D&B – The 4th SME Credit Bureau Conference

Dear friends,

My last posting to Accounting With Edgar was towards the end of last month. Edgar had since been engulfed in taking on new endeavours such as new classes and most importantly, preparing for this speech (among many other things) for the following event.

“Surfing the Wave of Increasing Competition”
Suntec City Convention Centre, Ballroom 3
Friday, 28 March 2008


Well I managed to pull it off. Addressing more than 250 people in a conference hall at Suntec City is a first for me.

How do I rate myself? A can do only. I will definitely strive to do better.

Read further if you wish to have a peek at my presentation. Essentially my simple objective was to arouse excitement among business owners currently being encircled in the rapid rate of price increases.

===== Start of Speech =====

The current business environment is one of:-

  • $107 per barrel of oil,
  • strengthening SGD,
  • tightening labour market, (In Mar 2008’s edition of CFO Asia, cost and availability of labour are top 2 concerns of CFOs in Asia.)
  • escalating rental rate,
  • increasing prices of raw materials …

Against this background, the focus of my presentation today is to ask ourselves as to how we can use these cost pressures to positively “excite” the way a business operates and ultimately its bottomline.

Some businesses do have the uncanny ability to transfer the increase in costs to their customers. These are companies who can price their product at a base selling price plus a fuel surcharge while demand for their products remains unchanged.

Utilities companies too are able to review their selling prices on a quarterly basis to its customers in the form of thousands of households.

At the other end of the spectrum, there are businesses who are holding on their prices for their dear life while absorbing the blows of increasing costs.
By some good fortune, there maybe some businesses out there who may say they currently not experiencing any such cost pressures. While life is good and dandy for these businesses, they should not rest on their laurels.

Can we “excite” the business from its comfort zone by injecting some sort of cost pressures into the system without costing it an arm and a leg?

Well the answer may lie in reviewing your business’s depreciation policies.

Here we look at how to achieve this awareness when analyzing depreciation, which can represent a big portion of the expenses found on a company’s income statement.

While there are rules governing how depreciation is expensed, there is still plenty of room for management to make creative accounting decisions that can create the necessary pressures to stimulate the business. It pays to examine depreciation closely.

What Is Depreciation?
Depreciation is the process by which a company allocates an asset’s cost over the duration of its useful life.

Each time a company prepares its financial statements, it records a depreciation expense to allocate a portion of the cost of the buildings, machines or equipment it has purchased to the current fiscal year.

For intangible assets – such as brands and intellectual property – this process of allocating costs over time is called amortization.
Assumptions Critical assumptions about expensing depreciation are left to the company’s management.

Management makes the call on the following things:-

  • Method and rate of depreciation
  • Useful life of the asset
  • Scrap value of the asset

Traditional Application of Depreciation

In the traditional mode of thinking, we take the sales turnover figure as given.

By adjusting the various components of the depreciation methods, our bottomline would be affected immediately ie. depreciation, being an expense would reduce our profit.

So to show higher profit, we can apply a longer useful life or switch from reducing balance method to straight line method of depreciation.

Now consider this…

What if we tighten the depreciation policy instead ie…

By reducing the useful life of certain key non-current assets or by changing the depreciation method from a straight line to reducing balance method, we immediately put pressure on the bottomline by increasing the depreciation expense in the early years.

The higher non-cash expense and consequently total costs would translate to a higher breakeven level.

The higher breakeven level is not meant to be kept top secret. We should instead translate these cost information into headline KPIs for all to see. Staff from all levels of a business must be aware of the KPIs.

Harness that awareness!!

Create a suitable environment to harness that awareness heightened by the injection of the additional cost pressures. Can the heightened awareness encourage ideas to freeflow?

Management must rally its troops to use the cost pressures positively to think of ways of improving the topline. Topline is a function of price and quantity sold.

Think of how we can sharpen our business model to sell more units? Or how to get our customers to pay more for our products?

If a business had priced its exports in SGD while the SGD continues to strengthen, it has to give its customers continuous good reasons to do business with us.

The process of creating these “continuous good reasons” for customers to keep coming back and buy from us is to innovate to differentiate.

The “good reasons” must be dug up from:-

  • production processes,
  • product design,
  • customer service,
  • staff training and retention,
  • management of call centres,
  • accounts dept,
  • support services, etc etc etc.
  • No stone should be left unturned.

Some examples of innovation that I observed recently.

Eg. 1 – moving to higher yield products by removing economy class seats and replacing them with business class seats. Revenue per flight would consequently increase. Brilliant!

Eg. 2 – In a product I drink quite often, the manufacturer raise the price after adding some vitamins. The “non-vitamised” product was removed from retail. Customers are again left with no choice but to buy the higher price product.

