Deloitte 2023 Q4 CFO Express 

In 2023, China's economy continues to recover, and signs of stabilization are increasingly apparent. In Q3, GDP grew by 4.9% year-on-year, which makes the 2023 growth target of around 5% highly achievable. Looking ahead to 2024, although protectionism and geopolitical risks still exist globally, China-US relations are expected to return to the trajectory of stable development after the meeting between the heads of China and the United States in San Francisco, which brings about a more favorable environment for China. Domestically, "insufficient aggregate demand" is the main economic concern and reviving economic growth is still the top priority. The Chinese government is actively promoting the economic transition from an investment-dependent growth model to a growth model driven by a higher proportion of private consumption.

With continuous integration of the digital economy in China, data has gradually become an important factor of production in the digital era and plays an important role in the value creation of enterprises, especially data-related enterprises. To further harness the value of data resources, the Ministry of Finance issued the Interim Provisions on Accounting Treatment Related to Enterprise Data Resources to clarify the scope of recognition of data resources and the applicable standards for accounting treatment. In a digital economy, artificial intelligence, cloud computing, big data and other technologies, as well as the changes in consumer behaviors, are also promoting digital-intelligence integration with respect to enterprises’ digital transformation, and related compliance supervision for digital technology is also constantly evolving.

• To comply with the requirements of data recognition, what preparations do enterprises need for their data resources? How can enterprise decision makers build a data asset system from a "full lifecycle management" perspective?
• What is the agenda for CFOs as the scope of their responsibilities expands?
  
• How should CFO respond to evolving global regulatory priorities and tax environments?
• How can Generative AI empower finance teams?
• In the digital intelligence era, how can enterprises in traditional industries keep pace with the times and innovate according to new consumption behaviors?

This issue focuses on the above topics. We hope finance executives and their colleagues find these excerpts and summaries instructive.

More policy support beyond property sector

Deloitte Chief Economist, Sitao Xu, shared his perspectives on the current China’s economic situation. His main takeaways are:

• Due to lower consumer leverage and pent-up housing demand, the broader residential housing market is unlikely to experience a significant price correction. However, supportive policies for housing sector remains crucial, for example, loosening homebuying restrictions in Beijing or Shanghai would effectively release the pent-up and upgrade demand, restoring the wealth effect and extending it to second-tier and third-tier cities.
• We anticipate more support measures on the horizon, but they cannot be delayed just because of a stabilizing economy. We think both fiscal and monetary policies could be made more assertive by increasing fiscal transfers to local governments and cutting interest rates.
• The recent eased tensions between China and the US will create more favorable external environment for China. Both China and the US have taken tangible steps to create a more conducive environment for the Xi-Biden meeting at APEC in November, including Chinese leaders’ recent meeting with executives from Apple and the Micron Technology, which demonstrates both sides are more focused on risk reduction rather than decoupling.

Global regulation drives accelerated penetration of RegTech

Rising compliance and regulatory requirements, a sharp increase in fraud activities, and high compliance costs have accelerated the development and adoption of RegTech in the financial industry. Highly automated RegTech not only redefines the compliance working mode, accelerates the digitization of compliance process, and enhance risk management capabilities, but also helps regulators improve their proactive management of financial transactions and behaviors. Currently, the global RegTech market is rapidly expanding, with the industry expected to reach a market size of USD15.2 billion in 2022, growing at a compound annual growth rate of 53%.

The EU and North America markets take domineering positions in the global RegTech industry, accounting for 69% of the total RegTech companies, while the Asia market only accounts for 25.6%. Mainland China and Hong Kong have shown strong development trends in the RegTech industry, mainly focusing on the R&D in the areas of intelligent risk control and identity management& control. As regulators have reached consensus on the importance of emerging regulatory issues, their focus has gradually expanded from financial institutions to data and privacy protection, open banking, and crypto assets. Each country constantly updates their regulatory frameworks under its social and economic contexts, which provides specific guidance to the companies in the RegTech industry:

