CMA. Devarajan Swaminathan

Suggestions - GACAP, CAS and essentially on Cost Information Presentation

2011-11-10T20:05:00.000-08:00

Suggestions regarding GACAP, Guidance note for Maintaining Cost Accounting Records and essentially on Cost Information Presentation:

Please note that "costs", "expenses" , "losses" , "expenditure" have NOT been used interchangeably. They all have distinct conotations.

1. The Term "Cost" needs to be redefined to include post production costs. The present cost definition is limited to production. A suggested definition of "cost"

A cost is a measurement, in monetary terms, of the amount of resources used for the purpose of making goods available for sale and includes resources used post sales for honouring pre sales contract (e.g warranty) or resources consumed for the purpose of rendering of services.

2. GACAP and CAS which provides guidance for inclusion of cost elements would therefore adhere to the above definition. In this regard it would make little sense to include the following expenses/losses under "costs".

i) Bad Debts (bad debt is a loss and not an expense/cost) - can substantiate if asked. Bad Debt must only reflect in the Cost-Financial Reconciliation Statement.
ii) legal expenses incurred for recovering bad debts cannot come as a selling costs but to be shown under business sustenance expenses.

3. Period Costs are expenses incurred for Business Sustenance Purposes. Therefore every product vertical has to make some contribution for absorbing period costs. This could be on the basis of sales value or anyother.

4. Similarly every product vertical has to make some contribution towards CSR Expenses incurred by the Company for the Company as a whole.

5. Interest and finance charges, as suggested by the GACAP to be shown as a part of total cost of sales, should in my opinion, not be shown under the Total Cost of Sales but the same need to be shown as a spearate line item in the cost information presentation.

6. It would make a lot of sense to include imputed risk cost as a separate line item in the cost information presentation. For this we would need a GACAP to provide guidance for recognition, measurement and discloure of imputed risk costs.

7. It is therefore imperative that cost information presentation relfect the above different nature of costs, expenses incurred/imputed. A format is suggested below. It goes without saying that this is not a perfect version and changes and other indeas may be included in this, or this suggested format may be dumped.

Cost Information Presentation

Sales

Less: Costs directly attributable to the Product

Direct Costs

Direct Material

Direct Labour

Direct Expenses

Total Direct Costs

Indirect Costs

Production Overheads

Administration Overheads

Selling Overheads

Distribution Overheads

Total Indirect Costs

Total Operations Costs

(Direct + Indirect)

Contribution before Interest

(Sales minus total operations costs)

Interest and finance expense

Contribution Before Business Sustenance Expenses

Less: Apportioned Business Sustenance Expenses

(Period costs not directly attributable to the Products)

Administration expenses

Selling expenses

Distribution expenses
Interest and finance expenses

Contibution before CSR Expenses

CSR Expenses

Total CSR Expenses

Net Contribution

Less : Imputed Risk Costs

Margin

Do share your thoughts on the above please.

Thanks

Some Observations on Exposure Draft on Tax Accounting Standards

2011-10-29T10:20:00.000-07:00

Why TAS is needed?

We need to understand a fundamental difference between TAS and IndAS.

The former is for computation of income, the latter is for investor iinformation. The purpose, as is obvious, different.

Further, prior period items and its later adjustements requires, Ind AS to make changes retrospectively, where as such changes would be effective prospectively in case of TAS.

They have done correctly in providing a guidance in the form of TAS on how income should be computed with a very clear caveat that TAS must not be used for Accounting purposes.

So it does make sense to have TAS, just as CBEC has a very limited purpose CAS 4 for calculating cost of goods despatched, exclusively for Central Excise purposes. The only difference is that CAS 4 is issued by ICWAI, TAS’s are issued by CBDT.

I would like to suggest to base the cost principles in Construction Contracts and Government Grants as provided in the Tax Accounting Standards on the Generally Accepted Cost Accounting Principles (GACAP) AND Cost Accounting Standards (CAS) as issued by The Institute of Cost and Works Accountants of India (ICWAI).

Below are some observations in the treatment as provided in TAS and the comparision in its treatment as suggested in the GACAP and CAS.

Government Grants:

GACAP:
Any Subsidy / Grant / Incentive and any such payment received / receivable with respect to the input cost is reduced from cost for ascertainment of the cost of the cost object to which such amount pertains.

TAS:

Where the Government grant relates to a non-depreciable asset or assets of a person requiring fulfillment of certain obligations, the grant shall be recognized as income over the same period over which the cost of meeting such obligations is charged to income.

