Grig says...

Dear Edgar,

Thanks for your kind support during last year. I feel my MBA at least 30% yours because according to my classmates accounting was the most difficult module.

Grig
25 Dec 2006

Merry Christmas!

If someone will grant me a wish for or maybe if there is enough of us to pray for peace, happiness and a stop to the degradation of the environment, the world would be a better place for all.

My friends, take care.

Serene, I thank you too :)

Hi Edgar,

I was your student in your main & revision classes this year (ie. 2006) from Jan to May, I took my CBE exam for paper 1.1 last week and am pleased to tell you I've passed!!!

To me, this exam was a difficult one, though I only managed to score 76 marks but I believe I had done my best and am glad I've cleared the paper!

I would like to take this opportunity to thank you for being an inspiring lecturer, though I was confused sometimes but over all I thoroughly enjoyed and am enriched from your lectures. Keep up the good work and may you enjoy more success in the coming Jul term!

Best wishes and God Bless You!!

Regards,

Serene
28 June 2006

Auditors to pay $775,000 damages

Who sue who and for what?

Gaelic Inns (of Muddy Murphy's Irish Pub and Penny Black of Boat Quay) sued Patrick Lee Public Accounting Corporation for $1 million losses suffered by Gaelic Inns.

How was the monies stolen?

The then Group Finance Manager, Ms Denise Ang did not banked in the daily bar takings between March 2003 and May 2004.

What is the Hon Judge Belinda Ang's decision and basis?

The Judge ruled in favour of Gaelic Inns and awarded $775,000 plus interest.

Judge said "while an auditor is not expected to be a detective, the duty to audit carries with it an incidental duty to warn... managementt or the directors of fraud or irregularities uncovered".

Was it uncovered by the auditor?

The audit was in progress in March 2004 while the crime was still in progress.

Mr Lawrence Phong, the audit manager in charge then, was reviewing the bank reconciliation statements. There was a discrepancy of about $680,000 noted between cash balance as per accounts and actual cash in bank!

Mr Phong was faulted for not doing an indepth investigation immediately upon its discovery, tardy in follow-ups and lastly for not highlighting the matter to the management.

Conclusion

Does this decision further increase audit risk to the auditors? Lawyer Philip Fong, representing Gaelic Inns, seems to think so. The decision highlighted the need to review process and audit procedures of cash, particularly in F&B or retail businesses.

However, such annual audits are still not expected to discover frauds unless specially commissioned to do so. In this case, the auditor had laid his hands on the most glaring documents highlighting the crime ie. bank recon statements. And thus the decision.

Good night.

P/S - Pic of December's rain clouds

Can you give some pointers to the new students?

Dear students, past and present,

Need your help to contribute some advice to the new students coming in in next academic term.

Advice on the following:-
How to manage time between work, studies, family and bfs/gfs?
How many subjects should I take?
How should I study? Read textbook or not?
How to deal with lecturers to get them to help?

Given that you guys and gals have now got the experience of going through at least one exam, let me have your views.

No right or wrong view. It is your view. - So just type :)

Stock Grant vs Stock Option

What is stock grant?
Company buys shares from open market and gives them to its staff according to an incentive programme.

What is stock option?
A company issues papers to its employees giving them the right to subscribe to shares of the company at a pre-determined price (usually below current market price) after a certain vesting period.

Similarities
Both forms of incentive plan enable the company to motivate employees to achieve superior performance as well as to align the interests of employees and shareholders'.
Both costs of incentive plan have to be expensed off against profit.

Differences
Expenses incurred to do stock grant is tax deductible as per cash compensation to employees. Stock option expenses are NOT tax deductible.
Determination of cost for stock grant is more definitive. There has been constant debate over the valuation of stock options.

Conclusion
SIA, SembCorp Industries, SMRT and StarHub, are recent adopters that have awarded employees with stock grants for the first time this year.

More expected to follow forth.

AirAsia may have to restate earnings?

Issue
In early Nov 2006, AirAsia, the Malaysian budget airline, have indicated that it may have to restate its earnings for its fiscal year ended June 2006. This is a result of difference in interpretation of a certain accounting policy. The dispute would translate to RM40mio swing in profit.

