Building your internal brand

The Brand Vision

The first step in implementing an internal brand development program is to start with a brand vision. The brand vision can be defined as the long–term strategic position of the brand in the market and in the minds of customers.

A good brand vision has three characteristics:

• inspirational – A good brand vision will motivate and inspire employees. Individual values will be aligned to the organization's values. Brand visions need to be inspirational so that the brand has room to grow and improve in the future.
• definitive – A definitive, clear, and focused long-term vision can connect with customers. It will help create an emotional affiliation to the brand, increasing brand loyalty and longevity.
• simple and easy to remember – Typically, a brand vision statement should be simple and be easy to remember. Consumers and employees should recognize it easily, remember it, and be able to quote it readily.

Developing a clear brand vision will help direct the organization effort and encourage senior management to reach consensus on long-term brand growth objectives. This avoids an over-reliance on a reactive, short-term approach. A brand vision will also guide research and development.

A good brand vision ultimately engages all stakeholders with the company's vision for the brand. Stakeholders include management, employees, and consumers. A good brand vision helps develop an emotional or rational attachment with the product or service. It helps the organization connect to its consumer via "touchpoints" such as the retail environments, advertising, word of mouth, and social media.

Creating a Brand Vision

You need to follow a number of guidelines when creating a good, sustainable brand vision. 

• involve top management – It's important for the brand to maintain synergy with the corporate strategy. This is the reason why the top management team must play a key role in the development of the vision. When the brand's vision is aligned with corporate vision, it helps ensure a sustained investment and support for the brand's continued growth.
• focus on customer needs – Brand visions should be created with the customer as the focal point. Focusing on customer needs will help organizations create visions that are practical and connect with the customer. Customers will also be able to relate to the brand vision since the vision is created with them in mind.
• involve employees – If employees are expected to "live the brand vision" in their interactions with each other, and with the customers, they must believe in the vision. Therefore, involving employees in the creation of the vision is much more likely to empower and inspire them.

The first step in creating a brand vision is to work with top management in order to answer a number of questions: 

• What's the position of the brand?
• Which stakeholder needs does it satisfy?
• What can be inspiring for the customers and the employees?
• What can support growth?
• What's clear and simple to understand for the customers and the employees?

Utilizing the Brand Vision

The brand vision gives the direction and inspires both employees and customers. It involves the brand vision to match the brand promise and the internal promise.

The brand promise is the benefit to the customer. The internal promise is the translation of the company's organization values toward its employees. 

The aim of internal brand development programs is to make employees progress from a position of awareness of the brand vision to a position where they accept and support the values. They are then in a good position to deliver the brand promise.

The brand vision is the long–term strategic position of the brand in the minds of the customers, leading to longevity in the marketplace. A good brand vision is simple and easy to remember, definitive, and inspirational to both employees and customers.

There are appropriate guidelines to follow when creating a good brand vision. It's necessary to involve both top management and engage employees to align the vision to the corporate strategy. Together they can focus on the needs of the customer.

An effective brand vision matches the brand promise with the internal promise.
Author - Vicky Sarin

Using Lean Control Tools and Maintaining Controls in Six Sigma - Visual Controls

A visual workplace is a workplace in which standardized visual communication is used in every part of the facility. Visual communication provides clear and self-explanatory clues to workers about operations, job performance, goal accomplishment, and expectations. Visual workplace management uses signs, cards, labels, color-coded markings, and other tactics to ensure workers have the right information at the right time.

In a visual workplace, employees have access to the information they need, where and when they need it. A visual workplace is made up of two main areas: visual displays and visual controls.

Visual displays impart information and data to employees in the area. Such displays make working areas user friendly by answering questions; identifying equipment, materials, and locations; describing actions and procedures; and providing safety warnings. 

Visual controls actually control or guide actions. Visual controls give management and workers a visible manifestation of what's happening at any moment, allowing for immediate feedback about the workplace's condition. 

Sharing information through visual tools helps keep operations running smoothly and safely, since the tools provide data such as process metrics, work instructions, and general workplace information. Visual factories enable anyone in the environment to accurately and efficiently assess at a glance the condition and performance of the process in a workplace.

The benefits of visual controls are that they increase employee involvement and motivation, keeps communication open, improve quality and productivity, and allow for a faster decision-making process.

