Accountant january march 2015


Published on

This is my first professional writing and my first published writing as well, appeared in The Bangladesh Accountant (ICAB) January - March,2015. Here I reproduce the same for your valuable evaluation. It was on Financial Accounting.

Published in: Business
  • Be the first to comment

  • Be the first to like this

Accountant january march 2015

  1. 1. Abstract Globalization is definitely one of the most uttered words today. In most aspects of our life, the implication of globalization is very clear. For example, we can talk about the high popularity of dish TV channels, the surprising improvement of technology, the incremental knowledge and information sharing, the growing rate of immigration and emigration, the emergence of transnational cultures and so on. The impact of globalization on business is also very particular: before doing any business, we have to consider facts from global viewpoint instead of confining in any particular geographical boundary. Import, export, production technology, manpower sourcing, marketing and promotion, competition – hardly there is any facet of modern business which is not influenced by globalization. As an important part of business, financial reporting is not an exception to this. In order to enhance comparability and consistency, the accounting profession has developed IAS, IFRS and likewise regulations to be observed by businesses in the preparation of general purpose financial statements. These are named standards, as they are equally applicable to all businesses around the world. Surely the launching of these standards has added to the quality of Some Adaptations to Financial Reporting in Response to Globalization Thauhidul Alam financial reporting. But it is also recognized that there remains huge room for perfection. Circumstance is continually changing, and businesses are exposed to new issues. Hence continuous modification of FR standards is essential in the interest of proper application. Here I have pointed out some of the areas in which the FR standards should be upgraded, along with pertinent suggestions. The discussion is given under appropriate section headings. Ratio Analysis to Address Increased Global Pressure for Quality It is beyond saying that globalization asks each and every business, irrespective of its geographical coverage, to continually improve its product or service quality. Nowadays no business is truly domestic. Just two decades back, most of the businesses faced competition from only their domestic counterparts. The scenario has changed quite dramatically. Trade and commerce has been cross border and foreign enterprises are expanding in gradually larger scale over your physical place of business. By dint of improved means of information technology and aggressive advertising campaigns by foreign enterprises, consumers are now pretty conscious about the real price and  
  2. 2.  utility of a product. Foreign companies are commonly found offering better quality and features within the same price range. So the competition is extremer now than in ever ago and you must work with the quality of your offerings in order to survive and thrive. The day of washing a new customer’s eye and making one-shot profit has passed away. The fundamental of financial analysis is ratio analysis. Various categories of ratios are common to demonstrate in notes to the financial statements, or at least in the annual reports. What to say is that all of the ratios focus on financial information, moving around assets, liabilities, equity, revenues, expenses and profits. Therefore, better the name is called “Financial ratio analysis” instead of merely “Ratio analysis”. As clear from the above discussion, many of the stakeholders (including customers, investors and owners) are by and large more interested in non-financial (i.e. operational) information, particularly quality. So it is high time financial figures were combined with non-financial ones to develop a new category of ratios, for the purpose of showing the impact of quality on the bottom-line of the financial statements and thereby augmenting the usefulness of financial statements to their users. Quality improvement attempts always sound to be expensive; moreover, the benefits are visible as well as valuable in the long run. So it is quite rational that the management hesitates about and delays in investing in quality. Provided this context, FR should come ahead to prove that the benefits of quality really worth the investment. The abovementioned ratios should be designed in a manner to exhibit relationship between quality, sales, costs, defects and wastage. I suggest some sample ratios below: QUALITY IMPROVEMENT ATTEMPTS ALWAYS SOUND TO BE EXPENSIVE; MOREOVER, THE BENEFITS ARE VISIBLE AS WELL AS VALUABLE IN THE LONG RUN. SO IT IS QUITE RATIONAL THAT THE MANAGEMENT HESITATES ABOUT AND DELAYS IN INVESTING IN QUALITY. PROVIDED THIS CONTEXT, FR SHOULD COME AHEAD TO PROVE THAT THE BENEFITS OF QUALITY REALLY WORTH THE INVESTMENT.
  3. 3.   much. One thing is clear that the above inconsistency or incomparability arises on account of differing laws and tax rules. So until and unless tax provisions of every country meet on a single point, the context of preparing financial statements will not be equivalent and the discrepancy can no way be eliminated. Now, living in this age of globalization, is it too absurd to say that some parallel tax laws to be developed among countries? Exchange Rate Fluctuation Gain or Loss: How Much Worth Accounting for? As one of the most visible consequences of globalization, businesses nowadays are more or less involved in foreign trade. Accordingly modern businesses are seriously exposed to the exchange rate fluctuation. Proper accounting treatments are directed in the FR standards in this regard. But, can there really be any fluctuation gain or loss which needs recording? Fluctuation gain or loss arises on account of exchange