Stock valuation - Weighted Average Pricing

P/S - My Sunday walk along Boat Quay today...

Hi class,

There are 2 general types of weighted average pricing ie.

a) Cumulative weighted average pricing
b) Periodic weighted average pricing

a) Cumulative weighted average pricing
- The average price is determined by dividing total cost by the total number of units.
- A new weighted average price is calculated everytime upon arrival of a new batch of materials into store - key feature

b) Periodic weighted average pricing
- For a certain period, a RETROSPECTIVE average price is calculated for all materials issued during the period.
- The issue price can only be determined upon closure of a certain period.
- How to calculate?

Opening stock value + Cost of all receipts within period
-----------------------------------------------------------------------
Opening stock in units + All receipts in units

ACCA2007 Exemption policy announced

There is now a standard and transparent set of policy guidelines for those seeking exemption as they initiate their pursuance of ACCA qualification

Here they are:-

Type of degree (ACCA exemption)
- Accounting degree - major (F1 - F4 )
- Accounting degree - joint/minor (F1 - F3)
- Finance degree (F1 - F3)
- General business / management degree (F1)
- Law degree (F4)
- MBA (F1 - F3)
- Non-relevant degree (no exemption)

LLP for small businesses

Friends,

Saw this signboard at a hawker stall.

It reflects the increasing sophistication of people operating even small businesses.

Are you familiar with this form business registration to take advantage of it? For those uninitiated, LLP is limited liability partnership.

Send me a pic of anything interesting relating to the topic of accounting.

Cheers...

P/S - Will try the food this weekend.

Companies in China have 2 sets of accounts?

P/S - Jalan Besar Stadium

Yes, it is official now.

What happened?
Mainland-listed companies will have to prepare two sets of annual reports for this year after new accounting standards come into effect on Jan 1.

Shanghai and Shenzhen-listed companies will have to publish their 2006 annual reports as before, using the current accounting standards, but will also have to publish an additional report where their results are calculated according to the new international standards.

What are the implications?
According to Haitong Securities analyst Zhang Qi - 'Many companies used the old accounting system as a form of window dressing to make themselves look profitable when in fact they were not.'

Will this lead to a severe correction of Chinese stock markets if this has still not been factored into the pricing by now?

Initial public offerings (IPOs) or secondary offerings must also use the new accounting standards starting Jan 1, according to new regulations issued last week by the China Securities Regulatory Commission. Last three years' profit is a prerequisite for listing in China.

Will this therefore reduce the queue for IPOs in China and thus reduce demand for listing in foreign bourses eg. Singapore?

For those who will not make the cut, will they go back door listing?

Local companies are exempted from the rule for now.

If the government want to see a change in this area, it should take the lead by asking all its state-owned enterprises to make that change asap.

Reference - Dec 5, 2006, "New accounting rules affect China firms' profits", BT/SCMP.

CCDG out. ASB in.

Minister of State for Finance, Mdm Lim Hwee Hua said that Accounting Standards Board (ASB) will replace the Council on Corporate Disclosure and Governance (CCDG).

Effective Sept 1, 2007.

It will comprise key regulators, senior accounting professionals, and leading users of financial information.

Why the change?
Except for expanded responsibilities of issuing standards to cover entities such as charities, societies and co-operatives, I wonder why the need to change the name when essentially almost everything else remains unchanged.

Probably the name change is just that ie. to signify the addition of responsibilities.

Good night...

Yen Hoon says ...

Hi,

I thought that I didn't do well for paper 1.1 as I did last minute revision. I was expecting to retake the paper or at most get only 60 marks.

Instead, I got 87. Really happy about the result.

I'm now doing regular studies for my papers 1.3 and 2.1.

Thank you, Edgar, for being a wonderful and dedicated teacher.

Yen Hoon

P/S - Congrats to Yen Hoon. Edgar

Annie says ...

Dear Edgar,

The December 2006 Exams results are out today and I want to thank you for your patience and self-less devotion in lecturing us.

You are an outstanding lecturer who delivers lessons in a unique way. Thank you for your many times of 'nagging' (repeated) so that the concepts are driven to my head without much effort.

You are already a successful lecturer and I know you will enjoy more successes in future.

P/S Annie secured 85 marks for P1.1.

Tan K.T says ...

Hi Edgar and Mr Goh,

Thanks for all your guidance in my paper 1.1.

