E commerce and accounting principles

11
E-Commerce andE-Commerce and
Accounting PrinciplesAccounting Principles
an observationan observation
By Mahender KhariBy Mahender Khari
Khari & Co International AccountantsKhari & Co International Accountants
www.StudsPlanet.comwww.StudsPlanet.com

22
E-COMMERCEE-COMMERCE
Travel
Banking Gambling
Professional Advice
Accountability Procedures?

33
E-cE-c
shift in buyer behaviourshift in buyer behaviour
 Sell online- e- procurementSell online- e- procurement
 E-care for customersE-care for customers
 E-care business partnersE-care business partners
 E- learningE- learning
The web continues to produce new value modelsThe web continues to produce new value models
that need to be translated into more appropriatethat need to be translated into more appropriate
accounting standards for accountability.accounting standards for accountability.

44
ACCOUNTING PRINCIPLESACCOUNTING PRINCIPLES
CA 1985 Sch 4 requires the preparation of companyCA 1985 Sch 4 requires the preparation of company
accounts to be based on the principles of:accounts to be based on the principles of:
- going concern- going concern
- consistence- consistence
- accrual- accrual
- prudence- prudence
Consider:Consider:
 Fundamental changes in the market and/or in technologyFundamental changes in the market and/or in technology
 Forced reductions in operations, e.g. necessitated by outsourcing abroadForced reductions in operations, e.g. necessitated by outsourcing abroad
 Loss of key customersLoss of key customers

55
ACCOUNTING RULESACCOUNTING RULES
CA 1985 sets out two alternative sets of accounting rulesCA 1985 sets out two alternative sets of accounting rules
- the historical cost of accounting rules- the historical cost of accounting rules
- the alternative accounting rules-- the alternative accounting rules-
Q: Should we price/capitalise information according to its value or its
cost?
Q: Could these accounting rules be applied to E-c transactionsQ: Could these accounting rules be applied to E-c transactions
worldwide?worldwide?
Q: Should we adopt legal approach as opposed to substance-over-formQ: Should we adopt legal approach as opposed to substance-over-form
for accountability of financial data?for accountability of financial data?
Q. What does the conventional wisdom say?Q. What does the conventional wisdom say?
“Mathematically arrived values raise many questions about the reliability
of the financial data”. Source AIA journal

66
ACCOUNTING STANDARDSACCOUNTING STANDARDS
 Accounting Standards are developed in the UK byAccounting Standards are developed in the UK by
ASB/FRC/FRRP/UITFASB/FRC/FRRP/UITF
Financial Reporting Council
Financial Reporting
Review Panel
Accounting Standards Board
Urgent Issues Task Force
“CA 1985 s 256 defines accounting standard as “statements of standard accounting
practice issued by such body or bodies as may be prescribed
by regulations”

77
FINANCIAL STATEMENTSFINANCIAL STATEMENTS
 Balance SheetBalance Sheet
 Income StatementIncome Statement
 Statement of Changes inStatement of Changes in
EquityEquity
 Cash Flow StatementCash Flow Statement
 NotesNotes
 Accounting PoliciesAccounting Policies
 Directors Report;Directors Report;
NO SPECIFIC REQUIREMENT TONO SPECIFIC REQUIREMENT TO
DISCLOSE E-C GENERATEDDISCLOSE E-C GENERATED
TRANSACTIONSTRANSACTIONS
Comprise of:

88
ACCOUNTING QUALITIESACCOUNTING QUALITIES
 UnderstandabilityUnderstandability
 Reliability & RelevanceReliability & Relevance
 VerifiabilityVerifiability
 PredictabilityPredictability
 Comparability & ConsistencyComparability & Consistency
 Suitability for decision making=usefulnessSuitability for decision making=usefulness
COMPLEXITY & DECREASE TRANSPERANCY =E-c

99
IAS 1IAS 1
Presentation of Financial Statements
• Basis for Presentation
• Comparability – Previous Period and Other Entities
• Going Concern Basis
• Accrual Basis
• Classification
• Annually or More Frequently
• Current and Non-current Assets
• Short and Long-term Liabilities
“Fair presentation requires faithful representation of the effects of
transactions, events and conditions in accordance with the definitions
and recognition criteria for assets, liabilities, income and expenses”

