Fair Value or Historic Cost?

Over the past few years, this question has been increasingly asked and pondered over. It is constantly debated whether historic cost actually provides the investor with the information required to make good decisions. There are strong views in favour of fair value measurement, proposing that it is a more current view on an asset's or liability's true value on the current transaction date. The fair value of an asset is the amount at which an asset can be purchased or sold between willing parties in a current transaction. The fair value of a liability is the amount at which a liability can be settled between willing parties in a current transaction. Fair value excludes any forced sales or settlements and does not include liquidations.

Is the historic cost of an asset/liability any indication of the value at which it can be sold/settled in the future?

In today's market, it is hard not to agree that an asset's historic cost is no longer relevant.

Janine Pakiry
Asst. Vice President
(Financial Control)
Lehman Brothers

International Financial Reporting Standards

I recently attended a seminar on IFRS (International Financial Reporting Standards) addressed by a lot of distinguished speakers. I am giving below a summary of it.

• Accounting is the language of business. With globalisation, IFRS will emerge as the common language by which companies across countries will do business. (With the decline of USA as a superpower, US GAAP is likely to be replaced by IFRS).
• The current accounting system is rule based and based on historical cost. IFRS is based on principles. No court order of any country will be able to supersede IFRS.
• India has agreed to accept this by 2011. Since accounts also have one-year-old data, it means Indian companies have to be IFRS compliant by 2010. A great deal of preparation will be necessary long before the adoption date.

By adopting IFRS, Indian companies can bridge the Atlantic divide, integrate and then participate in the global economy.

• The advantage for Indian companies adopting IFRS will be ease in doing business with global clients, particularly in USA and Europe. These countries do not trust the accounts of Indian companies, nor most of the small to medium size auditors who audit these accounts. It will also mitigate the risk premium built by investors who are not conversant with Indian accounting standards.
• Moreover, foreign investors are more likely to invest in firms whose accounting is similar to accounting of the country of the investors.
• In the area of M&A, accounting for intangibles like goodwill with indefinite useful life need not be written off in IFRS leading to declaration of higher profits. An impairment test has to be done by the management of the company, whose judgement will be supreme.

There will be nothing like "extraordinary income" in IFRS.

Much more non – accounting information will be included and the judgement of the management will be of paramount importance in several matters. Doing away with the schedule XIV rule for depreciation is just one of the many examples.

Contributed By:

Prof. J. N. Mukhopadhyay

(Globsyn Business School)

Economy in the Grip of Spiral Inflation - Should We Invest?

With the Indian Economy experiencing 11% spiral inflation, an average Indian previously buying essentials for Rs100 now paying Rs111, the burning prices of edible oil/lentils/cooking gas/fish & vegetables making deep holes in our pockets, bus/tram/taxi/auto fares on rise - situation is really grave. In this scenario the burning question is: Should we invest and if at all we do so, where should we invest to get good returns? The following avenues may really prove profitable in this situation: -

1. PPF (Public Provident Fund): The PPF carries 8% interest per annum & the interest is fully tax-free. In addition tax exemption benefit u/s 80 of the Income Tax Act 1961 can be availed. A maximum amount of Rs 70000 can be invested in the PPF.A minimum amount of Rs 500 p.a. need to be deposited in this 15-year term fund.
2. Fixed Deposits With Banks: The present interest rate on Bank Deposits vary between 8.45% & 9%. Senior citizens will get between 8.70% to 9.50%. However interest on FD with Bank is taxable but the Principal amount can be withdrawn before the term period.
3. Mutual Fund Fixed Maturity Plan (FMP): This is a Debenture / Bond based fund and is more or less similar to FD with banks. The term period can extend up to 3/6/12/14 months. The present rate of interest on 3 months FMP, after tax deduction is 8.41% p.a.
4. Postal Monthly Income Scheme (MIS): Presently, Postal MIS lost its importance after the Bank Interest hike.8% rate of interest is currently offered & 5% Bonus can be obtained after its 6 years term period.
5. Shares: Most risky of all investments but since the market is on the downswing, this period can be a good time for investment in IT, Pharmaceuticals, Fast Moving Consumer Goods (FMCG) Shares.
6. Equity Based Mutual Fund: Risky like shares, but investment in Yield Fund at this stage can be profitable.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)