341-350: Accounting and Audit - Accountancy Forum Topics

Revenues Vs Gains

The IASB Framework states that The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent. Gains represent other items that meet the definition of income and may, or may not, arise in the course of the ordinary activities of an entity. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element in this Framework. Do you agree with me that distinguishing between them according to the IASB framework is vague ?

Ias 23 On Exposure Draft

The exposure draft of proposed amendments to IAS 23 has been published by the IASB as part of its Short Term Convergance Project. The main change is to eliminate the benchmark treatment of expensing out the borrowing cost. Now and onwards borrowing cost eligible for capitalization under the revised version shall be capitalized. New version is yet open for comments and the last date is 29 September, 2006.

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National Accounting / National Income Accounts:

National Income Accounts are designed to produce a meaningful summary of the working of the economic system of a country. They provide a framework within which the operations of the economy are recorded. As the formulation of business policy depends upon a full knowledge and analysis of costs, sales and financial conditions of the firm, the analysis of national income accounts is necessary for a comprehensive appraisal of the working of the economy. Because of their usefulness as an aid in formulating economic policies and numerous other applications in the field of economic decision-making national income and product estimate are now regularly prepared by most countries of the world. International organisations, including the UN and its regional economic commissions, have contributed considerably to the standardisation of national accounts. Since national accounts provide a framework for studying the economic system as a whole and its various component parts, they bring out important inter-relationships of these parts with one another and with the economy as a whole. Thus, national accounting is of significant help in assessing and analysing the effects of policy measures on the structure of the economy and on major economic flows of income, expenditure and production. The shifts in the structural relationships of the economy as revealed by national accounts can be used to assess the success and consistency of policy measures. The quantitative picture of the economy provided by these accounts answers certain basic questions about the structure of the economic system; for instance, what part of the national income is shared by different factors of production and who makes savings available to the economy; what part is played by external trade in providing goods and services and how is the national product broken down by the industrial origin. All this basic information is available in a comprehensive system of national accounts. The growth of the economy is generally measured with the help of trends in national and per capita income over a period of time. One of the major uses of national accounts is in the field of economic planning. In order to ensure that an economic plan is internally consistent and optimal from the viewpoint of allocation and use of resources, it is necessary to examine its effect on the different aspects of economic activity. Such an appraisal is usually carried out with the help of data that become available through national accounts. The quantity of resources required to implement the plan, and the effects on employment, output and prices are best analysed within a national accounts framework. The utility of national income estimates is by no means limited to the formulation of policies in the public sector. Income statistics are multi purpose tools and they can be equally useful in regard to the measurement of shifts in demand for the output of the private sector. Since national income estimates and other components which go into making up of the accounts provide comprehensive and understandable summary of the country’s economic life, the breakdown of these totals provides detailed information on various aspects of economic transactions which can be utilised in formulating short as well as long run production policies. Some basic concepts Domestic product, national income value-added and other similar concepts serve the purpose of measuring economic activity of a nation during a given period of time, usually a year. A clear definition of the concepts is important for comparison over time as well as for comprehension with other countries. Gross domestic product Gross Domestic Products (GDP) is derived from gross output of the economy, that is, the total flow of goods and services, which are produced during the period. These numerous and heterogeneous goods and services cannot be added together unless they are expressed in terms of common measure. The value that these products fetch in the market, the market price - can be used as a measuring rod. If we deduct from the total gross output measured at market prices all intermediate goods and services domestically produced as well as imported, which are used up in the production process during the period, we arrive at the gross domestic product at market prices. Alternatively, the measuring rod can be the gross income received by the various factors of production. This measurement will yield the gross domestic product at factor cost. The difference between these two equals indirect taxes net of subsidies. Thus gross domestic product at market prices = gross domestic product at factor cost + indirect taxes net of subsidies. Some labour and capital belonging to the country may be engaged in production in other countries and vice versa. Factor payments may, therefore, take place both ways. If net factor payments from abroad, which can be positive or negative, are added to the gross domestic product, we get the gross national product (GNP). When measured at factor cost, the gross national product is the gross reward during the period of the factors participating in the production process. Gross national product at factor cost is therefore identical with gross factor income or gross national income. Various methods for estimating national income Product, income and expenditure mentioned above, form a circular flow and thus make it possible to measure national income, in three different ways, namely, as a sum of income derived from economic activities, as a sum of final expenditures on consumption and investment adjusted for exports or imports, or finally, as a sum of value-added by the various producing sectors in the country, adjusted for factor payments to and from abroad. One must be careful with regard to correction for depreciation of fixed capital so that the various elements in the aggregate are either gross or net. Since the measurement of national income through any of these approaches should yield identical results, they provide a check against each other. Each of these methods brings in the limelight different aspects of the basic operations of the economy viz; production, distribution and consumption. The boundary of production National income has been defined as the money value of goods and services produced by the economy during a given period of time, after deduction for certain inputs and other adjustments. This presupposes that each item entering into national income total can be traced back to goods and services expressed both in terms of a physical quantity and a value. Obviously this is not possible in every case. How for instance, can one measure and evaluate the services rendered by a mother to her child or services rendered to oneself. Any assumed value assigned to such services would be subjective and completely arbitrary. To avoid these difficulties of measurement, it is necessary to delimit the filed of production and draw a boundary between production that is included and that which is not. As a broad rule, all goods and services exchanged for money are included in the concept of production. There are, however, a few exceptions to this general rule. In certain cases output is not necessarily exchanged for money and is wholly or partly consumed by the producer himself. The farmers, for example, retain a part of their farm production for their own use and sell the remaining part in the market. To leave out this un-exchanged part would understate the farm production. It is assumed that the farmer is operating a business enterprise and sells a part of his production to himself as a consumer. Since a part of the production is already sold in the market, it is possible to apply a priced to the unsold part. Another important case where imputation is made is that of owner occupied houses. Some other imputations usually made are remuneration in kind to employees, such as food and lodging for domestic servants and buildings owned and occupied by government. In order to maintain the identity of production, income and expenditure, whenever income is imputed, a corresponding expenditure is also recorded. Depreciation of fixed capital National income, product and expenditure can be measured either net or gross of deprecation of fixed capital assets. The gross national product is gross only in the sense that it contains an element of depreciation. The net national product is defined as gross national product less depreciation. The measurement of depreciation presents many problems. In a stationary economy where the quantity and quality of fixed assets do not change, the estimation of depreciation is relatively easy. In an economy witnessing both qualitative and quantitative changes in capital stock, the problem becomes complicated. In the absence of detailed information on the duration of assets, on their cost and on the methods of depreciating them, the estimates of depreciation are to be treated as approximations. Market prices and factors costs As mentioned earlier, goods and services can be valued either at market prices or factor cost. These two methods of valuation lead to different results. The national product at factor cost represents the sum of the incomes received by the factors of production. Since the market price is the price which the consumers pay it includes indirect taxes net of subsidies, if any. The two totals derived from these two methods of valuation will therefore be different, but can be easily reconciled. Thus, if we deduct indirect taxes from the national product, and add subsidies, the resulting figure would be the national product at factor cost. Real national income In an open economy with a significant volume of international trade, it is advisable to distinguish between national income at constant prices and the "real" national income. In the former, exports of the country are measured with the help of export price, but in the latter exports are measured in terms of the real volume of imports that exports command at the current terms of trade. An adjustment of the estimate of national product at constant prices in thus necessary to arrive at "real" national income in the event of a change in the country’s terms of trade since the base year. This adjustment can be done by deflating the current value of exports first by the import price index and then by the export price of index; the difference between the two would represent a correction for change in the terms of trade. This correction should be added to national product to arrive at "real" national income. Personal income Personal Income (PI) is the total money received by individuals in the community. It is the aggregate of earned and unearned incomes. Corporate income taxes and undistributed profits of corporations reduce the personal incomes of individuals to that extent. Social security contributions also diminish personal income. Transfer payments made by government as well as private business sector to individuals are, however, included in personal income. Thus personal income = net national product - corporate income taxes - undistributed profits of corporation - social security contributions + transfer payments. Disposable personal income Disposable personal income (DPI), is arrived at by deducting direct personal taxes from personal income. It is also the sum of consumption and savings of individuals. Thus DPI is simply PI - T, where T is direct personal taxes such as income tax, wealth tax etc. Disposable personal income rather than net national product is the principal determinant of consumption because the consumption of a person largely depends on his take home pay.