Construction Contracts:

TAS:

Contract Costs
11. Contract costs shall comprise of :
(a) costs that relate directly to the specific contract;
(b) costs that are attributable to contract activity in general and can be allocated to the contract;
(c) such other costs as are specifically chargeable to the customer under the terms of the contract; and
(d) allocated borrowing costs in accordance with the Tax Accounting Standard on Borrowing Costs.

These costs shall be reduced by any incidental income, not being in the nature of interest, dividends or capital gains, that is not included in contract revenue.

12. Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall be excluded from the costs of a construction contract.
13. Contract costs include the costs attributable to a contract for the period from the date of securing the contract to the final completion of the contract. Costs that are incurred in securing the contract are also included as part of the contract costs, provided
(a) they can be separately identified; and
(b) it is probable that the contract shall be obtained.

When costs incurred in securing a contract are recognised as an expense in the period in which they are incurred, they are not included in contract costs when the contract is obtained in a subsequent period.

14. Contract costs that relate to future activity on the contract are recognised as an asset. Such costs represent an amount due from the customer and are classified as contract work in progress.

GACAP:
The above contract cost should be based on CAS and GACAP.

According to TAS, Costs that cannot be attributed to any contract activity or cannot be allocated to a contract shall be excluded from the costs of a construction contract, instead the concept in PARA 6 and PARA 8 of GACAP on Application Guidance of Admin O/H may be applied.

PARA 6 of GACAP application guidance on Administration Ovedheads:
The use of the terms “share of administrative overheads relating to production” and “share of administrative overheads relating to selling” in the erstwhile Cost Accounting Record Rules has led to arbitrary practices in some entities to assign all administrative overheads on an arbitrary ratio say 60:40 between production and selling. These terms can only refer to administrative costs of functions attached to production or selling. There will be a residuary head of “Administrative Overheads” which cannot be assigned to production or selling functions representing costs of policy making and strategic management and are to be treated as period costs. Also included in this category are expenses such as Directors sitting fees, audit fees, filing fees and other corporate expenses. Paragraph 6.3 in Cost Accounting Standard 3 on overheads should be interpreted in the light of the above discussions.

PARA 8 of GACAP application guidance on Administration Ovedheads:
The assignment of as much of the administrative overheads as possible based on identified cost drivers is recommended. The balance of administrative overheads can only be assigned to cost centres or objects based on capacity or sales value. It is usual in textile industry to charge corporate office cost to mills based on installed spindle capacity.

For Treatment of Borrowing Costs, GACAP on Interest and Finance Charges may be applied.

Is there a TAS on Borrowing Costs, Para 11 d above??. Here GACAP on Interest and Finance Charges should be used.

Interest and Finance Charges have come to be included in cost of sales though not in cost of production. Such costs are also assigned to products before arriving at margins by product.

PAGE 41 of GACAP.

Should there be a GACAP on Risk Cost also?
Risk is also factored in cost before arriving at Margins. So, in my opinion, there must be a GACAP for risk cost.

ICWAI must come up with a MAG on arriving at Cost of Capital. The earlier this is done, the better.

Cost of Compliance, Confidentiality they say? Really??

2011-10-03T22:14:00.001-07:00

Cost of Compliance, Confidentiality they say? Really??

It is interesting to observe when some people raise the pitch on cost of compliance and confidentiality when it comes to cost accounting, its audit and reporting.

Let me try allay some fears

Cost of Compliance:

One Example of the benefits of maintenance of cost accounting and its reporting:

http://www.dsir.gov.in/reports/techreps/tsr131.pdf

Most of the information that this report contains are also there in the cost audit report. It seems to have plucked it up and consolidated from the cost audit report of various companies.

What does the DSIR actually do by publishing such reports?
Who is to benefit from such a report?
This kind of industry analysis and analysis of India vis-a-vis the world benefits whom?

The cost of compliance they ask? really??

Confidentiality

How to make Paracetamol and its key ingredients?

http://www.ch.ic.ac.uk/rzepa/mim/drugs/html/paracet_text.htm

Name a product that you say requires to be kept confidential and I will try to provide you the link of its DNA, its ingredients, its history and geography.

Confidentiality they say? Really??

The point is quite simple. Its about national resources, its pattern of consumption, its productivity, its efficient and effective use. These are national resources belonging to the nation to which each and every one belongs and has equal right. Just by paying a "price" it does not change anything if those resources are not put to use to achieve an end that is in the interest of nation.

This is from a societal and national perspective.