What is the accounting policy under dispute?

The focus is on FRS 112 under the Malaysian standard.

AirAsia has maintained their position that the International Financial Reporting Standard (IFRS) allows it to recognise unused investment tax allowances as deductible temporary differences.

It argued that its accounts for year ended 30 Jun 2006 will not present a true and fair view of the company's financial performance if it were to comply strictly with FRS 112 under the Malaysian standard.

Malaysia's Securities Commission (SC) had asked AirAsia to restate its accounts.

The Malaysian Accounting Standards Board (MASB) confirmed recently that FRS 112 was not a new standard, and that it is also consistent with the international standard.

Bottomline
AirAsia's accounts could be qualified. The profit definition difference would have no impact on its financial position as the accounting treatment is non-cash in nature.

Anybody got any update on this case?

ACRA goes XBRL

Wef 1 April 2007, ACRA will require companies and local branches of foreign companies to file their financial statements in XBRL format via Bizfile.

To know more, sign up for "Public Awareness Seminar" and learn how to prepare and file financial statements in XBRL format.

Seminar will be held at Supreme Court Auditorium on Thursday, 30 November 2006 at 8.30 am to 12.30 noon. The eflyer says $12 (I think).

I would love to go and learn but alas I will not be in town. So to whoever intends to attend, pls share with us. Go to www.acra.gov.sg for more info.

Do a bit of national service for ACRA la..

N Khan says...

"Dear Mr. Wong,

My name is Nus and I am one of your I.IJ (revision class) student. I am a student of Singapore Accountancy Academy as well but this is the first time I am joining your class. I have already attended the first lesson and I think you have a brilliant approach to make everybody learn the concept and actually "apply" it in examination question.

You said in class, you send reading materials and assignments through the e-mails, and I would be very glad if you send me some materials as well.

I am very determine to pass this coming 1.1 exam and I believe your help will lead me to reach my destination.

Thank You So Much for taking your time to read this."

Your Student,

Ms Khan, May 2006 Revision Class

P/S On 15 Sep 2006, she did passed.

J Liew says...

"I have just completed paper 1.1 in the recent June 2005 exams.

The months of hard work have paid off and I would like to express my appreciation to Mr Edgar Wong for his unwavering commitment, patience and guidance. He has definitely helped his students cope with the subject at a more comfortable pace."

J Liew, Sep 2005

Serene says...

"By the way, I must say that you teach really well, whereby you'll put yourself in students' shoes and explain. As I had taken accounts back in Secondary and Poly days (lecturer seems to be teaching himself or maybe he could not explain clearly).

I didn't actually learn through so much understanding. I've only memorised to pass this far. As a matter of fact, I hated accounts in secondary days. I know I can't play a fool with ACCA now. Have to work triplely hard."

Serene, Sep 2005

Helena says...

"You are excellent lecturer. Your lecturing is very interesting.

I never felt boring or tired when attending your lecture after work. Besides you are very responsible lecturer who really cares about the improvement of the students."

Helena, Sep 2005

“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.

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.

Place your bets! Place your bets!

Hi,

Anyone dare to guess what questions will come out for Section B in the coming ACCA Paper 1.1 (ie. Dec 2006)?

Q1 -
Q2 -
Q3 -
Q4 -
Q5 -

Come on! Give it a calculated guess!!!

Good nite...

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.

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. :)

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 :)

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. :)

Amendments to Companies Act (Part 1)

What are the amendments made?

1. Shares no longer have a par value.
2. Companies can hold treasury shares.

Effective date - 30 Jan 2006

What are the implications?

1. In the absence of par value, a company may have greater flexibility in pricing new shares to be issued in raising new capital. This was a particular concern when distressed companies faced tremendous difficulties in attempting to encourage take up of new shares priced at par value.
2. The term "Authorised Capital" is now part of history too.
3. Treasury shares are shares of the company purchased during share buybacks for various reasons eg. to enhance shareholders' value. The company now has the flexibility to hold these purchased shares in a treasury account for possible subsequent issuance eg. as part of employee compensation scheme.
4. For balance sheets as at on or after 30 Jan 2006, you should not see any share premium account and capital redemption reserve. These accounts will now be part of Share Capital account under the Act.