Elements of a visual workplace

One visual control tool used to make problems visible is jidoka. Jidoka is defined as a device that stops a machine when a defective product is produced. It's a form of autonomation, which is an automation that has human elements. A jidoka system has machinery that automatically inspects each produced item. If a defect is detected, production is stopped and a human is notified. The jidoka system empowers workers as thinkers and gives them the right to stop the production line if necessary.

Another goal of visual controls is to help workers and management stay in direct contact with the workplace. A visual workplace has many ways to do this. Visual information systems provide employees with simple information about the performance of procedures and processes. Signs, labels, painted floor sections indicating specific areas or activities, tool boards, indicator lights, and many more strategies also visually supply information about the workplace.

Audio signals in the factory are another way to help workers maintain contact with what is going on in the workplace. Audio signals can indicate malfunctioning equipment, and sound warnings can alert people prior to the start of a machine operation or transport vehicles backing up, among other things.

Another way to help employees stay in contact with the workplace is through the use of visual production controls. These generally include the posting of daily production data, maintenance items, or quality problems for everyone to see and understand.

The third goal of visual controls is to clarify targets for improvement. Measurements track the progress toward planned goals. But if workers don't have access to the information, they can't adjust their behaviors to help reach those goals. A visual workplace excels at providing information that will help workers see where they stand in meeting their targets.

Visual performance measurement summarizes the information that keeps operators in touch with their targets. Status boards, indicators, quality control charts, and check sheets can provide the strategy and the means of conveying this type of information.

In a visual workplace, the whole workplace has visual elements such as signs, labels, and color-coded markings. The goal is for everyone to be able to know what's going on, understand the process, and see what might be out of place. Visual workplace tools help to maintain control over processes. Implementing visual workplace management makes problems visible, helps workers and management stay in direct contact with the workplace, and clarifies targets for improvement.

Manual versus IT-provided control

The goal of visual control in the Control phase of Six Sigma DMAIC is to provide teams with the control tools and techniques that are simple yet effective in maintaining the improved processes and holding the gains that the Six Sigma project delivered in the earlier stages of DMAIC. 

By establishing a Lean management system, visual controls can help enforce discipline among team members necessary in maintaining the quality and level of improved processes consistently and as a way of life. This Lean management system can be maintained by using accountability. Processes that are charted should be actioned and misses followed up with the person responsible for them. Charts should be studied on a daily basis and any hiccups that stall a project should be treated with importance. Examples of simple visual controls include hour-by-hour production tracking charts, late load logs, daily accountability boards, as well as visual control boards located in various areas of operation.

Simple visual control tools versus IT tools

While sophisticated information technology (IT) tools have their benefits – such as computational accuracy and the ability to have information available simultaneously in numerous places – simple visual control tools are favored by the Lean management system since they are seen as more beneficial. For instance, by using simple visual controls, current information can be displayed for everyone to see as it's updated on the floor. However, information updated via IT tools will only display the data last entered or when the last reporting was done and only to the people sitting in front of the screen. 

The information derived using simple visual controls is more accurate, as it's usually displayed close to the area it relates to and not lost in interpretation. However, information displayed using IT tools may not always be as accurate, because the data isn't located close to the actual area it relates to, and is dependent on human judgement and precision of data entry. 

Information displayed via simple visual controls prompt inquiry. Any questions can be asked in real time and responded to immediately at the location of the control. If the answers result in the form being modified, this too can be done immediately. In the case of information displayed via IT tools, typically the only questions that can be addressed are those already designed into the report, and any resulting changes would need to be updated by IT, which is time consuming.

Simple visual controls are less intimidating than IT tools, especially if an individual is not well-versed in technology. Additionally, simple controls allow individuals to take ownership by manually adding or updating information in their area, while IT tools often take information away from the area. 

When information is added or updated using simple visual controls, very little overhead is required because the data is updated by individuals already located in the area using inexpensive markers, highlighters, or pens. In contrast, updating information using IT tools is generally more expensive, as it requires specialized departments, software, and experts for managing and troubleshooting.

As part of visual controls, the whole workplace has visual elements such as signs, labels, and color-coded markings to ensure that the process stays on track and delivers intended results. The goal is for everyone to be able to know what's going on, understand the process, see what might be out of place, and take corrective measures, if required.

Visual control tools help to maintain control over processes. Implementing visual controls makes problems visible, helps workers and management stay in direct contact with the workplace, and clarifies targets for improvement.

