E-Commerce and Accounting Principles

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E-Commerce and Accounting Principles

• an observation
• By Mahender Khari
• Khari Co International Accountants

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E-COMMERCE
Accountability Procedures?
Gambling
Banking
Professional Advice
Travel
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E-cshift in buyer behaviour

• Sell online- e- procurement
• E-care for customers
• E-care business partners
• E- learning
• The web continues to produce new value models
• that need to be translated into more appropriate
  accounting standards for accountability.

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ACCOUNTING PRINCIPLES

• CA 1985 Sch 4 requires the preparation of
  company accounts to be based on the principles
  of
• - going concern
• - consistence
• - accrual
• - prudence
• Consider
• Fundamental changes in the market and/or in
  technology
• Forced reductions in operations, e.g.
  necessitated by outsourcing abroad
• Loss of key customers

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ACCOUNTING RULES

• CA 1985 sets out two alternative sets of
  accounting rules
• - the historical cost of 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 Should we adopt legal approach as opposed to
  substance-over-form for accountability of
  financial data?
• 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 STANDARDS
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

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

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FINANCIAL STATEMENTS
Comprise of

• Balance Sheet
• Income Statement
• Statement of Changes in Equity
• Cash Flow Statement
• Notes
• Accounting Policies
• Directors Report
• NO SPECIFIC REQUIREMENT TO DISCLOSE E-C GENERATED
  TRANSACTIONS

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ACCOUNTING QUALITIES

• Understandability
• Reliability Relevance
• Verifiability
• Predictability
• Comparability Consistency
• Suitability for decision makingusefulness

COMPLEXITY DECREASE TRANSPERANCY E-c
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IAS 1
Presentation 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 AMOUNTS
The fast pace of E-c is in fact causing first
years trading results to be different to the
second year, the second years 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 PL
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 Amounts

• Audit practice ignores the impact of E-c and
  places too much emphasis on accounts rather than
  assessment of the E-c-related global risk.
• The professional judgement accorded to
  accountants in expressing their opinion on
  financial statements is proving to be a step
  behind the fast-paced E-c.
• Old practice of accountability can produce
  misleading results when transactions are bundled
  together regardless of distinction between E-c
  and non E-c-related activities.
• The legitimacy of the techniques used by the
  accounting profession in the E-c world is open to
  questioning.

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Comparison not helpful

• Outsourcing redundancies, currency risks, lack
  of direct control, political uncertainties,
• Net Asset valuations not reliable
• Forecast not reliable
• Taxation various mitigating schemes in market
• Income expenditure fluctuates due to market
  forces

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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 IASB
MOU Shared objective to develop common
accounting standard for use in the worlds
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)
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EU-HARMONISATIONswitch to IFRS

• Variety of legal tax systems in existence
• Directives for Company Law harmonisation
• 4th 7th Ds adopted into national legislation by
  EU countries
• Formats, valuation rules, preparation
  presentation of consolidated accounts
• Anglo-Saxon T F V as a whole, where as French
  German prefer precision
• 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. Its
  wishful thinking.

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IFRS FOR LISTED COMPANIES

• Wef 2005 global standard for financial reporting
  except in US
• Cross border implications/consistency in
  application
• National variations in interpretation
• EU, Australia, China, SwitzerlandIFRS
• Legal issue who has jurisdiction in cases of
  conflict EC of Justice will have busy time
  ahead

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COMPLEXITIES OF INTERNATIONAL TRADING
Monaco
HOLDING COMPANY HOLLAND
Beneficiaries
Cyprus
Subsidiaries
Singapore
Mauritius
UK
Via Nominees BVI
Trust (exotic location)
Buys from China
Trading partnership with India
Sells to Eastern Europe Far East
Sells to Europe
Management Charge
Bank account in Singapore
Bank account in Mauritius
Bank account in India
Bank account in Switzerland/UK
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Taxation

• Let us take taxation as an expense or cost for
  example
• No consensus is in sight, as to which
  jurisdiction is entitled to impose taxes on
  internet transactions e.g digital products such
  as software and e-books e g VAT.
• Nexus, deemed presence in the taxing
  jurisdiction to justify levying of tax- how do
  you tax an out of state supplier? Opinions and
  practices differ in US and EU countries. There is
  no Accounting standard yet that could give us
  practical guidance on that issue.
• International Financial Reporting Standards,
  however sophisticated, in such circumstances will
  only serve a limited purpose.

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Transfer of property to foreign corporation

• A US person transferring property to a foreign
  corporation has reporting obligations
• Connection with foreign foundations/stiftung/trus
  ts.
• Receipts of gifts from outside US
• Transactions with foreign corporations/persons
• Acquiring an interest in foreign corporations
  25
• Acting as a director/agent of foreign
  corporations.
• Nominee relationships
• Report foreign disregarded entities.
• Foreign partnerships.
• Foreign bank accounts.

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Summary

• Development of a common accounting language
  long way away
• E-c activities remain difficult to police
• Taxation no accountability, no taxability
• IFRS US GAAP harmonisation a possibility but
  long way away
• Next 5 years exploit the legitimate loopholes