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CFO Insights | Japan 2015 Q3

The CFO Program | Japan


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Contents

Japan Economic Outlook P 3

Accounting News P 5

Tax News P 10

Navigating Change: How CFOs Can Effectively Drive Transformation P 12

Ten Types of Analytical Innovation P 16

CFO Insights | 2015 Q3

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Japan Economic Outlook – Slow Liftoff

The Japanese economy is having trouble taking off. Observers note several areas of concern: The Bank of Japan’s policy of quantitative easing (large

purchases of government bonds) has substantially

suppressed the value of the Japanese yen, but exports have

not surged, as hoped. The exchange rate is now roughly 125

yen per US dollar, with the yen down about 20 percent from a

year ago - the yen’s lowest value in 13 years. Yet rather than

exports shooting up, the government reports, May exports

rose only 2.4 percent from a year earlier, slower than April’s

8.0 percent increase. Indeed, exports declined 2.7 percent

from April to May. Moreover, export volume (exports adjusted

for price changes) actually fell in May 3.8 percent from a year

earlier. Many attributed the slowdown in exports, in part, to the

weakness of the Chinese economy: May exports to China

were up only 1.1 percent from a year earlier. In contrast,

exports to the United States rose 7.4 percent from a year

earlier, though this still represented a substantial slowdown

from the prior month. Also, imports fell 8.7 percent in May from

a year earlier, indicating weak domestic demand in the

Japanese economy. The weakness of trade is likely to have a

chilling effect on business investment; it also bodes poorly for

economic growth in the second quarter.

Likewise, Japan’s consumer and industrial sectors provide

cause for concern. The government reported that, compared

with a year earlier, in April, consumer spending declined 1.3

percent, industrial production fell 0.1 percent, and core

consumer prices remained unchanged. Plus, although

unemployment declined, that was entirely due to a sharp drop

in labor force participation.

Despite a highly aggressive quantitative easing program and a sharp drop in the yen’s value, inflation has not yet rebounded. The governor of the Bank of Japan attributes the low inflation to the impact of lower energy prices; he sees this as temporary and expects to see a pickup in inflation.

In addition, overall demand in the economy remains very weak,

as consumer purchasing power stagnates while businesses

remain reluctant to invest. The International Monetary Fund

says that Japan needs a new set of reform-oriented policies

and should not simply rely on a lower yen to boost exports.

As for the consumer, retail sales in Japan rose 5.0 percent in

April vs. a year earlier. This number sounds strong but actually


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reflects last year’s plunging retail sales following a national

sales tax boost. In fact, retail sales remain relatively weak.

Moreover, sales were up only 0.4 percent from March to April

on a seasonally adjusted basis, suggesting that retail

spending has nearly stalled. The government reports that

spending on big-ticket items remains weak, indicating that the

sales tax rise continues to negatively influence such spending.

That increase caused last year’s recession, and so far the

rebound has been disappointing.

The government hopes that corporations will pass strong profits on to workers in the form of higher wages, thus boosting spending, but this has not yet happened.

Evidence from the first quarter First-quarter GDP growth provides hints about the path of

Japan’s economy. The economy actually grew strongly in the

first quarter, with real GDP rising at an annualized rate of 2.4

percent - far better than the 1.6 percent growth in the

Eurozone or the decline in output in the United States.

However, much of Japan’s growth stemmed from an

accumulation of inventories; when this is excluded, real GDP

grew at a rate of only 0.7 percent. Moreover, the massive

growth of inventories in the first quarter means that

businesses may not boost production much in the second

quarter. This bodes poorly for second-quarter growth.

Thus, although Japan came out of recession in the fourth quarter of last year, growth since has been relatively anemic.

The government’s GDP report contained positive and negative

elements. Consumer spending and nonresidential investment

both grew at a moderate rate of 1.4 percent, while residential

investment soared 7.5 percent. Government spending grew

modestly, even as government investment declined sharply.

Interestingly, although exports grew at a blistering rate of 9.9

percent, imports grew even faster at a rate of 12.0 percent,

meaning that net exports actually made a substantial negative

contribution to GDP growth. This report suggests that the drop

in the yen’s value initially paid dividends in terms of export

competitiveness. Domestic demand, though, remains

relatively weak, and the modest increase in business

investment - the first rise in four quarters - is nevertheless

disappointing.

Another positive element concerns corporate profitability, which the yen’s sharp drop has boosted: For the fiscal year that ended in March, 30 percent of large publicly traded companies reported record profits - the highest percentage since 2006 - and total profits were up 6.7 percent from the previous year, hitting a record volume.

The companies that did especially well, benefiting from the

cheap yen, were those with substantial export sales or

overseas operations, as well as industrial companies, boosted

by falling oil prices. On the other hand, rising import prices and

weak domestic demand hurt many domestically oriented

nonmanufacturing companies. The rise in overall profitability

has led to a surge in dividend payments to shareholders, and

the question now is whether strong profitability will boost

investment, which, lately, has been relatively weak. The

government also continues to hope that companies will elect

to boost compensation, thereby stimulating increased

consumer spending.