Restricted Cash - the problem

There is no doubt that Apple is the company's critics love to hate corporate cash hoarding, STI cash on the balance sheet with approximately $ 38billion

But Goliath computing staff as possible to hang on to as much of the green stuff is not alone in his choice. Since the recession,  the growth in a  company's cash holdings has been statoshpehric.

According to data culled by Georgia Tech Financial Analysis Lab, the average cash and short-term investments of 3,000 largest public companies in June 2009 went up by 28.9% from $ 66 million in September  2013  to $ 86 million.

Briefly criticisms of excessive cash retention, Charles Mulford, a Georgia Tech accounting professor who runs the lab, says "cash is a non-productive asset." Instead, it has been said so much cash, corporations, may hold on plants, equipment and such things as hiring investment - generating more growth in the sluggish economy.

Many investors look to cash in on the huge cache of non-productive corporate financial. .

Such allocation they 'cash and cash equivalents (CCE), as well as short-term, highly liquid investments is defined as the analysts mention that the cash balance, be excluded from spreading. Under the rules of the Securities and Exchange Commission, although , restricted cash should be reported separately and its purpose is described in the footnotes to the financial statements.

To be sure, most of the restricted cash amount does not amount to a material financial statement.

That said, restricted cash, can amount to a significant chunk of change "and for some companies, it's the content," says Mulford. Georgia Tech's average cash amount of $ 102000000 for the sample is restricted. Ke $ 1500000000 for Chevron restricted group had the most amount of cash.

Restricted cash balances rise or fall as follows Unrestricted cash goes in the opposite direction. "Restricted cash goes down, it is free to do something else unrestricted cash," Mulford changes in restricted cash balances reported on the statement of cash flows that says noting.

This classification approach may be restricted cash due to the limited number of companies suggest that being buttressed by finding a Georgia Tech. "We restricted cash and cash flow statement classification of the change in cash among the main reasons for the restrictions placed on the general stability," the report's authors write.

Will the cloud be embedded in your books

Cloud computing is here to stay & estimates forecast the industry to be 11B dollar industry in the next two years.

Fundamentally, cloud computing converge infrastructure and shared services. This type of data center environment allows enterprises to get their applications up and running faster, with easier manageability and less maintenance, and enables IT to more rapidly adjust IT resources (such as servers, storage, and networking) to meet fluctuating and unpredictable business demand.

Most cloud computing infrastructures consist of services delivered through shared data-centers and appearing as a single point of access for consumers' computing needs. Commercial offerings may be required to meet service-level agreements (SLAs), but specific terms are less often negotiated by smaller companies.

Refer to my earlier discussions on embedded leases , the cloud now sits as a prime target of a financial lease. With more and more corporates outsourcing this activity to clouds and using dedicated servers, it attracts the "RIGHT TO USE" phenomena.

And if contracts aren't carefully worded, these assets could be staring in your books as assets with a corresponding liability, thereby making the balance sheet unattractive to investors.

Well until the accountants do figure it out, its best to leave this lease up in the clouds

Additional disclosures on credit quality of financing receivables

With Non-performing assets for banks still rising for some of the US banks, the FASB issued further guidance requiring additional disclosure on credit quality of financing receivables.

“The global financial crisis highlighted the need for additional information about a company’s financial instruments, including loans and other financing receivables,” FASB Chairman Robert Herz said in FASB's press release

The additional disclosures required include:

1. Aging of past due receivables,
2. Credit quality indicators,
3. Nature and extent of troubled debt restructuring
4. Modifications of any troubled debt done in the past 12 months which have resulted in losses again, and
5. significant sale and purchases of receivables

While the intent of the update is primarily to give the readers an assessment of the nature of credit risk in an entity, how this credit risk is managed and what are the reasons for changes in allowance for receivables.

While points 1,4 and 5 are more a matter of subject of fact and can be easily reported, it will be interesting to see as to how will Companies represent credit quality indicators in point 2. There will be a varied choice of benchmarks which each Company will use to map the credit quality indicators.

Short-term accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from the ASU.

For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after Dec. 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after Dec. 15, 2010.

For nonpublic companies, the amendments are effective for periods ending on or after Dec. 15, 2011.

About $1.2 Trillion of assets to be back on balance sheets of banks

With new accounting rules on off-balance-sheet transactions coming into effect in January, approx 53 large companies have already estimated that they will have put back an aggregate $515 billion in assets to their balance sheets during the first quarter, according to a new study of S&P 500 companies released by Credit Suisse.