Lets look at it from an analyst perspective. Financial transaction talk about acquisition and use of resources. Resource consumption talks about what has been done with the resources that has been acquired and how best it has been put to use. This is seen in the context of the capital raised, deployed and the product and service that it generated and is provided to the customer.

Governance is not just about fill in the blanks of various compliance forms, the mad analysis of the financial report and the bottom line. It is essentially about managing business better by making uses of resources acquired and also ensuring that the resources are made available to be sustainable in the long run.

The mad obsession of analysing aggregates to find out what it comprises of without knowing what it actually comprises of actually makes little sense. Even if it is cash to cash, its of little use if you do not know that the input cash has been put to the most productive use to generate the maximum output cash. (productivity).

More than anyone, it is the analyst community, financial institutions, banks and mutual funds who must demand cost audit report as an important document for making investment analysis before deploying funds. If the Income Tax Department, Central Excise Department, the Sales Tax Department make use of cost audit report to analyse the leakages in revenue then why not the investment community? Don't they want to know what is being done with their money? why has a product vertical that was most profitable, in the name of unlocking value hived off? What is the great secrecy that some want to maintain that they do not want their shareholders to know? This seems to be most prevalent in a family run business rather than a professional run or a public enterprise. What is it that family owned business house don't want their minority shareholders to know?

I look forward to the analyst community demanding cost audit report sooner than later as the efficacy and use of the cost audit report has not been used to its full potential by the providers of risk capital.

In its Comprehensive Business Reporting Model the CFA Institute has recommended the following

"Principle 10. Changes affecting each of the financial statements should be reported and explained on a disaggregated basis.For investors to be able to understand the changes that have occurred in financial statements and, consequently, to their wealth, it is essential that they be able to analyze the individual forces at work that affect the company’s performance. Accounting standards currently permit assets and related liabilities, revenues, and expenses, as well as investing and financing cash inflows and outflows, to be reported on a highly aggregated or netted basis, causing much important information to be obscured or lost altogether. The information loss can result inmisleading analyses, distorted conclusions, and suboptimal investment decisions. Such aggregation and netting should not be permitted. Similarly, we do not believe that netting should be permitted for individual line items. For example, changes in the property, plant, and equipment account can arise as a result of (1) purchases and exchanges, (2) sales and abandonment, (3) self-construction, (4) mergers and divestitures, (5) leases, (6) foreign currency changes, (7) depreciation, and (8) impairment write-downs. Clearly, information as to the precise source of the change is essential if investors and other users are to evaluate managers’ investments in productive capital, the effectiveness of managers’ decisions to invest scarce capital, and the value of the company’s capital. It is important to note that IAS 16 requires a full reconciliation of the change in gross fixed assets and accumulated depreciation.

Principle 11. Individual line items should be reported based upon the nature of the items rather than by the function for which they are used. By “nature,” we mean that items should be reported by the type of resource consumed, such as labor or raw materials, rather than by the function or purpose for which it is used, such as cost of goods sold or selling, general, and administrative expense. Categorization according to nature can greatly enhance comparability across companies and consistency within the statements of a single company. Currently, users of the statements cannot determine from the statements or related disclosures where individual items, such as pension expense and depreciation, are recorded in the income statement. The statistical distribution properties of the various resources consumed in operations behave very differently over time. Consequently, aggregation by function, the current practice, merges items with different properties, reducing the information content of the items and significantly reducing their value as decision-making factors. We believe that functional disclosure is best reserved for segment reporting where the categories are most likely to be more nearly homogeneous and, therefore, more meaningful for assessing the profitability of individual units."

More later.

Career as a Cost and Management Accountant

2010-07-07T19:08:00.000-07:00

My very first interview in the media with the Hindustan Times - HT Horizon - Mumbai edition - Published on 7th July 2010.

Topic: Career as a CMA.

This is the link to the interview:

http://epaper.hindustantimes.com/publications/ht/hm/2010/07/07/INDEX.SHTML

Alternatively I have uploaded it on google doc. Here is the link

http://docs.google.com/fileview?id=0BzXwPu9BeQHYZjRlMzk1NGUtNDcxNC00MWYzLTllNTAtOWUyMmVkMmNiOTYz&hl=en&pli=1

CII - TCM

2009-11-12T01:02:00.000-08:00

I was invited by the CII - TCM team (Total Cost Management) to participate in the cost management maturity assessment in a renowned company.

I was zapped by the interest, zeal, spirit shown by the company in climbing the cost management maturity level.

