E commerce and accounting principles

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E-Commerce and E-Commerce and Accounting PrinciplesAccounting Principles

an observationan observation

By Mahender KhariBy Mahender KhariKhari & Co International AccountantsKhari & Co International Accountants

www.StudsPlanet.comwww.StudsPlanet.com

22

E-COMMERCEE-COMMERCE

Travel

Banking Gambling

Professional Advice

Accountability Procedures?


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E-cE-cshift in buyer behaviourshift in buyer behaviour

Sell online- e- procurementSell online- e- procurement E-care for customersE-care for customers E-care business partnersE-care business partners E- learningE- learning

The web continues to produce new value modelsThe web continues to produce new value models

that need to be translated into more appropriate that need to be translated into more appropriate accounting standards for accountability. accounting standards for accountability.


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ACCOUNTING PRINCIPLESACCOUNTING PRINCIPLES CA 1985 Sch 4 requires the preparation of company CA 1985 Sch 4 requires the preparation of company

accounts to be based on the principles of:accounts to be based on the principles of:

- going concern- going concern

- consistence- consistence- accrual- accrual- prudence- prudence

Consider:Consider: Fundamental changes in the market and/or in technologyFundamental changes in the market and/or in technology Forced reductions in operations, e.g. necessitated by outsourcing abroadForced reductions in operations, e.g. necessitated by outsourcing abroad Loss of key customersLoss of key customers


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ACCOUNTING RULESACCOUNTING RULES CA 1985 sets out two alternative sets of accounting rulesCA 1985 sets out two alternative sets of accounting rules

- the historical cost of accounting rules- the historical cost of accounting rules- the alternative accounting rules-- the alternative accounting rules-

Q: Should we price/capitalise information according to its value or its cost?

Q: Could these accounting rules be applied to E-c transactions worldwide?Q: Could these accounting rules be applied to E-c transactions worldwide?

Q: Should we adopt legal approach as opposed to substance-over-form for accountability of financial data?Q: Should we adopt legal approach as opposed to substance-over-form for accountability of financial data?

Q. What does the conventional wisdom say?Q. What does the conventional wisdom say?“Mathematically arrived values raise many questions about the reliability of the financial data”. Source AIA journal


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ACCOUNTING STANDARDSACCOUNTING STANDARDS

Accounting Standards are developed in the UK by Accounting Standards are developed in the UK by ASB/FRC/FRRP/UITFASB/FRC/FRRP/UITF

Financial Reporting Council

Financial Reporting Review Panel

Accounting Standards Board

Urgent Issues Task Force

“CA 1985 s 256 defines accounting standard as “statements of standard accounting practice issued by such body or bodies as may be prescribed by regulations”


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FINANCIAL STATEMENTSFINANCIAL STATEMENTS

Balance SheetBalance Sheet Income StatementIncome Statement Statement of Changes in Statement of Changes in

EquityEquity Cash Flow StatementCash Flow Statement NotesNotes Accounting PoliciesAccounting Policies Directors Report; Directors Report;

NO SPECIFIC REQUIREMENT TO NO SPECIFIC REQUIREMENT TO DISCLOSE E-C GENERATED DISCLOSE E-C GENERATED TRANSACTIONSTRANSACTIONS

Comprise of:


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ACCOUNTING QUALITIESACCOUNTING QUALITIES

UnderstandabilityUnderstandability Reliability & RelevanceReliability & Relevance VerifiabilityVerifiability PredictabilityPredictability Comparability & ConsistencyComparability & Consistency Suitability for decision making=usefulnessSuitability for decision making=usefulness

COMPLEXITY & DECREASE TRANSPERANCY =E-c


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IAS 1IAS 1Presentation of Financial Statements

• Basis for Presentation

• Comparability – Previous Period and Other Entities

• Going Concern Basis

• Accrual Basis

• Classification

• Annually or More Frequently

• Current and Non-current Assets

• Short and Long-term Liabilities

“Fair presentation requires faithful representation of the effects of transactions, events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses”


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FRS 28 CORRESPONDING FRS 28 CORRESPONDING AMOUNTSAMOUNTS

The fast pace of E-c is in fact causing first year’s trading results to be different to the second year, the second year’s results to be significantly different to the third year etc…

Q: Would it not be misleading to compare results?

