Capture Theory

roaring biz

I am required to explain Capture Theory in my coming 3rd year class on Accounting Theory. The theory is used to explain the necessity of regulation in the disclosure of accounting information and the dynamics between the Regulator and the regulated.

What is Capture Theory?
The regulated party seeks to take charge (capture) of the Regulator with the intention that the rules subsequently released by Regulator will be in favour of the regulated party.

In more human language, I would paraphrase by saying, "Those people you are out to control in the first place, actually taken control of you."

Can Edgar relate the Theory to some real life applications in Singapore context?
National Wage Council is a tripartite entity made up of the employers, the union representatives and the Government. A tripartite entity would ensure nobody get "captured".

Under Code of Corporate Governance, the Board of Directors are required to be represented by independent directors too. Whether the independent directors are "captured" by directors who are in executive positions/representing majority shareholders are less clear and it varies from company to company.

In the recent ACCA conference, there was a rallying call from a leading accounting professional from Malaysia to fellow professionals and interest groups in this region, to speak up and participate actively in the IFRS standard-setting process. I guess this is ensure that IFRS put into law are not "captured".

The End of Double Entry?

the start of Bintan golf

I am reading a couple of textbooks at the same time for the new term of 2009. I wish with you these few interesting paragraphs challenging the existence of the double-entry system.

The books that I am reading credited the first organised written thought on double entry system to this Franciscan monk called Luca Pacioli and his now famous work called "Summa de Arithmetica, Geometrica, Proportioni et Proportionalita" published in Venice back in 1494. It is simply a system of debits and credits, where the debits going to the left and credits going to the right. It is a system of subtraction-by-opposition ie. put on the opposite side if you want to minus.

Then a clever chap (possibly someone who cannot handle double entry) asked, "Why can't we use positive and negative numbers instead of T-accounts?"

So if you want to pay salary, you just add to Salary expenses and minus the same amount from the Cash/Bank.

FYI - negative numbers were only accepted in the mathematics world in 17th century while double entry has been around since 13th/14th century.

In the 21st century's classes of Edgar, both systems are used in our learning programmes.

P/S - http://accountingwithedgar.blogspot.com/2007/09/origin-of-debit-credit.html

ACCA Graduation - Nov 1, 2008

210 graduands queuing to go in

Mr Richard Aitken-Davies, the guest of honour

Mr Tan Boen Eng in his ceremonial duty

ACCA Graduation - Nov 1, 2008

the people at the back

in jean and track shoes?

queuing to go up the stage

the girl is supposed to be after my brother if he was there

the MC

ACCA Graduation - Nov 1, 2008

the top students with top seniors

the top student from Vietnam now in KPMG

the graduands faced their relatives and said thank you

the final throw-your-mortar-boards

A step back for Fair Value?

Currently - Financial instruments are valued at mark-to-market ie. the price they would fetch if sold on the open market now.

To be adopted soon - They would be valued at historical cost if such financial instruments were to be held to maturity.

Who has adopted the change already?
Hong Kong, Taiwan and Europe. Quite a significant number already.

When is Singapore's ASC expected to give their blessing?
By end of the week.

Mr Tham Sai Choy - ACCA Conference 2008

He said under the new regime, the auditor and consequently the management of business entities would have to present written submission on risks considered and any actions taken to mitigate that risks in the preparation of the financial statements.

In the past, putting "Non Applicable / NA" in checklist may suffice.

To carry that idea to the extreme (if it is not in the extreme now) would be that a management of a business entity now could be required by the auditor to provide a management representation letter certifying that

• all risks, man made or otherwise, has been considered and deemed acceptable
• and also attached supporting documents for that conclusion ie. weather reports from MET office, geography records for earthquake risks, CIA reports for terrorist risks etc etc etc.

Does it mean higher audit fees too? :)

FRS 23 Borrowing Costs - ACCA Conference 2008

Current rule - interest accruing on ongoing projects shall be expensed off

New rule - such interest can be capitalised

Implications

• balance sheets could be carrying assets with bloated values initially and subsequently requiring more effort in reviewing them for impairment
• difference in capital/financing structure would have a direct implication on the carrying value of the asset

Delays in completion of projects under current economic environment ==> would mean that more of the interest "expense" would be capitalised onto the balance sheets instead being expensed off in the P&L.

Mr Kon Yin Tong, Partner of Foo Kon Tan Grant Thornton said he is not comfortable with the new rule. As for me, I would need to find out the basis behind Accounting Standards Council's (ASC) reasons for the change in the first place. Can someone share on this?

ACCA Conference 2008 - A Summary

My summary may not do justice to the quality and quantity of information being delivered by the many distinguished speakers from 9am to 5pm. As the Chairman of the afternoon session, I must admit that I tried to absorb as much as possible. The end result is that I have learned something more than at the beginning of the day. I am sure about 400 people who attended the conference too will agree with me.

Dato' John Raslan, Exec. Chairman of PWC Malaysia

• He is for convergence of IFRS.
• But he urged all of us to participate actively in the convergence process whether at national or international level.

Mr Barmaky, Partner, Deloitte & Touche

• He gave us a macro review of FRS changes to date and changes to come at IASB level.

