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t is quite an irritating feeling when you fail to comprehend what your business is producing, financial wise that is. All you wanted is just to make profits, grow your financial wealth and make a living. How did that simple concept turned into some complex jargon like "Fair Value", "Goodwill", "Impairment" and lots more. The answer is: "Accountants (have) Gone Mad". Historically, accountants were no more than administrators doing clerical job of book keeping and safeguarding the money. That trust traders have on their "clerks" has become too important that it has to emerge as a sexy professional high tech technically demanding career. In the old days, bankers were the only money matter professionals because they, well, have what everyone needs, Money!. Now, bankers find themselves on par with accountants and its contemporaries such as valuers, actuarists and financial planners. Over the years since the industrial revolution in the west, accountants have established themselves as respectable professionals giving rise to famous names such as Price Waterhouse, Coopers & Lybrant, Peat Marwick, Arthur Andersen, Ernst & Young, Deloitte Haskins & Sells, Touche Ross, BDO, Grant Thornton and lots more. Mr Price and Mr Waterhouse, one of which is American and the other British, met on a steam engined boat on Atlantic ocean back in the 1800's - a meeting that gave rise to a partnership across the ocean removing the boundaries of nations and synergizing global presence. They badly needed to survive until the fierce competition reduced the main players from Big 12 in the 70's down to Big 8 in the 80's, Big 6 in the 90's and now Big 4 (PwC, E&Y, KPMG and Deloitte).
They even established their own societies across the globe to instill the sense of belonging and to achieve Maslow's "Self Actualisation" - eg. Institute of Chartered Accountants in England and Wales (ICAEW), Institute of Chartered Accountants in Scotland (ICAS), Institute of Chartered Accountants in Ireland (ICAI), Institute of Chartered Accountants in Australia (ICAA), Institute of Chartered Accountants in New Zealand (ICANZ) and a whole lot more in other countries such as USA, Hong Kong, India, Canada, Malaysia, Singapore, South Africa, and the list goes on and on. Some countries' accountants couldn't even unite between themselves resulting in more than 1 organisation for the profession. For example Australia has ICAA and CPA Australia who failed to merge back in the 90's. The UK has ICAEW, ICAS, ICAI and ACCA... what a havoc - the more the merrier?
Anyway, with the growing importance of systems automation, ICT and IT infrastructure in the financial arena, IT experts have become more relevant. It only makes sense that you are both an IT nerd as well as a bean counter - but not everyone wants to do a double degree in IT as well as Accountancy. So you end up having accounting firms hiring IT experts alongside accountants - both are meant to communicate with each other but somehow there is still a disconnect between the accounting profession and the IT world. In addition, growing numbers of boutique firms who offer consultancy and advisory services, coupled with the usual suspects such as BCG and Accenture, have made the accounting profession erode in relevance to the market except for the only bread and butter they strongly hold on to, "Auditing". No wonder why the accounting standards have changed significantly over recent brief periods of time and frequency as well as in complexity - to ensure that 'they' remain relevant to the market.
Survival is important, yes, but why to the extent that financial statements become too complex defeating its purpose of conveying message to the stakeholders, whoever they are? Businessmen, shareholders, bankers, analysts, reporters and employees,... they just want to know how much money the company is making and how much will that money be returned to them in the form of dividends, bonuses, interests, etc. I am not surprised that even the directors and the senior management themselves struggle to understand what their own financial statements are saying. They are the owners of the financial statements but the person who knows what that piece of document is talking about is an external party called the "External Auditors", ie the accountants. This is illogical. I am a Chartered Accountant myself and have had over 13 years of experience in the accounting and auditing profession... and I am disgusted by the mere fact that nobody understands the financial statements!!! believe me. I even had investment analysts calling me asking me to explain to them like a 6 year old.