At each stage there was extensive debate on the vision, mission, strategy, functions, processes, products breaking it down to the micro level to understand the cost structure and the build up and ways and means of not only cutting or reducing costs but cost management as a culture across the organization structure.

What surprised me most was the willingness, the passion with which "cost", cost structure, cost accounting, cost information system, cost management both at the strategy level and at the operational level was discussed threadbare and appreciated by the employees of the company at various levels all the way up to the management and at the micro level to the shop floor.

Cost is at the hearts and minds of all and I suddenly realized the NEED (which I knew was there) that the Company understands and appreciates to have a cost management model in place and if it is so in this company I am sure it is across all industries. But mind you the thrust was on cost accounting as a cost information system as a decision support system. I had great experience sharing knowledge with other cost accountants in the company who were curious to know why wasn't the ICWAI doing what CII was doing.

The Institute of Cost and Works Accountants of India (ICWAI) needs to put THRUST in this area. If possible tie up with the CII. This is a ready made area of work exclusively for cost accountants and the company accepts and acknowledges that.

If there is any myth that cost management addresses just costs then think again it actually addresses resources, processes, activities, decisions that lead to incurrence of costs and in the process it addresses the entire gamut of business and essentially operations.

I just hope the profession moves to a more participative approach in business models to bring in cost management culture across industries.

Many thanks CII for the invite

IASB Framework

2009-07-19T06:18:00.000-07:00

The International Accounting Standards Committee Foundation (IASC Foundation) Constitution mentions about the IASB Framework twice, once in paragraph 29 and another in paragraph 43.

Paragraph 29 of the IASC Foundation Constitution reads like this:

Each full time and part time member of the IASB shall agree contractually to act in public interest and to have regard to the IASB Framework (as amended from time to time) in deciding on and revising standards.

Paragraph 43(a) of the IASC Foundation Constitution reads like this:

The International Financial Reporting Interpretation Committee (IFRIC) shall interpret the application of International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) and provide timely guidance on financial reporting issues not specifically addressed in the IAS’s and the IFRS’s with the context of the IASB Framework and undertake other tasks at the request of the IASB.

The International Accounting Standards Board Framework or the IASB Framework or the Conceptual Framework is the framework for the preparation and presentation of Financial Statements.

The IASB Framework was approved by the IASC Board in April 1989 and adopted by the IASB in April 2001.

The purpose of the IASB Framework is to assist and guide the IASB to develop new or revised standards and to assist the preparers of financial statements in applying the standards and dealing with issues that are not specifically addressed by the Standards.

The Framework does not have the force of a Standard. Therefore, in case of a conflict between the Standard and the Framework, the Standard will prevail over the Framework.

The Framework deals with:

1. The objective of financial statements

2. The assumptions on the basis of which the financial statements are prepared.

3. The qualitative characteristics that determine the usefulness of information in financial statements.

Objective of Financial Statements are:

The objective of financial statements is to provide information about

Ø Financial Position:

The balance sheet presents this information. The financial position of an enterprise is affected by the economic resources it controls, its financial structure, its liquidity and solvency, and its capacity to adapt to changes in the environment in which it operates.

Ø Performance:

Performance is the ability of an enterprise to earn a profit on the resources that have been invested in it. Information about the amounts and variability of profits helps in forecasting future cash flows from the enterprise's existing resources and in forecasting potential additional cash flows from additional resources that might be invested in the enterprise. The Framework states that information about performance is primarily provided in an income statement.

Ø Changes in the financial position of an entity.

Users of financial statements seek information about the investing, financing and operating activities that an enterprise has undertaken during the reporting period. This information helps in assessing how well the enterprise is able to generate cash and cash equivalents and how it uses those cash flows. The cash flow statement provides this kind of information

The Assumptions on which the financial statements are prepared include:

Ø Accrual basis of accounting: The effects of transactions and other events are recognized when they occur, rather than when cash or its equivalent is received or paid, and they are reported in the financial statements of the periods to which they relate

Ø Going Concern: The financial statements presume that an enterprise will continue in operation indefinitely or, if that presumption is not valid, disclosure and a different basis of reporting are required.

The qualitative characteristics that determine the usefulness of information in financial statements are:

Ø Understandability

Information should be presented in a way that is readily understandable by users who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently.

Ø Relevance

Information in financial statements is relevant when it influences the economic decisions of users. It can do that both by

(a) Helping them evaluate past, present, or future events relating to an enterprise and by

(b) Confirming or correcting past evaluations they have made.

Materiality is a component of relevance. Information is material if its omission or misstatement could influence the economic decisions of users. Timeliness is another component of relevance. To be useful, information must be provided to users within the time period in which it is most likely to bear on their decisions.

