FMAccounting.com » Financial Strategy

FRS 112-Reconciliation Of Effective Tax Rate To Statutory Rate

slang — Tue, 21 Oct 2008 04:07:51 +0000

In FRS112 on Income Taxes or IAS 12, there is a requirement for a reconciliation statement between the Effective tax rate (ETR) to the Statutory Rate in the notes to the financial statement wherein the following are normally taken up:

Non allowable expenses
Deferred tax assets not recognized
Expenses not allowed for tax purposes
Non taxable income
Differential tax rate-SME’s ( small & medium enterprise), foreign subsidiaries
Over/under provision for prior years
Changes in tax rates of overseas subsidiaries
Changes in deferred tax due to tax rate changes

The idea of this reconciliation is allow transparency for outsiders/shareholders to understand whats the company has done to manage its taxation namely how much the actual existing taxation rate compared to the norm statutory rate. An excessive variance between ETR versus statutory rate is alarming and should be critically look at. However, sad to say, many of us tend to ignore or take lightly of such review of the reconciliation.

My two cents is that whether you are an accountant, financial controller or CFO or top management, we should look at this reconciliation more carefully

Why is this so?

Effective tax rate (ETR) is very important. In my earlier article on Economic value added (EVA), it is mentioned that ETR is one way to improve EVA as ETR is an outright cash flow where, when we manage to plan it carefully, will increase shareholder value / EVA.

Deliberate investment in tax exempted industrial areas, looking ahead to plan for future material non-allowable expenses into allowable type, ensuring certain subsidiaries of the group enjoy the SME’s status by making sure the threshold on authorized capital not exceeded, might be some suggestions to reduce ETR

So look out carefully this reconciliation in your company’s notes to the financial statement and please plan ahead to try to lower ETR to enhance company’s shareholder value. Incidentally, one part of the kpa/kpi of an inhouse tax manager is to reduce the ETR of the group/company.

Cash Is King

slang — Thu, 09 Oct 2008 03:35:18 +0000

The recent world financial crisis again proves that Cash is king. Earlier article in my other blog explains about Profit Vs Cash concept wherein profit is not cash hence a highly profitable entity can also go down under without proper cash/liquidity supports.

Companies with the right balance of surplus cash can derive certain good opportunities. Let’s look at the recent case of Warrant Buffett acquiring some stakes in Goldman Sach and GE

Details:

In an interview with PBS’s Charlie Rose, Warren Buffett ,heralded as the world’s best stock picker quoted that “ there are times when cash buys more than other times and this is one of those times where it buys more”

Both Goldman Sach and GE sold to Buffet a combined USD 8 billion in preferred shares that pays a 10% dividend, allowing his Berkshire Hathaway Inc to earn 10% dividend or USD800 million annually. Besides these both companies gave Berkshire the rights to buy at their shares at discount at any point in the next five year. In return, the companies got Berkshire’s cash and the endorsement of the “Oracle of Omaha” at a time when stock prices are falling on concern that a tightening credit market may hobbled even the largest companies.

For Buffett, whose Berkshire Hathaway had USD44.3 billion in cash at the start of the year, he would commit at least USD28 billion this year to acquire companies, finance buyouts and purchase securities for Omaha, Nebraska-based Berkshire.(Buffett is the Berkshire’s chairman)

Well, for those cash rich companies, maybe there are now good times for certain investment like buying stakes into your trusted supplier’s companies, or investing cleverly like having preferred shares and warrants into very profitable companies that need allies during this world financial crisis.

Typical Role Of Manager- Corporate Strategy

slang — Fri, 28 Mar 2008 06:01:17 +0000

Normally, in the Finance’s Organization Chart, we might see but quite rarely the post of Manager for Corporate strategy reporting to the CFO.

As this post is quite crucial to the company’s business growth, it will normally be directly reporting to the senior management

So what does normally this role entails

Append below perhaps are some of the responsibilities/specifications for those who are interested to take up this role:

Identify and evaluate new investments opportunities
Formulate corporate strategies and structure corporate proposals in line with Group’s mission and vision
Undertake, coordinate and implement the Group’s strategic planning activities and corporate development initiatives
Prepare financial studies and forecasts, corporate proposal papers for evaluation and strategic business planning
Risk assessment of new initiative projects
Conduct in-depth analysis and review of the Group’s business
Perform market research, industry trend and competitors’ analysis
Monitor and report on progress of strategic and business plan implementation

Naturally, with the above specification, the person/specialist required should be of a high caliber hence some of the minimum requirements/qualifications should include the following:

Degree or professional qualification in Finance, Accounting, Economics, Business Studies or equivalent with relevant experience in corporate planning or corporate finance
Possess good business acumen
Excellent analytical abilities
Competent organizational and presentation skills
Possess good interpersonal skills and able to interact well with all levels of people.
Willing to travel extensively

Branding & Expanding Overseas

slang — Fri, 28 Mar 2008 05:37:07 +0000

As discussed, two of the main agenda in any Board Meeting should at least include branding as a strategy to boost sales and strategizing to go overseas for business expansion.