1010
FRS 28 CORRESPONDINGFRS 28 CORRESPONDING
AMOUNTSAMOUNTS
The fast pace of E-c is in fact causing first year’s trading results to be different to the second year,
the second year’s results to be significantly different to the third year etc…
Q: Would it not be misleading to compare results?
Many financial statements show in their P&L Account a high cost of digitalisation in year one but
low subsequent marginal costs. This is a prime example of non-comparability one year with the
next. This is because information is costly to produce but cheap to reproduce.
The technology infrastructure makes information more accessible and hence more valuable but its
value is difficult to quantify.
The accounting practices are in favour of “historic cost basis”. However, the cost of same
information, in the world of E-c can and often does fluctuate from one period to the next.

1111
……FRS 28 Corresponding AmountsFRS 28 Corresponding Amounts
 Audit practice ignores the impact of E-c and places too muchAudit practice ignores the impact of E-c and places too much
emphasis on accounts rather than assessment of the E-c-relatedemphasis on accounts rather than assessment of the E-c-related
global risk.global risk.
 The professional judgement accorded to accountants inThe professional judgement accorded to accountants in
expressing their opinion on financial statements is proving toexpressing their opinion on financial statements is proving to
be a step behind the fast-paced E-c.be a step behind the fast-paced E-c.
 Old practice of accountability can produce misleading resultsOld practice of accountability can produce misleading results
when transactions are bundled together regardless ofwhen transactions are bundled together regardless of
distinction between E-c and non E-c-related activities.distinction between E-c and non E-c-related activities.
 The legitimacy of the techniques used by the accountingThe legitimacy of the techniques used by the accounting
profession in the E-c world is open to questioning.profession in the E-c world is open to questioning.

1212
Comparison not helpfulComparison not helpful
 Outsourcing = redundancies, currency risks,Outsourcing = redundancies, currency risks,
lack of direct control, political uncertainties,lack of direct control, political uncertainties,
 Net Asset valuations = not reliableNet Asset valuations = not reliable
 Forecast= not reliableForecast= not reliable
 Taxation= various mitigating schemes inTaxation= various mitigating schemes in
marketmarket
 Income & expenditure= fluctuates due toIncome & expenditure= fluctuates due to
market forcesmarket forces

1313
Is hamonisation possible?Is hamonisation possible?
 Is there a justification why accounting rules and
standards should be fundamentally and vastly
different ?
 US, China, Japan and Taiwan e g differ in their
accounting language.
 Different traditions in accounting and different legal
and economic realities of the new E-c world,
contribute to varied practices. The objective being, to
communicate in a manner that the entrepreneurs of E-
c world understand.
 To make Business life easier use same accounting
rules .

1414
US FASB and IASBUS FASB and IASB
MOU
“Shared objective to develop common accounting standard for use in the world’s
capital markets.
Consistency, comparability, and efficiency of financial statements, enabling
global markets to move with less friction
Roadmap for the removal for the reconciliation requirement for non-US
companies that use IFRS and are registered in the United States.
Committee of European Securities Regulators to identify area for improvement
of accounting standard.”
“First, the Boards will reach a conclusion about whether major differences in
focussed areas should be eliminated through one or more short-term standard
setting projects, and, if so, the goal is to complete work in those areas by 2008.”
“Second, the FASB and the IASB will seek to make continued progress in other
areas identified by both boards where accounting practices under US GAAP
and IFRSs are regarded as candidates for improvement” (source: International
Accountants) www.StudsPlanet.comwww.StudsPlanet.com

1515
EU-HARMONISATIONEU-HARMONISATION
switch to IFRSswitch to IFRS
 Variety of legal & tax systems in existenceVariety of legal & tax systems in existence
 Directives for Company Law harmonisationDirectives for Company Law harmonisation
 44thth
& 7& 7thth
Ds adopted into national legislation by EU countriesDs adopted into national legislation by EU countries
 Formats, valuation rules, & preparation & presentation ofFormats, valuation rules, & preparation & presentation of
consolidated accountsconsolidated accounts
 Anglo-Saxon= T & F V= as a whole, where as French &Anglo-Saxon= T & F V= as a whole, where as French &
German prefer precisionGerman prefer precision
 EU Directive, not fitting in the global tax philosophy, and having little regard to theEU Directive, not fitting in the global tax philosophy, and having little regard to the
practical aspects of the offshore world, is hoping to collect consumer taxes online.practical aspects of the offshore world, is hoping to collect consumer taxes online.
Its wishful thinking.Its wishful thinking.