rate up or down between the transaction date, reporting date and settlement date. Of course future is uncertain and we do not know for sure whether exchange rate will go up or down on the settlement date. But we also know that there are Such ratios must be made an integral part of the notes to the financial statements. This will ensure that owners get to feel the merits of quality improvement attempts. Comparability of Financials in the Context of Differing Legislations and Tax Provisions As mentioned earlier, on account of globalization all businesses, irrespective of their scale of operation, are subject to cross-border competition. One of the major implications of this is that comparability becomes a major headache not only of the users of financial information but also of its preparers. In other words, businesses intend to show their operation same lucrative as compared to that of their domestic as well as foreign competitors. Going to do this, preparers of financial statements tend to compromise with FR standards. All businesses are operating within the jurisdiction of some regional laws and regulations. Moreover, every government has in effect its own tax rules and provisions. Compliance with these local laws and tax rules is more important for businesses than with FR standards. Every company intends to keep its financial statement figures in a way that its actual tax liabilities as well as disclosed profit lie around its planned figures. When you cannot do this in compliance with FR standards, you simply bypass them and arrange the financials in your own way. But listed companies and MNCs are bound to follow the FR standards, since their financial statements are subject to greater public and legislative exposure than that of a non-listed domestic enterprise. Now when some businesses are abiding by the FR standards and others are not, how effectual is the comparison of inter-business financials? The question is: why businesses sidestep the FR standards. The answer is twofold and very straightforward: - They are not facing any punishment for contravening the standards; - They are not able to keep the bottom-line figures as of their expectation if they comply with the standards. As to the first point, punishments are suggested in pen and paper, just awaited for implementation. I have nothing to say anew in this respect. What can FR do on the second issue? Simple answer: nothing Proposed name of the ratio How should be calculated Remarks Marginal cost of quality Monetary investment in quality ÷ Production units The lower, the better Marginal sales from quality Sales ÷ Monetary investment in quality The higher, the better Defection sales Sales price of scrapped units ÷ Sales price of good units This ratio will definitely stay below 1; yet the higher, the better.
  4. 4.  The Author is an Asst. Manager - Internal Audit, Valiant (Apparel Division of Habib Group) option contracts, forward contracts, future contracts and various other derivatives in order to hedge against this movement. Those are advance concepts of Financial Management; we just take the basics: you may fix up the exchange rate on a future date in order to prevent the downside risk of exchange rate fluctuation. If you can do that, you now surely know how much you have to pay to the foreign suppliers and how much you are going to receive from foreign buyers, in terms of your functional currency (often is the domestic currency). At the reporting date you will record receivables and payables in the fixed amount. Of course exchange rate on the settlement date may be higher or lower than the rate fixed by you, but it does not affect you any more since the contract is binding on you. In that case, what is the ground for showing fluctuation gain or loss in the accounts? ForEx contracts are not trendy in Bangladesh. But there is nothing too formal as to doing above. Simply you have to fix the exchange rate with your bank. First you must guess about the exchange rate on the settlement date. There are a number of futures exchanges around the world; such as: Chicago Mercantile Exchange, ICE, Eurex, CBOE and LIFFE. You can learn what the exchange rate is going to be on a future date from these sources. If you think appropriate, you can add your own assessments thereof. The bank you are dealing with also suggests you a particular exchange rate based on its assessment. Now, finally upon a successful negotiation, you mutually fix the exchange rate for your future ForEx agreements and shield yourself against the adverse fluctuation in exchange rate. If you compare with the spot rate on the settlement date, sometimes you will be gainer and sometimes be loser: but at the yearend you are likely to be balanced off. So you actually need not worry about it. This technique can be used equally for both transaction and translation exposures. This is not too sophisticated to use. The upside is that by using this simple technique you can: - definitely know the amount of cash inflow or outflow to incorporate in your budgeting; - eliminate the unnecessary gain or loss which may manipulate your profit figures; - make your reporting more understandable to people from non-accounting background. Concluding Remarks The lesson of globalization refers to the old maxim: “Survival of the fittest”. Rivalry has been intensified in every respect; so you must more and more excel in your operation for paving the way to growth. Since financial reporting is the major tool for representing the health of your business in front of others, it also requires to be reviewed continuously for the sake of enhancing its understandability, reliability and comparability to general people. “Accounting is the language of business, so people not having the basics should not understand it.” – such traditional rough and tough notions are definitely outdated in this dynamic era. Now is the time for practicing a rational accounting, which non-accounting people would feel easier to get with.