Year / 2006

by Edgar

“Brave New World” in Financial Reporting


The world’s biggest accountancy firms united in their call to make financial statements more meaningful for investors on 9 Nov 2006.

What are some of the proposed changes?

  • They are pushing to include more non-financial information.
  • They want quarterly financial statements to be replaced by real-time Internet-based reporting.
  • They want to create and present a menu of fraud audit proposals at different pricing.
  • Individual auditors (instead of the firm) be subject to penalty for faulty audits.

Who are the parties to this 24-page proposal?

PricewaterhouseCoopers, KPMG, Ernst & Young, Deloitte, Grant Thornton and BDO

Basis to include non-financial information

KPMG Singapore’s head of audit, Tham Sai Choy explained the close link between non-financial information and valuation of a company. Example of non-financial information – the changes to a company’s oil reserves, a telco’s subscriber numbers, an airline’s load factor etc. Is there a need for these numbers to be audited too as they become more and more meaningful in giving guidance to investors on its performance?

Basis for Internet-based reporting

The report has also suggested that information be easily accessed by users through new Internet-based reporting technologies. The main reason for the lag is the need to assure quality and reliability of business information to users. Till then, paper-based financial statements will prevail as the only legitimate form of communicating performance.

Basis for fraud audit proposals at different pricing

  • to close the expectation gap with clients to expect auditors to discover frauds and errors under current audit programmes
  • to provide clients with a choice on the level of intensity of investigative work needed

My Conclusion

It is an amazing effort for so many key players of the auditing industry to be able to come together present a united front. But what is the true underlying driving this cohesion? Is the auditing profession looking at how they can enhance their relevance to the business community and thus ensure their continued economic existence? One of the proposals highlighted the need for individual auditors (instead of the firm) be subject to penalty for faulty audits.

In any industry, the industry players are encouraged to do some self-regulation to ensure service quality and fair existence before the strong arms of the LAW come in and take full control of its destiny.

by Edgar

To pay IRAS/GST for service?

The front page of Business Times today presented a proposal for companies to pay for official GST help.

What is the pricing?
For advance GST guidance, $525 for each query of initial 4 hours plus $131.25 per subsequent hour. Please double the charges for express service.

Why charge?
My initial response is why. Are companies or their representative in the form of tax agent or untrained accounting staff abusing GST administration with excessive superfluous queries? Does this move contribute to higher business costs? How does GST administration justify the proposed pricing? Are there similar models operated by other government agencies or statutory boards or corporatised entities? What is/are the objectives and roles of IRAS in relation to the the “bigger picture”? How will the new pricing model contribute to that bigger picture?

Why don’t charge?
I humbly drawed on my experience in the property development. The architect submits plans to the various government entities for guidance and approvals for the intended development. Relevant fees are payable. You have to pay for the use of Court facilities too. Should the same be acceptable for GST’s official guidance?

There maybe some justifications.

  • Firstly, there is a need for a pricing mechanism to allocate resources efficiently as resources within IRAS/GST administration is finite too (just like everywhere else).
  • Secondly, the businesses of today are relatively complex as they traverse across national boundaries. Such business would require some level of certainty in the form of official guidance to avoid resource-sapping effort trying to recover from skirmishes with law. They want to focus on doing business. Thus the “small” sum payable for that peace of mind is definitely worthwhile.

Does it increase the costs of doing business in Singapore?
Some of these companies may be paying their tax agents for advice already. As the fees are applicable to advance (and not normal) queries, I presume such queries would only be relevant to bigger and complex companies. The fees thus would be relatively nominal.

Is there a possibility that IRAS/GST recycle official guidances? No two property development applications will ever be the same. So will 2 applications for GST guidances be similar?

Other implications
The fees, when applied, may implicitly provide a check and balance on the performance of the tax agents.

The application of the fees may also change the relationship between IRAS/GST and the enquirer. When a fee is paid for an official guidance, does it imply is a higher level of responsibility? How was it done before? Were there any official guidances given out in the past? Or does IRAS/GST wait until the actual occurrence of the transaction and relevant documents submitted for review before an official judgement is given?

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by Edgar

Hour Glass, Gems TV and FRS39

Hour Glass paid $15.5 million for a 5% stake in Gems TV Holdings towards the end June 2006.

Who is Hour Glass and who is Gems TV?
Hour Glass is in business of retailing luxury watches and accessories and listed in the SGX.