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Accounting News

IFRSs No new standards or interpretations were issued by the IASB,

except the amendments to the IFRS for SMEs finalized in May.

Other major developments include issuance of the Conceptual

Framework Exposure Draft, the completion of the post-

implementation review of business combination accounting

standard, and the new revenue standard.

The IASB issued a comprehensive Exposure Draft (ED) of its new Conceptual Framework

The ED contains proposals for topical areas where the IASB

considers updating, clarifying and filling the gap are needed

for the existing Conceptual Framework (issued in 1989).

Included in the ED are proposals to revise the definitions of an

asset and a liability, to introduce guidance on measurement

basis selection, and to establish use of other comprehensive

income and recycling into profit and loss.

The proposed Conceptual Framework covers the following

matters:

The objective of general purpose financial reporting (e.g.

assessing management stewardship)

Qualitative characteristics of useful financial information

(e.g., role of prudence and substance over legal form)

Financial statements and the reporting entity (e.g.

consolidated versus non-consolidated)

The elements of financial statements (e.g. definitions of

asset, liability, equity, income, expenses)

Recognition and derecognition

Measurement

Presentation and disclosure

Concepts of capital and capital maintenance

Comments on the EDs are due October 26, 2015.


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The IASB has completed its post-implementation review of IFRS3

The review concluded that there was general support for IFRS

3 and its related Standards; however, the review confirmed

that there are several aspects where additional actions are

needed. In this regard, the IASB decided to add to its agenda

research projects that may result in future changes to relevant

standards on:

Definition of business

Goodwill accounting, in particular, impairment and

subsequent accounting

New Revenue Standards

Please see IFRS & U.S.GAAP – New Revenue Standards

below.

U.S. GAAP The FASB has issued several Accounting Standards Updates,

including:

ASU No. 2015-09

“Financial services – Insurance (Topic 944): Disclosure about

Short-Duration Contracts” aims to increase transparency of

significant estimates made in measuring the liabilities for

unpaid claims and claim adjustment expenses, improve

comparability by requiring consistent disclosure of information,

and provide financial statement users with additional

information to facilitate analysis of the amount, timing, and

uncertainty of cash flows arising from contracts issued by

insurance entities and the development of loss reserve

estimates.

The ASU is effective for public business entities for annual

periods beginning on or after December 31, 2015, and interim

periods within annual reporting periods beginning after

December 15, 2016. The effective date is deferred by one year

for all other entities. Early application is permitted.

ASU No. 2015-08

“Business Combinations (Topic 805): Pushdown Accounting -

Amendments to SEC Paragraphs Pursuant to Staff

Accounting Bulletin (SAB) No. 115 (SEC Update)” removes

references to SAB Topic 5.J on pushdown accounting from

ASC 805-50 in response to the SEC’s November 2014

publication of SAB 115.The amendments are effective

immediately.

ASU No. 2015-07

“Fair Value Measurement (Topic 820): Disclosures for

Investments in Certain Entities That Calculate Net Asset Value

per Share (or Its Equivalent) (a consensus of the Emerging

Issues Task Force)”. Under this ASU, investments for which

the practical expedient is used to measure fair value at Net

Asset Value (NAV) must be removed from the fair value

hierarchy. Instead, those investments must be included as a

reconciling line item so that the total fair value amount of

investments in the disclosure is consistent with the amount on

the balance sheet. Further, the ASU requires entities to

provide certain disclosures only for investments for which they

elect to use the NAV practical expedient to determine fair value.

The guidance in this standard is effective for interim and

annual periods beginning after December 15, 2015 (entities

that are not public business entities are granted an additional

year). Early adoption is permitted.

ASU No. 2015-06

“Earnings Per Share (Topic 260): Effects on Historical

Earnings per Unit of Master Limited Partnership Dropdown

Transactions (a consensus of the Emerging Issues Task

Force)” amends ASC 260 to “specify that for purposes of

calculating historical earnings per unit under the two-class

method, the earnings (losses) of a transferred business before

the date of a dropdown transaction should be allocated

entirely to the general partner.”

The guidance in this ASU is effective for interim and annual

periods beginning after December 15, 2015. Early adoption is

permitted.

ASU No. 2015-05

“Intangibles - Goodwill and Other - Internal-Use Software

(Subtopic 350-40): Customer’s Accounting for Fees Paid in a

Cloud Computing Arrangement” provides guidance on

whether a cloud computing arrangement contains a software

license to be accounted for as internal-use software. The ASU


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requires customers to perform the same assessment that

vendors currently perform under ASC 985-605; that is,

customers must determine whether an arrangement contains

a software license element. If so, the related fees paid are

accounted for as an internal-use software intangible asset

under ASC 350-40; if not, the arrangement is accounted for as

a service contract.