Ø Reliability

Information in financial statements is reliable if it is free from material error and bias and can be depended upon by users to represent events and transactions faithfully. Information is not reliable when it is purposely designed to influence users' decisions in a particular direction. There is sometimes a tradeoff between relevance and reliability - and judgement is required to provide the appropriate balance. Reliability is affected by the use of estimates and by uncertainties associated with items recognized and measured in financial statements. These uncertainties are dealt with, in part, by disclosure and, in part, by exercising prudence in preparing financial statements. Prudence is the inclusion of a degree of caution in the exercise of the judgement needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated. However, prudence can only be exercised within the context of the other qualitative characteristics in the Framework, particularly relevance and the faithful representation of transactions in financial statements. Prudence does not justify deliberate overstatement of liabilities or expenses or deliberate understatement of assets or income, because the financial statements would not be neutral and, therefore, not have the quality of reliability.

Ø Comparability

Users must be able to compare the financial statements of an enterprise over time so that they can identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises. Disclosure of accounting policies is essential for comparability.

Elements of Financial Statements

Financial statements portray the financial effects of transactions and other events by grouping them into broad classes according to their economic characteristics.

Recognition of the Elements of Financial Statements

An item is recognized when it is included in the financial statements. It is the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the following criteria for recognition:

· It is probable that any future economic benefit associated with the item will flow to or from the enterprise; and

· The item's cost or value can be measured with reliability.

Matching principle is a useful concept where it considers whether an asset arises when liability is recognized and vice versa. It is the principle of matching expenses with income.

The following elements are directly related to financial position (balance sheet) are:

Assets

Definition: An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise.

Recognition: An Asset is recognized in the balance sheet when it is probable that the future economic benefits will flow to the enterprise and the asset has a cost or value that can be measured reliably.

Liability:

Definition: A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.

Recognition: A liability is recognized in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably.

Equity:

Definition: Equity is the residual interest in the assets of the enterprise after deducting all its liabilities.

The following elements relates to performance:

Income.

Definition: Income is the increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an enterprise and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent. Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an enterprise. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element in the IASC Framework.

Recognition:

Income is recognized in the income statement when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably. This means, in effect, that recognition of income occurs simultaneously with the recognition of increases in assets or decreases in liabilities (for example, the net increase in assets arising on a sale of goods or services or the decrease in liabilities arising from the waiver of a debt payable).

Expense.

Definition: Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

The definition of expenses encompasses losses as well as those expenses that arise in the course of the ordinary activities of the enterprise. Expenses that arise in the course of the ordinary activities of the enterprise include, for example, cost of sales, wages and depreciation. They usually take the form of an outflow or depletion of assets such as cash and cash equivalents, inventory, property, plant and equipment. Losses represent other items that meet the definition of expenses and may, or may not, arise in the course of the ordinary activities of the enterprise. Losses represent decreases in economic benefits and as such they are no different in nature from other expenses. Hence, they are not regarded as a separate element in this Framework.

Recognition:

Expenses are recognized when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. This means, in effect, that recognition of expenses occurs simultaneously with the recognition of an increase in liabilities or a decrease in assets (for example, the accrual of employee entitlements or the depreciation of equipment).

Measurement of the Elements of Financial Statements

It is probable that any future economic benefit associated with the item will flow to or from the enterprise; and the item's cost or value can be measured with reliability. Based on these general criteria:

Measurement involves assigning monetary amounts at which the elements of the financial statements are to be recognized and reported.

The Framework acknowledges that a variety of measurement bases are used today to different degrees and in varying combinations in financial statements, including:

Historical cost

Current cost

Net realizable (settlement) value

Present value (discounted)

Historical cost is the measurement basis most commonly used today, but it is usually combined with other measurement bases. The Framework does not include concepts or principles for selecting which measurement basis should be used for particular elements of financial statements or in particular circumstances. However, the qualitative characteristics do provide some guidance.

Concept of Capital and Capital Maintenance:

The framework distinguishes between a financial capital and a physical concept of capital.

Under Financial Capital maintenance, profit is earned if the financial amount of the net assets at the end of the period exceeds the financial amount at the beginning of that period, after excluding distributions to and contributions from the owners during the period.

Under physical capital maintenance concept, a profit is earned if the physical productive capacity (or operating capabilities) of the entity (or the resources or funds needed to achieve that capacity) at the end of the period exceeds the productive capacity at the beginning of that period after excluding any distributions to and contributions from the owners during that period.

