Contemporary Issues in Finance

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The very first steps towards international accounting standards date back to 1959, when a founding partner of a major European firm of independent accountants urged that work begin on this subject (Choi, Frost, & Meek, 1999). Since then, the work of accounting and non-accounting organizations culminated in the setting up of the International Accounting Standards Committee (IASC) in 1973. In 1997 the IASC changed its structure to "bring about convergence between national accounting standards and practices and high quality global accounting standards."

Convergence with International Accounting standard (IAS) and International financial Reporting Standards (IFRS) has gained momentum in the recent years due to the global financial landscape and significant transformation of accounting policies. The changes in the business climate have increased global competition which results as market-based economies, and rapid technological changes. Capital markets operate more efficiently when investors have access to high quality financial information

For integrating the economy of the countries all the countries are going in the direction of adopting IAS and IFRS to make themselves comparable in the global economic environment. It is essential for a company to prepare the financial reports as per Generally Accepted Accounting Principle (GAPP) of the country. But since the business of the companies are not limited up to home country it is essential to make the financial accounts as per the GAAP of operational country and then it is required to reconcile all such reports for the purpose of consolidation as per GAPP of the country to which the parent belongs. This increase the cost of preparing the financial report and also it is difficult to make the segment of the report in as per the GAPP of all countries. For effective evaluating the position of the company the Accounting standards followed must be same in both the countries, and for this purpose the International Accounting Standards were issued by the International Accounting Standard Committee. (IASC)

IASC was the body which issued International Accounting Standards from 1973 to 2000. In 2001 IASC was replaced by International Accounting Standards Board (IASB). IASB is independent body and consists of members from nine different countries around the globe having variety of functional backgrounds.

International Financial Reporting Standards (IFRS), the new version of International Accounting Standards (IAS) are issued by International Accounting Standards Board (IASB). The International Accounting Standards Committee (IASC) Foundation, based in London, is the oversight body of the IASB and is governed by 22 trustees, chaired by former US Federal Reserve chairman. The IASC Foundation is funded by contributions from the major accounting firms, private financial Institutions and industrial companies throughout the world, central and development banks, and other International and professional organisations.

IASB adopted all the existing IAS (numbered 1 to 41) issued by IASC (before 2001) and decided that it will make amendments in the present IAS and all future standards issued will be called IRFS. IASB is reviewing the IAS and has amended as well as replaced some of them with new IFRS. Several interpretations of Standards have also been issued. Broadly, IFRSs refers to the entire body of IASB and IASC pronouncement.

Over 70 Countries have either approved or mandated application of IFRS for their domestic listed companies including Austria, Finland, France, Russia, Sweden, Germany, UK, Australia, Singapore, Taiwan, and Mauritius etc. till 2009. With the emergence of global financial markets, IFRS is increasingly becoming relevant and overshadowing regional accounting standards.

The purpose of this IFRS is to ensure that the financial statements under IFRS an entity, as well as their interim financial reports concerning a portion of the exercise covered by such financial statements, contain high quality information and provides benefit to users.

Globalisation of IFRS is also necessitated as global financial markets are integrating and investors are looking for more consistency in the financial reporting of multinational corporations.

The Asian crises of 1997-1998 marked an impetus for supporting international accounting standards, where many countries either adopted international accounting standards in their entirety, or with minor changes. Several companies in countries that did not implement international accounting standards, adopted international accounting standards nonetheless for their own financial statements in order to be able to compete in international markets (Hansen, 2003). Similar accounting adoption steps have been taken by Australia, Canada, and Russia, as well as in several countries in the Middle East and North Africa.

In India, The Institute of Chartered Accountants of India (ICAI) has announced that IFRS will be mandatory in India for financial statements from the periods beginning on or after 1 April, 2011. The existing accounting standards will be revised to make them compatible with IFRS. The banks are also not so far in accepting the new IFRS. The Reserve Bank of India has stated that for preparing financial statements all the banks have to adopt IFRS and make their records as per it from the periods beginning on or after 1 April, 2011.

The Adoption of IAS and IFRS will change the accounting policies in India, which look like a big task but it will be a benefit to Indian companies now their financial records can be comparing with anyone in the world. The Multinational Corporation can also free from making different-different annual records as per the Local GAPP of their working country. It will also give our professional a chance to be global. They also get the new countries for work new job opportunities.

International Financial Reporting Standards have been widely adopted by countries across the world and this has been achieved by transposing International Financial Reporting Standards into local regulations with the convergence.

