Outdated of knowledge and new IFRS -2

This is continuation of my previous post. I have stated that

Traditional method of value a company using Net Tangible Assets (NTA) has been outdated. World richest person Bill Gates's Microsoft doesn't own any factory nor his company own many real estate or other form of tangible assets. How his company market capitalization enable him to become richest man in the world. His company assets are in intangible form ....... Copyright of software and human capital.

Thus, how valuation of company in new economy become a challenge of accounting profession.

For the last one year. You might saw some 40 something part qualifying accountant, enroll to the college to study their professional qualification again. Those who qualified earlier, will have all their knowledge obsolete on 1 Jan 2006 in Malaysia( Other countries are much earlier).

Today, I read an interesting post on Jeff Ooi's blog. A guest blogger who is a Chartered Accountant member of MIA and ICAEW and claims to know a thing or two about accounting standards write on an argument on who should absorb the cost of applying new accounting standard.

For me, this is a non issue. If you hire a newly qualified Accountant. He has been study the New International Financial Reporting Standard (IFRS) over the past few years and he able to come up with the new accounts complying with the new standard with no extra cost.

For old Accountant. Your knowledge is obsolete. Either you have to go back to your college or you have to attend some Seminar to update your knowledge.

The world is changing.

Valuation of company and intangible assets

From production economy wherenet tangible assets is important like General Motor or Ford. Now the biggest company list dominated by new economy company like Microsoft, where no factory of real property. Where company main property is copyright and staff / human resources. How the accounting report reflect the large market capitalization of share price?

Fair value accounting

Then, with all the new financial intrucment, like derivative, option, future contract, bond and globalization which cause cross border investment more easily done than previously. All this increase financial risk and foreign exchange risk of a company. Company exposure to such risk can bankrupt over night like Baring, Enron, Worldcom. How financial statement or company accounts reflect such risk to give earlier warning to the management.

Thus, a new financial standard is needed to reflect such risk in the accounts and to give earlier to the investor and the management. This call "fair value" accounting compare to "historic" cost accounting. A large part of the new standard is just to transfer from historic accounting to fair value accounting. Once understand this concept. It is easy to understand why that particular standard need to change.

In historic cost accounting. Profit is more stable. Like if property cost RM100,000 to buy. It would recorded as RM100,000 every year, maybe some depreciation. However, in fair value accounting under new accounting standard. You have to determine the fair value of the property every year. If the market value of the property diminish to RM50,000. You might have to write off RM50,000 and your accounts would have RM50,000 more than accounts prepared by old standard. If the property in foreign country. Devaluation of currency also have to take into accounts. Thus, profit and loss will fluctuate more than old accounting standard. In a Asia financial crisis situation like 1997, where Malaysia currency depreciated. It will reflected in company accounts immediately if company have EuroBond or foreign currency loan.

New Remuneration Packages

Now a lot of company give Employee shares option (ESOS) as part of the remuneration packages other than salary. Most company just recorded as additional shares being issue. However, this is a cost to the company like salary. World second richest man Warren Buffet does not like the old accounting treatment. Thus, New accounting standard also provided a standard on this new remuneration packages.

Radha K Vengadasalam example must be for non-listed company or small and medium company. Public listed company have to do Quarterly report now and cannot relied on auditor until year end. They have to make announcement every quarter.

As I have mentioned in my previous post. Passing an exam too fast might not be at your advantage in this knowledge economy. Knowledge obsolete faster than you can imagine. Thus, A Continue Professional Education (CPE) is required if you pass too fast.

However, I feel after few years. Every old Accountant can master the new accounting standard like old Accountant can used spreadsheet like Microsoft Excel now.

New accounting standard like fair value accounting have not tested it effectiveness as it almost change and implemented immediately worldwide. Any weakness in the system compare to old standard have not tested in practice.

However, this historic transformation, which may affect the country's economy if not carried out successfully, should be taken at a wider scale to avoid further public criticism. Failing to respond to users' feedback may only arouse suspicion and result in a higher resistance to change.

Write Dr Hassan Ali , associate professor with the school of business, Swinburne University of Technology (Sarawak campus)

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