For public business entities, the ASU is effective for interim

and annual periods beginning after December 15, 2015. For

all other entities, the ASU is effective for annual periods

beginning after December 15, 2015, and interim periods in

annual periods beginning after December 15, 2016. Early

application is permitted for all entities. An entity adopting the

ASU may apply it either prospectively to new cloud computing

arrangements or retrospectively.

ASU No. 2015-04

“Compensation - Retirement Benefits (Topic 715): Practical

Expedient for the Measurement Date of an Employer’s

Defined Benefit Obligation and Plan Assets” gives an

employer whose fiscal year-end does not coincide with a

calendar month-end (e.g., an entity that has a 52- or 53-week

fiscal year) the ability, as a practical expedient, to measure

defined benefit retirement obligations and related plan assets

as of the month-end that is closest to its fiscal year-end.”

The ASU also provides guidance on accounting for (1)

contributions to the plan and (2) significant events that require

a remeasurement (e.g., a plan amendment, settlement, or

curtailment) that occur during the period between a month-end

measurement date and the employer’s fiscal year-end. An

entity should reflect the effects of those contributions or

significant events in the measurement of the retirement benefit

obligations and related plan assets.

The ASU is effective for public business entities for financial

statements issued for fiscal years beginning after December

15, 2015, and interim periods within those fiscal years. For all

other entities, the ASU is effective for financial statements

issued for fiscal years beginning after December 15, 2016,

and interim periods within fiscal years beginning after

December 15, 2017. Early application is permitted, and the

ASU should be applied prospectively.

IFRS & U.S. GAAP – New Revenue Standards IASB and FASB have been jointly trying to address

implementation issues identified since the issuance of new

converged revenue standards in 2014. However, the direction

of their travel has showed difficulty to get to the identical

solution for issues identified.

Effective Date

After its formal public consultation, the FASB has decided to

defer the effective date of its new revenue standard, namely

ASC 2014-09, for one year for both public and nonpublic

entities. The final ASU expected to be issued in due course

will require that the new standard will be effective for annual

reporting periods (including interim periods within those

periods) beginning after December 15, 2017, with early

adoption permitted in annual periods beginning after the

original effective date in ASU 2014-09. For nonpublic entities,

the standards will be effective for annual reporting periods

beginning after December 15, 2018 and interim reporting

periods within annual reporting beginning after December

2019, with early adoption permitted in annual periods

beginning after December 15, 2016.

The IASB is in the process of public consultation on one-year

deferral of the effective date of IFRS 15, Revenue from

Contracts with Customers. The proposed new effective date is

annual periods beginning on or after January 1, 2018, largely

consistent with the FASB’s decision set out above.

Proposals for Clarifying Amendments

In addition to the effective date change, the FASB has

proposed amendments to ASC 2014-09 to clarify certain of the

accounting requirements, in particular, identification of

performance obligation (e.g. immaterial promise and shipping

and handling activities) and accounting for licensing

transaction. Comment period was closed on 30 June, 2015.

The FASB is expected to issue another amendment on issues

identified subsequent to the issuance of the proposal such as

gross versus net presentation principle.

The IASB is also expected to propose its own version of

amendment in the third quarter of 2015. The IASB’s proposal


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will be developed with the aim of resolving issues common to

both of IASB and FASB; however proposals are not identical.

The joint Transition Resource Group (TRG) activities

The joint TRG is responsible for soliciting, analyzing, and

discussing issues arising from implementation of the new

revenue standards in order to assist the IASB and the FASB

to determine what, if any, action will be needed to address

those issues. Clarifying amendments discussed above reflect

past discussions by the joint TRG.

The TRG held its fifth meeting in July 2015 and discussed the

following matters:

Consideration payable to a customer

Credit cards

Portfolio practical expedient and application of variable

consideration constraint

Completed contracts at transition

Application of the series of provision and allocation of

variable consideration

Practical expedient for measuring progress toward

complete satisfaction of a performance obligation

Measuring progress when multiple goods or services are

included in a single performance obligation

Determining when control of a commodity transfers

Accounting for restocking fees and related costs

Deloitte publishes fifth annual global IFRS banking survey

Our report captures the current views of 59 major banking

groups - including 12 of the 18 global systemically important

financial institutions (G-SIFIs) - on recent accounting and

regulatory changes. With IFRS 9 published and the FASB's

CECL project expected to come to a conclusion soon, this

study focuses on how banks are approaching the

implementation of the anticipated IFRS 9/FASB CECL model

requirements in their organizations.

Japanese GAAP

Accounting Standards Board of Japan (ASBJ) publishes ‘Japan’s Modified International Standards’

In June, ASBJ has issued “Japan’s Modified International

Standards (JMIS): Accounting Standards Comprising IFRSs

and the ASBJ Modifications”. JMIS are standards and

interpretations issued by the IASB with certain ‘deletions or

modifications’ where considered necessary by the ASBJ.

