AccountSpeak: August 2007

Thursday, August 30, 2007

Pricing of energy products must reflect their economic value

Four disputes rock gas pricing in India

What is the future of gas in India? “Bright,” says Mr Deepak Mahurkar, Associate Director, PricewaterhouseCoopers. Natural gas as an energy resource is critical to the growth of the country, he adds. “Gas reserves in India appear promising. Discoveries are located far from centres of demand, which calls for robust infrastructure. If India’s gas usage is to reach 20 per cent of primary energy consumption by year 2030, $340-400 billion investment will be needed in the gas sector,” explains Mr Mahurkar in an email interaction with Business Line.

Saturday, August 25, 2007

Foreign-owned companies come under the national regime

On how to set up business in Russia

Strong trade, cultural and diplomatic ties for decades between India and Russia (and the erstwhile Soviet Union) are now seeing a new dimension in the form of more Indian companies seeking to set up shop in Russia, with Tata Tea being the latest to announce plans in this direction.

However, although Russia opens up huge opportunities in many spheres, doing business in the country may be a tricky affair, especially at the starting point, according to Mr Alexander Mednikov, Deputy Managing Partner of the Moscow- based Jurinflot international law firm, which specialises in maritime law and issues of legal support for foreign investors doing business in the Russian Federation.

Risk management has assumed enormous significance

Good governance demands disclosure of risk perceptions

The Hyderabad-based Institute of Insurance and Risk Management (IIRM), jointly set up by the IRDA and the Andhra Pradesh Government in 2002, which has been offering one-year post-graduate diploma courses in insurance and risk management, recently opened an International School of Actuarial Sciences (ISAS).

The school, which offers a two-year post-graduate diploma course in actuarial sciences, is supervised by the IIRM board and the Managing Director, Mr Vepa Kamesam.

Speaking to Business Line on risk management and how useful it can be for various industry sectors, Mr Kamesam said that risk management has assumed enormous significance as the volume of money passing through the financial system a s a consequence of globalisation is growing at a very high rate.

Introduction of a new methodology for calculating P&L charges

Actuary’s role vital in the new accounting standard on employee benefits

The revised AS-15 accounting standard, which ushers in a new era in accounting for employee benefits, will have a substantial impact on the financial statement of employers, says Mr Chris Mayes, Benefit Consultant, Watson Wyatt, a global consulting firm that partners corporates on people and financial issues, particularly employee benefits and insurance and financial services.
Speaking to Business Line on the implications of the revised accounting standard, he said that it would make the role of the actuary vital, not just to calculate actuarial valuations of the liability with respect to employee benefit schemes but also to fully understand the new disclosures.

Convergence no longer is an option or an alternative but a requirement

Take IFRS convergence challenge head-on

International Financial Reporting Standards (IFRS) came into prominence when the EU (European Union) decided to adopt it for all its members starting 2005. Since then, IFRS has spread rapidly across the world.
There are now more than 100 countries where IFRS is required or permitted. Last week, the Institute of Chartered Accountants of India (ICAI) decided that Indian Accounting Standards will be fully in line with the IFRS from April 1, 2011, for public listed companies and extended to other entities in a phased manner. How do accounting professionals react to this development? Business Line sought to find out.

There is nothing better than having a satisfied workforce

Standards needed for computation and audit of non-GAAP measures

Making non-GAAP measures routinely available to investors will provide a powerful incentive to managements to manage their companies in a way that would be beneficial in the long term, says Mr Dolphy D’Souza, Partner, Ernst & Young.
Non-GAAP financial measures, for starters, can be numbers or ratios based on amounts that may be different from what are used for computing measures disclosed as per GAAP (generally accepted accounting principles).
For instance, “economic value added” is a financial non-GAAP measure, while employee turnover is a non-financial, non-GAAP measure. In contrast, EPS (earnings per share) is an example of a GAAP measure.

Provide a platform for Indian businesses to participate in global e-commerce

Pseudo-intellectualism continues to be attached to computer crimes

In the fight against cybercrime, companies are moving towards multi-layered defence of information resources, also referred to as defence in depth, says Dr K. Rama Subramaniam, an information security professional specialising in cybercrime management and CEO of Valiant Technologies, which provides consulting and training services in the areas of information security and digital forensics.

Speaking to Business Line on the gravity of the problem and the challenges that keep popping up with alarming regularity, he said that the use of strong technological defences, coupled with well-orchestrated policy-driven controls s upported by clear demonstration that the company takes security seriously, is the best way to minimise the occurrence of cybercrime.