Gems TV buys cut gemstones, makes them into handcrafted jewellery in Thailand and sells the goods through a ‘reverse auction’ over television shopping networks to home buyers in the UK.

Gems TV is currently offering nearly 285.8mio shares at $1.08 apiece in its IPO now.

At the offer price of $1.08, that stake will be worth $44.5mio ie. a potential unrealised investment gain of $29 million after just 4 months!!! This is definitely a situation of “got money can make more money”.

What is Hour Glass’s investment horizon?
Hour Glass has indicated that it will hold the investment for the long term. It has also agreed that it will not, without the PRIOR CONSENT (as compared to “moratorium”) of the IPO’s global coordinator, dispose of any of the shares for 12 months after the listing. Thus technically speaking, Hour Glass may be able to sell its stake within 12 months.

How will Hour Glass account for this investment in their books?
Hour Glass has stated that the investment will be classified as being available-for-sale (AFS) under FRS39 – Financial Instruments: Recognition and Measurement and will thus be restated at fair market value as at the end of the financial year.

What are the impacts of this decision?
For investments under AFS, any unrealised holding gains and losses are deferred in reserves until they are realised or when impairment occurs.

Thus the unrealised gain of $29mio expected on 10 Nov 2006 will go to the reserves and not go to P&L.

Shareholders will thus see the impact on net tangible assets per share and no effect on the earnings per share.

by Edgar

KPIs of IRAS

What are the key performance indices for IRAS? I will present its KPIs using the analogy of a company’s financial statement.

  1. The topline has grown by 11%. Total tax revenue collected for FY05-06 is $19.9bio. This is about $2bio more than FY04-05. This upward trend has been apparent over the last 5 years.
  2. Its cost of sales ie. the cost to collect a $1 tax revenue, is 1 cent.
  3. IRAS’s revenue is now about 70% of the Group’s (ie. Government’s) total operating revenue of $28bio. This is higher than last two financial years’ average of 65%.
  4. Sectoral performance review of its topline. IRAS received $7.3bio (37%) from corporate tax, $4.3bio (22%) from income tax, $3.8bio (20%) from GST and last $1.8bio (9%) from property tax.
  5. Other operating income ie. IRAS’s collection of fines and penalties. The amount of penalties collected from GST violations amounted to $76.2mio (a drastic decline of 35%). The amoun of penalties collected from income tax violations amount to $61.4mio (an even bigger decline of 46%).
  6. IRAS’s online business is not going as plan. What online business? IRAS wishes to encourage more e-filings. The no. of e-filers among individuals declined to 785,000 from 885,000 in FY04-05 despite an increase in total no. of taxpayers from 1.3 people to 1.5 people.
  7. IRAS’s bottomline ie. operating surplus of $40mio is a significant 93% improvement over the previous year.

Recommendation – This company is a strong buy with significant growth expected in most sectors that it is in. All KPI measures indicate the company is more than ready for that growth with a small black mark noted on its “online business”.

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by Edgar

Are you earning >$1million income last year?

If you did, you are one of the 1,738 who earned more than a million dollars last year out of a total 1.5 million tax payers. Then sincere congratulation to you is in order from the masses out there.

The bad news is that if you are earning exactly $1,000,001, I am sorry you do look quite bad in comparison to most of the other 1,737. Why? These 1,737 people earned about $3.5billion (minus a million from u) ie. averaging $2mio per person.

So you have to work harder!

All in all, Singapore should say thank you to 1,738 of you for paying about $500mio in income taxes (albeit only about 3% of total tax revenue).

From the sour grape here, please help me to join this real Million Dollar Club.

Cheers!

Click http://www.AccountingWithEdgar.com for another view of Edgar.
by Edgar

A New Ratio from Manchester Business School

Hi friends,

Attended a taster seminar by Mr Bob Ryan of Manchester Business School.

Interestingly he is rumoured to be the examiner for ACCA’s new financial management paper. After listening to him for 2 hours, I wish “All the Best” to those taking that paper :)…

Back to the topic proper.

What is the issue?
When companies are required to show aggressive numbers, creative accounting (hei! actually some are not so creative after all) becomes the order of the day. Companies like Enron, ACCS and Informatics are at various stages of proving their respective revenue recognition being true.

Is there a magic panacea to detect this problem before it explodes and takes the savings of thousands of good hardworking people and places thousands of people out of work?

The ultimate test of a true revenue is whether that revenue is convertible to “CASH”.