The rules that force companies to put such assets back on their balance sheets were issued in 2008 and went into effect at the beginning of this year. They are Topic 860 (formerly FAS 166), which deals with transfers and servicing of financial assets and liabilities, and Topic 810 (formerly FAS 167), the rule governing the consolidation of off-balance-sheet entities in their controlling companies' financial reports.

Predictably, most of the asset increases belong to companies in the financial sector, where off-balance-sheet transactions such as securitization, factoring, and repurchase agreements are popular.

Assets are returning to balance sheets for several reasons, most notably the Financial Accounting Standards Board's elimination of QSPEs, or "Qs," in 2008, when it became apparent that the structures were being abused. Indeed, Qs were permitted to remain off bank balance sheets if they took a "passive" role in managing the structures' finances. But when the subprime crisis hit, and the mortgages being held in Qs began to fail, banks — with the blessing of regulators — took a more active role, reworking the terms of the entities' mortgage investments. At the time, FASB chairman Robert Herz called Qs "ticking time bombs" that started to "explode" during the credit crunch.

Since their enactment, the accounting rules have affected their industry big time. Of the companies reporting an impact, nine purely financial-sector outfits plus General Electric account for 96% of the $515 billion being consolidated during the first quarter, says Credit Suisse. Of that group, which includes Bank of America, JP Morgan Chase, and Capital One, Citigroup tops the list with an estimated $129 billion in assets being brought back on the books in the first quarter — which represents 7% of its existing total assets. The newly consolidated assets come in all shapes and sizes, says the report: $86.3 billion in credit-card loans, $28.3 billion in asset-backed commercial paper, $13.6 billion in student loans, and $4.4 billion in consumer mortgages, for example ($5 trillion of the $5.7 trillion held in VIEs and Qs is mortgage related). Citigroup also disclosed a $13.4 billion charge for setting up additional loan loss reserves and eliminating interest lost from consolidating the assets.

Operating the lease - a discussion paper

The FASB is looking to overhaul its 35 year old standard on Leases - FASB 13. This overhaul looks to have been directed with the convergence of the FASB and the IASB.

Both the bodies have recently issued a discussion paper on changing the way we account for operating leases. The discussion paper higlights the rationale to change the way we account for a "right to use assets" as described in EITF 01-08 or my earlier blog on embedded leases.

Under the current rule, Companies record finance lease obligations on the balance sheet while disclosing the operating lease obligations in the notes to accounts.

Under the discussion paper, the new rule will require companies to record operating lease obligations on the balance sheet as a liability and capitalise the right to use the asset as an asset, thereby making Companies look highly leveraged.

Broadly the implications of such a rule will have a bearing on the following

1. Balance sheets look highly leveraged (an estimate pegs the operating lease obligations for SEC listed companies at $1.25 trillion
2. Financial reporters will have to test for impairment on the capitalized operating lease assets in case of non-cancellable lease obligations
3. Operating lease obligations will be required to be recorded at fair values
4. In case of contingent rentals for operating lease assets, computing the value of the assets and obligations will be a nightmare
5. Periodic reassessment of the lease classifcation in case of constant renewal options/modifications coming in the agreement
6. Rental expenses now will be broken into rental expenses and interest costs (for the imputed value of the lease obligation)
7. A nightmare of companies who outsource work say for a period of 2 years under a non-cancellable lease - splicing the agreement into services and assets would take some doing

I welcome FASB's stance on recording the obligations and recording the assets on the balance sheet. This will make reporting more structured by ensuring stakeholders get to know as to whether an asset taken on an operating lease is impaired or not and the leverage of the balance sheet.

For instance financials of Airlines companies who lease planes on operating leases do not have any planes as assets on their balance sheets nor any liabilities. This is strange considering that from a going concern perspective airline companies cannot live without these planes. The new rule will reflect a clearer picture of the financial position of such companies.

The real problem will come to accountants when they address issues on contingent rentals, renewal clauses etc. These will be highly subjective from one company to the other and will render the purpose of meaningful comparasions among different companies baseless.

Well the proposed change is in mid 2011, hopefully by then we will have a lot more brightlines to easily account for the new OPERATING LEASE REGIME.

