Accountants generally steer clear of monetary policy pronouncements

Interest rates never cease to hold interest

Lady Macbeth, with 'a heart so white' says, 'A little water clears us of this deed' and exclaims, 'How easy is it, then!'

The recent hike in reverse repo rate by 25 basis points may likewise seem little for bystanders. Because the change is but small — a mere quarter of a percentage point — though the impact is felt on several other economic variables.

"A very little little let us do. And all is done. Then let the trumpets sound the tucket sonance and the note to mount; for our approach shall so much dare the field that England shall couch down in fear and yield," writes the Bard in King Henry V. Yield, yes, of bonds, is just one of the variables that reacts sharply to even the minuscule changes in interest rates. There are similar responses to interest hikes from sectors such as home lending and corporate credit, for they are all interconnected gears that turn in tow with the tweaking of the master wheel.


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He that will have a cake out of the wheat must needs tarry the grinding

Chocolate teacakes or 'unjust enrichment'
"Molly, my sister and I fell out, and what do you think it was all about?" Thus begins a nursery rhyme with a question. The answer is simple: "She loved coffee and I loved tea, and that was the reason we couldn't agree."

Marks & Spencer plc and the UK taxman fell out, and what do you think it was all about? Chocolate teacakes said M&S, 'unjust enrichment' said the taxman, and that was the reason they couldn't agree.

"The problems concerning the VAT (value-added tax) treatment of chocolate biscuits and cakes are by now something of a legend. I remember them from my student days, and so I was surprised to note this week that problems are still rumbling on and on and on," writes Nichola Ross Martin, in an article Storm in a teacake - the never-ending saga of VAT and chocolate, dated July 17 on AccountingWEB.

"For many years, starting with the introduction of VAT in 1973, the Commissioners of Customs and Excise took the view that M&S teacakes, which are covered with chocolate, were biscuits and therefore standard-rated," narrates the text of an earlier judgment of House of Lords.

The supply of food is, in general, zero-rated for VAT, one learns. "But there are exceptions. One exception is confectionery. And there is an exception to that exception: cakes or biscuits are in general also zero-rated. There is however an exception to that exception to the exception, namely, biscuits wholly or partly covered with chocolate. They are standard-rated."

As tricky as a recipe! Perhaps, that's why M&S got mixed up and kept accounting for VAT, for over two decades. Then, in September 1994, M&S admitted that it had been wrong. Teacakes were actually cakes and should have been zero-rated, said the company. It, therefore, claimed "repayment of all the VAT for which they had wrongly accounted over the years, totalling £3.5 million."

What did the taxman say?


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Master, for my hand, both our inventions meet and jump in one!

On separate paths of standard evolution
T. N. Manoharan, President of the ICAI, informs that the draft AS is broadly based on IAS 39. The forthcoming standard aims to lay down "recognition and measurement principles for all financial instruments, including derivative instruments, in a comprehensive manner," he elaborates.

Manoharan says that the draft of the proposed AS will be circulated shortly 'among the specified outside bodies and other interest groups, for comments'. After considering the comments received, the ASB will finalise the Exposure Draft of the proposed AS and issue the same for public comments. "The final AS on the subject is expected to be released by the end of this year," outlines Manoharan.

By which time, the central bank's norm should be out. In Act I, Scene I of The Taming of the Shrew, Tranio tells Lucentio, "Master, for my hand, both our inventions meet and jump in one." He gets a fast response: "Tell me thine first." Is the ICAI more like Lucentio? Perhaps, a subject as crucial as accounting for derivatives would have been better done justice to if the professional body and the central bank had put their heads together, rather than go on separate paths of standard evolution and reinvent different wheels.



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Dress code for CAs

From uniform accounting standards to standards on uniforms for accountants
CAs, breathe easy for now, because nothing final has emerged from the portals of the ICAI, where the dress code is still 'under formulation', more like a bitter medicine. "It will include Indian national dress, besides suggesting full hand sleeves shirt, trousers and shoes for gents; saree, salwar kameez or pant and shirt for lady members," assures the prez. "Subject to conducive climatic conditions, wearing of suit or blazer with tie shall also be recommended," he promises.

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Mountains of bank data sifted through...

Financial terrors in dark databases
A worrisome aspect of Levey's statement was his disclosure that as part of sleuthing, his office had, using powers under the International Emergency Economic Powers Act of the US, subpoenaed records on terrorist-related transactions from Swift (Society for Worldwide Interbank Financial Telecommunication), the 'cooperative' mentioned in the news report.
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Exotic derivatives have been compared to pornography!

Because derivatives are merely contracts, just about anything can be an underlying asset
More innovative and less usual derivative products are often called 'exotic', explains www.hmrc.gov.uk, the site of the UK taxman. "The term has no precise meaning. Exotic derivatives have been compared to pornography: both are easier to recognise on sight than to define and the definition of both is dependent on time and place," it adds, citing William Margrabe's Derivatives Strategy. For example, "Interest rate and currency swaps were exotic when they first appeared in the 1980s, but are now standard financial tools. Similarly, proprietary products originally developed by merchant banks or other financial institutions to meet the needs of particular clients may in time diffuse more widely into the market."
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