Forensic Accounting Practices

Opportunity and Greed are the driving forces for theft. It is easy to put enough zeroes behind a number, and it's amazing how equally flexible morals become. After all how many years in prison would anyone do for accumulate a half a billion dollars illegally in his bank account?

With increasing white collar crimes, for example in the case of Enron, WorldCom, Parmalat, insurance scams, and computer crime, there is a need for a new breed of accountants- Forensic Accountants (FAs). With some magnifying glasses, computer print-outs, and calculators, this glamorous profession of forensic accounting is prospering with every passing day. Certainly Forensic Accounting is the best way to curb white-collar frauds. it is also known as Designing Accountants or Fraud Buster. Forensic Accountants are certainly a threat to the green eye shade image of the companies. In the aftermath of fraud FAs assess the accounting systems and accounts presentation if the numbers reflect reality.

In India the formation of Serious Fraud Investigation Office is the landmark creation for the Forensic Accountants. Growing cyber crimes, failure of regulators to track the security scams, series of co-operative banks bursting - all are pinpointing the need of forensic accounting, irrespective of whether we understand the need or not. This statement is enough for the chartered accountants in India to foray in this field. It is new child on the block. Both CBI and CID do the forensic accounting work. Until recently there was no separate community in India but now the movement of forensic community is gaining the momentum. .

In addition to the specialized knowledge about the techniques of finding out the frauds, patience and analytical mindset is also needed. We have to look beyond the numbers and grasp the substance of the situation.

Mayur, certified by the ACFE in 2001 brings out a bi-monthly magazine White Crimes on forensic accounting is of the view that in India, it(forensic accounting) is still a new concept", and adds that even banks are hesitant in approaching certified fraud examiners, and are mostly dependent on their internal auditors.

The growing number of regulator and the administrative agencies will demand the services in the nature of forensic practice. The Chartered Accountants in India is making plans to explore this field. Chartered Accountants are going to find essentially a type of forensic practice. The changing nature of the Accounting and Auditing & assurance standards also confirms this.

Financial crimes

Wipro Spectra mind lost the telemarketing contract to Capital one due to an organized crime. The telemarketing executives offered fake discounts, free gifts to the Americans in order to boost the sales of the Capital one. The internal audit revealed the fact and surprisingly it was also noted that the superiors of these telemarketers were also involved in the whole scenario.

In India CA can encompass the use of accounting and auditing skills and will use computers as an audit tool. C A's can be trained in forensic accounting. Forensic accounting Techniques includes data mining, fraud detection, Generalised Audit software(GAS), Audit Command Language(made by ALL Service Limited), Interactive data extraction analysis (ALL Dimension services ltd, 2002), etc. ACL is widely accepted in India for Private equities and other stakeholders as an effective tool to verify the accounts of companies and present a clear and transparent picture of the financial health of the entity concerned.

Gordon (1999:1) observed, "The world does not trust financial reports." ,Forensic accountants are now in a position to turn the Satyam scandal into an opportunity during tough times for getting jobs. A latest report suggests that the country needs more than 6,000 such professionals to check corporate frauds in India.

There is an acute shortage of forensic accounting skill sets in India and the demand of forensic accountants to fight corporate frauds in the country effectively increasing day by day. There are only 400 forensic accountants in the country though India loses approximately $40 billion because of frauds. There is one forensic accountant to handle the fraud worth $0.1 billion (Rs 480crore). If the shortage continues then India might witness some really serious frauds.

An effective accountant must be bright, honest, personable, passionate about his work and technically competent. The FA's task is exciting yet dangerous and the time is ripe for this career as this is the need of the hour.

Economic Value Added

Performance Measurement systems was developed as a means of monitoring and maintaining organisational control, which is the process of ensuring that an organisation pursues strategies that lead to the achievement of overall goals and objectives (Nanni, et al 1990). PM is a forward-looking system of measurements it plays a vital role in every organisation and assist managers to predict the company's economic performance and spot the need for changes in operations. It can provide information required for making day to day decisions and judgments and enable the organisation to ensure that they are achieving continuous improvements in their operations in order to sustain a competitive edge over the competitor and to increase market share and profits.

EVA (Economic Value Added) was developed by a New York Consulting firm, Stern Steward & Co in 1982 to promote value-maximizing behavior in corporate managers (O'Hanlon. J & Peasnell.K, 1998). It is a single, value-based measure used to evaluate business strategies, capital projects and to maximize long-term shareholders wealth. It is assumed under EVA that Value has been created or destroyed by the firm during the period can be measured by making a comparison between profits and the cost of capital. The outcome of it helps the managers to take the decision and withdraw value-destructive activities and invest in projects that are critical to shareholder's wealth, which will lead to an increase in the market value of the company.

