold, copper, iron and lead, as well as oil and natural gas derivatives; and shipments of fish derivatives and agricultural products such as coffee. Also contributing to the result was household consumption, evidenced by higher retail sales, which were up 0.93%, and credit card consumption, which was up by 7.44%.
Considering that the audit of financial statements is not mandatory in Peru, the challenge for auditing firms is to convey to the market the importance of auditing. In addition, they should promote the implementation of international financial reporting standards.
In the short and medium term, the greatest expectation rests on recovering from the economic recession, caused mostly by the impact of the Odebrecht corruption scandal and the Lava Jato investigation that cooled down the economy.