Mr Tirumalai, Oracle

• He briefed us on a solution in the form of platform which can enable us to implement the standards.

In the panel discussion chaired by Professor Pearl Tan of SMU, the following are my general feel of the panelists

• Fair value should not be blamed for the current state of financial turmoil.
• Global standards should not be tweaked too much to accomodate local market needs and culture as differing standards may lead to greater uncertainty to practitioners.
• How can our voice from this region be heard in between the dominating noises from Europe and US?
• FRS on SMEs/Private Entities - As there are significant differences between big and small business entities, they should thus be treated separately as apples and oranges.
• Should we take on other non-FRS standards on board? - Officially perhaps no but there are invisible forces moving business entities towards taking on non-FRS stds like Corporate Social Responsibility (CSR) in their reporting.

Mr Kon Yin Tong, Partner, Foo Kon Tan Grant Thornton
He gave us a rundown of the many FRSs due for implementation in 2009.

Mr Tham Sai Choy, Partner, KPMG, spent "5 minuates" telling us about Clarity Project and possible implications to the audit committees.

Mr Sum Yee Loong, Partner, Deloitte & Touche explained why IRAS has collected more billions than expected (just kidding) and shared another billion ideas for us to be more tax efficient.

Ms Kala Anandarajah, Partner, Rajah & Tann gave us a lengthy review of 2 cases on auditor's responsibility and director's responsibility.

Finally, I reached the end of the conference, exhausted with adrenalin still pumping for many hours after.

Petition to Protect "Accountant" in Singapore

my investment

I had a meeting with a prospective client recently who complained about their existing "accountant". The "accountant" has apparently allowed toner for office printer to be capitalised and depreciated over time. The client was flabbergasted that an accountant can make such mistake.

While I am not sure of the person's credentials, I ended up trying to explain to the client that almost everyone in Singapore can call themselves an accountant without breaking any law.

Recently in UK, Mr Alan Shooter submitted a petition with 4,000 signatures to the Prime Minister to seek protection for the designation "accountant".

There must be some regulation in this area to ensure that the integrity and professionalism of those who have dedicated years of their life in securing formal accounting training, are not eroded away by irresponsible individuals.

If you are serious about your profession, please say "Yes" when you post your message here.

The ACCA Annual Conference 2008

Global Standards - The Business Benefits: Engineering a Global Business Community
Friday, 17 October 2008, Raffles City Convention Centre

In the morning session, we will have the STRATEGIC segment. Mr Thomas Thomas of Singapore Compact will chair a series of presentations as follows:-

1. Dato Johan Raslan, Executive Chairman, PwC Malaysia with the keynote address
2. Mr Shariq Barnaky, Partner at Deloitte & Touche to give us a review of global IFRS Development
3. Mr Joseph Alfred, our technical advisor for ACCA Singapore will present the findings of ACCA/CFO survey on Asia Pacific's Road to Global Standards
4. Mr Ravi Tirumulai of Oracle Corp will present their approach for enabling Global Standards
5. Dr Pearl Tan of SMU will then lead a panel of distinguished professionals to discuss the pros and cons for Global Standards.

In the afternoon session, Edgar will have the honour of chairing the afternoon's TECHNICAL segment.

Mr Kon Yin Tong of Foo Kon Tan Grant Thornton will kick off with FRS updates while Mr Tham Sai Choy of KPMG will do the Audit updates.

After the break, Mr Sum Yee Loong of Deloitte & Touche will then give us the Tax updates. Our anchor for the day will be Ms Kala Anandarajah, Partner of Rajah & Tann will address the legal issues that we need to know.

So for those who are interested, please check out more details here.
http://singapore.accaglobal.com/databases/events/singapore/171008

Suspending fair value accounting to save the world?

a little girl enjoying her ride, oblivious to sub prime

A friend who is in the know of markets told me that US is suspending fair value accounting for one year as part of its armoury of measures to contain the sub-prime crisis.

I exclaimed, "No way." I am trying to search for the authoritative article that confirms my friend's words. Can any help me on this?

My googling led to me to this article by Karey Wutkowski and Emily Chasan from Reuters dated Sep 19, 2008. It did not mention any outright suspension but instead presented the usual arguments for and against fair value accounting.

I would be very disappointed if it was true as the true value of any law/standard can only be realised if it is put through the baptism of fire of current sub-prime financial storm.

A critic highlighted an important "hole" in fair value accounting ie. the complete absence of any markets to provide an indication of value. So the Authorities may probably have to disappoint people like Edgar by suspending fair value accounting while they work furiously trying to calm the global markets to save thousands of jobs and a few hundred billions dollars.

The article mentioned that Fair Value Accounting took effect in US this year. So could it be that the new accounting standard has "encouraged" the revelation of sub prime storm to the current scale.

FRS 18 Revenue

a marriage contract in progress

Hi AWE readers,

In the Exposure Draft of Proposed Improvements to FRSs expiring Oct 3, 2008, I wish to share an interesting portion where ASC proposes guidance on determining whether an entity is acting as a principal or as an agent.

What is the big deal?
The clarification of the status of either principal/agent will determine how much of an invoice/contract you would record as your company's turnover.

