by Edgar

Depreciation policy and your bottomline

branding?

I have just completed my session on FRS16 on property, plant and equipment with F3 Financial Accounting class.

I have stressed that depreciation policy is within management’s right to decide. The management may adopt a relevant method or formula to account for depreciation for the “right impact” on its bottomline.

Allow me to cite the example of this airline company managing its fleet of planes and the choice of depreciation policy.

The company chose to expense high depreciation for its young fleet. This will consequently push up the breakeven passenger load factor and cargo capacity utilisation levels. The management are thus “motivated” to think at operating its business at different levels (ie. in terms of efficiency, effectiveness, customer service etc) compared to its competitors.

After using the planes for a few years and given its expressed desire to maintain the youngest fleet for its passengers, these planes with relatively low net book values were then disposed at market prices at very handsome accounting profits.

If these gains from disposals were to be judged as non-operating profits and thus not subjected to the usual corporate tax, this would be certainly provide the icing on the cake for the overall bottomline.

Conclusion
Attentive review and consequent adoption of any accounting policies are critical first steps of a company. While the depreciation policy alone is not the magic wand in making a company successful, it will help in certain circumstances.

by Edgar

Financial leverage?

It relates to how your business is funded ie. how much of it is funded by your own money and how much of it is funded by other people’s money.

There is always a price for money. Money is a precious resource. Price of money comes in different terms ie. interest, dividend etc.

While you may be willing to forgo your dividends for the monies that you have invested in the business, other investors and lenders of monies to the business would want their “pound of flesh”. These groups of people would want to be paid.

Thus the risk.
In any economic downturn and consequent negative impact on your topline ie. sales revenue, it would severely reduce your ability to pay these investors.

As accountants to be and in practice, we have to ensure a capital structure that is vigorous enough to protect the company’s existence and also to meet the investors’ aspirations.

I will continue to review the specifics of the article here in AWE.
by Edgar

Was Mr Wee Sing Guan the only one who knew? Part 2

BNPP relied on Singapore Financial Reporting Standard 39 as the basis of its rebuttal to Mr Riehl’s expert opinion.

BNPP said concealment or deferment would be impossible “with fair valuation of ALL derivative financial instruments through the profit-and-loss account as required by by FRS39”.

BNPP said this is further evidenced by assurances made by Board of Directors in 2006’s audited financial statements on Mr Wee’s forex transactions.

BNPP said it was not able to fully appraise its client’s forex positions as it was dealing with 11 other banks.

On a hindsight, similar to APB’s case, a bank with significant dealings with a company, should seek periodic face-to-face report and review with a panel of at least 2 or more its senior management staff.

by Edgar

Was Mr Wee Sing Guan the only person who knew in SembMarine? Part 1

Referring to the court proceeding between BNP Paribas (BNPP) and SembMarine as reported by Conrad Raj in BT, January 3, 2008.

Heinz Riehl, SembMarine’s “expert” witness, is trying to offer a defence for SembMarine, with the following:-

  • non-financial institutions do not mark to market the value of the forward positions and;
  • only recognise cash (ie. realised) profits and losses.

My opinion

This is a very poor excuse offered on behalf of a corporate of the size of SembMarine. He is saying that SembMarine do not have anyone to monitor whether the respective forex positions were making money or otherwise. They would just receive any profit and pay out any losses upon closure of any position.

As I have said before in my last posting on this topic, SembMarine could always ask the bank for a daily mark-to-market report assuming if SembMarine may not have the expertise in house.

Mr Riehl, are you saying that once a pregnancy is conceived, there is no need for any medical review at various stages of pregnancy but are only concerned with the outcome at the day of birth?

by Edgar

Changes to ACCA OBU Degree

The following changes will be effective immediately for ACCA students who registered after 1 January 2007 and who will sit the new ACCA Fundamentals level papers in December 2007.

* RAP – research and analysis project

  1. Project mentor is still required.
  2. RAP will be graded A, B or C.
  3. RAP word limit is increased to 6,500 words.
  4. Overall class of degree will be determined by the average marks of F4 – F9 module papers and the RAP grading.
  5. You have to submit the RAP and a Skills and Learning Statement. And you must pass both papers.
  6. If you failed the first submission of RAP, you can only get “C” at best, for getting a pass on resubmission.
  7. You are given 3 chances to secure a pass for RAP. After 3 “strikes”, you are out!

Bottomline
The process to be a “graduate” has become more vigorous. You need to plan your time and effort as part of your ACCA education strategy. For more information, you may click www.accaglobal.com/students/study_exams/qualifications/degree/.

by Edgar

Malaysia’s new single-tier corporate tax system…

….is now in sync with Singapore’s system.

Under Malaysia’s old two-tier imputation system, profits earned by companies were firstly taxed at corporate rate and subsequently tax at individual level when received as dividend distributed.

Singapore’s old two-tier imputation system while similar but slightly different from our neighbour’s ie. profits earned by companies were firstly taxed at corporate rate. The after-tax dividend received by individuals were then “re-grossed” and subject to the individual’s tax rate.

Now both Singapore and Malaysia will pay out exempt dividend ie. after corporate tax rate, to shareholders.