FASB issues statements 166 and 167

The FASB recently published Financial Accounting Statements No. 166, Accounting for Transfers of Financial Assets, and No. 167,Amendments to FASB Interpretation No. 46(R), which change the way entities account for securitizations and special-purpose entities. The new standards will impact financial institution balance sheets beginning in 2010. The impact of both new standards has been taken into account by regulators in the recent “stress tests.”

These projects were initiated at the request of investors, the SEC, and The President’s Working Group on Financial Markets. Copies of the new standards are available at theFASB’s website, along with a concise briefing document.

Statement 166 is a revision to Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures.

Statement 167 is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.

Robert Herz, chairman of the FASB, said:

“These changes were proposed and considered to improve existing standards and to address concerns about companies who were stretching the use of off-balance sheet entities to the detriment of investors. The new standards eliminate existing exceptions, strengthen the standards relating to securitizations and special-purpose entities, and enhance disclosure requirements. They’ll provide better transparency for investors about a company’s activities and risks in these areas.”

Both new standards will require a number of new disclosures. Statement 167 will require a company to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A company will be required to disclose how its involvement with a variable interest entity affects the company’s financial statements. Statement 166 enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and a company’s continuing involvement in transferred financial assets.

Both Statements 166 and 167 will be effective at the start of a company’s first fiscal year beginning after November 15, 2009, or January 1, 2010 for companies reporting earnings on a calendar-year basis.

Fair Valuations - can they propel the next bull run

FASB on April 9, laid to rest atleast a controversial subject on marking assets in distressed economic conditions.

The FASB via FSP157-4 issued its position on defining illiquid markets for assets and giving a leeway that the management can rely on their internal valuation models instead of using the external factors.

The rule revision applies to all assets and liabilities within the scope of accounting pronouncements that either require or permit fair value measurements.

The FSP provides that a reporting entity should evaluate a battery of factors to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability when compared with "normal market activity" for the asset or liability. These factors include, but are not limited to, the following: 

• There are few recent transactions;
• Price quotations are not based on current information;
• Price quotations vary substantially either over time or among market makers;
• Indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability;
• There is a significant increase in implied liquidity risk premiums, yields, or performance indicators for observed transactions or quoted prices when compared with the reporting entity's estimate of expected cash flows for the asset or liability;
• There is a wide bid/ask spread;
• There is a significant decline or absence of a market for new issuances for the asset or liability; and
• Little information is released publicly.

This move is a welcome step and will definetly aid a lot of banks in shoring up their balance sheets. No wonder, that post April 9, most of the markets are on a bull run and have started factoring this change in the swing in the balance sheets of various financial institutions.

The FASB must also be appreciated for relenting under pressure to delineate mark-market to accounting forever and has come out with the correct decision considering the economic scenario.

Will wait and wonder what will be FASB's position in a reverse scenario, when markets are in prime bull position and prices are overvalued, will they come out with a new FSP to FAS 157....????

Read all our earlier articles on Fair value accounting

Bond conversions now weigh on your EPS

With the change of an old accounting rule of APB 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion" coming into effect this quarter, companies may start seeing a dip in the EPS reported. The rule which was amended last year, requires companies which settle their bonds (liabilities) in the form of part equity and part cash, now will have to take an additional charge to the income statement on account of interest expense, thereby lowering the EPS

The interest expense will be the differential between the value of the equity shares as on the date of the conversion and the maturity value of the debt.

This rule does not affect straight convertible debt that must be settled with the corporate issuer's stock, convertible preferred shares classified as equity, convertible debt with embedded options that are recorded as derivatives, and convertible bonds that require cash settlement for fractional shares when converted.

Separating the settlement into cash and shares requires the use of so-called split accounting to record the transaction. That is, the issuer must book the debt and equity components of the bond separately. It's the split that results in a higher interest expense on the income statement that tugs the EPS ratio down. Here's why.

A convertible bond is attractive to issuers because the interest paid to bondholders is lower than the market rate for most other borrowing. On the other hand, the low-interest bond attracts investors because of the conversion option, which allows the bondholder to turn the debt into equity if market conditions are favorable. For many, convertible bonds were seen as a win-win situation.

But FASB wanted to make sure that companies issuing convertible debt reflected the economic reality of the instrument — that is, the risk associated with the bond — on their financial statements. In the board's opinion, companies that issued convertible bonds had a tendency to inflate their EPS because the interest expense associated with the potential cash payout was under-reported.