Allow me to illustrate
Let assume an IT system integrator has got a contract to deliver the following:-
1. Ten servers and 100 laptops - $3 millions
2. Consultancy service (including set up and integration) - $0.5 million

Upon completion of the contract, how much should the IT company record as its Sales Turnover? It could be just $0.5 million or seven times more ie. $3.5 millions. So which is it?

Key point
FRS 18 requires you to determine whether you are acting as a PRINCIPAL or as an AGENT.

ASC is proposing the following for adoption to help you.

When is an entity acting as a PRINCIPAL?

1. the entity has the primary responsibility for providing the goods or services to the customer or for fulfilling the order, for example by being responsible for the acceptability of the products or services ordered or purchased by the customer;
2. the entity has inventory risk before or after the customer order, during shipping or on return;
3. the entity has discretion in establishing prices, either directly or indirectly, for example by providing additional goods or services;
4. the entity bears the customer’s credit risk.

When is an entity acting as an AGENT?

1. An entity is acting as an agent when it does not have exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. One feature indicating that an entity is acting as an agent is that the amount the entity earns is predetermined, being either a fixed fee per transaction or a stated percentage of the amount billed to the customer.

Source - ED - Proposed Financial Reporting Standard (Oct 3, 2008), ASC

If you don't tell,...

Singapore under seige for F1

The managing director of Chuan Soon Huat Industries Group and four other directors were charged in Court for failing to tell the world that there has been a change in effective control of a public listed company.

Mr Lee Tian Teck, the executive chairman, was not in control of the company for two and half years. But nobody bothered to report the matter to the Authority for that long a time.

The gang of five has thus committed an offence under Section 157(1) and if found guilty, each could face a maximum fine of $5,000 or get the jail hospitality for up to a year.

Obviously, we cannot have a situation where there has been a coup in the government of a country. Amazingly, the gang can keep that a secret for so long in this small island of Singapore.

FRS 38 Intangible Assets - Summary

An intangible asset is recognised at cost if and only if:-

1. the asset meets the definition of an intangible asset;


2. it is probable that the expected future economic benefits that are attributable to the asset will flow to the entity; and


3. the cost of the asset can be reliably measured.

Internally generated goodwill, brands, mastheads, publishing titles, customer lists and similar items are not recognized as assets. Intangible items that do not meet the criteria for recognition as an asset is recognized as an expense when incurred. Expenditure that was initially recognised as an expense is not included in the cost of an intangible asset at a later date.

Research Phase
Expenditure on research is recognized as an expense.

Development Phase
Intangible asset arising from development is recognized only if an entity can demonstrate all of the following criteria in getting the intangible asset ready either for use or sale:-
(a) the technical feasibility of completing the intangible asset;
(b) its intention to complete the intangible asset;
(c) its ability to use or sell the intangible asset;
(d) how the intangible asset can generate probable future economic benefits;
(e) the availability of adequate technical, financial and other resources to complete the development; and
(f) its ability to reliably measure the expenditure due to the intangible asset during its development.

Subsequent to its initial recognition, an intangible asset is carried at:
(a) cost, less accumulated amortisation or impairment losses; or
(b) revalued amount (fair value at the date of revaluation), less any subsequent accumulated amortisation or impairment losses.

An entity shall assess whether the useful life of an intangible asset is finite or infinite. The useful life is infinite if there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. An intangible asset with infinite useful life is not amortised but is tested for impairment at least annually. The depreciable amount of an intangible asset with finite life is amortised on a systematic basis over its useful life.

Gain/loss on derecognition of an intangible asset is the difference between the net disposal proceeds and the carrying amount of the item. The gain/loss is recognized in the profit or loss.

Source - ICPAS ePublication Issue 25/2006 20 Jun 2006

FRS 37 Provisions, Contingent Liabilities and Contingent Assets - Summary

The objective of FRS 37 is to prescribe the accounting standards and disclosure for provisions, contingent liabilities and contingent assets.

A provision is a liability of uncertain timing or amount.

We recognise a provision when:-
(a) an entity has a present legal or constructive obligation as a result of a past event;
(b) it is probable that an outflow of economic benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation

A constructive obligation is an obligation where the entity, through its actions, has indicated to other parties that it will accept certain responsibilities and as a result has created an expectation that it will discharge those responsibilities.

Provision is the best estimate of the expenditure required to settle the obligation at the balance sheet date. Provision should be reviewed and adjusted to current best estimate at each balance sheet date.

A constructive obligation to restructure arises only when an entity has:

• a detailed formal plan for restructuring; and


• raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.

A contingent liability is not recognised, but is disclosed unless the possibility of an outflow of resources is remote.

A contingent asset is not recognised, but is disclosed when an inflow of economic benefits is probable.

FRS 37 specifies disclosures about provisions, contingent liabilities and assets.

Source - ICPAS ePublication Issue 23/2006 13 Jun 2006

IFRS Conference - Non Controlling Interest

Non controlling interest is a stake ie. percentage of shareholdings, that is not high enough to control the company's financial and operating policies.