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The quality of the reported numbers will depend on the quality of the auditor

Effective audit committee can ensure financial reporting quality

The constitution of an audit committee to review and be satisfied with the adequacy of a company's financial reporting process, as mandated by the revised Clause 49, is a significant step in the right direction, according to Mr Navin Agrawal, Director, Ernst & Young India.

However, a few areas of concern remain, he added. These include the quality of the work done by the auditor and rules relating to his independence and the ability of the audit committee to discharge its role in an effective manner, given the "current milieu of rapidly changing accounting literature."

Foreign-invested enterprises

How to set up a business in China

As one of the world's fastest growing economies and a major low-cost manufacturing destination, China is too important a market to be ignored by any multinational. But doing business in China remains an area fraught with various speed-breakers.

The country's entry into the WTO has brought a tremendous change in the Chinese legal system, especially in the field of foreign investment, according to Ms Shirley Chin, Partner of the Beijing-based Alliance Law Firm, and Ms Yuhua Yang (of the same firm), who specialises in corporate restructuring, mergers and acquisitions, banking and financing and securities.

Use of technology and FTS will only increase in the years to come

Act proactively to pre-empt fraudulent behaviour

The corporate world is facing a growing incidence of fraud, where the source is internal or external, apart from encountering issues around recent phenomena like phishing and skimming and whistle-blowing on suspicion of fraud.

In this context, forensic technology services assume greater relevance, according to Mr R. Benton Armstrong, Global Leader, Forensic Technology Services, PricewaterhouseCoopers (PwC).

Speaking to Business Line on the PwC division's operations in India and the challenges arising out of corporate fraud, he said that forensic technology services (FTS) are also relevant to American multinationals operating in India, as they need to comply with the Foreign Corrupt Practices Act (FCPA) and anti-money laundering (AML) standards. "Besides, AML could also be enacted as a requirement for Indian banks."

Co-operation is the way forward

In a knowledge economy, professionals require new skills

Acquiring another professional qualification like CFA should never be construed as professional misconduct, as such a stand would be illogical and unreasonable, according to Mr N. J. Yasaswy, founder-Member of the ICFAI.

Sounding upbeat after the Supreme Court ruled in the ICFAI's favour in an 18-year-old case against the ICAI, he told Business Line that no professional institute should do anything that violates the fundamental rights of its members.

The ICAI had, in 1989, prohibited its members from using the description `Chartered Financial Analyst' or its abbreviation, CFA.

Investments in power generation are immediate prospects

Power needs access to long-tenure funds

Poor collection of revenues and high transmission and distribution (T&D) losses constitute the chief source of inefficiency in the Indian power sector, according to Mr Arvind Mahajan, Executive Director, Advisory and Head (Energy, Infrastructure and Government), KPMG.
Speaking to Business Line on the challenges facing the sector, he identified cross-subsidisation and reliability of power as other major issues. "Aggregate technical and commercial losses constitute a key metric. They reflect the difference between the power procured by distribution companies and the sale of power for which they are able to realise revenues — the difference is lost as unbilled power or uncollected revenues."

The job of the leader is to `get everyone to share the same specific mindsets'

Distil `the company's value algorithm' into `an elevator speech'

Quick promotions, salary hikes, perk heaps, ego massages... Despite all these, workers are restlessly scanning the job horizon for the next stopover. Which only leaves the business leaders as confused fire-fighters all the time. To help them, here is a recent research from Accenture (http://www.accenture.com/): On ``how to create a culture of high performance in an environment with high workforce mobility''.

A culture of high performance, a.k.a. performance anatomy, has three components — mindsets, practices and results. "When the mindsets are aligned, they generate operational practices that, in turn, lead to superior business results. Left on its own, however, the performance anatomy of even the best organisation will remain at rest, a prisoner of inertia."

The RBI's Credit Policy Statement

Governor-speak can add fizz to `considerable fuzziness'

`Long on language and short on measures' is how the Reserve Bank of India Governor, Dr Y. V. Reddy, described the Annual Policy Statement for 2007-08, announced last Tuesday. The `short' part of the cryptic phrase may interest experts who generally like to analyse and dissect the policy to pick holes in the measures. For the rest of us, who are ready for a long haul, a patient ploughing through, of the 73-page, 30,000-word, two-lakh-character output from the RBI can unearth many examples of linguistic acrobatics.