The question an investor, a good CEO, a good CFO should asked is whether the Operating Cash Flow (OCF) commensurates with the rapidly growing Operating Profit (OP). If OP had grown by 300% while OCF grew by a meagre 2%, one should ask where had the OP gone to?

The Panacea
The panacea as proposed by Mr Bob Ryan required us to calculate the COP, Cash to Operating Profit ratio.

COP = EBITDA / OCF

The steady state would be COP = 1 where a $1 of EBITDA would translate to $1 of OCF.

Mr Bob Ryan said the ratio would have detected a severe dislocation in ENRON given its COP of 19!!!!!!

Tired and sleepy.. pardon me for any typo and factual disjointment..
Good night and take care.

by Edgar

Bonus issue of new shares

For my students.

Many are unable to tell the difference between bonus issue and rights issue of shares. I wish to present my interpretation on bonus issue to shed some light on this front.

Is this a possible exam questions? Of course, my friends.

Bonus Issue
Essentially we are issuing new shares by capitalising the reserves ie.

DR Reserve account
CR Share capital account

Any cash flow from the issue?
No money exchanged.
The company will send notices to shareholders to inform on the number of shares allocated based on the approved ratio.

Example – You were holding 1,000 shares prior to bonus issue. The company has been approved to issue bonus shares on the basis of 1:4. You would be issued 250 bonus shares for a total holding of 1,250 shares.

Are you any richer given the higher number of shares you now have?
Theoretically no. Has the company make any monies from the exercise? The answer is no. It is merely a paper exercise. Every existing shareholder maintains status quo in terms of their percentage ownership of the company.

Then why would a company do a bonus issue?
The company has essentially issued more shares to increase liquidity of the counter by reducing the absolute dollar value of each share. For example, DBS Bank may issue enough bonus shares to reduce its current share price from an “expensive and prohibitive level” of $20 to a more affordable level of $8. Then more people can “afford” to buy the shares and participate in success of DBS Bank.

Trust this helps. 🙂

by Edgar

Opening Stock and Closing Stock

For my Students.

Issues
You may have noticed that the Closing Stock figure is usually placed outside the Trial Balance. You would then use the figure in computing Cost of Sales in the Profit and Loss (P&L) Account. The figure is then presented as part of Current Assets in the Balance Sheet.

Have you ever wonder where did the Closing Stock figure come from and how it enters the accounting system? Two questions on stock were asked for Jun 2006 ACCA Paper 1.1 Preparing Financial Statement.

My views
Profit and Loss account is part of the double entry system.

Balance Sheet and Trial Balance are essentially just listing of account balances.

Closing stock balance is a factor of price and quantity.

  • The quantity is tracked by the no. of deliveries in and out over the financial year and confirmed after a physical stock count after end of financial year.
  • Price is determined after doing the FRS2’s lower-of-cost-and-NRV exercise.

To transfer the Opening Stock to P&L account,
DR P&L account
CR Stock account

To bring Closing Stock into the accounting system,
DR Stock account
CR P&L account

Not many lecturers can or bother to explain this nowadays.
Hope it helps. Cheers 🙂

by Edgar

Amendments to Companies Act (Part 2)

What are the other amendments made?

  1. Reforms in the capital maintenance regime.
  2. Liberalise the amalgamation process for companies.

Huh!!! Blur???
What do you mean? I share the same reaction as you. Allow me to present my understanding of these lesser known rules as compared to those discussed in Part 1, my earlier posting.

What is that?
The regime ensures that the shareholders cannot happily deplete capital from the entity without due consideration to the creditors’ interest and the working capital needs of its daily operations.

Under the old regime, the following are prohibited:-

  • financial assistance to 3rd parties to buy its shares;
  • reduce share capital (unless you got permission from High Court) and;
  • share buybacks.

Under the new regime, the following are now in force.

  • Company can now give financial assistance to buy its shares. How much? Up to 10% of share capital or if all shareholders are offered the same assistance.
  • Now a company can do a capital reduction through a special resolution subject to 2 conditions. The company must perform a solvency test and do the necessary publicity ie. an advert in a national newspaper.
  • Why do the publicity? If you, a creditor of the company, saw the Notice in the newspaper and are unhappy with the proposal, you may seek legal redress.
  • The directors must sign a “Solvency Statement” ie. to confirm that the company can meet its obligations and that assets > liabilities. So if the coffee aunty’s salary is not paid when due, the directors who signed that Solvency Statement may to pay her salary personally!

These changes further escalate the directors’ responsibilities in managing the affairs of companies. They are earning their fees. 🙂