According to Management Guru Peter Drucker "EVA is a vital measure that reflects all the dimensions by which management can increase value. EVA is the financial measure that comes closer than any other measure in capturing true economic profit of an enterprise.

EVA is a new measure of corporate surplus that should be shared by the employees, management and shareholders. It focuses on clear surplus in contradiction to the traditionally used profit available to the shareholders. It is used by companies as a performance indicator and also as a basis for executive compensation. Surplus should be derived by deducting cost of capital from profit before interest but after tax.

EVA = NOPAT - WACC X Capital Employed.

Where, NOPAT means Net Operating Profit before Interest and after Tax.

WACC represents Weighted Average Cost of Capital.

Capital Employed = Net Block + Trading Investment + Net Current Assets.

It is free from subjective assumption that needs to be adopted while identifying profit and cost of capital. Cost of equity is derived on the basis of Capital Assets Pricing Model (CAPM).

Advantages of EVA

EVA is more than just performance measurement system and it is also marketed as a motivational, compensation-based management system that facilitates economic activity and accountability at all levels in the firm. Stern Stewart reports that companies that have adopted EVA have outperformed their competitors when compared on the basis of comparable market capitalization.

EVA eliminates economic distortions of GAAP to focus decisions on real economic results, it provides for better assessment of decisions that affect balance sheet and income statement or tradeoffs between each through the use of the capital charge against NOPAT. IT decouples bonus plans from budgetary targets and covers all aspects of the business cycle it aligns and speeds decision making, and enhances communication and teamwork

EVA helps create a mindset throughout the organization that encourages managers and employees to think and behave like owners. It often leads to increased shareholder value through increased capital turnover. EVA has been helpful because it forces companies to pay attention to capital employed and especially to excess working capital. The advent of this concept has provided flexibility to the management in measuring the performance of their business operations. EVA is not a wealth creator; it only measures value.

The experience of some of Indian companies is good after they have implemented EVA, especially NIIT Limited where EVA has doubled after introduction of the concept itself.

Brewer, Chandra & Hock (1999) cite the limitations to EVA like it does not control for size differences across plants or divisions ,is based on financial accounting methods that can be manipulated by managers, may focus on immediate results which diminishes innovation, provides information that is obvious but offers no solutions in much the same way as historical financial statement do Also, Chandra (2001) identifies the two limitations of EVA like it emphasizes on improving business-unit performance, does not encourage collaborative relationship between business unit managers and EPS, PAT and RONW is still not a perfect measure

Brewer et al (1999) recommend using other performance measures along with EVA and suggest the balanced scorecard system. Other researchers have noted that EVA does not correlate as strongly with stock returns as its proponents claim. Chen & Dodd (1997) found that, while EVA provides significant information value, other accounting profit measures also provide significant information and should not be discarded in favor of EVA alone. Biddle, Brown & Wallace (1997) found only marginal information content beyond earnings and suggest a greater association of earnings with returns and firm values than EVA, residual income, or cash flow from operations.

The EVA based performance measurement system which is helpful to company in decisions related to the choice of strategy, capital allocation, merger & acquisitions, divesting business and goal setting. So Management Accountants have to successfully transform traditional management system into value based management system.

Mergers and Acquisitions

The process of mergers and acquisitions has gained substantial importance in today's corporate world. This process is extensively used for restructuring the business organizations. In India, the concept of mergers and acquisitions was initiated by the government bodies. Some well-known financial organizations also took the necessary initiatives to restructure the corporate sector of India by adopting the mergers and acquisitions policies. The Indian economic reform since 1991 has opened up a whole lot of challenges both in the domestic and international spheres. The increased competition in the global market has prompted the Indian companies to go for mergers and acquisitions as an important strategic choice. The trends of mergers and acquisitions in India have changed over the years. The immediate effects of the mergers and acquisitions have also been diverse across the various sectors of the Indian economy.

The different Indian sectors that have resorted to mergers and acquisitions in recent times, telecom, finance, FMCG, construction materials, automobile industry and steel industry are worth mentioning. India is now one of the leading nations in the world in terms of mergers and acquisitions.

The merger and acquisition business deals in India amounted to $40 billion during the initial 2 months in the year 2007. The total estimated value of mergers and acquisitions in India for 2007 was greater than $100 billion, which is twice the amount of mergers and acquisitions in 2006.