Indian GAAP is sufficient, relevant and clear

Financial statements have become unintelligible to lay readers

Three out of four CFOs (chief financial officers) say that companies should send to shareholders soft copies of financial statements, rather than the printed booklets. Almost one in two CFOs `strongly recommend' industry specific accounting standards. Over 90 per cent applaud the sarkar's e-initiatives such as MCA-21 as revolutionary. About 95 per cent of the CFOs are interested in convergence with global accounting standards, mainly IFRS (International Financial Reporting Standards). And on whether the ICAI (Institute of Chartered Accountants of India) should be the sole standard-setter, there seems to be a consensus.

These are among the findings of a recent survey conducted by Ernst & Young India, based on the views of 125 CFOs, of whom 78 per cent were from listed companies. "The most important point in the entire survey is the fact that though 62 per cent of CFOs feel that CEO/CFO certification is a high-risk area, actually 81 per cent of them still feel that this should be mandated," says Mr Rahul Roy, Director, Ernst & Young India Pvt Ltd, speaking to Business Line.

An effective compliance programme in place will minimise the risk to the company

Corporate compliance programme to combat the `corruption' risk

Corruption closer home is in a comfort zone, cosily with its perpetrators who span all levels of society. Corruption is the leading type of fraud in India, finds a recent survey by KPMG. Theft of cash has paled to the second place. At 33 per cent, `corruption' is more than three times of what `false financial reporting' scores, and seven times of `embezzlement'. Not surprising, because India is ranked 70th, along with Brazil and China, amongst 163 countries in the Transparency International (TI) Corruption Perception Index 2006, with a score of 3.3 on a scale of 10.

It may be easy to give up saying that any clean-up effort would match with the labour that Hercules was faced with at the Augean stables. Yet, we may draw lessons from the US Foreign Corrupt Practices Act (FCPA), which imposes severe civil and criminal penalties on US companies and individuals who bribe or offer to bribe foreign government officials to obtain business.

"Compliance with the FCPA is challenging in many developing countries It is especially challenging in countries where corruption is widespread and the government continues to own and manage many of the country's largest companies," says Mr Deepankar Sanwalka, Executive Director, KPMG, interacting with Business Line.

Biomass power is not only firm but it also promotes rural employment

Factor carbon emissions into fuel costs

When climate change worries and global warming fears surround us, as they do now, solace comes in the form of those who talk `green'. Such as, Mr Banmali Agrawala, Managing Director of Wärtsilä India Ltd, and perhaps, `the Sexy Green Car Show' in the Eden Project, UK.
Many a `beauty' is lined up at the Eden Show, on till April 15. Sean O'Grady writes (http://www.belfasttelegraph.co.uk/) about `the ultra-economical little Volkswagens and Citroëns', `future- facing carbon-fibre technology and biofuels, thanks to Ford and Saab', and `Le Mans racer that can run on biodiesel derived from the seeds of jatropha trees'.

Demand for air travel is not infinite

Aviation demands cost containment

A section on India notes that the airline market here developed with little oversight or intervention, leading to `quite unfettered expansion and cutthroat competition', and proving costly for all the players. More problematic than the not-so-profitable environment are that `airports and facilities are inadequate and the large aircraft orders currently placed are unevenly matched with available pilots'. As a result, expensive measures are being undertaken to fill the gap, says Unisys. "It is likely that there will be considerable upheaval before equilibrium is achieved."

Talking to Business Line about the study, Ron Kuhlmann, Editor-in-Chief of the Unisys aviation publication, Scorecard, says that it would be a significant challenge to find any writing on global aviation in the 21st century that did not highlight the emergence of India and China. "Both are lands of rapid development, enormous populations, and untapped demand that put suppliers aflutter over the market potential."

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Start with transparency in shareholding and investment structures

Weird turns in a wireless deal

Last week, the FIPB (Foreign Investment Promotion Board) deferred a decision on Vodafone's proposal to acquire Hutch-Essar. Vodafone, the UK-based mobile giant, wants to buy a controlling stake in Hutch-Essar for over $11 billion, and the FIPB nod is needed for the deal to be completed. The Board is delving deep into the transaction, even as different Ministries and the central bank are said to be studying if the structure of shareholding violates the norms of FDI (foreign direct investment).

To know more about the weird turns in the wireless world, Business Line connected with Mr George Vivek Durai, Partner, IndoJuris Law Offices, Bangalore. Mr. Durai focuses on mergers and acquisitions, real estate and technology law. His experience in the telecom, technology and media sectors includes assisting in domain name disputes, advising on patent strategy, drafting online trading rules for a stock exchange, and negotiating the procurement of a telecom network.