I am quite delighted with the result i have achieved for your paper 1.1
I have obtain a score of 78 marks for this paper 1.1. Although it is still a bit below my target score (80 marks), at least i pass the paper.

Finally can relax now and can enjoy my Chinese New Year before going all out for the other papers (especially Paper 2.3 under Mr Goh) Hahaha. =)

And by the way, Mr Goh, please forgive me of all those broken english (or maybe not even english language) i have use in this email. Just treat like what you always mention in the sunday class, listening to the uncle's conversation at the coffeeshop.

By the way, i like to wish you a happy Chinese New Year and have a prosperous new year ahead.

Gong Xi Fa Cai.

Once again thanks for all the effort you have made in order for me to pass this paper.

Regards,

Tan K. T.

Making Accounting Cool

Need to up the profile of accountants.

Why? General increase in demand for accountancy services due to:-

• increasing regulation
• hot economy
• record levels of M&A
• adoption of international accounting standards

In Australia, there is only one accountant for every 4 job openings.

How to raise the x-factor in accountancy for the supply?
Besides the standards thrills and frills of bigger pay packages, signing on bonuses, etc etc etc,

• Hong Kong Institute of Certified Public Accountants (HKICPA), through its office in Beijing, will help to train 1,500 mainland accountants over 10 years.
• The most interesting idea of all - Institute of Chartered Accountancy of India (ICAI) want to add the prefix "CA" (ie. Chartered Accountant) to the names of all licensed CPAs ie. as per "Dr" for doctors.

So signing off now at 1.45am, CA Edgar Wong :)

Reference - Feb 2007, "Making Accounting Cool", CFO Asia.

Denise Ang and her Gaelic victim

The festive spirit is among us.

Remember the case of Gaelic Inns of Muddy Murphy's Irish Pub and Penny Black vs Patrick Lee Public Accounting Corp for $1mio of negligence.

Judge Belinda Ang had found the auditors guilty of negligence for not alerting management earlier of possible discrepancy in the cash balances of up to $672,253. $775,000 was awarded.

In yesterday's ST, Judge Ang explained her judgement. She said directors cannot "siam" or abdicate their duties by engaging experts and reasonably competent employees.

Duties such as asking for and analysing bank reconciliation statements. The managment has to take some level of responsibilities for contributing to the negligence.

Patrick Lee PAC is appealing.

A definition of Accountant

Hi friends - Share with you the sentiment of this reader who wrote to me.

====================================

Hi Edgar,

Share my thoughts with you. A practical accountant in a harsh business climate is very different from a academic accountant. I am very shocked to learn what is meant by a real life accountant from my own exposure. This is also confirmed by your article on the Auston's case.

Their life is definitely not easy. I am beginning to re-define an accountant's job. Now, I know that running a business and being an accountant is no difference. Think about this point and you will know that their stress level is no joke.

RP

Ford Motor Co - Can this pre-historic company survive?

This 103 years old company recorded a whopping USD$12.7bio loss for 2006.

Why?

- slumping sales and huge restructuring costs

What is Alan Mulally, the president and CEO, and its management team trying to do?

Apparently they are executing a plan that will put the 103 years old company through a complete makeover costing USD$23.4bio. The makeover has started in 2006 and is expected to end in 2009. To pay for the bill all the way to year 2009, it has mortgaged its assets and borrowed the money.

• To shrink its massive production capacities to match shrinking demand.


• To change their product lines of trucks and petrol-guzzling SUVs to producing smaller, more fuel efficient vehicles.


• To clear up its pension commitment to 38,000 employees.


• To remove 14,000 white-collar managers.

Can they pull it off?

If not, another pre-historic dinosaur will disappear.

FRS 39 - etched in an apprentice's memory forever

Hi friends,

I am reproducing, with permission, an email (albeit edited) from a friend.

=========================================

Hi Edgar,

Share with you my day in the office today. I had been working on this assignment on FRS 39 - revaluation of fair value of term loans for a week already.

I submitted my completed audit schedule to the Accountant. With one glance and she said this to me, "The figures don't make any sense. How can the bank be making huge losses and the company be logging huge gains by lending the money to the company?".

She picked up a high-lighter and high-lighted almost every item in the schedule. I started laughing uncontrollably. Of course I am laughing at my stupidity.

Of course, I understand perfectly the remarks, "The figures don't make sense." because in auditing, somehow we are trained to have feelings for numbers.

FYI - The Accountant had been explaining FRS 39 to me for ONE WEEK already.