Conclusion: The above framework is subject to amendment. The IASB along with FASB is working on a Conceptual Framework which is expected to be ready by 2010.

References have been heavily drawn from:

1. www.iasb.org

2. http://www.iasplus.com/agenda/framework.htm

3. IFRS Practical implementation, guide and workbook by Abbas Ali Mirza, Magus Orell, Graham.J.Holt, Second Edition, a John Wiley Publication.

The Organization Structure of IASC Foundation

2009-06-17T00:25:00.000-07:00

IFRS or The International Financial Reporting Standards are the accounting standard norms that Companies globally have started to adopt. India is committed to prepare its financial statement based on IFRS from 2011 onwards. An attempt is made here to understand the DNA of the Organization, namely the International Accounting Standards Committee Foundation or the IASC Foundation, which has taken on the responsibility to frame International Financial Reporting Standards and how India is represented in this structure (at least till now).

In writing this article references have been heavily drawn from the IASB website www.iasb.org , IASC Foundation Constitution and the book IFRS Practical Implementation Guide and Workbook – 2nd Edition by Abbas Ali Mirza, Magnus Orrell, Graham .J. Holt, a John Wiley Publication.

The International Accounting Standards Committee Foundation or the IASC Foundation is the parent body or the Organization.

A little back in History:

From 1973 untill 2001 the body in charge was the International Accounting Standards Committee (IASC). IASC was created in 1973 between the professional accountancy bodies in 9 countries and from the year 1982 its membership comprised of all the accountancy bodies who were members of the International Federation of Accountants (IFAC). The principle significance of the IASC was to encourage national accounting standard setters around the world to improve and harmonize national accounting standards.

The members of the IASC who were Professional Accountancy Bodies of the world delegated the responsibility to the IASC Board. The IASC Board was responsible for all activities including standard setting activity. The Standards adopted by the IASC Board were known as the International Accounting Standards (IAS).

The IASC Foundation:

The constitution of the International Accounting Standards Committee Foundation (IASC Foundation) was approved in its original form by the erstwhile International Accounting Standards Committee (IASC) in the year 2000 and by the members of the IASC at a meeting on 24th May 2000.

The erstwhile IASC Board had appointed a nominating committee to appoint the first Trustees. In execution of its duties the first trustees formed the International Accounting Standards Committee Foundation on 6th February 2001.

There is a key difference between the erstwhile IASC and the present IASC Foundation. The members of the IASC were the accounting bodies of the world who were also the members of the IFAC. The IASC Foundation does not have such a relationship with these global accounting bodies.

The IASC Foundation is an independent not for profit private sector organization. Its Governance rests with its 22 Trustees.

It receives funding in the form of donations from Organizations, Accounting firms, Central Banks and Capital Market Regulators amongst others. The funding of the IASC Foundation is based on four principles.

In its Annual Report of 2007, the Foundation received funds of approximately 11.28 Million Sterling Pounds. 26 Countries contributed. Of these, 174,358 Sterling Pounds was India’s contribution. Contributors from India include the RBI, ICICI, Infosys, Grasim Industries, Bharti Airtel, Tata Sons, Satyam Computers, L&T and RIL.

It is interesting to note that International Accounting Firms contributed 3.24 Million Sterling Pounds approximately 28% of the Total Funding received by the Foundation. Firms included PWC, Deloitte, E&Y, KPMG, Grant Thornton, BDO and Mazars.

The governance structure within IASC Foundation comprises its key parts namely:

1. The Monitoring Board
2. The Trustees
3. The International Accounting Standards Board (IASB)
4. The International Financial Reporting Interpretation Committee (IFRIC)
5. The Standards Advisory Council (SAC)

The Monitoring Board:

Although the governance of the IASC Foundations rests with the Trustees, the Monitoring Board plays a pivotal role as the crucial link between the Trustees and the Public Authorities that have generally overseen accounting standard setters. This link between the Trustees and the Monitoring Board is established by way of a Memorandum of Understanding (MoU). Such a MoU will be made available to the public. A draft of the MoU is available on www.iasb.org. The process of getting the MoU signed between the Trustees and the Monitoring Board is already in process.

The monitoring board has the authority to participate in the process and the appointment of Trustees. It has the authority to overlook whether the trustees are discharging their duties in accordance with the constitution. The Trustees make an annual written report to the Monitoring Board.