As mentioned earlier, why make it incomprehensible? Accountants have many concepts that govern their conduct such as "materiality", "comparability", "measurability", "transparency", blah, blah, blah. But what is lacking, I mean SERIOUSLY lacking, is "UNDERSTANDABILITY" of the financial statements. The accountants, well, they understand but we don't. We pay money to them to look at the accounts and ended up having something that only they understand and we (stakeholders) don't? This must be the biggest con job ever in this modern age. How much do companies pay their auditors or accountants? Some public listed companies pay in the region of millions, whatever the currencies are, USD, RM, GPB, etc. Just go to the web site of Bursa Malaysia and browse through the annual reports of those public listed companies and see what are the auditors' remuneration. Then go and read the financial statements itself. Can you understand it? Yes, you (doctors, teachers, retirees, government servants, etc). If you think you can, then read the Notes to the financials statements on 'Accounting Policies'. Now, can you understand?
The Malaysian Accounting Standards Board (MASB) issued the first set of Malaysian accounting standards back in the years 2000 to 2004 whereby all companies in Malaysia had to undergo painful changes on how they account their businesses. This includes standards such as MASB25 for Deferred Tax and MASB24 for Financial Instrument alongside other equally complex and incomprehensible standards for areas such as business combination, intangibles, goodwill, impairment, hyper-inflationary market, construction and project accounting, contingent liabilities, leases, pension funds, mining and exploration and they even had one for agricultural activities! Like I said earlier, "incomprehensible". The market went through the pain to understand and familiarise itself with these standards and just as they have reached a comfortable level to live life back as normal, MASB suddenly changes its mind to converge with the International Accounting Standards (IAS). Why on Earth did they decide to embark on a "Malaysian" standard in the first place when they could have followed IAS right from the beginning? It is really not fair to expect the market to move at that speed because it requires time to get the various parties and stakeholders in the market to assimilate new sets of reporting regime. After all, the talk about harmonising global accounting standards have been discussed quite extensively since my 'uni' days in the mid 90's.
This whole debacle about Malaysian vs International standards was once demonstrated in the Annual Report(s) of a public listed company in Malaysia. The company had Reinvestment Allowances granted by either the Inland Revenue Board or the Ministry of Trades (MITI) which gives them the right to reduce taxes in the future. This so called 'right' represents an ability to make money via reduction in taxes, hence was regarded as future economic benefits, ie an "asset" really. Under the International standards, they are allowed to realise that asset as Deferred Tax Assets whereas the Malaysian standards prohibit such realisation. A disparity which put the company in a dilemma. Alas, the company produced 2 sets of financial statements, one in compliance with MASB and the other with IAS (or now known as International Financial Reporting Standards (IFRS)). This created havoc with the regulators such as Bursa Malaysia, Securities Commission (SC) and Companies Commission Malaysia (CCM). A few years down the road, the Malaysian standards, under FRS112 Taxation adopted what IFRS was doing, ie, allowing the recognition of Deferred Tax Assets for Reinvestment Allowances. Those of you who are not accountants may not fully understand this whole paragraph - it's ok. All you need to know is that, issues were created unnecessarily - full stop.
... the IAS has also evolved from a 'monkey' to a 'Homo Sapient' quite significantly over the last decade or so....
To be honest, even if MASB had decided to follow IAS/IFRSs right from the beginning, our lives wouldn't have been much better anyway. The IAS/IFRSs has also evolved from a 'monkey' to a 'Homo Sapient' quite significantly over the last decade or so. The latest Malaysian standards, ie the Financial Reporting Standards (FRS), which are supposed to mirror the IAS/IFRSs, have incorporated all the characteristics of the IAS/IFRSs. The talk of the town now (amongst the corporate community as far as financial reporting is concerned) is "fair Value" and "Financial Instrument" under the banner FRS139, FRS7, FRS132 and FRS9. The market is still trying to understand FRS139 and FRS7, as a progression from its predecessor FRS132 issued in 2002/2003 - but no, they had to now draft FRS9 as a replacement to FRS139 (or so I was told). These people need to get a life and know what is relevant to the market. Changes that does not add value,.. errrr will simply NOT ADD VALUE!!!!.