The CAs are able to act objectively and with fairness

Who are `neutral CAs'?

Recently, there were reports that the CBI (Central Bureau of Investigation) would take the help of `neutral CAs'. The context was a preliminary enquiry against Uttar Pradesh Chief Minister Mulayam Singh for allegedly amassing assets disproportionate to his known sources of income, and the CBI planning to use the services of a neutral team of chartered accountants (CAs) to scrutinise the evidentiary material. Business Line contacted Mr Sunil Talati, President of the Institute of Chartered Accountants of India (ICAI), to know more about the `neutral CAs'.

Management Consultant

The evolution of `management consultant'

Management guru Peter Drucker once confided, "My greatest

strength as a consultant is to be ignorant and ask a few questions." That may not comfort most of us who invariably find management consultants to be an inscrutable class of people. But it should comfort us that we are not alone; the Finance Ministry too seems to have the same problem. Why else would North Block be changing the definition of `management consultant' over the last two years?

`Management consultant' stands at No. 18 in the list of services, sandwiched between `interior decorators' and `practising chartered accountants', on www.servicetax.gov.in. Services rendered by these professionals came into the service tax net with effect from October 16, 1998, along with nine other services.

Specific provisions on buyback of shares

Budget has little for corporate restructuring

Budget 2007 has no proposal advancing the cause of restructuring other than the one specifically covering the merger of Air India and Indian for the purpose of utilisation of carry forward of losses and unabsorbed depreciation under Section 72A of the Income-Tax Act. Thus rues Mr P. K. Vijayaraghavan, Associate Director, PricewaterhouseCoopers Private Ltd. "Also, the proposal denying tax holiday benefit under Section 80IA to companies owning undertakings engaged in the business of infrastructure, industrial parks, generation, distribution or transmission of power will act as a dampener to restructuring," he adds. "The benefit will not be extended to such undertakings if they are transferred in a scheme of amalgamation of de-merger after March 31, 2007." Mr Vijayaraghavan is, however, hopeful that the needs of corporate restructuring will be addressed in the new tax code. Here are his answers to a few questions from Business Line.

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Only players with lean cost structures can survive and grow

Tax efficiencies and treaties help M&A

Not many believe that accountants can make some of the best matches — of businesses, that is, going by what Arun Gandhi did for the Tatas, and Gautam Doshi, in Reliance. "The recent involvement of CAs (chartered accountants) in M&A (mergers and amalgamations) and takeovers clearly proves that CAs in industry are now not stuck only to finance and accounts. They are giving best business consultancy services and helping managements take major and vital decisions," acknowledges Mr Sunil Talati, the President of the Institute of Chartered Accountants of India.

To know how accountants study the M&A field, Business Line interacted with Mr Hitesh Gajaria, Partner, BSR & Co, Chartered Accountants. As `Sector Head - Pharmaceuticals', he focuses on international tax and transfer pricing issues too, apart from watching the deal terrain.
"Before the mega deals of Corus, Novelis and Hutch were announced, Indian pharma companies had stolen the thunder in the Indian M&A space with acquisitions worth $2.5 billion in the last couple of years," notes Mr Gajaria. "Most of these acquisitions were strategic and were primarily driven by consolidation pressures in the pharma generics space globally, helped in no small measure by easy access to capital."

Global Transfer Pricing

Transfer pricing presents substantial tax planning opportunities

Chiltern Plc is a London-based company that advises clients on international taxation. "At Chiltern we make it a point of being different. Not for the sake of it but because that is what our clients want. We're large enough to offer the very best advice and support, but we're independent, and small enough, to offer a genuinely personal service," declares http://www.chilternplc.com,/ the company's site. Chiltern is a member of Taxand, `the first independent global tax alliance of independent and specialist tax firms (now including more than 1,500 tax professionals with firms in 33 countries)'.

As the Head of Transfer Pricing at Chiltern, Shiv Mahalingham, is definitely different. Before embarking on a career in transfer pricing, he played three seasons of basketball in the Southern Conference of the English Basketball League, as one learns from his bio. "Shiv has previously worked in the Big 4, predominantly advising large multinational companies in relation to transfer pricing and value chain optimisation.

He regularly publishes articles in the international trade press and, at the age of 26, was accepted as one of the youngest fellows in the history of the UK's Chartered Institute of Taxation on submission of his thesis on modernising UK tax legislation whilst maintaining the competitiveness of the UK economy." Here is Shiv, taking on a few questions from Business Line.