1616
IFRSIFRS FOR LISTED COMPANIESFOR LISTED COMPANIES
 Wef 2005 global standard for financial reportingWef 2005 global standard for financial reporting
except in USexcept in US
 Cross border implications/consistency in applicationCross border implications/consistency in application
 National variations in interpretationNational variations in interpretation
 EU, Australia, China, Switzerland=IFRSEU, Australia, China, Switzerland=IFRS
 Legal issue = who has jurisdiction in cases of conflictLegal issue = who has jurisdiction in cases of conflict
= EC of Justice will have busy time ahead= EC of Justice will have busy time ahead

1717
COMPLEXITIES OF INTERNATIONAL TRADING
HOLDING COMPANY
HOLLAND
Beneficiaries
Monaco
Cyprus
Subsidiaries
Singapore Mauritius UK
Buys from China Trading partnership
with India
Sells to Eastern
Europe & Far East
Sells to Europe
Bank account in
Singapore
Bank
account in
Mauritius
Bank
account in
India
Bank account in
Switzerland/UK
Via Nominees
BVI
Management
Charge
Trust (exotic
location)

1818
TaxationTaxation
 Let us take taxation as an expense or cost for example;Let us take taxation as an expense or cost for example;
 No consensus is in sight, as toNo consensus is in sight, as to which jurisdiction is entitled towhich jurisdiction is entitled to
impose taxes on internet transactions e.g digital products suchimpose taxes on internet transactions e.g digital products such
as software and e-books e g VAT.as software and e-books e g VAT.
 ““Nexus,”= deemed presence in the taxing jurisdiction toNexus,”= deemed presence in the taxing jurisdiction to
justify levying of tax- how do you tax an out of state supplier?justify levying of tax- how do you tax an out of state supplier?
Opinions and practices differ in US and EU countries. There isOpinions and practices differ in US and EU countries. There is
no Accounting standard yet that could give us practicalno Accounting standard yet that could give us practical
guidance on that issue.guidance on that issue.
 International Financial Reporting Standards, howeverInternational Financial Reporting Standards, however
sophisticated, in such circumstances will only serve a limitedsophisticated, in such circumstances will only serve a limited
purpose.purpose.

1919
Transfer of property to foreignTransfer of property to foreign
corporationcorporation
 A US person transferring property to a foreign corporation hasA US person transferring property to a foreign corporation has
reporting obligations;reporting obligations;
1.1. Connection with foreign foundations/stiftung/trusts.Connection with foreign foundations/stiftung/trusts.
2.2. Receipts of gifts from outside USReceipts of gifts from outside US
3.3. Transactions with foreign corporations/personsTransactions with foreign corporations/persons
4.4. Acquiring an interest in foreign corporations =25%Acquiring an interest in foreign corporations =25%
5.5. Acting as a director/agent of foreign corporations.Acting as a director/agent of foreign corporations.
6.6. Nominee relationshipsNominee relationships
7.7. Report foreign disregarded entities.Report foreign disregarded entities.
8.8. Foreign partnerships.Foreign partnerships.
9.9. Foreign bank accounts.Foreign bank accounts.

2020
SummarySummary
 Development of a common accountingDevelopment of a common accounting
language = long way awaylanguage = long way away
 E-c activities = remain difficult to policeE-c activities = remain difficult to police
 Taxation= no accountability, no taxabilityTaxation= no accountability, no taxability
 IFRS & US GAAP harmonisation= aIFRS & US GAAP harmonisation= a
possibility but long way awaypossibility but long way away
 Next 5 years= exploit the legitimate loopholesNext 5 years= exploit the legitimate loopholes

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