Situation
So assuming if you were buying a 20% stake in a company as a passive investor, how much should you pay for that stake or how much should the seller be selling it for?

20% of net book value? 20% of [fair value of net assets + goodwill]?

Well the answer is:-

20% of value of business LESS the value of non controlling features

Now that we got the formula, we need to work on valuing the business':-
- assets and liabilities, both tangible and intangible
- goodwill
- non controlling features

Can tell me how?

The moral of the story - We still go a job until the confusion stops.

FRS 16 Property, Plant and Equipment - Summary

FRS 16 prescribes the accounting treatment for property, plant and equipment.

Property, plant and equipment are tangible assets that are in use for more than one accounting period. Cost of property, plant and equipment comprise:-

1. its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
2. any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.
3. the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purpose other than to produce inventories during that period.

Property, plant and equipment are initially recorded at cost. Subsequently, they can be carried either

1. Cost less any accumulated depreciation and any accumulated impairment losses; or
2. Revalued amount (Fair value at the date of revaluation), less any accumulated depreciation and any accumulated impairment losses.

If option (b) is chosen, all assets within a class of property, plant and equipment must be revalued and the valuations must be updated regularly.

A revaluation increase shall be credited directly to equity as revaluation surplus, unless it reverses a revaluation decrease of the same asset previously recognized in profit or loss.

A revaluation decrease shall be recognized in the profit or loss. However, the decrease is debited directly to revaluation surplus in equity to the extent of the credit balance in revaluation surplus.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The residual value and the useful life of an asset should be reviewed at least at each financial year-end. If expectations differ from previous estimates, (FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors) is applied.

Impairment is recognised in accordance with FRS 36 Impairment of Assets.

The gain or loss on the derecognition of an item of property, plant and equipment shall be determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item and is included in the profit or loss.

FRS 16 specifies disclosures about property, plant and equipment.

Source - ICPAS ePublication Issue 3/2006 17 Jan 2006

IFRS Conference - What say you?

veg juice in test tubes @$4

This is a situation described by an accoutant from a local bank. Let me know how would you, as the accountant, would advise the bank officer.

Situation
Within the same bank, there are two departments, A and B, investing and trading for 2 different investment funds with different objectives.

Dept. A is looking to sell a certain financial instrument that is no longer fit its investment objective. Coincidentally, Dept. B is looking to buy the same financial instrument for its portfolio.

Issue
Should Dept A just sell to Dept B directly? And at what price so as to be fair to both sets of investors of the respective funds?

What say you?

Mr Goh Lian Tse, what are you talking about?

Mr Goh Lian Tse, Chairman and CEO of Innovalues, has written in to BT Forum yesterday in an attempt to salvage some "face" for the embarassing debacle of appointing a bankrupt to the position of Group CFO.

• He said his company's whistle blowing policies are working fine despite conceding on the lapses in their hiring procedures. I wonder who blew the whistle?
• Mr Goh said the employee was the country financial controller for a Malaysian plant and he was brought to Singapore with a view to be appointed as the Group CFO. Basically his simple defence here is that the appointment to Group CFO position was not confirmed yet. But is he also implying that it is all right for a bankrupt to be a country financial controller in Malaysia but not good enough to be a Group CFO in Singapore? Please enlighten me.

Mr Goh, please confirm whether the said employee is being considered for the position of Group CFO or not given the 2 contradictory statements I am quoting from your letter to the Forum.

1. "He was redeployed to Singapore with a view to being confirmed as group financial controller."
2. "At no time was the said emplyee being considered for the CFO position."

"Why can't a bankrupt be a CFO?"
I agree that a person, bankrupt or otherwise, would need to have some income to keep oneself alive and to pay his/her creditors. But the key question is whether a bankrupt can be a CFO? In my opinion, NO. As a bankrupt, the person has demonstrated that he/she is unable to manage his own financial affairs. And thus I am unable to justify a bankrupt to manage the financial affairs of a company where the likelihood of many are at stake.

IFRS Conference - Revised IFRS 3 on Business Combination

To be effective on July 2009.

Auditors trained in the world of historical cost accounting now have to deal with issues of Fair Value.

1. Stepped acquisition as a way of earning management.
Suppose you had intended to buy 60% stake in the target business with projection that that business would be in net loss in Year 1 and significant profit in Year. To avoid consolidating the bad result of target business into your company from Year 1, you decide to split the acquisition over 2 years ie. 30% in Year 1 and another 30% in Year 2.

2. The magic of 1% stake
If we base on 50% as a measure of control over a company, and you expect your 50%-stake-subsidiary to lose heavily this year and that you do not wish to consolidate that results with other companies in your Group, can you enter into sell-and-buyback contract for the 1% stake ie. sell 1% to demerge the loss-making subsidiary in one year and buy-back 1% to re-consolidate?

3. Internal consistency (within a FRS), external inconsistency (between FRSs)
The choice words from Professor Pearl Tan from SMU. She cited an inconsistency when borrowing costs can be capitalised but pre-acquisition costs must be expensed off to P&L under the revised IFRS 3. Sir Tweedie responded to that comment but I missed the rebuttal sadly.