A good example is the recent announcement by F& N’s CEO Tan Ang Meng pertaining to the aforesaid two subjects:

Branding:

to consolidate their products under one F&N Brand. The objective of a common brand is to enable the more well recognized and popular products to leverage the smaller, lesser-known products and also to ensure that customers are not loosing sight of the brand as F&N has too many products in its portfolio and the launch of a new corporate F&N Brand to grow its food and beverage (F&B) business. The new corporate brand will create better public awareness.
Incidentally, the group would invest over RM2mil in the coming months on advertisements, billboards and marketing campaigns to promote the new brand image.

Overseas expansion:

F&N’s group already had a strong presence locally. It is quite large in Malaysia and Singapore and would want to expand overseas to be more geographically based to cut volatility in one particular country
The group already had a strong presence in Thailand following the acquisition of the Nestle dairy business last year and would be focusing its sights on Indochina.Targeted countries like Laos,Vietnam,Myanmar and Cambodia. Revenue from overseas business had grown steadily over the past couple of years. Two years ago, foreign business contributed about 10% to group revenue. Currently, it contributes about 35%. The rationale for regional expansion was because the growth of the F&B business was dependent on the growth of the population. The population in the region is more than 10 times the Malaysian population, which means more mouths to feed and more sales for F&N’s products
(The Star Malaysia-26/3/08)

Sukuk And Islamic Capital Market

slang — Thu, 24 May 2007 04:22:46 +0000

The emergence of the Islamic capital market in 2002 with the inaugural sukuk issued by the Malaysian Governement spearheaded the capital markets exponentially as it became the blue print to an increasing variety of instruments which can be used to create an efficient Islamic portfolio in line with portfolio theory and financial planning.
Increasingly, many companies have begun to tap into the sukuk market to take advantage of the increased liquidity in the Islamic world.

This article seeks to give a basic understanding of the sukuk market and to understand what are the various common types of sukuk so that accountants can tapped into this market for their financing needs.

What is sukuk?

Frequently referred to as an Islamic bond but more accurately translated it is an Islamic investment certificate.
Unlike a bond where the issuer is contractually obliged to pay to the bondholders on certain specified dates, interest and principal, under a sukuk structure, holders of the sukuk each hold an beneficial ownership in the underlying assets. Consequently sukuk holders are entitled to share in the revenues generated by the sukuk assets as well as been entitled to share in the proceeds of the realization of the sukuk assets.
Is a form of assets-backed securities
It requires an underlying tangible assets transaction either in an outright sale and purchase transaction or in a master lease transaction
The primary condition for the issuance of sukuk is the existence of assets on the balance sheet of the issuing entity that wants to mobilize its financial resources.
However, the assets need to be Shariah compliant. Hence, the identification of a suitable asset is a critical step in the process of issuing sukuk certificates.

If you noticed, it is very important that sukuk assets need to be Shariah compliant.

So what is Shariah compliant?

Shariah-compliant investment is “ethical” investment organized in compliance with Islamic law.
To comply with Shariah Law, investment must not involve ‘riba’, a kind of usury practised during pre-Islamic times among the Arabs, which involves delaying the payment of debt in return for an increase in its amount – in other words, interest.

For example, Shariah property investment funds must not rent properties to organizations involved in alcohol, armaments, cinema, conventional financial services, tobacco, pornography, pork or gambling
The common types of sukuk are as follows:

	TYPE	BRIEF DESCRIPTION
1	Murabaha Sukuk	One of the most widely used instruments for Islamic short-term financing Based on the notion of purchase finance. The structure is based on a declared mark-up integrated into the selling price with a deferred payment
2	Istisna’a Sukuk	Use to advance funding of real estate development, major industrial projects or purchase of large equipment like aircraft/ships. Generally, the financial institution funds the purchaser or the manufacturer during the construction of the assets,acquires title/ownership of the asset and upon completion of its construction, passes the title/ownership to the purchaser on an agreed deferred payment terms.
3	Salam Sukuk	Refers to a sale wherein the seller undertakes to supply a specific commodity to the buyer at a future date in return for an advanced price paid in full on the spot. Represents a type of forward contract but with actual physical delivery at the maturity of the said contract.
4	Ijara Sukuk	A leasing structure coupled with the right to the lessee to purchase the asset at the end of the lease period The certificates are issued on stand-alone assets identified on the balance sheet. Presently most sukuk issued follow this structure.
5	Mudarabah Sukuk	Comprise an agreement between a party who provides the capital and another party (the entrepreneur) to enable the entrepreneur to carry out business projects based on pre-determined profit sharing ratios. Losses to the business are borne by the provider of the funds.
6	Musharakah Sukuk	Similar to Mudarabah concept except that this structure requires both parties to participate in the funding of the project. Any losses will be shared by both parties up to the size of their respective investments.