FRS103 for 2 companies who got married

What is the Rule?
According to FRS 103 for Business Combinations, all intangible assets acquired in a business transaction must be separately identified and valued by the buyer. Applicable from Jan 2005.

This new requirement has affected the way companies think and work in the following areas:-

• states how business acquisitions should be accounted for
• the valuation of intangible assets
• defining the various types of intangibles acquired into registered trade marks, patented technology, trade secrect and/or the plain old goodwill
  

What is the big deal between the old and new rulings?
Under the old regime, the buyer can basically disregard its existence by letting it "rot away" ie. being amortised away somewhere in the balance sheet.

Under the current FRS103, the buyer's management has to make an effort in protecting and enhancing these intangible assets' value after acquiring them. Annual review for impairment is necessary.

Shareholders of the buying company or the investing community would be reminded to query its management over any significant impact on profit due to changes to valuation of intangibles. This happened to DBS Bank last year.

For the selling company, it would accelerate a sale if its management is able to crystalise the intangible assets to the buying company by compiling a comprehensive customer database, registering trade marks, patenting innovative technologies and protecting trade secrets.

Directors are sweating over Interim Results

What is the Rule ?
Directors are required to confirm that "to the best of their knowledge, nothing has come to the attention of the Board of Directors which may render the interim results false or misleading". Effective 1 Sep 2006.

This is a negative confirmation rule ie. to state that generally there is nothing wrong, as compared to "generally everything is ok".

So why are the directors sweating over it?
- unable to rely on the comprehensive audit work done by auditors in year-end audit
- they have to worry whether the internal processes and procedures are vigorious
- especially if the company has operations over many countries with thousands of employee
- wondering to buy professional assurance service and incur more compliance costs

What is the proposed solution?
ACCA has proposed that directors should be allowed to explicit:-
- add a "read-and-act-at-your-own-risk statement" and,
- the numbers are mere estimates.

Conclusion
There is a need to find a balance to give some interim information to shareholders on the performance of the company and yet put certain amount to pressure to ensure credibility of information presented by directors.

Reference - "Use estimates to take heat off directors: Accounting bosy", Lee Su Shyan, ST 25 Sep 2006

SingTel got "mulled" over a possible writedown for Optus

What is the Rule?

Under Singapore FRSs, SingTel has ceased amortisation of goodwill on acquisition since April 2004.

The carrying value of goodwill continues to be reviewed annually or whenever there is an indication of impairment.

What are the possible indications of impairment?

• introduction of a superior product by competitor
• significant change in the business environment

How much monies are we talking about ie. size of goodwill in Singtel's books?

• Singtel paid $13bi0 for Optus in Oct 2001. $11.4bi0 (about 87%) of which is for goodwill.
• By FY2005, Singtel had reduced goodwill by $1.78bio. ie. the Group's profit had been reduced by that value.
• The auditors had just signed off the accounts for year ended March 31, 2006 with no request to adjust the goodwill figure.

A Mr Patrick Russel, a Merrill Lynch analyst attempted to value that intangible assets from different approaches. The current book asset value of Optus is $18.2 bio.

In his first approach, he used the current Singtel's share price of $2.50, multiplied by the no. of shares outstanding and then less all liabilities. It churned out a figure of $10.6 bio.

He calculated the present value of Optus' future cash flows in his second approach to give $9.4 bio.

Both Mr Russel's approaches highlighted the difference of about $5 - 8 bio from book value. I would love to know how Singtel does its valuation. While it may be true that goodwill amortisation and impairment charges are non-cash accounting adjustments in post-acquisition years, Singtel did pay good monies of about $13 bio back in 2001.

Merrill Lynch has reaffirmed its SELL recommendation on Singtel. So if you were one of those Singaporeans who are holding Singtel shares, should you panic and sell? Mr Heng, Singtel spokesman, correctly highlighted the need for investors to read widely from other analysts for a balanced view.