The new rule, however, forces companies to record a higher interest expense — or a higher depreciation expense in the case of debt used for capital improvements — because the debt is calculated as if there were no conversion option, and will be settled in cash. That assumed cash payout includes the additional interest expense.

FASB also is requiring that the rule be applied retrospectively to 2008 financial statements. That means that if issuing companies report a material adjustment to their income statement, they must restate their financial results accordingly, going back two or three years, depending on how many years of comparison reporting they included in their 2008 filings.

Involuntary terminations - filling the GAAP

Layoffs are unpleasant and every accountant would wish they are never exercised for in his Company.

 At March 31, 20xx (year end), your company has approved a termination plan to exit a part of its operations. Under the plan,  the Company will close 2 of its branches, which will result in 100 employees being terminated in the next 60 days. 

 Your Company has announced a VRS scheme of Rs. 10lakhs per employee , given to employees on a first come first basis. In case, less than 100 employees opt for  theVRS, then the Company will involuntarily terminate the employment of the balance employees and give them Rs. 8lakhs each. 

 As the year end, what will be your accounting treatment.... 

• will you accrue for the entire liability of Rs. 10 crores (ie. 100* 10 lakhs) and take a P&L hit
• you will do nothing with it, the liabilty arises in the next year as employees will be terminated in the subsequent year
• you will disclose the liabilty in the notes to the accounts

On the Indian GAAP front, there have been no clear guidance on accounting for involuntary terminations, while on voluntary terminations or more popularly known as VRS schemes, the cost of such terminations  is recognized in the period in which the offer is accepted by the employee. So do we by the same principles account for costs on involuntary terminations, in the period in which the pink slip is handed over to the employee....

 

FAS 146 (earlier EITF 94-3) addresses this issue...

 FAS 146 requires managements to record liabilities at fair value in the period in which it is incurred. The following events should have occurred to conclude that a liability should be recorded and recognized immediately

 The board has approved the termination plan and has been adopted, in case shareholder approvals are required, then at the time of shareholder approval

1. The plan has identified the number of  employees, their job classification, their functions, location and expected completion date
2. The termination benefits are clearly documented stating the quantum for everydesignation of employee
3. The plan is communicated to the employees (not necessarily naming them specifically)
4. It is highly unlikely that points 1 to 3 will be withdrawn or there will major changes in the plan

Once all the above factors, exist the management will be required to account for the liability of involuntary termination benefits at its fair value.

 So going by the above guidance, our accounting treatment will be as under; 

• Take Rs.8 crores to P&L (i.e. 100 * Rs. 8 lakhs) being the value of termination benefits which the management has committed to as at March 31, 20xx
• Account for the increment liability of Rs. 2 lakhs in case of VRS in the period in which the employee opts for the scheme
• Disclose the facts in the notes to accounts.
• Disclose the facts to the actuary, so that provisions can be trued up to make for leaveencashment and gratuity accruals more accurate

PS  - In case a company knows that the profitability of the current accounting year is bad, and wishes to book a lot of expenses in the current year in order to make the next year look more profitable, all it needs to do, is to arrange for documentation, have a board resolution in hand and book the expense. All of this can be done in the last week prior to the year end.....  

On the contrary, a Company may have announced this in the last week of the year end and may just chose not to account for it...... if numbers are big.....and your auditor doesn't catch it...just hope nobody else does...

Is Raju playing the Green Goblin of Spiderman

Vengeance has become the buzzword this season with the release of Ghajini, so is Raju playing the same game aka the Green Goblin of Spiderman...............

I called up some of contacts both in PWC and Satyam's finance and internal audit functions, to get their views.

Predictably the response from PWC was more muted on account of a gag order. 

A chat with a core member of the accounting function at Satyam reflected a sense of disbelief,  he wasn't willing to believe any of the contents of the Raju letter was true. Same was when I spoke with the member of the internal audit team, the reaction was the same. At both quarters they were unwilling to digest that cash and cash equivalents could have been inflated by such magnanimous proportions.

Interestingly, both of the the Satyam's contacts i spoke to had an inner feeling that this revelation comes at a time when Raju himself had no stock in the Company as his shares were pledged and, this disclosure by Raju manifests in an opportunity to get himself or through his benami shareholders a back door entry in Satyam by acquiring the stock at cheap prices.