FRS coming to effect in 2009

1. Revised FRS 1: Presentation of Financial Statements
• effective 1 January 2009
• learn how to prepare the revised formats to financial statements

2. FRS 23: Borrowing Costs
• effective 1 January 2009
• learn how to capitalise interest on qualifying assets

3. FRS 27 – Consolidated and Separate Financial Statements
• effective 1 July 2009.
• learn the new rules for consolidation

4. FRS 103: Business Combinations
• effective 1 July 2009
• learn the new rules for consolidation

5. FRS 107: Financial Instruments: Disclosures
• effective 1 January 2008
• learn about the best practices for the new disclosure requirements under FRS 107

6. INT FRS 113: Customer Loyalty Programmes
• effective 1 July 2008
• learn how to account for reward points for credit and loyalty cards etc

Are you a bankrupt?

If you are, I am sorry you are disqualified from being appointed as the Group CFO of a public listed company.

In yesterday BT's, it was reported that Innovalues nearly appointed a bankrupt as their Group CFO. The process was only halted after someone anonymously sent a copy of an "individual insolvency search result" to a director of Innovalues.

Apparently the poor chap has verbally informed the interviewer of his status BUT somehow, nobody (including the chap himself/herself) cared to put that information on paper.

Consequent to that embarassing revelation, Innovalues has, of course, promised to do better on their recruitment procedures.

And by the way, the position is still open.

Negative impact of Fair Value is here!

July 29, 2008 -Australand hit by revaluation, writedown

CapitaLand's Aussie unit's half-year earnings slide 79% to A$25.6m

Property revaluation and project writedown have resulted in CapitaLand's Australian subsidiary, Australand, reporting a 79 per cent year-on-year fall in net profit to A$25.6 million (S$33.4 million) for the half-year ended June 30, 2008.

July 29, 2008- Oceanus interim gain halves to 21.3m yuan on goodwill writeoff

Oceanus saw its net profit for the first six months of this year halved from 44.09 million yuan a year ago to 21.27 million yuan, due largely to a hefty goodwill write-off of about 150 million yuan arising from its reverse takeover of TR Networks in April.

As a new accountant.. Part C

Good morning, I wish to focus on Accounting Estimates and the need to review them for bias.

I participated in a few rounds of discussion with a client recently on the basis of estimates done for various balance sheet items.

On occassions, you could be in a position where you could be pressured to accept the basis amd thus values of estimates and pass the necessary entries to reflect them on the balance sheet.

How would resolve the situation without losing your job?

As a new accountant.. Part B

the railway station

I wish to focus on journal entries and other adjustments today.

• We need to have some understanding of the whereabout of key controls over the recording and processing of journal entries.

• Keep an eye on material journal entries and other adjustments at end of reporting period during the course of preparing the financial statements. Eg. top-side entries, consolidating and eliminating adjustments and other closing journal entries such as reclassifications.

• Is there a specific file holding journal entry vouchers with proper authorisation?

As a new accountant.. Part A

things people will do for their business

When one is hired/appointed to a new position in a new company, please keep your eyes and ears open to the following areas when you are being briefed on your new responsibilities by your new colleagues.

1. You should obtain an understanding of the business and its environment.
2. You should obtain an understanding of the business's accounting processes.
3. Are there opportunities that controls may be incomplete, non existent or overrided?
4. What is the money flow for the business? Follow the money!
5. Focus on other key areas of potential risks in journal entries, accounting estimates and significant transactions.

Be careful.

Financial Reporting Process (FRP)

a wall of orchids.. not china wall

What is FRP?
Essentially FRP is the processes, procedures and controls that the management rely on in doing the following tasks:-

• performing accounting period close
• preparing the financial statements
• reviewing and approving the financial statements

We need an understanding of how key judgements are made.

Why is understanding the FRP critical to Audit or to you, a newbie Accountant joining the management team in a new company?

• FRP is where management is more likely to manipulate the financial statements. It is often more difficult to manipulate routine transaction entries.
• FRP forms the foundation for other systems and processes within the company.

As a new management staff, while it may take some time before you get a complete feel of the decision process, it is also utmost critical that you get to know it soon. Why? You are responsible for all things big and small from the first day you start work in that office.

Take care.

FRS 10 Events after balance sheet - Summary

Events after the balance sheet date are those events, favourable and unfavourable, that occur between the balance sheet date and the date when the financial statements are authorised for issue.

Two types of events can be identified:

(a) those that provide evidence of conditions that existed at the balance sheet date (adjusting events after the balance sheet date); and
(b) those that are indicative of conditions that arose after the balance sheet date (non-adjusting events after the balance sheet date).

Things you got to know for FRS 10:-

• When are financial statements authorised for issue?


• Can you name some examples of adjusting events?


• Can you name some examples of non-adjusting events?

IFRS Conference - Fair Value

The following were some points made by the participants of the Conference with regard to the issue of Fair Value and various practical difficulties experienced.

1. How to value each component of a financial instrument?
A company owns Convertible Loanstocks of a blue chip borrower.
For liquidity reason, a company may consider selling away the bond portion of the Convertible Loanstock to get some cash while keeping the right to convert the loan to shares. This is to allow them to participate on the upside of the blue chip borrower. And you are ask to value the instruments in parts. How to do it?

