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.

Financial leverage?

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

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

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

Thus the risk.

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

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

Refer - http://investingwithedgar.blogspot.com/2008/01/big-picture-impacts-on-singapore.html

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

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

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

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


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


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


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

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

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

Heinz Riehl, SembMarine's "expert" witness, is trying to offer a defence for SembMarine, with the following:-

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

My opinion

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

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

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

Changes to ACCA OBU Degree

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

* RAP - research and analysis project

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

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

Positive impact of fair value gain for Ipco

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

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

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

This was offset by a rise in other revenue from $2.4 million to $8.2 million, which included $7.5 million in 'fair-value gain' on financial assets.

So without the fair-value gain, the Group's total revenue would be $16.9mio instead of the currently reported $24.4mio (a 16% drop instead).

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

P/S - Fair-value gain of $7.5mio is accounted as "Other revenue". Hmmm...

Audit exemption criteria for Groups?

a Japanese chef who has left this

The current law on audit exemption applies to individual company but not to a group of companies. So say Mr Joseph Alfred, Technical Advisor for ACCA Singapore.



Which law?

• Companies Act's Section 205(2) says companies are required to appoint auditors.
  
• Companies Act's Section 205A says private exempt companies with less than $5mio turnover and dormant companies are exempted from audit.

Where is the problem?

Let me illustrate with a simple example. Holding company has a turnover of less than $5mio and may be exempted from audit.

Subsidiary company has a turnover of more than $5mio and thus its financial statements would be audited. So far so good.

But when it comes to Group's consolidated financial statements, the regulator has confirmed that there is no legal compulsion for them to be audited.

Joseph opined that a Group with a turnover of of more than $5mio should NOT be exempted.

As for me, I am still not convinced with the need to audit the consolidated statements. As some practitioners have said, the need to audit should rest primarily on who are the ultimate key users of the statements. We should not just rely on mere criteria.

Four banks vs Asia Pacific Breweries for $109mio

"The best defence is offence."

Well that is the basic position of the four banks against APB in trying to claim back $109mio of their lost funds. Disregarding the bank's internal control failure to detect the fraud, the banks have chosen to place the faults on APB.

• One of the banks argued that Chia Teck Leng's acts were carried out in his capacity as APB's finance manager - and the company must shoulder the blame.


• Senior counsel Steven Chong, who represents two of the foreign banks, told the court that the fundamental issue was how Chia was able to perpetrate the fraud for almost five years and remain undetected. The obvious answer, he said, is that APB has vested wide powers and authority on Chia without any proper checks and balances in place.


• Chia was also able to ensure that correspondence from the banks was never opened by anyone other than him. His secretary was specifically never to open letters from banks addressed to him.

Background

From 1999 to 2003, Chia, now 47, had submitted to the banks fictitious documents with forged signatures of top APB executives, which convinced the banks to give him credit facilities in APB's name.

What did Chia do with the monies? He blew $62 million in casinos around the world, before being convicted and sentenced to 42 years' jail in 2004. Some millions still cannot find.

While Mr Chia sits in prison for the remaining 39 years, many bank officers' career have been scarred.

Accounting for Charities and Coops

The new Accounting Standards Council (ASC) will issue a separate set of accounting rules for Charities and Coops.

Donors to charities are more concerned with how the donated funds were used rather than financial performance information generally required by shareholders of companies.

The new accounting rules are still pending ie. waiting the new Council to get around to this issue.

Appeals Court raps Accounting profession

The Courts of Appeal ruled recently on 2 fraud cases where the auditors took some blame for losses experienced by their respective clients.

What are the 2 cases?

• Case 1 - Gaelic Inns vs PlanAssure Public Accounting - I discussed it back in Feb 2007. Take a look. http://accountingwithedgar.blogspot.com/2007/02/denise-ang-and-her-gaelic-victim.html


• Case 2 - JSI Shipping vs TeoFoongWongLCLoong (Tfwl) - Mr John Riggs, the MD of JSI Shipping, made $1.8 million disappeared via its monthly salary! FYI - his salary represented 25% of total staff costs. The Court said "Tfwl should have shown more professional scepticism." (In another word, the errors are so BIGG that normal human eyes should be able to see and check on them.)

So what is the penalty for not doing your job?

In Case 1, PlanAssure is to pay Gaelic Inn $317,108 (half of earlier ruling of $775,266) for contributing to the negligence.

In Case 2, Tfwl is to pay JSI $273,386 for being bo-chap to Mr Riggs' activities.

As in any profession, auditors too have their fair share of problems and risks.

Origin of "Debit" & "Credit"

I was curious about where and how the terms debit and credit come about.

I finally come across a brief explanation of the terms.

The words have Latin origins ie. "debitum" and "creditum". Pacioli is the name of the Italian monk who wrote about accounting in the 15th century and used these terms.

So they were NOT "debere" or "credere" as I thought they were initially. And the mystery continues ie. who was the inventor of these terms.

Well I learned something new today.