Many financial statements show in their P&L Account a high cost of digitalisation in year one but low subsequent marginal costs. This is a prime example of non-comparability one year with the next. This is because information is costly to produce but cheap to reproduce.

The technology infrastructure makes information more accessible and hence more valuable but its value is difficult to quantify.

The accounting practices are in favour of “historic cost basis”. However, the cost of same information, in the world of E-c can and often does fluctuate from one period to the next.


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……FRS 28 Corresponding AmountsFRS 28 Corresponding Amounts

Audit practice ignores the impact of E-c and places too much Audit practice ignores the impact of E-c and places too much emphasis on accounts rather than assessment of the E-c-related emphasis on accounts rather than assessment of the E-c-related global risk. global risk.

The professional judgement accorded to accountants in The professional judgement accorded to accountants in expressing their opinion on financial statements is proving to expressing their opinion on financial statements is proving to be a step behind the fast-paced E-c.be a step behind the fast-paced E-c.

Old practice of accountability can produce misleading results Old practice of accountability can produce misleading results when transactions are bundled together regardless of when transactions are bundled together regardless of distinction between E-c and non E-c-related activities.distinction between E-c and non E-c-related activities.

The legitimacy of the techniques used by the accounting The legitimacy of the techniques used by the accounting profession in the E-c world is open to questioning.profession in the E-c world is open to questioning.


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Comparison not helpfulComparison not helpful

Outsourcing = redundancies, currency risks, Outsourcing = redundancies, currency risks, lack of direct control, political uncertainties, lack of direct control, political uncertainties,

Net Asset valuations = not reliableNet Asset valuations = not reliable Forecast= not reliableForecast= not reliable Taxation= various mitigating schemes in Taxation= various mitigating schemes in

marketmarket Income & expenditure= fluctuates due to Income & expenditure= fluctuates due to

market forcesmarket forces


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Is hamonisation possible?Is hamonisation possible? Is there a justification why accounting rules and

standards should be fundamentally and vastly different ?

US, China, Japan and Taiwan e g differ in their accounting language.

Different traditions in accounting and different legal and economic realities of the new E-c world, contribute to varied practices. The objective being, to communicate in a manner that the entrepreneurs of E-c world understand.

To make Business life easier use same accounting rules .


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US FASB and IASBUS FASB and IASBMOU

“Shared objective to develop common accounting standard for use in the world’s capital markets.

Consistency, comparability, and efficiency of financial statements, enabling global markets to move with less friction

Roadmap for the removal for the reconciliation requirement for non-US companies that use IFRS and are registered in the United States.

Committee of European Securities Regulators to identify area for improvement of accounting standard.”

“First, the Boards will reach a conclusion about whether major differences in focussed areas should be eliminated through one or more short-term standard setting projects, and, if so, the goal is to complete work in those areas by 2008.”

“Second, the FASB and the IASB will seek to make continued progress in other areas identified by both boards where accounting practices under US GAAP and IFRSs are regarded as candidates for improvement” (source: International Accountants) www.StudsPlanet.comwww.StudsPlanet.com

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EU-HARMONISATIONEU-HARMONISATIONswitch to IFRSswitch to IFRS

Variety of legal & tax systems in existenceVariety of legal & tax systems in existence Directives for Company Law harmonisation Directives for Company Law harmonisation 44thth & 7 & 7thth Ds adopted into national legislation by EU countries Ds adopted into national legislation by EU countries Formats, valuation rules, & preparation & presentation of Formats, valuation rules, & preparation & presentation of

consolidated accountsconsolidated accounts Anglo-Saxon= T & F V= as a whole, where as French & Anglo-Saxon= T & F V= as a whole, where as French &

German prefer precisionGerman prefer precision EU Directive, not fitting in the global tax philosophy, and having little regard to the EU Directive, not fitting in the global tax philosophy, and having little regard to the

practical aspects of the offshore world, is hoping to collect consumer taxes online. practical aspects of the offshore world, is hoping to collect consumer taxes online. Its wishful thinking. Its wishful thinking.