Eg. 3 – In the banking business, a simple switch from a 365-day year to a 360-day year in interest computation would translate to millions more to the bottomline.

Were these ideas the fruits of the cost pressures?

For it to be sustainable for a long time, the cost pressures must induce a PARADIGM shift all together to adapt to the extreme environment.

If the business is currently experiencing cost pressures, use it to create, to innovate.

If the business is currently immune from current cost upheavals, perhaps you may “adopt” some cost increase by reviewing your depreciation policy.

Translate the higher breakeven into KPIs for all to see.

KPIs heightened awareness.

Harness the awareness.

We then await the fruits of our effort.

I shall conclude my paper today by quoting Mr John Kao, the Chinese-American innovation evangelist, who was in Singapore recently.

He said, “innovation enables people to adapt to the waves of disruptive change”.

Whether the business is facing the disruptive waves now or otherwise, innovation to differentiate can and must be institutionalised within an organisation, compelled or otherwise.

On that note, I wish you all a good day. I thank you.

How to finance Development Expenditure?

What is Development Expenditure (DE)?
According to Ministry of Finance, DE refers to expenses that represents a longer term investment and result in the formation of a capitalisable asset of the Government.

How is DE financed currently?
Based on FY2007 Budget, $7.1 billion of total DE of $13.1 billion (ie. 54%) is financed out of current revenues, mainly taxes.

How should DE be financed according to Mr Basant Kapur?
Mr Kapur said most DE should be financed by borrowing. Exception – DE on military hardware which should be financed out of taxes.

What are the basis of Mr Basant Kapur’s position?
DE, as in any investments, would generate a return over time. The return should be measured by the incremental GDP contributed by the DEs. The interest servicing and loan capital repayment should be paid out of taxes on the incremental GDP.
Using current tax revenues to pay for future returns may have negative repercussions. Mr Kapur argued that the 2% GST increase may thus not be necessary if the DE were to be financed through borrowing, from internal sources or otherwise. The GST increase has resulted in higher than expected tax revenue which may curb consumption and fuel inflation.

In summary, we should not impose cost to the present when we are investing today for future benefits based on economists’ “efficiency argument”.

Who is Mr Basant Kapur?
He is a Professor of Economics and Director, Singapore Centre for Applied and Policy Economics, NUS.

Reference – Basant Kapur, “Better to borrow than raise GST”, Straits Times, 29 Feb 2008.

Destroying records and selling computer…

Png Yeow Leng, 35, pleaded guilty to 6 charges under GST Act when he faked transactions to claim $42,000 in tax rebates over 9 months to March 2005.

Nothing amazing about this so far.

The interesting thing is that he has the honour of being the first person in 14 years to be convicted of not keeping proper business records.

When the IRAS officers first attempted to commence investigation into his business dealings, he closed his shop, burnt its records and sold his computer to a karung guni man.

Under section 46(1) and (2) of the GST Act, a GST trader is required to keep business and accounting records, copies of all tax invoices and receipts issued by him and tax invoices received by him and to preserve such records for a period of not less than 7 years.
From 1 Jan 2007, you have to keep your records for 5 years.
Failure to do so is an offence. Under section 46(6), the offence is punishable with a fine not exceeding $5,000 or to imprisonment for a term not exceeding 6 months or to both and, in the case of a second or subsequent conviction, to a fine not exceeding $10,000 or to imprisonment for a term not exceeding 3 years or to both.

SRS enhancements

things people watch together

Old rule – Workers only can top up their own accounts.
New rule – From Oct 1, 2008, employers can top up the SRS accounts for their employees and enjoy tax exemptions.

So if you know that an employee of yours is going to contribute to SRS, why don’t the company do it on behalf of the employee?

Old rule – Currently, members are given 10 years to withdraw their SRS savings from the retirement age of 62.
New rule – It will start only when a SRS member makes his or her first withdrawal.

Other features:-

  • 50% of the amount taken out of SRS account during that 10-year period is taxable.
  • Top-ups will still be capped at $11,475 for Singaporeans and PRs and; $26,775 for foreigners.

Section 94A of the Income Tax (Amendment) Act

two lonely petals

A piece of legislation, passed in Feb last year, has sharply upped the ante for filing late returns. The harsh new penalty kicks in for those who fail to file tax returns for two years or longer. There could also be a fine of up to $1,000.

The new Act has been giving sleepless nights to many, especially this fellow called Joe Ang. He felt so bad that he wrote a letter to IRAS.

“Dear Honourable Tax Officer of IRAS,

I have had many sleepless nights over the last two years for the tax owing. Please see the attached cheque of $100.