Responsibility for risk management

From compliance to performance

Has the risk landscape of companies changed over the past 2-3 years? This was the subject matter of a recent study, `Board Members on Risk', conducted by Ernst & Young (E&Y). After tabulating the views of 150 independent, non-executive board members from 16 countries, E&Y found the response to be an emphatic yes. Over 70 per cent of the respondents were convinced that levels of operational risks in business have risen, and 40 per cent of directors felt that the risk potential has risen significantly. "There are many reasons for this growing risk awareness, but in large part it is due to new legislation such as the Sarbanes-Oxley (SOX) Act in the US, and the revised Clause 49 of the SEBI (Securities and Exchange Board of India) listing agreement," says Mr Ram Sarvepalli, Partner, Risk & Business Solutions, E&Y.

As you may be aware, the Clause in question prescribes corporate governance guidelines, which require the board to be informed about the effectiveness of risk management in the company apart from requiring the CEO and CFO to certify the effectiveness of the internal control systems in the company.

The Clause seems to be bringing about a change. "Board members have begun to seek and rely on the advice and support of their controllers and financial auditors. Even board members who are not on the audit committees are today well aware of the great importance of the topic of compliance," says Mr Sarvepalli, interacting with Business Line. Here are his answers to a few more questions.

Most Indian refineries have low to medium complexity

`Energy' talk for the `power' hungry

Power is a happening sector. Newer projects have been coming up to meet demand, and grids carry power across borders. Meanwhile, energy prices continue to cause concern. To know more about energy-related issues and the economics of power, Business Line interacted with Mr Hiranyava Bhadra, a member of the Infrastructure Advisory Group in KPMG. He is an MBA (from XLRI) and a B Tech in Electrical Engineering (from IIT Madras). Mr Bhadra has a special interest in the energy sector, and has been involved in assignments on policy formulation, portfolio analysis, transaction advisory and risk analysis, business restructuring and change implementation. Here is, Mr Bhadra answering a few quick questions.

The demand for management accountants, on a global basis, is increasing

Strategic management accountants require more than technical competencies

The National Convention of the Institute of Cost and Works Accountants of India (ICWAI), slated later this week at Hyderabad, seeks to reposition management accounting as a value adding management process, rising much higher than the usual financial or cost accounting framework. The ICWAI is drawing strength for this initiative from two premier institutions in the field, namely, Certified Management Accountants of Canada (http://www.cma-canada.org/) , and the Institute of Management Accountants of the US (http://www.imanet.org/) . Participating in the convention will be Mr Steve F. Vieweg, President and CEO, CMA of Canada, and Mr Paul Sharman, President and CEO of IMA.

Mr Vieweg works closely with CMA Canada's National Board of Directors in setting the strategic direction for the Society of Management Accountants of Canada, developing and implementing business strategies, and building partnerships with allied professional organisations in Canada and internationally.

Mr Paul Sharman, since January 2004, when he was asked by IMA's Executive Committee to manage the association's operations, has established an entirely new direction for the association, its members, and staff. His mission is to advance the management accounting and finance profession through certification, superior professional ethical standards, and competence-based continuing education.

Business Line interacts with Mr Vieweg and Mr Sharman to know their views on a few management accounting issues.

Young students are attracted to the cost accounting course

Cost audit has a major role in consumer protection

Meet Mr Dhananjay V. Joshi, president of the ICWAI (Institute of Cost and Works Accountants of India). He is a Fellow Member, both of the ICWAI and the ICSI (Institute of Company Secretaries of India). Mr Joshi initiated the formation of `Technical Advisory Board' in the ICWAI and was the first chairman of this Board, which renders technical advice, and gives opinions and clarifications on queries raised by professionals and the industry. Here's his take on a few questions from Business Line.

On what to visualise in 2007 and beyond

`Global debate on convergence of standards is hotting up'

Mr Rahul Roy, Director, Ernst & Young India Pvt Ltd, is the youngest person to have headed the Institute of Chartered Accountants of India. He has served on a number of international bodies, which include the ethics committee of the International Federation of Accountants (IFAC) , an advisory committee of the International Accounting Standards Board (IASB), and committees constituted by the Government of India, SEBI, RBI, etc. He specialises in international and Indian financial reporting and assurance. Mr Roy answers two questions from Business Line, on the year gone by, and on what lies ahead?