Who In The World Is Entrepreneurial?

slang — Wed, 23 May 2007 10:24:00 +0000

Extracted from CNNMoney.com (23/5/07) the below ranking for countries which are the most and least friendly to small business:

Most and least friendly countries to small biz
Rank	Country	Fortune Small Business Score
1	New Zealand	2.03
2	United States	2.01
3	Canada	1.99
4	Australia	1.93
5	Singapore	1.88
6	Hong Kong, China	1.86
7	United Kingdom	1.85
8	Ireland	1.85
9	Denmark	1.75
10	Iceland	1.75
11	Norway	1.70
12	Sweden	1.64
13	Japan	1.64
14	Finland	1.60
15	Thailand	1.60
16	Chile	1.59
17	Israel	1.59
18	Latvia	1.57
19	Switzerland	1.57
20	France	1.50
21	Jamaica	1.49
22	Netherlands	1.45
23	Belgium	1.45
24	Germany	1.37
25	Portugal	1.36
26	Peru	1.33
27	South Africa	1.32
28	Malaysia	1.31
29	Colombia	1.29
30	Russia	1.29
31	Austria	1.28
32	Mexico	1.26
33	Turkey	1.26
34	Korea	1.25
35	Czech Republic	1.24
36	Italy	1.20
37	Taiwan, China	1.15
38	Spain	1.11
39	Hungary	1.11
40	Slovenia	1.10
41	Uganda	1.05
42	China	1.05
43	Argentina	1.04
44	Poland	1.02
45	Croatia	0.95
46	India	0.94
47	Jordan	0.94
48	Uruguay	0.92
49	Ecuador	0.92
50	Brazil	0.92
51	Philippines	0.90
52	Greece	0.76
53	Indonesia	0.61

No related posts.

To Diversify Or Not To Diversify

slang — Fri, 16 Feb 2007 08:09:26 +0000

I believe the aforesaid subject-matter has been and is still presently a most challenging decision for a company to make. In spite of it, the rewards and risks are extraordinary.
It has been noted that some public listed companies who are in the sun-set business or pressures from investors to generate more sterling results could have coerced managers to look at diversification.
The below are extracted from Harvard Business Review on Strategies for Growth pertaining to some critical questions that managers need to review before embarking on diversification:

What can our company do better than any of its competitors in its current market?

To diversify on some loose/vague decisions rather than on a systematic analysis of what sets their company apart from its competitors. By determining what they can do better than their existing competitors, companies will have a better chance of succeeding in new markets

What strategic assets do we need in order to succeed in the new market?

Excelling in one market does not guarantee success in a new and related one. Managers considering diversification must ask whether their company has every strategic asset necessary to establish a competitive advantage in the territory it hopes to conquer.

Can we catch up to or leapfrog competitors at their own game?

All is not necessarily lost if managers find that they lack a critical strategic asset. There is always the potential to buy what is missing, develop it in-house, or render it unnecessary by changing the competitive rules of the game.

Will diversification break up strategic assets that need to be kept together?

Many companies introduce their time-tested strategic assets in a new market and still fail. That is because they have separated strategic assets that rely on one another for their effectiveness and hence are not able to function alone.

Will we be simply a player in the new market or will we emerge a winner?

Diversifying companies are often quickly outmaneuvered by their new competitors. Why? In many cases, they have failed to consider whether their strategic assets can be easily imitated, purchased on the open market, or replaced.

What can our company learn by diversifying and are we sufficiently organized to learn it?

Savvy companies know how to make diversification a learning experience. They see how new businesses can help improve existing ones, act as stepping-stones to industries previously out of reach or improve organizational efficiency.

Dividend for TNB shareholders

slang — Thu, 01 Feb 2007 13:47:43 +0000

Reported in The Edge (31/1/07) Tenaga Nasional Bhd (TNB) is now reviewing its dividend policy to reward shareholders. This is particularly so with its rising spare cash so as to make this utility stock more appealing, especially to foreign investors.

According to Chief executive officer Datuk Seri Che Khalib Mohamad Noh:-

· when the company was doing well, there was no reason not to pay dividend.

· TNB is now looking at its dividend policy which is going to be TNB’s first ever dividend policy

· TNB had hired a merchant bank to advise on the group’s dividend policy that would be announced when the group released its second quarter results, expected in April.

· He noted that foreign investors preferred to invest in companies that had a “structured dividend policy.”