Another point of note is that most of the FII's were able to offload a majority of their stake in Satyam on both the trading sessions on Wednesday and Friday... well then someone should have been buying this stock... but why would any sane person buy this stock, knowing fully well that Rs. 80 on Satyam's stock price was only attributable to the book value of the inflated cash position in Satyam alone....

On a closer introspection of the "priceless" letter released by Raju, the first para of the letter reminisces a more USGAAP language, where he takes of the inflated cash and cash equivalents, receivables etc, the remaining portion of the letter seems to have been carefully drafted by a lawyer. If rumour mongers are to be believed then the letter seems to have been drafted by a US based law firm close to Raju.

The Green Goblin of Spiderman wanted his vengeance after he was ousted from his own Company by the board, is Raju also doing the same...... only time will tell

Satyam Shivam Sundaram - alias Satyam Ramalingam Srinivas

Srinivas Talluri is a worried man, having spent 20 years in the accounting profession, he would have wished the 7th day of the new year would never had happened. He is now guilty of certifying and giving a clean chit to the three golden rules of audit reports on Satyam's financials.... how he wished his last certification on Satyam's would have looked like this

Reproduction of Satyam's audit report (changed for our readers)

In our opinion and to the best of our information and according to the explanations given to us, the said financial statements together with the notes thereon and attached thereto give in the prescribed manner the information required by the Act and give a Satyam (true) and fair view in conformity with the accounting principles generally accepted in RAJUGAAP

(i) in the case of the Balance Sheet, of the state of affairs of the Company as at March 31, 2008; excepting for cash balances which have been overstated by Rs. 5000 crores, based on explanations and informations given by the management, the corresponding credit might have been shown as a loan payable to Maytas or the offset could lie in reserves and surplus

(ii) in the case of the Profit and Loss Account, of the profit for the year ended on that date; excepting for only excel based workings given on interest accrued of Rs. 376 crores on the above cash balances and no confirmations or orders were found for revenues invoiced of Rs. 500 crores resulting in higher debtors, however the resulting higher profits have been offset by taxes booked against the same

(iii) in the case of the Cash Flow Statement, of the cash flows for the year ended on that date excepting for grossing up the financing activities where the offset to the cash balances of Rs. 5000 crores were shown as loans received.

Sgd Srinivas Talluri
April 21, 2008
PriceWaterhouseCoopers

Having worked in the audit profession, i can picture the scene at PWC's office in Hyderabad and Kolkatta, these is what it could look like

• The entire audit team of PWC would have been redeployed on Satyams e-audit workpapers, all scheduled leaves, vacations and other audit assignments would have been called off, beleive me, its worse than army deployments (PWC was the first to go on electronic audit documentation in India)
  
• Article clerks will be given the mundane tasks of scanning the documents given by the seniors, seniors will be sharing confidential papers with the managers, managers will be wondering what to shred and what not to
• There will be a set of article clerks who will be filling out the checklists including questions on Integrity of management, fraud checklist, accounting standard checklists etc
• There will be a huge demand for green and red pens, after all linking of all audit work papers would need to be done...
• Audit confirmations will be treated like GOLD, seniors would be combing the postal section of PWC's office to trace if at all any banks/debtors had confirmed balances. on PWC's stationary...... senior managers will be telling the seniors ..." I told you not to rely on email confirmations"
  
• Someone, would definitely be searching for the management rep letter if at all signed by Raju
• Managers and Senior Managers will now be recasting the reasons used in the variance analysis - a very popular tool used to audit balance sheet items..... imagine the answers which would have been documented for increase in cash balances, receivables and for non-increase in liabitlites......
• And finally, someone will cast the schedules given (this practice has been done away with)... good chances are that someone will discover that higher bank balances of Rs. 5K crores were a result of casting errors i.e 10 FD of Rs. 100,000,000 would have been shown as Rs. 10,000,000,000 on the excel schedule (with an extra 0) and the totals would have been a number entered on the cell, rather than a formula on the cell..... well if this happens to be the case, there is no audit negligence right..........
  

Well i beleive at the end of the day, no amount of form i.e. checklists etc) can hide the substance of the transaction..... Substance is truly greater than form

SEC releases study on fair value accounting

To round up a tumultuous 2008, with the entire industry particularly banks, up against fair value accounting, comes the SEC's report mandated by Congress on the use of fair value accounting. 