1616

IFRSIFRS FOR LISTED COMPANIES FOR LISTED COMPANIES

Wef 2005 global standard for financial reporting Wef 2005 global standard for financial reporting except in USexcept in US

Cross border implications/consistency in applicationCross border implications/consistency in application National variations in interpretationNational variations in interpretation EU, Australia, China, Switzerland=IFRSEU, Australia, China, Switzerland=IFRS Legal issue = who has jurisdiction in cases of conflict Legal issue = who has jurisdiction in cases of conflict

= EC of Justice will have busy time ahead= EC of Justice will have busy time ahead


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COMPLEXITIES OF INTERNATIONAL TRADING

HOLDING COMPANYHOLLAND

Beneficiaries

Monaco

Cyprus

Subsidiaries

Singapore Mauritius UK

Buys from China Trading partnership with India

Sells to Eastern Europe & Far East

Sells to Europe

Bank account in Singapore

Bank account in Mauritius

Bank account in India

Bank account in Switzerland/UK

Via Nominees BVI

Management Charge

Trust (exotic location)


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TaxationTaxation Let us take taxation as an expense or cost for example;Let us take taxation as an expense or cost for example; No consensus is in sight, as to No consensus is in sight, as to which jurisdiction is entitled to which jurisdiction is entitled to

impose taxes on internet transactions e.g digital products such impose taxes on internet transactions e.g digital products such as software and e-books e g VAT.as software and e-books e g VAT.

““Nexus,”= deemed presence in the taxing jurisdiction to Nexus,”= deemed presence in the taxing jurisdiction to justify levying of tax- how do you tax an out of state supplier? justify levying of tax- how do you tax an out of state supplier? Opinions and practices differ in US and EU countries. There is Opinions and practices differ in US and EU countries. There is no Accounting standard yet that could give us practical no Accounting standard yet that could give us practical guidance on that issue.guidance on that issue.

International Financial Reporting Standards, however International Financial Reporting Standards, however sophisticated, in such circumstances will only serve a limited sophisticated, in such circumstances will only serve a limited purpose.purpose.


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Transfer of property to foreign Transfer of property to foreign corporationcorporation

A US person transferring property to a foreign corporation has A US person transferring property to a foreign corporation has reporting obligations; reporting obligations;

1.1. Connection with foreign foundations/stiftung/trusts. Connection with foreign foundations/stiftung/trusts. 2.2. Receipts of gifts from outside USReceipts of gifts from outside US3.3. Transactions with foreign corporations/persons Transactions with foreign corporations/persons 4.4. Acquiring an interest in foreign corporations =25%Acquiring an interest in foreign corporations =25%5.5. Acting as a director/agent of foreign corporations. Acting as a director/agent of foreign corporations. 6.6. Nominee relationshipsNominee relationships7.7. Report foreign disregarded entities. Report foreign disregarded entities. 8.8. Foreign partnerships. Foreign partnerships. 9.9. Foreign bank accounts. Foreign bank accounts.


2020

SummarySummary

Development of a common accounting Development of a common accounting language = long way awaylanguage = long way away

E-c activities = remain difficult to policeE-c activities = remain difficult to police Taxation= no accountability, no taxabilityTaxation= no accountability, no taxability IFRS & US GAAP harmonisation= a IFRS & US GAAP harmonisation= a

possibility but long way awaypossibility but long way away Next 5 years= exploit the legitimate loopholesNext 5 years= exploit the legitimate loopholes


Date post:	09-Aug-2015
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