Earlier in my articles, it’s not easy to shape up a dividend policy. Generally, investors prefer a company that at least has clear structured dividend policy rather than one which is erratic in paying dividend. An erratic unclear dividend pay out might occasionally confused investors as if management is not planning ahead .

Exploring IPO In Vietnam

slang — Mon, 22 Jan 2007 04:33:05 +0000

Interestingly, Furniweb Manufacturing ( Vietnam) Co Ltd (FMV) which is a subsidiary of Malaysian public listed company, Furniweb Industrial Products Bhd was reported in The Star (22/1/07) to explore listing in Vietnam vide the Ho Chi Minh City Securities Trading Centre. Also, this might be the first time that a Malaysian corporate is looking into listing a subsidiary in the Vietnamese stock market.

The Vietnamese stock market has chalked up an unbelievable 36% increase in just three weeks this month, after surging 144% last year as measured by the Vietnam Ho Chi Minh Stock Index or VNIndex;
The stock exchange has evolved from nowhere to a small base of companies listed in its stock exchanges;
Vietnam market has attracted a lot of foreign portfolio funds as they interpreted it to be the lesser China or Thailand;
FMV’s business is in upholstery webbing. FMV’s revenue increased from 46.8bil dong or RM11.8mil in 1997 to RM27.4mil at the end of 2005 ( higher than its Malaysian counterpart Furniweb Manufacturing Sdn.Bhd.);
Generally, the listed Vietnamese companies have relatively high price/earnings ratios (PEs) of 20 to 30 times where the companies have a higher market value than elsewhere. (Compared with about 10 times or less on Bursa’s second board.);

So if the parent company in Malaysia is trading at # 5.2 times annualised on its earnings per share of 2.8 sen in its third quarter ended Sept 30, 2006 (Furniweb’s market value was RM52.2mil.)
If the proposed listing of FMV were successful, and at a PE of 20 times or more, it would substantially raise Furniweb’s net asset value like the listing of Parkson Retail Group Ltd in Hong Kong which enhanced the value of parent company Lion Diversified Holdings Bhd.

Presently, we have other Malaysian companies which have relatively sizeable operations in Vietnam which include Latitude Tree Holdings Bhd, Scientex Packaging Bhd, Perusahaan Sadur Timah Malaysia Bhd (Perstima) and Poh Huat Resources Bhd.

Acquisition Strategy –Buying A Stake In The Acquiree’s Company

slang — Wed, 10 Jan 2007 10:17:25 +0000

Recently reported in the Star (12/06), there is a smallish acquisition by public listed company, London Biscuits (confectioner) of acquiring a 20% stake in poultry player Lay Hong for Rm4.8m or #Rm1.07 per share.
This case is worth noting as London Biscuits is not interested in merely signing a long term supply contract with its supplier, Lay Hong.

We should be able to learn some of good rationales/intentions from this small but interesting acquisition:

From Confectioner’s ( London Biscuit) side:

the tie-up results in a more strategic relationship with its raw materials supplier which provides a more solid, long term partnership;
liquid eggs are one of London Biscuit’s highest costs, accounting for 10% of total raw material costs;
by allying itself with poultry supplier (Lay Hong), this will ensure that London Biscuits gets a continuous, guaranteed supply of eggs;
able to protect the company from the vagaries of the market (pricing is more controlled);
able to benefit from significant savings due to lower packaging costs;
in view of Lay Hong’s ability to produce the required eggs in line with company’s expansion program ( Lay Hong can produce # 500 million eggs per year );
can look forward to more stable margins, as the company gets to insulate itself against fluctuations in price;
provides more opportunities for both parties to work together in the future;
able to reap capital appreciation as Lay Hong has a good profit trend;
able to build its branding in the local network (Lay Hong’s products very strong in its local distribution network which has over 5,000 outlets in both urban and rural regions across Malaysia, and it is seeking to gain a foothold abroad. It currently exports liquid eggs to Dubai and Vietnam);
Lay Hong’s product –nutriplus egg which is a branded egg which are low in cholesterol and contains health supplements such as Omega-3 and Selenium can assist London to move towards more health-oriented line of products;
able to use the pasteurized eggs of Lay Hong for its impending cake manufacturing production facility.

From Lay Hong’s ( poultry) point of view:

a good tie up with London Biscuit which guarantee a certain portion of sales;
further growth in sales if London’s expansion program is on full force;
unlike Lay Hong which is locally strong in local distribution network, London Biscuits is traditionally strong overseas which # 65% of its revenues derived from exports

In earlier articles, we noted that there are basic rules of thumb to at least initiate merger/acquisition, one of which is the congruence of visions/goals of the CEOs’. In this case, we seemed to see a strong synchronization of two top executives’ visions/needs.