As she stared straight into my eyes, I felt her asking me telepathically, "Can or can you not handle it?".

My subconcious mind responded, "And what makes you think I can handle it?" But for my pride and dignity, I kept silence. Yet I was very apologetic that I was not able to perform and deliver on my work.

FRS 39 should be included in paper 1.1, so that I don't have to look stupid. But I did learn a thing or two from this assignment. FRS 39 is actually a schedule to calculate the IRR in order to get the effective interest rate and compare against the book value as per the general ledger.

Am I right, Edgar?

============== The End ==================

P/S Jane Doe :), thanks again for letting me share a page from your auditing life with your fellow students.

The financial statements are not telling us enough?

Our students are often asked, "What are the various financial statements?"

The five statements are:-

• Balance Sheet
• Income Statement
• Notes to the Account
• Cash Flow Statement
• Statement of Changes in Equity

In a study by the Economic Intelligence Unit (EIU) and Deloitte last year, it suggested that financial statements - in their present format - do not provide a complete picture of the soundness of a company.

The study calls for financial statements to reflect both financial and non-financial indicators of a company's health.

The Americans set the pace with the Sarbanes-Oxley Act in response to the collapses of Worldcom and Enron. The Act is a set of rules that are targetted more towards severe corporate misbehaviour, eg. fraud and the falsification of accounts.

The EIU-Deloitte study showed that 'traditional' financial measures fail to reflect the state in the more mundane but critical non-financial areas.

Some examples of these non-financial areas cited:-

• What are company's relationships with important parties, such as customers, employees and suppliers?
• Are the products of company of certain quality?
• Are your employees committed to the company?
• What is the key source of future revenue and profit in a firm?
• What is the state of product innovation?
• What is the level of brand loyalty and strength?
• What is the level effectiveness of the board and top management?

Most of the white-collared executives surveyed in Europe said they would prefer to see more incisive information on their companies' key non-financial drivers of success.

How to make such information on key non-financial drivers a reality?

• Set industry standards to measure these crucial drivers. Without such standards, reliability of such information would be a big concern.


• Coerce a mindset change in companies that non-financial measures do affect profitability. I believe the companies will get the message when the market reacts to such information compared across companies and industries.


• It is also important to have board members and executives who are knowledgeable about non-financial measures. In similar vein, the scope of auditing would expand too and will thus require the necessary expertise beyond accounting and/or auditing.

These non-financial measures would help us to see the company's future prospect better.

Reference - "Inadequacies of Financial Statements", Business Times, Michelle Quah, February 4, 2005.

Auston and classification of expenses

Auston International Group's former chief financial officer, Chua Peck Wee, 32, was sentenced yesterday to seven months in jail - for playing a part in the falsification of the company's accounts four years ago. The charge carries a penalty of a fine and/or a maximum seven-year jail term.

Auston is a listed company in the education business.

What was the accounting falsification done?
The former CFO admitted to instructing its accounts staff to record a payment of $268,525 as 'academic cooperation fees' to the Upper Iowa University for FY2003.

This amount was actually a payment made by Auston to the University of Wollongong for university fees for FY2002.

What is the impact?
By falsely recording the amount as academic cooperation fees instead of university fees, Auston could capitalise it as a development cost and subsequently amortise the amount over three to five years from FY2003.

Essentially, Auston had avoided recognising $268,525 as expenses for FY2002. It increased the net profit for Auston's IPO prospectus in 2003.

The ex-CEO said the ex-CFO had came up with the wonderful idea of smoothening out the expense. The ex-CFO said he was too weak to stand up against the ex-CEO's demands.

Whatever the circumstances preceding the crime, you Mr ex-CFO had helped to pass the necessary entries. So you got to pay for it!

Reference - Jan 12, 2007, "Ex-Auston CFO gets seven months' jail", Business Times, Michelle Quah.

Xpress Holdings - 2 responses in the press

Subsequent to Ms Michelle Quah's article on Xpress and its auditors, Mr Christopher Chong, Chairman, Audit Committee, Xpress Holdings Limited and Mr Mak Yuen Teen, director of Corporate Governance and Financial Reporting Centre NUS Business School presented their respective views on the Jan 9/10, 2007 respectively.