The standards on fair value accounting is the mother of all accounting standards. What it does is that it introduces vulnerability, volatility, instability, uncertainty, variability and of course stupidity in the financial reporting. The accountants can argue till the cows come home on the topic of fair value but at the end of the day, who cares whether it is scientifically or financially logical. Whatever happened to the concept of return on investments? From a bank, insurance company or financial institutions' perspective, fair value makes sense but from other commercially driven companies such as manufacturing, media, mining, retailing, services and transportation; it is way off tangent. The true profits of a business should come from the operations. Not from how its borrowings fluctuate from month to month. The profits from operations signify the performance of the company which is correlated with its immediate market sentiments such as consumers' demand and supply of the commodities in the market or even the cost of running the day to day business operations.
Contaminating the Profit and Loss account with artificial gains and losses arising from fair value adjustments of financial instruments will cloud the true performance of the company. I call them "artificial" because the change in value of those items are just theoretical rather than actual. For example, bank loans are liabilities to a company. In my mind, a simple stakeholder's mind, whatever you owe is what your liability is. But no. The accounting standards require you to record the value of the loan at a fair value as if you had procured the loan at comparable terms from the market at any point of reporting snapshots. So if you had acquired the loan couple of years back at an interest rate less favourable than what a similar loan in the market now costs, say at 31 December 2009, then for no God-accepted reasons, your liabilities on your balance sheet goes up and your profit goes down by that adjusting amount. It's rather technically heavy to explain that behaviour but for your information, that is the behaviour.
One question that pops in our mind would be "Well, why are we concerned about the loans we can get from the market? We are only concerned about the loans that we have to pay. If we think that the loans that we have are being charged at an excessive rate, then,... go refinance it!!!!". Why book in the bloody differential in value in our profit and loss? Like I said, it does makes sense from financial academia type analysis but from commercial point of view, when you are not a bank, an insurance company nor a financial institution, such fair value element is nothing other than an unnecessary variable that adds to the volatility of achieving the returns to the investments. One can say that you can always report other adjusted profits (eg. EBITDA, Profits from Operations, etc) to exclude the volatility caused by fair value accounting but at the end of the day, under the Companies Act, the bottom line after taking into account fair value accounting, is what governs how much dividends you are allowed to declare to the shareholders of the company. So, it is still a nuisance.
Another concept that puzzles me since my first university lecture on accounting back in the early 90's (as a student that is - Accounting 101) is "deferred taxation". If a shareholder was to stand up in an Annual General Meeting and ask "What is this deferred tax assets or deferred tax liability?" I will be pissing in my pants if I was the CEO or CFO (or Directors for that matter). So far, I have never heard anyone answered that question in an understandable way to a lay man. To put it in simple words, deferred tax arise because of the disparity between accounting standards and tax law - the former is a By-Law and the latter a Law with parliamentary authority. The tax law has its own peculiar way of calculating tax due to reasons such as battling "tax avoiding schemes", broadening or speeding up tax collections for the government. The accounting standards on the other hand, simply takes the tax rate (say 25% as in year 2010) times the profits derived from the business as accounted for using the accounting standards.
This incongruence in tax treatment disharmonises financial reporting further with the need to calculate deferred taxation. When you have paid taxes to Inland Revenue Board (IRB) in accordance with tax law in excess of what the accounting tax would be, then that excess is the deferred tax asset. The converse, when you have paid tax to IRB less than what the accounting tax is , you'll have deferred tax liability. Nevermind whether you understand this or not. The main point is, why do accountants bother calculating the tax differently? If the tax law by the parliament is the legal way of determining the tax liability payable to the IRB, then that is your tax liability. Just put that into the accounts and everybody can go home to watch DVDs at 6pm. No, like I mentioned earlier, to not make accountants obsolete, they need things to do even if it does not make sense to non-accountants. I just don't comprehend why is there a need to even calculate deferred taxation, let alone doing it, which I am unfortunately forced to do.