Following two ASBJ modification Accounting Standards were

published:

ASBJ Modification Accounting Standards No.1

Accounting for Goodwill contains modifications to IFRS3

Business Combinations and IAS28 Investments in

Associates and Joint Ventures

ASBJ Modification Accounting Standards No.2

Accounting for Other Comprehensive Income contains

modifications to IFRS7 Financial Instruments:

Disclosures, IFRS9 Financial Instruments (2010), IAS1

Presentation of Financial Statements, and IAS19

Employee Benefits.

By these amendments, JMIS amend IFRSs as issued by the

IASB and mandate:

periodic amortization of goodwill over its useful life of less

than 20 years, and

recycling of other comprehensive income (OCI) arising

into profits and loss when the OCI arises from equity

instruments designated as FVTOCI (under IFRS9) and

remeasurements of defined benefit obligation (IAS19).

Use of JMIS will be possible in consolidated financial

statements when the FSA of Japan will finalize relevant

ordinances that define the sets of accounting standards that

may be used under the Financial Instruments Exchange Act of

Japan.

English translation of these standards is available from the

ASBJ Website.

ASBJ releases the Exposure Draft of Guidance on Recoverability of Deferred Tax Assets


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The exposure draft proposes to carry forward most of the

current accounting requirements on assessing the

recoverability of deferred tax assets and aims to provide more

clarity to the existing requirements.

The exposure draft is available in Japanese from the ASBJ

Website.

ASBJ publishes the research paper on the amortization of goodwill

ASBJ has published the Research Paper No.1 “Research on

Amortization of Goodwill” with a view to make a contribution to

the global discussion regarding how goodwill should be

accounted for.

The research paper provides preliminary results of the

research conducted by the staff of the ASBJ into the aspects

of, for example, recent accounting practices of major

Japanese listed companies relating to goodwill amortization

and discussion among financial statements users in Japan

regarding it.

English translation of the research paper is available from the

ASBJ Website.

The Revised Japan Revitalization Strategy backs up further use of IFRSs in Japan

The Japanese government has issued the revised “Japan

Revitalization Plan” that summarizes the nation’s growth

strategy and policy. Among many other measures IFRSs are

included in the document.

The document states that two policy measures will be taken to

promote further IFRSs adoption by Japanese companies.

Developing/ improving material that may be useful to

companies adopting IFRSs, based on recent disclosure

examples, and

Raising awareness around the IFRSs adoption situation

by providing an analysis of disclosures by public

companies on their choice of accounting standards (a

disclosure required by the Tokyo Stock Exchange)

While the two measures may not particularly strong in

themselves, a continued support for IFRSs by the highest level

of the government does create a comfortable environment to

those who are willing to adopt.

For more information, please visit: IASPlus.com (IFRS) or USGAAPPlus.com (U.S. GAAP) or speak to our Deloitte experts Shinya IWASAKI, Partner ([email protected]) or Etsuya WATANABE, Senior Manager ([email protected]).


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Tax News

Exit tax regime effective, with transition period for foreign nationals Japan's new exit tax regime, introduced in the 2015 tax reform,

became effective on 1 July 2015. As from this date, when

covered persons (Japanese resident individuals, including

foreign nationals) exit Japan and certain conditions are fulfilled,

income tax will be imposed on the unrealized gains on their

covered financial assets, as if these assets were disposed of

on the departure date. Under transition rules, the earliest the

exit tax may be imposed on foreign nationals is 1 July 2020.

Covered persons A Japanese tax resident, regardless of his/her nationality, will

be subject to the exit tax if the individual fulfills the following

conditions:

He/she holds covered assets (defined below) of JPY 100

million or more at the time of exiting Japan; and

He/she has stayed in Japan for more than five out of the

previous 10 years at the time they exit Japan.

For a foreign national resident in Japan, certain periods may

be excluded from the residence period when determining

whether the "five years out of 10 years” condition is satisfied,

depending on the type of visa the individual holds.

Periods during which a foreign national holds a visa

covered in “table 1” of Japan’s Immigration Control and

Refugee Recognition Act (including, but not limited to,

visas for journalists, investors/business managers,

engineers, specialists in humanities/international services,

etc.) may be excluded from the residence period,

regardless of the relevant dates; and

Periods during which a foreign national holds a visa

covered in “table 2” (including, but not limited to, visas for

permanent residents (defined differently for visa purposes

than for income tax purposes), spouses or children of

Japanese nationals, etc.) may be excluded from the

residence period if the period begins before 1 July 2015.

Due to these exclusions, the earliest the exit tax may be

imposed on foreign nationals would be 1 July 2020 (for table

2 foreign nationals).