The Latest Trends in India

Acquisition of foreign companies by the Indian businesses has been the latest trend in the Indian corporate sector. There are different key factors includes Favorable government policies, buoyancy in economy, additional liquidity in the corporate sector, and dynamic attitudes of the Indian entrepreneurs are behind the changing trends of mergers and acquisitions in India.

The Indian IT and ITES sectors have already proved their potential in the global market. The other Indian sectors are also following the same trend. The increased participation of the Indian companies in the global corporate sector has further facilitated the merger and acquisition activities in India.

Major Mergers and Acquisitions in India

HindalcoIndia deal of acquiring Canada based Novelis involved transaction of $5,982 million. Tata Steel deal of acquiring Corus Group plc amounted to $12,000 million. Dr. Reddy's Labs deal of acquiring Betapharm worth of $597 million. Ranbaxy Labs deal of acquiring Terapia SA amounted to $324 million. Suzlon Energy acquired Hansen Group through a deal of $565 million. The acquisition of Daewoo Electronics Corp. by Videocon involved transaction of $729 million. HPCL acquired Kenya Petroleum Refinery Ltd.. The deal amounted to $500 million. VSNL acquired Teleglobe through a deal of $239 million.

When it comes to mergers and acquisitions deals in India, the total number was 287 involved monetary transaction of US $47.37 billion (out of it 102 cross country deals with a total valuationof US $28.19 billion) from the month of January to May in 2007.

The mergers and acquisition (M&A) activity in Asia Pacific region dropped nearly 30 per cent to $160 billion in the first quarter of 2009 as against $223.21 billion in the same period a year-ago, as per data compiled by global deal tracking firm Zephyr.

India is among the top five countries in the region in terms of the number of M&A activities in the first three months of 2009 with 331 deals, even as the deals saw a 72 per cent decline from the same period a year-ago.

The country had witnessed 571 deals in the first quarter of 2008, while they had been as low as 176 in the fourth quarter, the report revealed. Japan is at the top with as many as 904 M&A deals in the first quarter of 2009, followed by Australia (636), Republic of Korea (620), China (611) and India with 331 deals, the Zephyr quarterly M&A report published by BvDep pointed out.

However, in terms of the value of the deals India is at the 8th place with deals worth $6.85 billion in the reviewed period.

In value terms, Australia has emerged at the top with M&A deals worth $ 35.06 billion, followed by Japan ($ 33 billion), Korea ($ 24.3 billion) and China ($ 22.9 billion).

The metal mining industry topped the table this quarter with Aluminium Corporation of China's pending purchase of $ 7,200 million worth of convertible bonds in Australian Rio Tinto. Interestingly, all the top ten deals in the first quarter were worth over $ 2,000 million with seven being minority stakes and three being acquisitions.

The proposed merger between BhartiAirtel and South Africa's MTN would be India's biggest-ever M&A deal. The potential value of the BhartiAirtel-MTN deal would amount to $23 billion. MTN and its shareholders would acquire around 36 per cent economic interest in BhartiAirtel, while, the Sunil Mittal-promoted BhartiAirtel would acquire 49 per cent stake in South African telecom giant MTN.

The largest M&A transactions involving an Indian company until now Tata Steel-Corus: $12.2 billion On January 30, 2007, Tata Steel purchased a 100% stake in the Corus Group at 608 pence per share in an all cash deal, cumulatively valued at $12.2 billion. The deal is the largest Indian takeover of a foreign company till date and made Tata Steel the world's fifth-largest steel group.

Indian Potential of M&A are Good R&D base with access to low-cost, high-quality human resources, Proven capability for chemical process development, raw materials availability within the country, SEZs have no import tariffs and provide income tax concessions, Vibrant downstream industry and a large number of manufacturers provide options, for joint ventures, alliances and acquisitions.

The chemical industry in India is likely to be on the high growth phase in the next few decades with growth rates at around 15% per annum growing at double the Asian growth rate and five times the worldwide growth rates. The Investment opportunity is expected of over $75 billion in the next 10 years, India requires large investments in chemical plants, this industry is expected to grow to an $80 billion industry by 2010, Share of the global industry could increase from 1.9% (2001) to 3.9% (2010), India is also expected to be the 3rd largest polymer consumer by 2010, The sector has been witnessing domestic pharma companies on a major acquisition spree in Europe.

This shows that there are major acquisition opportunities in India not only in the Pharma sector but in the Chemical industry as a whole.