While for starters the SEC supports the continued use of fair value accounting standards while also making eight recommendations to improve application of the standards. The suggested changes include reconsidering accounting for impairments of financial instruments and developing more guidance for determining the fair value of investments in inactive markets.

The SEC recommends against the suspension of fair value accounting standards and finds that investors believe fair value accounting generally increases financial reporting transparency and facilitates better investment decision making. The 211-page report by the SEC’s Office of the Chief Accountant and the Division of Corporation Finance finds that mark-to-market accounting did not appear “to play a meaningful role in bank failures occurring during 2008.” Rather, the report says, the bank failures “appeared to be the result of growing probable credit losses, concerns about asset quality, and, in certain cases, eroding lender and investor confidence.”

The improvements outlined in the SEC report include:

·         Development of additional guidance and tools for determining fair value when relevant market information is unavailable in illiquid or inactive markets, including consideration of the need for guidance to assist companies and auditors.

·         Enhancement of existing disclosure and presentation requirements related to the effect of fair value in the financial statements.

·         Educational efforts, including those to reinforce the need for management judgment in the determination of fair value estimates.

·         Examination by FASB of the impact of liquidity in the measurement of fair value, including whether additional application and/or disclosure guidance is warranted.

·         Assessment by FASB of whether the incorporation of credit risk in the measurement of liabilities provides useful information to investors, including whether sufficient transparency is provided currently in practice.

 

The report also recommends that FASB reassess impairment accounting models for financial instruments, including consideration of narrowing the number of models under U.S. GAAP. The report finds that under existing accounting requirements, information about impairments is calculated, recognized and reported on bases that often differ by asset type.

The report recommends improvements, including: reducing the number of models used for determining and reporting impairments; considering whether the usefulness of information available to investors would be improved by providing additional information about whether current declines in value are consistent with management expectations of the underlying credit quality; and reconsidering current restrictions on the ability to record increases in value when market prices recover.

 Read all our articles on fair value accounting by clicking here

Goodwill impairment testing - Merry Christmas

Its closing bell for 2008, (whew finally...) and this year in addition to the usual laundry list of closing activities for USGAAP related accounts, there is bound to be an extensive list of activities to be added to the closing checklist on the CFO's calendar.... "Impairment Testing"

Companies are under FAS 142 required to look for factors that may lead to goodwill or other intangible asset impairments at quarter ends but are mandatorily required to examine and assess whether a firms goodwill and intangible assets have been impaired at the year end. This is to be performed regardless of there being a triggering event.

A goodwill write-down is required when the impairment is deemed permanent — or not "recoverable within a reasonable amount of time". In accounting terms, if the stock price stays below carrying value for 60 days it generally means a triggering event. We are in that kind of situation now, in which many companies are experiencing depressed pricing for longer than 60 days, and not seeing much volatility on the upside,

Where there is smoke there is fire, well if plummeting stock and real estate prices weren't enough, significant cash flows have begun to dry up. These will make it a thorny and a rather intriguing time on the excel sheets for financial analysts drawing up their round of cash flows over the next 5 years for impairment analysis testing.

The testing process itself is onerous and can be thorny, as it includes running several valuation models, examining and reworking internal forecasts, gathering and digesting analysts' price targets, reviewing historical pricing, and crunching industry data. Whats more once all this is through on the excel sheets, the same needs to be convinced to the board, thanks to  SOX & as well as to the audit firms. Companies may need to plan additional time devoted to this activity.

Assuming after all the testing, there is a permanent impairment and a Company is required to book impairment losses, "USGAAP rules prevent impairment losses to be reversed in the future.

This means that if the year 2008 were to be the worst year for a decade, we will be stuck with these impairment losses sitting in the reserves in the years to come. This can however be overcome, once you either sell the business unit in which the goodwill loss has been booked or the easier way out convert your accounts to IFRS as IASB allows reversal......... 

Well converting to IFRS maybe an easier solution as you can offset your losses by booking DTA (deferred tax assets) on the impairment losses with the hope that these will reverse once you convert to IFRS.......but thats only when you can pass the going concern test in the first place.......blip..zzzbliiipppzzz

Merry Christmas to Goodwill testing (i have time until March 31 as my books close then..)

PS - i now beleive in the theory that fair value accounting will lead to naked short selling (read our earlier article)... with the losses to be posted in Jan 09...better we shy away from the markets..click here