Good night.

Your humble taxpayer, Joe Ang.

P/S – If I still can’t sleep, I will send the rest of the monies.”

I will attribute the above adapted joke to Mr Sum Yee Loong who has kindly shared it with us during his budget review presentation on 27 Feb 2008. Cheers.

Mr Tharman explains…

Singapore achieved S$6.4 billion Budget surplus in fiscal year 2007 (equivalent to 2.7% of GDP) against S$0.7 billion deficit forecasted. The variance is a humongous SGD $7.1 billion between actual and budgeted.

The Finance Ministry has been urged to improve its fiscal marksmanship. Mr Tharman attempted to explain the variance in Parliament on Feb 27, 2008.

At the time of the Budget last year, the finance ministry estimated 2006 stamp duties to be $1.5 billion and hence projected the same level for 2007 on the basis that 2006 was itself already an exceptional year for property.

After the budget was released, the data showed a significant increase in stamp duty collection for Jan-Mar FY2006 to $2 billion, not $1.5 billion figure used at the time of preparing the Budget. Eventually, the property market accounted for more than $3.5 billion in extra revenues, lifting the budget surplus for FY2007 to $6.4 billion.

Well Mr Tharman has explained SGD$2 billion of the SGD$7.1 billion variance, how about the rest of the variance?

There was also uncertainty on whether the buoyancy in luxury projects would filter through to the rest of the property market. They did not expect the surge in the volume of transactions.

Singapore is a very open economy and thus very expose to external factors, positively and negatively.

I wonder we can quote Mr Tharman when we miss our business targets and hope our bosses will still see us positively by saying, “We cannot expect too much prescience in the budget planning process.”

Our bosses may respond, “Mr Tharman is running the country’s finances while you are just running a department’s/section’s finances.”
For the record, there had been six instances of over-projection in the Budget positions in the last 10 years.

Reference – Chen Hui Fen, Govt uses ‘realistic’ assumptions instead of ‘optimistic’ ones, Business Times, 27 Feb 2008.

Hong Kong pushes the ante in its budget

HK slashes taxes and doles out the goodies, with greater generosity than Singapore’s, funded by its record budget surplus achieved in 2007.

Singapore achieved S$6.4 billion Budget surplus (equivalent to 2.7 per cent of GDP) while Hong Kong’s record FY2007 HK$115.6 billion (S$20.7 billion) surplus – 7.2 per cent of GDP.

  1. Both governments to give out tax rebates. 20% tax rebate, up to $2,000 for Singapore. For HK, 75% tax rebate on salaries and corporate tax, up to a ceiling of HK$25,000.
  2. While Singapore holds its corporate and income tax rates steady, HK has decided to cut its headline corporate rate by 1% to 16.5% (Singapore – 18%). For income tax, HK’s top tier rate is 15% compared to 20% in Singapore. That is HK’s way of sharpening its competitive edge in the international arena.
  3. In promoting entrepreneurship in its already highly entrepreneurial society, HK is waiving business registration fees for a year. Singapore has decided to develop its competitiveness for its future by placing its chips on specific targeted areas:-
  • seeding Research and Development culture in all business entities in Singapore if possible, with tax grants and relaxation of restriction to perform R&D related to your existing business and;
  • targeted incentives for specific financial and maritime industries, and tech start-ups.

4. While HK has decided to scrap its 40% tax on its wine and beer duty all together, Singapore has instead decided to moderate its liquor duties by charging duties based on its alcohol content.

5. On Green front, HK is ahead of Singapore with tax concessions for environmentally-friendly vehicles and even machinery. We were just lamenting the lack of concrete intention ie. $, by Singapore on this front.

6. For the lower income group in both economies,

HK will do the following:-

  • mandatory pension payments – to inject cash of up to HK$6,000.
  • extra month’s payment under Comprehensive Social Security Assistance (CSSA).
  • The elderly were also given additional funding of HK$60 million a year for day care, residential and infirmary places.
  • Old Age Allowance recipients will also receive a one-off grant of HK$3,000, costing the government HK$1.5 billion.
  • set aside HK$50 billion for health care financing in the ageing society.
  • subsidy of HK$1,800 for electricity charges per household, costing the government HK$4.3 billion.

Singapore will do the following:-

  • Singapore is disbursing some S$1.8 billion of ‘growth dividends’ to all Singaporeans still holding on to their shares.
  • Another S$1 billion in benefits under a GST offset package unveiled earlier when the consumption tax rate was raised by two percentage points.

Anna Teo, A tale of the Budgets of two cities, Business Times, 29 Feb 2008.
Jane Moir, HK slashes taxes, doles out the goodies, Business Times, 28 Feb 2008.