Covered assets Covered assets are determined on a worldwide basis, not

limited to those assets located in Japan, and the JPY 100

million threshold is the aggregate threshold for all of the

covered assets held. Covered assets include the following:

Securities (as defined in the income tax law; additional

guidance is expected from the tax authorities on the

interpretation of the term for exit tax purposes);

National and municipal bonds;

Corporate bonds;

“Tokumei-kumiai” contracts (i.e. silent partnerships); and

Unsettled credit transactions and unsettled derivative

transactions.

Cash and cash deposits, and nonfinancial assets such as real

estate, are not covered assets for exit tax purposes.

Taxation and other considerations

Tax rate:

At the time of departure from Japan, a covered person will be

subject to the exit tax on the net unrealized gains on covered

assets, at the same rate that applies to realized gains for

individual tax residents (currently 15.315%, including the

restoration surtax). Local inhabitants tax will not be imposed.

Timing for filing a tax return and paying tax:

The timing for filing a tax return reporting the exit tax and

paying the tax will depend on whether the individual appointed

a tax representative prior to departure from Japan, and

whether any collateral is pledged for payment of the tax:

If a taxpayer appoints a tax representative before

departing Japan, he/she is deemed to have transferred

the assets at the time of departure, and the tax return is

due by 15 March of the year following the year of

departure.


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If the individual has pledged collateral, the payment

of the exit tax may be deferred (as described

below);

If the individual has no pledged collateral, the exit

tax is due on or before the tax return filing date.

If a taxpayer does not appoint a tax representative, or

does not do so before departing Japan, the taxpayer is

deemed to have transferred the assets three months

before departure. The individual must file the tax return

and pay the tax due prior to departure.

If the exit tax payment may be deferred, the deferral period is

five years. An extension may be applied for; this would

increase the deferral period to 10 years. The potential benefit

of the deferral is that it may permit a covered person to adjust

the final exit tax due for events occurring within the deferral

period, such as where the value of covered assets declines or

where covered assets are sold and foreign tax is imposed on

the gain. It should be noted that an interest charge will be

applied on the deferred tax payment.

The administrative process for providing collateral is being

clarified, but the earliest the collateral would be due is the first

deadline when the tax returns are due for taxpayers who have

appointed a tax representative, i.e. 15 March 2016.

Return to Japan:

If a covered person exits Japan and later returns to Japan

within five years from the departure, still holding the covered

assets, he/she may request a correction to cancel the exit tax

within four months from the return date to Japan. In this case,

interest will not be levied, even if the tax has been deferred.

Inheritance and gift tax:

Although this article focuses on the exit tax imposed when a

covered person leaves Japan, exit tax also may be imposed

when covered assets are gifted or bequeathed to a non-

Japanese resident. In these cases, gift and inheritance tax

also may be levied, regardless of the transferor’s residence

period in Japan.

Comments The introduction of the new exit tax has generated

considerable attention in the foreign community, but it appears

that the majority of foreign nationals temporarily working in

Japan likely will not be exposed to the new exit tax regime.

As the exit tax will not be imposed upon foreign nationals until

1 July 2020 at the earliest, foreign nationals and their

employers have a transitional period to consider its potential

effects:

Foreign nationals should use the transitional period to

consult with their tax and immigration advisors and

consider any options available to mitigate the potential

impact of the introduction of the tax;

Although many secondments to Japan initially last for a

period of less than five years, employers with foreign

national secondees (or those considering seconding a

foreign national employee to Japan temporarily) may wish

to review the visa options with their immigration advisor,

given that the visa type now is linked to exposure to the

exit tax; and

Employers should review their tax equalization policies

and secondment agreements to deal with any potential

exposure to exit tax that may arise.

For more information, please speak to our Deloitte experts Russell BIRD, Partner ([email protected]), or Shingo IIZUKA, Director ([email protected]).


12

Navigating Change: How CFOs Can Effectively Drive

Transformation

Today’s CFOs are increasingly required to partner with CEOs

to drive transformations in their organizations. Indeed, a

previous Deloitte CFO Signals survey of CFOs from major

North American companies found that on average CFOs

aspire to spend about 60% of their time as a catalyst for

change and a strategist in their organizations.¹ Yet, many

CFOs who aspire to the catalyst role are often ill equipped to

go beyond the numbers and effectively drive organization-

wide change that improves future company performance. This

article examines sources of resistance to change and provides

some practical tools for CFOs to diagnose and navigate

change efforts more effectively. In addition, the article clarifies

how CFOs may effectively support and influence change in

their organizations.

Triggers of Resistance Whenever a change initiative is announced, there is invariably

resistance. It is change, after all. That resistance typically falls

into one of the following three categories, each of which may

be diffused by proper information, process and work design,

and high-level sponsorship:

1. More work; no payoffs

A key type of change that invites resistance is one that creates

new work without payoffs for those doing the work. The most

common manifestation is when a group level CFO or controller

asks for new information from a division or business unit CFO

without accounting for the extra work demanded of that unit. If

the business unit CFO and CEO do not value the information

requested, it is very likely the request will be resisted, slowed

or done in an ad hoc or untimely way. Avoiding this form of

resistance requires consideration for the extra effort required

at the business unit level and perhaps reducing other

demands on that unit to free up resources to gather and

provide the information to the group level. For CFOs to

diagnose potential resistance from added work, they need to

undertake a process-stakeholder analysis, which will diagnose

how new processes impact the work effort of different

stakeholders.