2. Fair Value, Tax and Cashflow
Mr Eugene Wong, Managing Director of Sirius Venture Consulting said fair value gives rise to volatility in earnings. Companies in Singapore may be facing the situation where they have paid 20% tax on increased valuation gains last year and get tax deductions calculated at 18% of valuation losses this year.

3. Is there anything that may aid the practitioners in understanding and applying Fair Value?
Mr Foo of Foo Kon Tan asked. Ms Judy Ng of DBS Bank suggested that there should be qualitative disclosures on the assumptions used in arriving at the fair value and also state the sensitivity of a particular assumption to market forces.

4. Mark to market
FRS39 calls for those assets available for sale to be marked to market. How do you do that when the market is thinning/illiquid or when the market has disappeared? Can you get an answer from the auditors? Nope.

In conclusion - Well guys, we are inventing the rules as we play.

Words and figures differ

What if Edgar drew a cheque like this where the words and figures are different...

"Amount - Five Thousands Dollars Only $500/-"

In the Forum page of ST a couple of days, DBS Bank apologised to the account holder for wrongly clearing a cheque where the words and figures differ. DBS said they should not have cleared the cheque.

I wish to question whether DBS's position of not clearing such a cheque is legally correct.

In the Banking Law class that I attended many years ago, I was told that the Bank should honour the cheque based on the "words" stated.

Has the law changed since the years after my Banking Law class? Or have I heard wrongly? If you are not from Singapore, can share with me your country's practice?

FRS for SMEs

While we are eagerly awaiting for the launch of FRS for SMEs in Singapore, there are changes to IFRS's version as outline in recent IFRS Conference held on July 17, 2008 in Marina Oriental Singapore.

First and foremost, IFRS said there is going to be a name change from IFRS for SMEs to IFRS for PRIVATE ENTITIES. Warren McGregor gave some background info on the proposed name change.

The IFRS for SMEs is definitely not for the mom-and-pops businesses but rather caters to entities with 50 or more employees in general. They were considering other names like non-publicly accountable entities.

The IFRS for Pte Entities will be fully stand alone ie. no reference to the main/full FRSs.

Exam Results by Email

Lynn has forwarded to me an email message from ACCA reminding students to sign up for results by email.

I would strongly advise so for a hassel free experience as compare to waiting for it by mail days after others have got theirs or you waiting to access the results online on those busy days.

You can sign up by Aug 15, 2008 at myACCA.

ACCA said you should expect the results to be emailed out by Aug 18, 2008.

Accounting for Leases

In the IFRS conference held on July 17, 2008, Sir David Tweedie and Warren McGregor said IASB is working towards abolishing the need to differentiate between finance lease and operating lease.

The Board is taking the approach of "right of use" in crafting the new FRS on Leases. With this approach, it would be reflected as an Asset as long as the lessee has the right of use and consequently mirrored as a Liability as long as the lessee has an obligation to pay.

The Board faces difficulties in sorting out the following features in a lease agreement:-
- option to renew or terminate a lease
- measurement eg. contingent rentals
- overlap with other projects in the area of revenue recognition, derecognition and conceptual framework.

Sir Tweedie made an interesting remark. He said he is looking forward to the day when he could say that he is flying in a plane that is actually reflected in the airline's balance sheet.

IASB and FASB are doing something together.

Marina Viaduct's skyline now

Who are they?
IASB - International Accounting Standards Board
FASB - US's Financial Accounting Standards Board

What have been doing together?
Essentially trying to move the two standards together.
They are planning to do it over 3 phases ie. A, B and C.

What are the 3 phases?
Phase A - completed in Sep 2007 with the issuance of FRS 1R. The FRS introduces the use of some American terminologies. The use of these terms for Singapore is not compulsory. Thus expect confusion in Singapore. Examples,
- Balance Sheet is "Statement of Financial Position"
- Cash Flow Statement is "Statement of Cash Flows"

Phase B
Mr Yeoh Oon Jin, Assurance Leader, PwC Singapore, said the Phase will take a few years to complete and would cover areas on how to prepare the respective statements. Examples,
- what income and expenses items to be classified under which totals and sub-totals in which statements etc etc etc
- whether direct or indirect cashflow presentation should be adopted

Phase C
While they have an idea of what they want to do, no point remembering them as it would too long down the yellow brick road for any certainty of being effected.

Reference - ACCA Focus Q2 2008 pp13-15

Why do you rob banks?

a party in KL worth the memory

A reporter once asked famous bank robber, Willie Sutton: "Why do you rob banks?"
Willie simply replied: "Because that's where the money is!"

I am sure you will get the same answer if you manage to ask those robbers of banks and ATMs in Malaysia.

In the current new term of my classes, I asked the students the reason as to why did they decide to take up ACCA course.

A student duly responded that it is because ACCA is a qualification regularly asked for in the job advertisements she has reviewed.

So for those who have decided to start and complete your ACCA course, it is a good decision ... Good day.

HK outranked Singapore

my ketchup-filled fish ball noodle

ACCA released a report in BT today after conducting a survey among ACCA members in Singapore, HK, UK, US, Canada and Australia to rank their respective tax system in terms of fairness, simplicity and transparent.