Mr Chong covered the following areas in his letter:-

• He said the statement that " 'problems' began in Nov 2006 with the dismissal of Deloitte & Touche ('Deloitte')" is incorrect. He said the issue with Deloitte started in Sep 2006 and the committee reacted with increase allocation of resources to address those concerns raised. So Mr Chong, are you making an issue on the 2 month's difference?
• The statement by Ms Quah that Deloitte 'refused to pass the company's accounts' is wrong as per Mr Chong. From his response, I couldn't see what is wrong with the statement. Yes I can read from Mr Chong's letter that Xpress has taken steps to address the concerns of Deloitte. But I am also sure the brains in Deloitte must have taken all these into consideration before deciding not to complete the audit exercise.
• To be fair to Xpress, I note that it has secured help and endorsement from other experts such as RSM Nelson Wheeler in Hong Kong, KPMG Corporate Finance Pte Ltd and Foo Kon Tan Grant Thornton at an estimated cost of $500,000, in its effort to work with Deloitte.
• Mr Chong said he couldn't understand why ACRA is not agreeable to the extension request. While I may understand that ACRA or any other governmental/business entities may take the position that it is not obliged to give you a reason for rejecting your application, we should however ask whether such position is good for the maturity of Singapore's corporate scene.

Mr Mak, a recognised authority, in the field of corporate governance, came forward with the following views:-

• On the Xpress' issue with its auditors, the shareholders should direct questions at the audit committee, who has the primary responsibility on audit matters. The committee should state its views on the matters raised by the auditors, and share any plans to do to address the concerns.
• On a more a macro level, he suggests that "shareholders carefully study the independence, expertise and activities of the audit committee of companies they invest in and ask more questions about it at AGMs. Companies should consider following higher standards on matters such as the independence, expertise and frequency of meetings of the audit committee..."

Well Jan 15, 2007 is the AGM for Xpress. Perhaps we will have more daylight on the issue after "the day after tomorrow".

Till then, cheers.

Reference
- Jan 9, 2007, "Why Xpress changed auditors", Business Times, Letter to the Editor.
- Jan 10, 2007, "Ask the Xpress audit committee", Business Times, Letter to the Editor.

Xpress Holdings has sacked its auditors?

Deloitte & Touche, Xpress Holdings' auditors, has refused to sign off on its FY2006 accounts. The company subsequently decided to sack the auditors.

The latest development is that ACRA has refused to grant it an extension of time - to get its accounts audited and hold its annual general meeting.

Why the refusal to sign off the accounts? Two main issues.
1. Precise Media Group (PMG)
Deloitte had doubts about certain revenue items recorded in the statements of PMG, and the cost of Xpress's investment in PMG and the goodwill from the purchase, recorded in Xpress's books. (Xpress had raised its stake in PMG in June, from 60 per cent to 100 per cent, in a $27.5 million deal.)

2. PMG's internal control


What is Xpress' position?
Xpress said they have tried to address Deloitte's concerns.

Xpress then hired Foo Kon Tan Grant Thornton for a 2nd opinion on its financial results. Foo Kon concluded that 'Deloitte's observations are mostly correct' but added that alternative evidence could be obtained to address those concerns. It was obtained.

Foo Kon 'indicated its willingness to act as Xpress's auditors'. Xpress proceeded to ask Deloitte to resign and moved to hire Foo Kon.

The AGM is slated for Jan 15, 2007.

As shareholders of Xpress, would you not be interested in asking Deloitte what have caused the "divorce"? Shareholders should also ask the new "bride to be", why she would be willing to marry Xpress?

P/S - Edgar has got no shares in Xpress.

True and Fair - Accounting or Legal Concept?

Can you find a specific definition of "True and Fair view"? As of my last attempt, there is no authoritative ie. "black and white" version available for all parties to adopt.

The ambiguity then gives rise to confusion.

The public accountants are required by the Companies Act to express an opinion on whether the financial statements are true and fair. The auditors conduct control test and substantive test based on varying degree of sampling to reach a conclusion.

Clients may enter into a lengthy discussion to change their auditors' opinion to qualify their accounts.

ACRA said the criterion of a "true and fair view" is NOT an accounting criterion. It is open to legal test in Court. ACRA is saying that public accountants thus do not have the final say.

Mr Joseph Alfred, Technical Director of ACCA Singapore, in his article in Focus Qtr 4- 2006, presented his arguments against accounting profession being "absorbed and subsumed under the legal profession".

Given the current direction from ACRA, he said you should not be surprised if you were to be directed by your auditors to the lawyers to obtain opinions on contentious accounting interpretations.

My view
Why should the accounting profession be exempted from a legal review when other professions like medical are included?

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.