2. New roles; less satisfaction

Another trigger for resistance arises when work roles are

transformed, leading to less satisfaction or a change in worker

status.

For example, many CFOs look to create savings in finance by implementing a shared services solution. While moving key staff from multiple locations to a centralized shared services center may immediately appear to reduce costs, the real outcome could be reduced client satisfaction and increased turnover - undermining the cost saving benefits.


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When jobs and the location of jobs are redefined through a

shared services initiative, the satisfaction of existing workers

may be reduced. They may have less connection with their

local clients and less of a sense of being appreciated and

valued by the finance function. These changes may engender

resistance to change or reductions in productivity undermining

change efforts. The risk of adverse impacts can be mitigated

through careful consideration for the “socio-technical systems”

prevalent in a company. To manage change, CFOs should

consider the social status and other social satisfaction impacts

of work redefinition in a change effort.

3. More transparency; less power

The third rail of resistance arises from change that may impact

power relationships in an organization. For example, when the

group level CFO seeks greater transparency into the business

units and their work-in-process inventories, it may reveal

information that dramatically alters the power between the

center and business units. The information the group CFO

gathers may reveal the shortcomings of the business unit CEO

and undermine his or her power and influence in the overall

group. Thus, a request for information to the center that

undermines local autonomy and power is likely to be resisted.

To overcome resistance to changes in power, it is likely the

CFO will have to accumulate his or her own power or have the

power of the group CEO behind changes in information flows

that change the distribution of power in the organization.

These three types of resistance can generally be diagnosed in advance and mitigated by careful process design, work design and reorganization of information flows with the support of powerful sponsors such as the CEO. In contrast, the change that most often stumps CFOs is cultural change - diagnosing and altering the underlying pattern of beliefs and assumptions in the organization. This requires a different level of change management.


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Culture Conundrums: Beliefs and Behaviors Culture is defined as the “shared beliefs and assumptions

underlying an organization.” Thus, changing culture requires

change at the belief level, which is often substantially more

difficult than process or information systems change. To

complicate matters, CFOs have much less authority for culture

change. While CEOs have the authority to drive cultural

change across a company, typically CFOs can only be

supportive of a CEO’s companywide culture change efforts or

are limited in scope to drive belief changes in their finance

organization.

Still, CFOs can help diagnose dysfunctional cultural attributes and get at the underlying beliefs to help drive culture change. How? Consider that most culture change models build on the three stages: “unfreezing” the beliefs in an organization through critical events, change through role modeling and setting new behaviors and beliefs, and “refreezing” the organization to lock in a new culture.

These stages have been adapted into a series of practical

steps CFOs can use to diagnose the culture of the

organization, reframe and replace the culture and narratives

in a company, and reinforce a new belief system to help their

CEO establish a new company culture. Each of the four steps

is discussed below:

1. Diagnose the culture

The first step is to diagnose and articulate the beliefs

underlying the existing culture. To do this, it is useful to have

CFOs think through the organizational outcomes they do not

like, the behaviors that led to them and the underlying beliefs

driving the behavior. By writing the outcomes or behaviors that

frustrate you as a CFO, it is often possible to get at the

underlying beliefs more easily.

Outcomes Behaviors Beliefs

Multiple ERP and

financial systems

across multiple

divisions

increasing cost

and not enabling

information

sharing

Overt or passive

aggressive

resistance to

efforts to

establish shared

services; each

unit has its own

way of doing

business

High autonomy

for each

business unit

(“We are special

and different.”)

Delays in

executing

initiatives with

respect to the

market. Over-

engineered and

expensive

projects; lack of

ownership of

initiatives

Endless reviews

of proposals with

multiple sign offs

and indecision as

risks are weighed

“We have to do

everything

perfectly right.”

2. Reframe existing narratives

The second step to culture change is to frame the narratives

that will be used to change beliefs. This begins with the

recognition that existing beliefs did not arise in a vacuum and

often served a good purpose even if they are not useful now.

To begin reframing existing beliefs, it is important to create a

narrative that shows the value of the widely held beliefs and

also shows the pitfalls and inappropriateness of the beliefs in

other contexts.


15

In an example of a high-technology company going through a turnaround, it was important for the CEO and CFO to partner and create a new consistent narrative - one where both acknowledged the power of autonomy and “being special and different” in creating products and also spoke to the limitations of this belief in other areas of the business as well as the costs it imposed on the overall business to not have standardized financial and other systems.

Sometimes it’s useful to articulate the belief, behaviors and

outcomes that are desired. Narratives to challenge existing

beliefs, however, need to be carefully crafted (and

communicated) to acknowledge the value, but also to disaffirm

the misapplication of the belief.