• The EU financial regulatory framework urge EU members to create a unified digital market, requiring financial institutions to disclose more regulatory reports, enhance monitoring of unusual transactions, and increase market transparency.
• The UK financial regulatory authority is actively exploring digital sandboxes and Central Bank Digital Currency (CDBC), including promoting financial industry environmental protection in the digital sandbox, and exploring using CBDC as a payment method in the digital economy.
• The US financial sector has regulatory reforms, which pays special attention to consumer privacy, data protection and crypto market security, and highlights business resilience and recovery capabilities of financial institutions.
• The Monetary Authority of Singapore (MAS) continues to expand regulatory requirements in the payment services, with an ongoing focus on anti-money laundering (AML) and countering the financing of terrorism (CFT). In addition, they are strengthening control over payment token suppliers and related activities from various aspects.
• The Securities & Futures Commission of Hong Kong (SFC) will enhance regulation in the securities industry, while promoting green and sustainable financial regulation, accelerating the formation of a regulatory model for digital assets and exchanges in Hong Kong; Mainland China will accelerate the protection of personal privacy and data security, and strengthen regulation of non-financial industries such as e-commerce, real estate, and manufacturing.

In the future, continuous regulatory updates will continue to drive the penetration of RegTech. Based on industry practice and policy development, we recommend regulators to strengthen interactions with companies, to focus on its own roles and capabilities to provide institutional and technical support for RegTech innovation and application, and to cover areas such as corporate application, market standards, data capability, application integration, management models, technical control, and new industry application.

Graph: RegTech development recommendations

Inheritance and Innovation: The road for time-honored brands to break new grounds

As an important part of national brands, time-honoured brands play a significant role in promoting consumption, upgrading industries, and developing culture. Currently, there are 1,128 national time-honored brands and 3,227 local time-honored brands in China, mostly located in the Yangtze River Delta region (35%) and the Beijing-Tianjin-Hebei region (19%). With a developing market economy and the intergenerational effect, traditional Chinese time-honored enterprises are likely to face many operational challenges in the coming years. Deloitte recently released a whitepaper on "Inheritance and Innovation: Chinese time-honored brands", analyzing four major challenges faced by Chinese time-honored brands from the perspective of their development pattern and the current situation of financing and investment, and propose nine innovative approaches, discussing the core competitive advantages that Chinese time-honored brands need to have for their development in domestic and international markets.

From the industry distribution perspective, time-honored food& beverage brands (32%) and hotel catering (19%) dominate the market. The food& beverage industry has the highest number of Chinese time-honored brands, with more than 50% being century-old shops. Their total output value has shown fluctuating growth, and the revenue growth of listed companies in the time-honored industry has lagged the average level of the food& beverage sector. Due to larger operational scales and strong financial capabilities, Chinese time-honored catering industry is more resilient. In terms of attracting investment and financing, both listed companies with time-honored brands in the food& beverage and catering sectors fare worse than the sector average. They prove less attractiveness to strategic investors, and the rare M&A & financing transactions are mostly industry consolidation. Time-honored brands have higher recognition in the stock market. Compared to food& beverage sector, time-honored catering companies saw a noticeable increase in net debt-to-equity ratio in recent years and have a higher demand for capital.

Chinese time-honored brands still face considerable challenges in terms of capital market activity, industrial layout, profit improvement, and brand image diversification. To address the four major challenges facing Chinese time-honored brands, Deloitte puts together nine innovative approaches, spanning across manufacturing, products, standards, scenarios, channels, marketing, branding, ecosystem, and mechanism. Benchmarking against global brands, Deloitte recommends that Chinese time-honored brands focus on products, manufacturing and ecosystems, as well as product innovations to keep up with trends and consumers, while continuously developing their product matrix and ensuring unified quality control in overseas market through intelligent technologies.

Graph: Nine innovative approaches

With the introduction of data resources in financial reporting, establishing a data asset system from the perspective of lifecycle management

With the continuous development of the digital economy, data was first written into central documents as a new factor of production in 2020, and related data policies and systems were continuously introduced. The development of data factors reflects that data will be highly integrated into social production process, which will inevitably require the construction of an overall framework for data industry chain. In August 2023, the Ministry of Finance released the "Interim Provisions on Accounting Treatment of Enterprise Data resources" (refer to interim regulations), clarifying the scope of application of the provisions, accounting principles for data assets, and the presentation and disclosure requirements, which are scheduled to take effect on Jan 1, 2024. The Interim regulations mainly relates to the existing accounting standards of "inventory" and "intangible assets". Among the assets that can be recognized in these two types of data resources, the recognition of intangible assets requires more stringent criteria than inventory, and the actual scenarios involving intangible assets are more complex, posing bigger challenges to recognition. Inventory recognition is more targeted at enterprises involved in regular data transactions such as professional data traders.