Initially the Board comprise of

1. A responsible member of the European Commission.
2. The Chair of the IOSCO Emerging Market Committee.
3. The Chair of the IOSCO Technical Committee
4. The Commissioner of Japan Financial Services Agency
5. The Chairman of the United States Securities Exchange Commission and
6. As an observer, the Chairman of the Basel Committee on Banking Supervision

India as is apparent is not represented on the Monitoring Board.

The Trustees:

The Trustees of the IASC Foundation are responsible for its Governance including funding. The Trustees are publically accountable to the Monitoring Board of the capital market authorities.

According to the present trustee distribution, the Trustees comprise of 22 individuals. 6 Trustees have been appointed from the Asia Oceanic region, 6 Trustees have been appointed from North America, 8 Trustees have been appointed from Europe (although the constitution has provided only for 6 from Europe), 1 Trustee from Brazil and 1 Trustee from South Africa (although the constitution provides for 4 from other regions).

India is represented by Mr. Mohandas Pai of Infosys.

The Trustees are initially appointed for a period of three years.

The trustees are, in addition to the governance of the foundation, responsible for the appointment of the members of the International Accounting Standards Board (IASB), the International Financial Reporting Interpretation Committee (IFRIC) and the Standards Advisory Council (SAC). They also have the power to terminate non performing members of the above board, committee and council.

The International Accounting Standards Board (IASB):

The IASB is responsible for all standard setting activities, including the development and adoption of IFRS. The IASB comprises of 14 members that is to be increased to 16 members. The members of the Board are a mix of practical experience in standards setting process, or as a user, or accounting, academia or from the preparer community. The Trustees appoint the members of the Board.

The present distribution of the Board is 6 members from Europe (although the constitution provides for 4), 4 Members from Asia Oceanic (the constitution provides for 4 members from Asia Oceanic), 3 members from North America (although the constitution provides for 4), 1 from South Africa (the constitution provides for 1 member from Africa) and 1 from Brazil (the constitution provides for 1 member from Latin America). That takes the tally to 15 members.

The constitution also makes it amply clear that the work of the IASB will not be invalidated by its failure at any time not to have representation in accordance with the geographical allocation laid down in the constitution. Members of the IASB are appointed for a term of up to 5 years, renewable once.

Mr. Prabhakar Kalavarcherla is a member of the ICAI so can be said to represent India.

At the time the IASC Foundation was constituted first, the IASB adopted all IAS issued by the erstwhile IASC. The existing IAS continues to be operative till the extent it has not been amended or withdrawn by the IASB. New standards issued by the IASB are called the IFRS. Collectively IFRS includes both IAS and IFRS.

The International Financial Reporting Interpretation Committee (IFRIC):

The interpretative body of the IASC Foundation is IFRIC. It is responsible for developing guidance on the interpretations of the application of both the IAS and IFRS. Such guidance on interpretation would be on financial reporting issues not specifically dealt with in the IAS and IFRS. It would also be on those issues where there are conflicting or divergent interpretations in the absence of an authoritative guidance.

IFRIC comprises of 14 members appointed by the Trustees for a renewable period of three years. No specific geographical allocations have been spelt out in the constitution.

Going by the profile of the existing members that comprise the IFRIC it is apparent that the committee does not have representations from India.

The constitution provides that the Trustees, as they deem necessary, appoint non voting observers representatives of the regulatory authorities who shall have the right to attend and speak at the meeting. Accordingly, IOSCO (International Organization of Securities Commission) and European Commission are presently the Observers.

Standards Advisory Council (SAC):

The members of the SAC are appointed by the Trustees. The objective of the SAC is to advice the IASB on agenda decisions and priorities. The constitution provides that the council may comprise of 30 or more members. No geographical allocations have been specified. Members appointed on the council would represent a wide group of organizations and individuals who are affected by or with an interest in international financial reporting.

Conclusion:

With so many organizations, institutions, individuals, countries that are participating in this exercise of creating an Organization that will eventually issue Reporting Standards that will be adopted globally, it remains to be seen how the various committees, councils, trustees steer away from the political pushes / compulsions to have a high quality standards drafted and issued. The IASC Foundation has a Conflict of Interest Policy in place but the same was not available on their website for download and for me to include it here. India has to increase its participation in the entire process to ensure that its interest is addressed appropriately.

Enterprise Governance

2009-06-16T23:21:00.000-07:00

In the wake of various scams around the world and the recent Satyam fiasco in India.

Is there an urgent need to shift focus from Corporate Governance to a more comprehensive Enterprise Governance which includes Conformance (Corporate Governance) and Performance.

It is argued that Corporate Governance on its own cannot make a Company successful. It must balance Conformance with Performance.