Outcomes Behaviors Beliefs

Faster decision

making, less

over-engineering

of solutions and

increased speed

to market

Critical review of

decisions that

can create a high

adverse impact.

Rapid decisions

on low adverse

impact choices

“We have to do

some things

perfectly right

and most things

well enough

quickly”

3. Replace existing belief patterns

While specific narratives may disaffirm beliefs, replacing

existing beliefs requires articulating and demonstrating the

behaviors and supporting beliefs required to support desired

outcomes. Establishing new beliefs requires role modeling -

demonstrating by doing things consistent with new beliefs and

rewarding those who behave in ways that support desired

outcomes and beliefs. But new narratives and role modeling

may not be sufficient. Instead, they often require recruiting

new leaders and staff to replace those unwilling to change

their behaviors.

4. Reinforce desired behaviors and outcomes

To establish a new set of behaviors and beliefs in a sustained

way, it is important to revisit incentives and performance

management policies. This may include changes in

compensation and goal setting to better align with desired

outcomes. Such levers can serve to lock in changes. To

institutionalize new behaviors, it is important for CFOs to

breakdown silos and lack of teaming - characteristics of many

finance organizations that CFOs inherit. Creating an open-

door policy or establishing regular in-person team meetings

with new expectations for behavior can go a long way to

reinforcing change by demonstrating new behaviors from the

top.

Change Leadership: What Can CFOs Do? CFOs may have to change the culture of the finance

organization they inherit or partner with CEOs on broader

organizational transformation. To do either successfully, they

need to diagnose sources of resistance to change and

develop appropriate strategies to mitigate that resistance.

Resistance from changing workloads or shifts in satisfaction

from work or changes in power are relatively easy to diagnose

and can be addressed through careful process and work

design or by getting critical sponsors.

In contrast, CFOs and CEOs are most usually challenged by the need to change culture. Here, CFOs can help CEOs and others on the leadership team correctly diagnose beliefs, behaviors and outcomes that do not serve the organization well. They can provide the fact base on outcomes that help CEOs and the leadership create narratives to disaffirm beliefs and evaluate the costs of replacing staff and redirecting the organization. They can also role model desired behaviors, and finance can help create incentive programs to sustain new behaviors.

For many CFOs, becoming an effective change partner

requires employing fundamentally new skills beyond those

that got them to the CFO position.


16

Ten Types of Analytical Innovation

In the following essay, Tom Davenport, the President’s

Distinguished Professor of Information Technology and

Management at Babson College, a Fellow of the MIT Center

for Digital Business and independent senior advisor to Deloitte

Analytics, discusses 10 types of innovation that can be driven,

supported or measured with analytics.

A few weeks ago, I heard an interesting presentation by Larry

Keeley of Deloitte Monitor’s Doblin Group, a company that

consults on innovation. I had seen Doblin’s Ten Types of

Innovation (http://www.doblin.com/tentypes) before, but hadn’t

really paid enough attention to it. Keeley’s presentation

reminded me that I thought it was the most complete listing of

how companies can be innovative. It also made me wonder

how many of the 10 types of innovation might involve analytics

in some way.

So I started going through the list, one by one. I didn’t know

how many might result in a hit - a link to analytics - when I

started. Through the magic of ex-post-facto editing, I now

know how many. I won’t spoil the secret, but here’s a hint: This

essay is pretty long.

Profit model Profit model innovation involves new ways to monetize a

company’s offerings and assets. There is certainly an analytics

spin on this form of innovation, in that many companies in both

online and offline businesses are attempting to make profits

with new data and analytics-based products and services.

Several traditional businesses are exploring profit model

innovation with analytics.

Network Network-oriented innovations involve new products, services

or processes that are delivered across a business network or

ecosystem. In analytics terms, this might involve delivering

analytics to suppliers or partners in order to help them make


17

better decisions. In another context, with the Internet of Things

(IoT), companies almost always need to share sensor data

with their ecosystems, and to define standards so that the

information can be integrated and analyzed. More about this

below.

Structure

To quote the Doblin/Deloitte website, “Structure innovations

are focused on organizing company assets - hard, human or

intangible - in unique ways that create value.” In an analytics

context, this would most likely mean creating new business

units that focus on analytics or using new organizational

formats that allow analysts to work with decision-makers.

Large banks, for example, have formed new business units to

analyze customer data. Similarly, other businesses create a

centralized group of analysts, and then “embed” many of them

with key decision-makers in business units and functions. Both

of these could qualify as structural innovations.

Process These types of innovations are, of course, about

improvements - small or large - in how organizations go about

their operations. Process improvement was perhaps the most

common use of analytics in the earliest days - particularly for

supply chains and logistical processes. Today, companies use

analytics to enable process improvements and innovations in

pricing, marketing, sales and manufacturing. Of course, a firm

can never stop innovating with its processes, using analytics

or other resources. Otherwise, competitors will adopt the

same process innovations and can quickly catch up.