The good news is that Singapore and Hong Kong have the fairest, simplest and most transparent tax systems, out of six major developed countries.

The bad news is that Hong Kong ranked better than Singapore in all 3 areas.

The question that matters is whether having a tax system that is fair, simple and transparent translates to real comparative advantage against these big economies.

Or is it a hollow victory for Singapore and HK as it basically reflects the smallness of its geographic size and economic complexities?

SME Rebate Scheme

I quote...

"The SME Rebate Scheme is a 2-year assistance scheme to help locally registered SMEs* adjust to rising business costs.

You are invited to apply for the SME rebate at our website http://www.smerebate.gov.sg/ if your firm meets the following criteria:-

i. For a non-manufacturing firm:

- Business must be registered in Singapore

- Fixed Asset Investment (FAI) of less than S$15 million

- Not more than 200 employees

ii. For a manufacturing firm:

- Business must be registered in Singapore

- Fixed Asset Investment (FAI) of less than S$15 million

Please be reminded to submit your application by 31 July 2008 to receive cash rebates pegged to the total employer and employee CPF contributions made by your firm over two years for the period July 2007 to June 2009.

Firms that apply after 31 July 2008 will only qualify for the rebate for the period July 2008 to June 2009.

Eligible firms will receive notification letters from CPF Board indicating the date and amount of payment.

Please visit the SME Rebate Scheme website (http://www.smerebate.gov.sg/) for more information." Unquote...

FRS 7 Cash Flow Statements - Summary

FRS 7 prescribes the principles in preparing cash flow statements.


The standard requires the provision of information about historical changes in cash and cash equivalents of a company by means of a cash flow statement that classifies cash flows during the period by operating, investing and financing activities.


Operating activities are the principal revenue-producing activities of the enterprise. Cash flows from operating activities are disclosed either using the:-

a) direct method (disclosure of major categories of gross cash receipts and payments); or

b) indirect method (profit or loss for the period is adjusted for non cash items (such as depreciation, foreign exchange losses etc.) and income or expense related items related to investing and financing activities to determine the operating cash flows.


Investing activities are those expenditures incurred with an intention to generate future income and cash flows.

Financing activities are those expenditures incurred that result in changes in the size and composition of the contributed equity and borrowings of the entity.


"Do you know the definition of "cash and cash equivalents"? Can you name some examples of cash equivalents?", ask Edgar.


Source - ICPAS ePublication 22 November 2005 Issue 11/2005

FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors - Summary

The objective of FRS 8 is to prescribe the criteria for selecting and changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and correction of prior period errors.

Changes in accounting policies
An entity should change its accounting policies only if the change is required by the Standards or the change results in a more relevant and reliable information about the entities financial position. Any changes in accounting policies shall be accounted for in accordance with the specific transitional provisions of the Standards. If there are no specific transitional provisions, the change in accounting policies shall be done retrospectively as though the new accounting policy had always been applied.

Changes in accounting estimates
Changes in accounting estimates should be recognised prospectively in the profit and loss account either in the period of the change only or the period of change and future periods, if the changes affect both. Any corresponding changes in assets, liabilities or equity are recognised by making adjustments to the carrying amount of the assets, liabilities or equity in the period of change.

Errors
Material errors in financial statements that are discovered in subsequent periods must be adjusted retrospectively in the first set of financial statements authorized for issue after their discovery. The comparative amounts for prior period are either restated or if the error occurred before the earliest prior period presented, the opening balances of the assets, liabilities and equity for the earliest prior period are restated.

FRS 8 specifies that in instances where it is impracticable to do a retrospective adjustment for change in accounting policy, the entity should restate the comparative information prospectively from the earliest date practicable.

FRS 8 also specifies the disclosures required of changes in accounting policies, accounting estimates and errors.

What is prior period errors? When did an error occur?

Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:-

• was available when financial statements for those periods were authorised for issue; and


• could reasonably be expected to have been obtained and taken into account in the preparation and presentation of those financial statements.

Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.

Source - ICPAS ePublication 29 Nov 2005 Issue 12/2005

FRS 2 Inventories - Summary

Objective
FRS 2 provides guidance on the determination of cost of inventories and its subsequent recognition as an expense, any write down to net realizable value.

FRS 2 applies to all inventories except for:

a) WIP under construction contracts;
b) Financial instruments; and
c) Biological assets related to agricultural activity produce at the point of harvest.

Inventories are measured at the lower of cost and net realisable value (NRV).

• NRV is the estimated selling price in the ordinary course of business less estimated costs of completion and costs necessary to make the sale.
• Cost of inventories comprise of cost of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Three methods of costing inventories are specified under paragraph 23-27 of FRS 2.

i) Specific identification of costs method

ii) First-In, First-Out (FIFO) costs method

iii) Weighted average costs method

FRS 2 requires that the amount of write down of inventories to NRV is recognised as an expense in the period the write down or loss occurs. Any reversals of the write down, as a result of increase in NRV, is recognised as a reduction in amount of inventories recognized as an expense in the period the reversal occurs.

