Editorial

Security

Politics

World

Letters

Sports

Obituaries

Archives

Biz Buzz by Iris & Aved

From time to time, the business community and public investors are bombarded with accounting concepts and pronouncements by the Institute of Chartered Accountants, the Accounting Standards Committee, the Securities and Exchange Commission and other such organisations. The ordinary investor and some business leaders are often bemused by what the accounting experts refer to as Accounting Standards.

Stakeholders, and there are many types of them, ask questions that fumble accountants. The recent corporate failures include some enterprises such as Enron which have complied with US Accounting Standards and rules to the letter if not in spirit. If Accounting Standards, - U.S. Generally Accepted Accounting Practices ( US GAAP) permitted such misleading financial reporting, how good are those standards? The proponents of Accounting Standards say that Enron would not have been able to mislead the investors, creditors and stakeholders if it adopted International Accounting Standards (IAS) which are soon going to be the benchmark for national standards on accounting.

Reports are many of companies such as the manufacturer of Mercedes Benz which are listed on the US and other country stock exchanges producing US GAAP financial statements which reflect financial results substantially different to the information in home country financial statements. How can a global capital market use financial statements when such disparities exist in Accounting Standards of developed and highly industrialised countries? The accounting gurus again, take cover under the international project aimed at harmonising Accounting Standards around the world with IAS as the model.

Accounting Standards do not recognize the value of intangible assets such as company name, product names or brands, internal processes, a well trained workforce and the customer base. Accounting rules also require research and development costs to be written off as expenses (while allowing some development costs to be deferred under special circumstances) and do not adequately address off-balance sheet financing (Enron a good example) or the quality of investments. For instance, ten million rupees invested in highly secure Government Bonds will be stated at the same value as an investment in a more risky finance company which will of course give a higher return (interest).

The Chamber of Commerce also rejected the relevance of some Accounting Standards and picked on the IAS on Income Taxes, which when adopted as a Sri Lanka Accounting Standard (SLAS) will diminish some of the benefits of tax holidays granted and the SLAS on Segment Reporting, which provides sensitive information to competitors (who may not be under a statutory obligation to comply with SLAS). A senior Chamber leader asked why Sri Lanka which had advanced in adopting accounting standards well ahead of South East Asian countries lags far behind in economic development if Accounting Standards are relevant to the development of capital markets and the economy.

A survey of Standard & Poor's top 500 companies had shown that the market value (which is the value assigned to the company on the basis of markets expectation of future cash flows and risk) and the net asset value on the balance sheet is approximately 20%. The question is asked as to what makes up the remaining 80%. Intangible assets and non-financial value drivers and the difference between the market value or the assets and their accounting (net book) value are the possible explanations. If so, are the Accounting Standards and the financial statements prepared in accordance with such standards appropriate and adequate?

While there are many arguments for and against the relevance and usefulness of accounting standards, they should be regarded as providing the best guidance for the uniform application of accounting rules and policies in the preparation of financial statements. Till the various international projects to make accounting standards uniform are completed, accountants and business leaders should get back to basics and use fundamental accounting principles to truthfully report the financial performance and financial position of the companies they manage. This initiative will contribute to the prosperity of the business sector and the country. Failure to do so will destroy not only the credibility of Accounting Standards, but also the structure on which financial reporting and private sector enterprises are built.

News | Business | Features | Editorial | Security
Politics | World | Letters | Sports | Obituaries

Produced by Lake House
Copyright 2001 The Associated Newspapers of Ceylon Ltd.
Comments and suggestions to :Web Manager