Product performance Innovations in products have not historically involved analytics.

However, this is beginning to change. A variety of devices,

from golf clubs to basketballs to health activity trackers, now

come with the ability to capture and evaluate physical

movements by their user or wearer. Some firms that produce

these devices have realized that the ability to generate

analytics - largely descriptive at the moment, but potentially

more predictive over time - is an important selling point. But as

the authors acknowledge, product innovation with analytics -

or any other feature - is subject to rapid and widespread

copying. Many activity-tracker vendors already offer similar

types of analytics, for example.

Product system Innovations of this type involve broad “ecosystems” of

offerings. Analytics can be useful in these contexts after

ecosystem players have determined how to integrate and

share data. In the IoT domain, for example, there are plenty of

opportunities to create an “analytics of things” from all the data

that sensors create. The big challenge, however, is that no

single company can create an IoT initiative on its own; it must

collaborate with other firms.


18

Service

Service innovations can either involve analytics directly, or can

be measured by analytics. For complex products that collect

and transmit data (computers, network equipment, large and

complex vehicles and equipment, jet engines and so forth),

service processes can increasingly be based on analytical

calculations about how machines are performing, and when

they are likely to need maintenance or servicing. For services

involving humans, analytics can be used to create metrics of

overall service levels or components of service (one company

measures how often service people smile, for example).

Analytics can also be used to understand how service

improvements yield financial improvements; the “service-profit

chain” is a good example.

Channel Channel innovations involve new approaches to delivering

offerings to customers. The key role for analytics here is not to

provide a new channel, but to let organizations know how well

a new (or old) channel is working. Some channels, such as

online, are much better sources of data than others. But today,

the enormous challenge for many organizations is to

understand customer relationships across all channels and

touch points. Even identifying the same customer across

channels is often a problem, although analytics can make it

much easier.

Brand This type of innovation involves new approaches to how a

company represents its offerings and its general reputation

and perception. Analytics may not be terribly useful in creating

brand innovations, but they are crucial to knowing how a brand

innovation is working. Metrics of brand value, which are

somewhat subjective, indicate the overall effectiveness of a

brand. Social media analytics can help to assess what people

are saying about a brand.

Customer engagement

Innovations in engagement involve approaches to fostering

compelling interactions with customers. Doblin says that it

requires “understanding customers’ deep-seated aspirations,”

and analytics are useful for that - particularly for understanding

those aspirations that are revealed by actual behavior.

Engagement with online sites and digital environments is

particularly easy to measure - and improve, through

approaches like A/B testing - with analytics. With analytics,

you can know exactly what your customers are looking at,

clicking on and (of course) buying.

I wasn’t sure when I started, but as you have probably counted, I am now quite convinced that all 10 types of innovation can be driven, supported or measured with analytics. If you’re not using analytics for all 10 types, you may not be optimizing your analytical capabilities


19

The CFO Program for International Companies

Deloitte’s Chief Financial Officer (CFO) Program brings together a

multidisciplinary team of Deloitte leaders and subject matter specialists to help

CFOs stay ahead in the face of growing challenges and demands. The Program

harnesses our organization’s broad capabilities to deliver forward thinking and

fresh insights for every stage of a CFO’s career - helping CFOs manage the

complexities of their roles, tackle their company’s most compelling challenges and

adapt to strategic shifts in the market. Deloitte’s vision is clear: To be recognized

as the pre-eminent advisor to the CFO.

The CFO Program in Japan hosts regular events for executives of international

companies to provide insights and networking opportunities.

Contact: Michael M. Laurer | [email protected]

Website: http://www.deloitte.com/jp/en/cfo

Deloitte Tohmatsu Group (Deloitte Japan) is the name of the Japan member firm group of Deloitte Touche Tohmatsu Limited (DTTL), a UK private company limited by guarantee, which includes Deloitte Touche Tohmatsu LLC, Deloitte Tohmatsu Consulting LLC, Deloitte Tohmatsu Financial Advisory LLC, Deloitte Tohmatsu Tax Co., DT Legal Japan, and all of their respective subsidiaries and affiliates. Deloitte Tohmatsu Group (Deloitte Japan) is among the nation's leading professional services firms and each entity in Deloitte Tohmatsu Group (Deloitte Japan) provides services in accordance with applicable laws and regulations. The services include audit, tax, legal, consulting, and financial advisory services which are delivered to many clients including multinational enterprises and major Japanese business entities through over 8,500 professionals in nearly 40 cities throughout Japan. For more information, please visit the Deloitte Tohmatsu Group (Deloitte Japan)’s website at www.deloitte.com/jp/en. Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s more than 220,000 professionals are committed to making an impact that matters. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms. This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication. © 2015. For information, contact Deloitte Touche Tohmatsu LLC.

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