FRS 2 also specifies the disclosures required of inventories.

Source - ICPAS ePublication

FRS 1 - Presentation of Financial Statements Nov 2005

Objectives

1. To prescribe the basis of presentation of general purpose financial statements and;
2. To ensure comparability of entity’s financial statements with previous periods and with other entities’ financial statements.

Below is a summary of the overall considerations for the presentation of financial statements.

• Fair presentation and compliance with FRS

A faithful representation of the effects of transactions, events and conditions in accordance with the FRS.

• Going concern

Preparation of financial statements with the assumption that the business will continue indefinitely.

• Accrual basis of accounting

A method where income and expense items are recognized and recorded when income is earned and expense is incurred, regardless of when cash is actually received or paid.

• Consistency of presentation

Presentation and classification of items in financial statements are retained from one period to the next unless the standard requires a change in presentation or there is a significant change in the nature of the entity's operations, such that another presentation would be more appropriate.

• Materiality and aggregation

Similar items of each material class are to be presented separately.

• Offsetting

No offsetting of asset and liabilities, and income and expenses unless permitted by a Standard.

• Comparative information

To disclose comparative information of previous period for comparative purposes.

FRS 1 also specifies the minimum line item disclosure required on the face of the balance sheet, income statement, statement of changes in equity and notes to the financial statements except for presentation of cash flow statements which is covered under FRS 7.

FRS 1 also specifies that entities disclose information that is presented in the financial statements such as the accounting policies, judgments and key sources of estimation uncertainty at the balance sheet date.

Source - ICPAS ePublication 8 November 2005 Issue 9/2005

ATTS Graduation Ceremony 2008

Congrats to all graduands.

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
http://www.dnb.com.sg/agenda.html

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.

Summary
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.

ACCA's Certificate of Achievement for F1, F2 and F3

Under the new scheme,

There will be no more paper winners for F1 to F3. Instead a Certificate of Achievement will be awarded to students who have scored 85% and above in these papers. This is regardless of whether they took the paper-based or CBE exams.

MSER students will only be eligible for prizes from F4 to F9 and P1 to P7 when they transfer to the Professional Scheme.

P/S - So for those who have scored higher than 85%, please look out for your "Certificate of Achievement". Cheers.

We got to learn new names.

The terms "Balance Sheet" and "Cash Flow Statement" will be passe very soon.

In Sept 2007, IASB issued the revised IAS 1 (similar to our sFRS 1) with the main changes in the presentation of financial statements and terminology.

For international versions of CAT6, CAT8, F3, F7, F8, P2 and P7:-

• "Balance sheet" will be "statement of financial position".
• "Income statement" - no change.
• "Cash flow statement" will be " statement of cash flows".

It is effective from June 2008 sitting.

For other papers NOT mentioned above :-

• "Balance sheet" = "statement of financial position (balance sheet)" (for Jun / Dec 2008 exams).
• "Balance sheet" = "statement of financial position" (from Jun 2009 exam onwards)
• "Cash flow statement" = "statement of cash flows" (from Jun 2008 exam onwards)
• "Income statement" = "statement of comprehensive income" (from Jun 2009 exam onwards)

Michelle says...

Hi Edgar,

Checked my results on Monday. Passed all the 1st 3 papers =) n I got 91 for F3 (reflected in myACCA).

Many thanks for your guidance all this while. Really appreciate all the effort u've given!

Thanks again.

Regards,
Michelle

Sok Ching says...

"... I really really a big thank you to u. i got 94 for F3. =D

Many thanks"

Mei Hua says...

Hi Edgar,

Just logged in to the ACCA website to check my F3 exam result....I got 86. Just want to say thank you for your repeat reminders on the important points and for the extra (free) revision class given going through all MCQ. I struggled for about 15-20 minutes on the first question and was all nervous throughout the whole examination.....

Cheers,
Mei Hua (Jun 2007)

Pui Shan says...

Thanks Edgar! I got 72 for F3 (June 07 intake)!

Thanks so much for ur effort! Without your constant revision and reminders i wont have passed as i really had no time to study!

You are the best!

What is "verifiable CPD"?

What is the Rule?
A member has to fulfill 40 relevant units of CPD each year, where one unit is equal to one hour of development. 21 units must be verifiable. The other 19 can be non-verifiable.

Verifiable CPD, to many, is the act of getting a certificate ie. a black and white to confirm that you have attended a learning event.

But is it all that is? The simple answer is no.

There are 3 other critical criteria to be fulfilled before a verified event can be counted towards the Rule. What are they?

• The relevant activity must be relevant to your role/s.
• You need to tell ACCA how you can apply the learning.
• You need to show some things that learning has taken place. (This last is tough ya?)

Is there any other ways, beside collecting the certificates, of evidencing that you have attended a learning event/activity?

• Can you show the report/review/proposals arising from that event?
• Did you get a copy of the handouts/powerpoint slides?
• A copy of the invoice or evidence of payment made to attend the event?
• Did you keep the email confirmation of your attendance?
• Or like Edgar, writing about these events on the blog after attending them?

P/S - This is note to remind Edgar and for those who have completed your studies and qualified for the ACCA qualification.

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.