Systems and data are two main pillars for achieving enterprise digital transformation. They complement each other, with digital transformation placing requirements on data governance system, which provides foundational support for digital transformation, ensuring the quality, accessibility, and security of data. From the perspective of full lifecycle management of data assets (see the figure below), the accounting and disclosure of data assets are in the final stage of data capitalization, and their value greatly depends on the level of resourcing and asset utilization in the earlier stages.

The valuation and recognition of data assets require collaboration among different departments in an enterprise. Decision makers should establish a holistic system for data assets from the perspective of "data asset lifecycle management", promote full cooperation in various fields, and ultimately realize the value creation and release of data assets. As part of process, decision makers need to synthesize banking information and to decide strategy/path for data recognition. The Finance department should focus on the valuation and recognition of data assets and provide professional interpretations of current accounting standards. In addition, close cooperation between the data/IT/digital departments is required, to customize the design of data assets according to accounting standards and requirements. The data/IT/digital departments should focus on inventory, governance, and operational activities of data assets, providing a foundation for data assets valuation and recognition, as well as an effective path to enhance the value of data assets. For data assets recognition, unlike the traditional asset accounting, the data department plays a critical role in providing professional support.

Graph: full lifecycle management of data assets

2023 China CFO Agenda: Reshaping the CFO Role and Leading Value Creation

If this year’s events are any indication, CFOs will likely continue to face their share of challenges. And while chief financial officers have always had to deal with new—sometimes unforeseen—issues, the very nature of change appears to often be, well, changing. Speed has altered the equation, often leaving little time to make decisions, let alone weigh options. Geopolitical turmoil, for one, has spread lightning fast, forcing companies to act swiftly to try to secure supply chains and, where necessary, pull out of once lucrative markets. Sources of capital have tightened, while the cost of capital itself has escalated. Increasingly, stakeholders and investors are applying pressure on companies to both improve performance and act on climate change. Meanwhile, breakthrough, possibly disruptive, technologies like generative AI seem to be arriving on the scene at a dizzying pace.

These sorts of disturbances have sizeable implications for CFOs. The reality is, the job description for a chief financial officer has expanded mightily in the past few years. Thus, when disruptions happen, CFOs will likely feel the impact on a number of fronts. Indeed, consider the wide array of board-level considerations that often involve input from CFOs. When CEOs were asked to list the executives most important to their success in a Fortune/Deloitte CEO winter 2022 survey, more than half of the CEOs named CFOs as most important.

The seven key drivers discussed in this year’s CFO Agenda are, to varying degrees, front and center for many chief financial officers. In some cases, they are reframing the job itself, pushing finance executives well beyond traditional functional boundaries.

Changing global tax environment is driving five major transformation trends in the tax department 

Tax departments at many companies are today undergoing transformations to respond to a changing legal and regulatory landscape, including the OECD’s pillar Two requirements, and a rise in indirect taxes around the world. There are some of the key themes that emerged from Deloitte’s 2023 Tax transformation Trends research, which included a global survey of 300 senior tax and finance executives together with a series of qualitative interviews with the heads of tax departments at large multinational companies.