To throw in another example of an unnecessary heartache of compliance, I refer to FRS117 Leases. Before the introduction of any standards for leases, leasehold land used to be classified as Property, Plant and Equipment (PPE) in the balance sheet. When it was introduced, every company in the market (in fact globally), had to reclass it out from PPE and disclose it separately as Long Term Prepaid Leases. This was simply because leasehold land does not represent ownership of the land but rather ownership of the rights to use the land for a particular period of time (In Malaysia its normally between 60 to 99 years). freehold land on the other hand remains as PPE because it is supposed to represent ownership of the physical land itself. What this concept lacks is that, the perception that actually has impact on stakeholders' mind.
A leasehold land of 99 years, to me, sounds like its my land for 99 years and if I want to sell it, I can. Why did a simple interpretation have so much bearing on how you disclose? I agree that FRS117 is logical in that sense but what (subsequently) confuses me more is that, the revised FRS117 commencing 1 January 2010 requires you to reclass the leasehold land back to PPE and there will no longer be a separate item called Long Term Prepaid Leases. What a waste of time, effort and resources for the past 4 years to identify, quantify and reclass those land out when its now back in. Maybe they now realised the freehold land is actually the rights to use the land for 999 years, hence things become further complicated and the best thing to do is to drop the whole concept altogether.
Departing away from the accountants, I would like to end my essay with "deadline" of financial reporting. The main reason for financial reporting is to convey useful information to the readers, ie stakeholders. What does "useful" means? Well, it must be of quality that allows readers to understand and make relevant business and investment decisions supportable by correct information. The last point on "correct" is a strong key word in the sentence. Once the information is incorrect, it will render the whole reporting useless, low quality (or No quality at all) and irrelevant for decision making. Correctness of financial information is a function of integrity of the source of data and diligence of the compilation of that data.
... this involves application of numerous ridiculous standards and the time required to get endorsement from the auditors themselves as bearer of the "True and Fair" policehood - a watchdog turned bloodhound....
A group of companies in a public listed enterprise will normally require more than 3 months throughput time in order to get that level of diligence; simply because each subsidiary company (whether local or overseas) will have to produce their individual sets of financial reports for consolidation by the parent company. This involves application of numerous ridiculous standards as mentioned throughout this article and not to mention, the time required to get endorsement from the auditors themselves as bearer of the "True and Fair" policehood - a watchdog turned bloodhound. This is a long and rigorous process involving conversion from foreign standards to Malaysian standards for the overseas companies, discounted cash flow analysis to support the carrying values of investments, PPE and deferred tax assets, assessment of the probability of liabilities chrystalising from legal cases, tax treatment reconciliation from accounting standards to tax laws and a whole list of work that your Finance department normally do that you don't know of (Unsung heroes because efforts are not valuable to others anyway).
Having all that in mind, I am bemused by the fact that some public listed companies make it a big deal to produce audited financial statements 1 month after financial year end. This puts pressure to all the other listed companies on the exchange. As a result, Bursa Malaysia has done a survey to scan market's readiness to produce audited financial statements as early as 2 months after financial year end. For some companies, this is achievable but for larger group of companies that consist diversified businesses and platforms, that normally comes with diversified issues and complexities as well, 2 months is almost impossible. Perhaps some of these big groups can do it with 20 people employed under their payroll solely specialising in producing financial statements. Companies that do not have deep pockets will just have to bear the pain with only having a handful of people or for some, just 1 staff to the very extreme. Financial reporting timeliness must observe the concept of cost vs benefits. If the benefit of producing the financial statements 1 or 2 months earlier out weights the cost of doing it, then by all means, let's all do it. If not (which is probably the case here in Malaysia), then please join the accountants on their way opposite the heavens.
* kopihangtuah
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