Till my next post, good night...

Revenue recognition on trial at Informatics

Informatics, a private education school, apparently booked revenue even though students had yet to attend a single course.

Apparently, quite a few people in top management team back in the few years pre-2004 were not aware that the company's revenue recognition policy in 2003 may have contravened financial reporting standards or its own finance manual.

Ex Informatics senior vice-president Lawrence Wee said in court yesterday that he was not advised of possible contravention.

Ex Informatics chief executive (CEO) Ong Boon Kheng too said he wasn't advised so.

The ex finance team consists of Group's financial controller and the chief financial officer (CFO) Patrick Lau apparently didn't know they could have violated any law too.

The company's ex finance controller and former franchise department senior vice-president are expected to testify on this question too.

Another interesting point to note is that there is/was a "Finance Manual" written and the management then may have possibly contravened its content. I wonder who had the knowledge to write it then. Was he or she part that management team then? Who approved the manual as a guidance document for the company? Ex Board of directors?

We await the outcome of the trial.

The demise of the Auditors?

On Sep 1, Mr David Mason, was a partner with PricewaterhouseCoopers in Singapore for 14 years, opined that auditing was once a coveted profession and auditor's opinion on the financial statements was held in high regard. His letter is entilted, "Prognosis not optimistic for auditing profession".

He observed that auditing as a service has been commoditised, whose pricing could be reduced to capture the more lucrative advisory business.

There is some possible linking between some corporate failures in Singapore with "audit failure".

Have the corporate failures hastened the demise of the auditing profession? Mr Mason certainly think so as he is now a business consultant in UK.

On the 6th Sep, Ms Penelope Phoon, head of ACCA Singapore, in her letter entitled "Prospects good for accounting profession", came to the defence of auditors.

When I first read the title, I was expecting information supporting the growing demand for accountants given the expanding economy.

I was duly disappointed when the reference to "auditors" precipitated the whole letter. Maybe it is not her fault. Perhaps it was due to the person who nominated that title to her letter. I am of the opinion that accountants and auditors are 2 very different terms.

Are all auditors accountant?
Are all accountants auditors?

Clearly Ms Phoon was defending the growing prospect for auditors and their assurance services. She said auditors are getting higher fees due to greater audit risks. There is demand for qualified personnels to attend to assignment relating to Sarbanes-Oxley's. Will a nationalised audit office prevent audit failures? Or does the man on the street want to let the government take the rap in corporate failures?

For those aspiring auditors out there, these 2 letters are certainly worth reading.

Cheers...

Term Assurance

While this is not strictly an accounting matters, I am putting up the info as part as our overall financial awareness.

Give it a thought at both personal level and corporate need.

What is term assurance?
It is for pure protection for a specific period.
No cash value at the end of period.

When sourcing for term assurance for yourself, review the following areas:-
- any cash values
- Does it bundled with total and permanent disability?
- Does it budnled with terminal /critical illness benefit?
- Is it guranteed renewable despite changes to the condition of your health?

The observed trend - Insurers are cutting term rates as life expectancies improve admist competition driving down prices.

Reference - BT Executive Money 30th Aug 2006

Apple to pay Creative USD$100m

The biggest number being tossed around town in recent days is the $100m in USD that Apple Computer Inc. will pay for licence to use (and had used?) Creative Technology Ltd's patented technology.

1. Will this settlement encourage other fringe yet significant alleged "infringer" of the patent to play ball like Apple albeit for smaller sum?
2. Singapore companies have been shown an example of how the act of registering an intellectual property promptly has been translated to real tangible benefits to the registrant.
3. If Apple had NOT use the patent, would its iPods still be as successful? And Creative would have rule the MP3 world?
4. I am really eager to know how much the next violator would pay?
5. What is the formula used in arriving at this ball park figure of USD$100m?
   

What are the lessons for accountants?
- Remember to consider the benefits of IP.
- Do you know that you too have a role in safeguarding assets, tangible or intangible, purchased or internally generated?