What is Enterprise Governance? It is a set of responsibilities and practices exercised by the Board and Executive Management with the goal of providing strategic direction, ensuring that the objectives are achieved, ascertaining that the risks are managed appropriately and verifying that the resources of the organisation are used responsibly.

Corporate governance is about how companies are directed and controlled. It is focused on conformance with regulations. This conformance is important but a governance structure should also support an organization’s efforts to improve performance. It has to come out of a check-list mentality which leads to governance in form and not in substance (as was amply evident in the Satyam case). There is an urgent need to move from compliance governance to business governance which also happens to be the view of the International Federation of Accountants (IFAC) (Report on Financial Reporting Supply Chain).

The governance structure has to expand its horizon to include a system that ensures optimal utilisation of resources for the benefit of shareholders while meeting societal expectations. There has to be a shift from compliance or rule based governance to a performance management framework with enterprise governance.

Business, Customer Value, Cost and Management Accounting

2009-06-16T23:18:00.000-07:00

My understanding of a BUSINESS: Back to basics

There is a customer: He has money

I am the supplier: I have the product.

The aim is to sell him my product in return for his money.

A business is not and cannot be more complicated than this. Everything revolves around this.

To do the above I have spent resources like financial, technical, physical, human to bring the product first at my doorstep and then to the customers doorstep. My aim is to sell my product and in turn take his money. The difference what we call PROFIT, is actually my earnings for (a) the efforts I have put (b) the risk I have taken.

How well I do the above is what holds the key to the success or failure of a business ?

The above is true when my product will sell. How about a scenario where my product does not sell? Not because there is no demand but because some one else sells the same or better product better than me and at a better price. I stand to loose the customer. This brings out the question what is the true value of my product and what is the true value of my customer.

PROFIT: Determined by the complex interplay of value, price and cost and its maximization are what every business tries to achieve. In other words maximization of the shareholders wealth, ROI and so on and so forth. The issue how does one go about doing this?

The reason for so much importance to the compliance is because of more and more weightage given to enhancing shareholder value rather than enhancing customer value. Although the irony its customer value that's creating shareholder value. The sales value declared in the financial are taken for granted without any thought on how and why the sales value has been arrived at.

What is driving the sales?
We have a measurement of the shareholder value with all those EBIDTA, EPS, PE, ROI ratios. All these are meaningless unless we measure customer.
Do we have a measurement of CUSTOMER VALUE?
Cost based pricing and price based costing in my opinion are both insufficient.It should be customer value based costing and pricing.
In my opinion Customer value comes into play not when they are there but when they are not there. Most of the time the customer is taken for granted. We need to ask all those companies that were either closed down or are in the verge of closing down and the reason for the same. As the scale of operations increase the customer value increases significantly. E.g. I put a plant and mobilize resources to take my product to my customer for Rs. 10 billion. Tomorrow another player enters the market with a better product and better delivery capability due to which I loose my customers and my business, what is my loss, is my customer value.

Customer value is not the PROFIT per customer that I WOULD have earned but the LOSS per customer that I WILL incur if they are not there/ i loose them. How do I come down to a unit value is based on the capacity built up to serve customers. How well (efficiently and effectively) I either structure the Rs.10 billion or the customer base or both is what determines the cost, the premium that the customer is willing to pay for my product (which is based on his perception of the product value i.e. brand, quality, service, performance, resale value etc) is what sets my premium / margin and the addition of the two is my Price. This significantly varies between market segments. The day the business goofs up on cost structuring (which is a good quality product taken to the customer in the best possible manner and quickest possible time) and customer perception it's got to loose both the customer and value.

The shareholders expectations is taken care by the generalists and compliance oriented accounting. In terms of money received, deployed and returns generated and reported. We as management accountants need to shift our focus from shareholders and bring it to customers for the sake of shareholders because business revolves around customers and not shareholders. Interests of shareholders are taken care automatically when the interests of the customers are taken care of. Vice versa is not true.

Management accountants as bean growers need to be customer/ business centric and focused. Strategy is how best I can add and create value to my customers and thereby my shareholders using management accounting tools and techniques. To do all that I have said above one needs to focus on management accounting, customer measurement, cost measurement, cost management and cost control. Once the focus shifts to customer value and cost, other things revolving what determines cost (i.e. financial, physical, technical and human resources) are automatically addressed to, managed and maximized. It thus adds value to the needs of the customer which in turn adds value to the shareholders.

Just a thought.

Your value additional thoughts, opinions, perspective solicited.