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by Edgar

Yeo Hiap Seng multi million dollars tax saga continues

this is not as clear as black and light brown

Back in Apr 2007, I became aware of the ongoing ding-donging between YHS and IRAS on a “simple” definition issue that may result in YHS paying IRAS millions of dollars.

http://taxwithedgar.blogspot.com/2007/04/revaluation-surplus-and-tax-issues-with.html

What is the ding-donging about?
In 2000, IRAS wants to treat $108.2 million of the revaluation surplus of $128.8 million as a taxable gain. The tax payable by YHS would be $23.3 million.

YHS has insisted that the $108.2 million is capital in nature and thus not taxable.

What is today’s news about?
Apparently, the statutory time limit for assessing profits on the Sterling project for YA 2001 expires at the end of this month. So IRAS has issued a “protective assessment” on the tax payable to avoid the situation of the “claim” becoming a legal-no-show (ie. YHS can no longer be legally obliged to answer/pay).

YHS’s responses
– YHS applied for a “standover without penalty” of the tax raised by the protective assessment. IRAS granted the request.
– YHS will make a tax provision of $23.3 million and consequently issued a profit warning.

For most of the taxpayers, you pay first if you wish to object to the assessment. If you don’t, you got fined. For YHS, standover without penalty was granted.

Friends, this series of “tactical” moves of creating the revaluation reserve prior to converting the land from factory use to condominium property developments, subsequently objecting to the tax assessment and dragging it over the last 6 years should be documented and reviewed in MBA/tax classes.

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by Edgar

Positive impact of fair value gain for Ipco

On Dec 15, 2007, BT reported that fair-value gain boosted Ipco International’s 6-month profit by more than 100% (ie. from $2.1mio ti $5,4mio on a revenue of $24.4mio) despite a 31.5% fall in first 6-month sales.

What is Ipco’s business?
Ipco is essentially a developer and investor in oil and gas, water and environment infrastructure projects.

ESA Electronic, its subsidiary in the semiconductor equipment distribution business, responsible for 31.5 per cent fall in group’s sales of goods to $11.9 million from $17.4 million.

This was offset by a rise in other revenue from $2.4 million to $8.2 million, which included $7.5 million in ‘fair-value gain’ on financial assets.
So without the fair-value gain, the Group’s total revenue would be $16.9mio instead of the currently reported $24.4mio (a 16% drop instead).

So while Labroy and SembMarine have been negatively affected by financial assets valuation, we have a company here that has been glossed with positivities instead.

P/S – Fair-value gain of $7.5mio is accounted as “Other revenue”. Hmmm…
by Edgar

Property tax too will be increased for bigger HDB flats

What happened?
The Inland Revenue Authority of Singapore (IRAS) will be revising the Annual Values (AVs) of most properties, including HDB flats.

The AVs of all properties are subject to annual reviews by IRAS to ensure that they reflect prevailing market rentable values for property tax computation. This year, most AVs will be revised upwards.

What are the property tax rates?
The property tax rate is currently set at 10% of the AV of the property. For owner-occupied residential properties, the owners enjoy a concessionary tax rate of 4%.

What is the impact to you?
From Jan 1, 2008, if you are a property owner in the more centralised and popular areas like Bishan, Bukit Merah and Marine Parade, you would have higher AV increases, compared to other areas.

The average AV increase in percentage terms for the flat types are: 20% for 1-room and 2-room flats, 25% for 3-room flats, 18% for 4-room flats, 20% for 5-room flats and 18% for executive flats.

However, the increase in AVs does not translate to a proportionate increase in property tax actually payable, due to the property tax rebates that have been granted by the Government.

As part of GST Offset Package announced in Budget 2007, an additional property tax rebate of up to $100 per year in 2008 and 2009 to be handed out. Thus 90% of all HDB flat owners will not pay more property tax in 2008 even after the AVs of their flats will be increased in 2008.

In summary,

  • All 1-room and 2-room flats will pay zero property tax room flats.

  • 3-room flats – 60% (compared to 13% in 2007) will pay zero property tax and 40% will be paying less tax than in 2007.

  • For 4-room, 5-room and executive flats, about 15% will pay more property tax but the increase in property tax is less than $40 (or about $3 per month).
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by Edgar

Do you DARE to go to trial on tax evasion?

If you have been charged by IRAS for tax evasion, would you accept the accept the charges and submit yourself to whatever punishments befitting OR would you seek your justice in court? What did Mr Looi, our famour curry puff entrepreneur do under similar circumstances?

For income tax offences

Section 96 and Section 96A provide for statutory presumption which relieves the prosecution from having to prove an intention to evade tax, the very hallmark of tax evasion.

Where a false statement is found to have been made in the taxpayer’s return, accounts or records, this is considered proof of an intention to evade tax.

You can try to challenge the presumption by having the burden of to disproving the presumption in trial.

For GST violations,

The advantage is also with IRAS, the plaintiff / prosecution. The defence ie. the alleged violators, would have to prove its case beyond reasonable doubt.

Concluding remark

To date, very few persons charged with tax evasion have been brave enough or not foolish enough to seek justice in court.

As for our Mr Looi, he pleaded guilty with any legal representation.

Mr Sharma, a partner of KhattarWong rallied the authority to level out the playing field ie. BOTH prosecution and defence are required to prove their case in court.

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