1. Holistic data management and integrated systems are required for insight-driven global compliance. According to survey, complying with a changing tax environment was reflected in both the top priorities (38%) and top challenges (43%) that tax departments expect to face over the next three to five years. Accordingly, integrating tax-related data across organization has also become the second biggest challenge for tax department.
2. Costs and efficiency are still important, but the top priority in tax transformation is complying with changing tax laws and regulations. Although responding to changing tax laws and regulations has moved to the top of the agenda for many tax departments, achieving greater efficiency remains an important objective. When asked about priorities of the tax department over the next three to five years, 31% of respondents cited increase the efficiency/reduce the operating costs of the tax department – a fourth priority after global tax provision (40%), tax data management (38%) and tax governance and risk (35%).
3. Outsourcing is a prime strategy to access technology capabilities. 74% of respondents say their company uses outsourcing as their primary approach for one or more tax activities. Access to the latest technology capabilities (54%) has now become an important driver to companies’ outsourcing strategy, allowing them to develop in-house technology without incurring significant capital investment.
4. Tax isn’t just done in the tax department anymore. Since 2016, companies have increasingly performed several tax activities outside the tax department, such as tax provision, corporate income tax return and payments, indirect tax returns & payments, and transfer pricing documentation. In particular, the intention to outsource statutory accounts and transfer pricing documentation has continued to increase since 2021.
5. Future skills requirements are giving rise to the "hybrid tax professional". When asked about the mostly needed skills in the tax departments in the coming years, respondents most often named data analytics, data-driven strategic insights, and data management (44%), a reflection of the growing importance of data-driven decision-making and increased governance requirements for tax authorities’ direct access to company data.  

How will Generative AI(GAI) impact the finance?

Generative AI is data-driven and is capable to create original content (e.g., text, images, audio), increase contextual awareness, and simulate human decision-making. For enterprises, Generative AI will bring significant changes including frontend customer engagement, new sources of revenue, and other back-office functions such as finance. As the finance function relies on large amounts of data, a growing number of CFOs are choosing Generative AI to empower their finance functions. According to a Gartner study, 80% of surveyed CFOs in 2022 expect to increase their investments in the AI sector over next two years. CFOs and finance leaders should start developing strategies and considering how Generative AI will impact the finance function and operation.

Graph: The significance of Generative AI in the Finance sector

In the short term, Generative AI will automate financial analysis and reporting, as well as optimize financial operations. With its ability to process large amounts of data and quickly generate original content, Generative AI may fundamentally change how the finance department functions in the future. To apply Generative AI to other departments, CFOs and finance executives should work together to promote collaboration among key management, while considering critical issues related to the deployment and application of Generative AI:

• Test and learn from well-governed and accessible data, by developing rational strategies and practical cases;
• Stay cautious in using Generative AI, be aware of its limitations such as data biases, model reliability, information security, and data sovereignty;
• Finance professionals should regularly verify and evaluate training data over the period, while collaborating with the technical team to ensure that Generative AI application complies with company policies and national privacy laws and regulations;
• Finance professionals need to develop and strengthen skills related to Generative AI, such as designing prompts (i.e., ask good questions) to obtain desired results, identifying potential biases, confirming the quality and validity of generated outputs, and monitoring model performance periodically. 

Reshaping talent management system from a global perspective

According to Deloitte’s recent CEO survey, 71% of CEOs identified global talent/skills shortages their top external challenge to their business strategy. Changes in the workforce, the digital age, the shifting geopolitical climate, the rise of remote work and increasingly dispersed talent, and the evolving employee expectations have altogether catalysed a perfect storm for the race for talent:

In this context, many organizations have realized the need to reshape their global talent management system, integrating recruitment, talent deployment, tax and legal supports, business expansion, and talent pools to empower organizations to achieve their core business objectives.

Graph: Core elements of the new global talent model

The new global talent model revolves around the overall strategy of the organization, identifies the ways of integrated talent development and achievable deployment. Organizations can flexibly adjust their employment to ensure that the adopted approach is aligned with their goals. Embracing the new model presents realistic challenges, thus it requires decision-makers and stakeholders to understand the need for transformation, support from senior and cross-functional departments, and analysis of the organization’s issues from different perspectives. We anticipate that the organization will follow four key steps to create their new Global Workforce Strategy:

1. Seeks to understand what the business imperatives are and strategic goals as an organization.
2. Seeks to understand what skills are needed to allow the organization to deliver its strategic objectives.
3. Looks at how to meet international talent requirements through a mixture of buy, build, and/or borrow of talent.
4. Be able to think about the requirements for a ‘Global Workforce’ function which will manage both long-term attraction methods and support individual requests, delivering operational support.