Treatment Of Other Assets

Asasalamoalikum, my dear respected brothers, i need information about "other assets". if in question of "financial ratios", other assets are given then what is its treatment? they are deffered assets or we can assume other assets as "current assets". if in answer sheet note is given of assumption that other assets are assumed as current assets, then is it correct? i have added "other assets" with current assets and i also gave an assumption of this. will my be correct? i know most of brothers are accounting specialist, and you can help me in this regard. thanking you in anticipation, with best regards khyber

Britain Embraces Islamic Finance:

LONDON (AFP) - "You may have heard stories about cash under pillows," said Islamic scholar Abdul Kadir Barkatulla, recalling a time when British Muslims preferred to keep their money in the bedroom rather than in a bank account. But times have changed, with Britain's estimated two million Muslims being catered for by a small number of banks - notably Lloyds TSB - who are providing financial products which comply with Islamic or Shariah law. "Some Muslims are likely to suffer social exclusion," said Barkatulla, who advises Lloyds TSB on Islamic financial law. "We are bringing them into the mainstream" by offering Islamic financial services, he added. British finance minister Gordon Brown believes this can help Britain to become the gateway to Islamic finance and trade - a move favoured by the country's Muslim leaders. Last week, Chancellor of the Exchequer Brown noted that London has more banks supplying services under Islamic principles than any other Western financial centre. His comments came as Lloyds TSB, the fifth-biggest bank in Britain, began a roll-out of its Islamic financial services across Britain following a successful pilot scheme. Lloyds' 2,000 branches in England, Scotland and Wales now offer a current account which complies with Islamic law while most of its banks allow Muslims to apply for Islamic home loans. Lloyds' Islamic current accounts offer no interest or overdraft facilities. Under Shariah law both payment and receipt of interest are forbidden because it is deemed unacceptable to make profit on the investment of money alone. An Islamic home loan, meanwhile, works by the bank buying a property on behalf of the customer, contributing up to 90 percent of the purchase price. The customer pays the remaining percentage up front and pays the outstanding sum over an agreed term, together with a rental payment. Lloyds says the amount paid on an Islamic home loan over the usual 25-year term would be broadly similar to payments on a conventional mortgage. Lloyds is ahead of its rivals, but the bank's head of Islamic Financial Services, Paul Sherrin, expects greater competition. Global banking giant HSBC is offering also Islamic products, although not on the scale of Lloyds. “This greater the competition, the greater the acceptance of Islamic banking in the UK," Sherrin said. The bank chief pointed to research by Datamonitor which suggests that the Islamic home loans market in Britain could reach 4.5 billion pounds (6.59 billion euros, 8.31 billion dollars) in 2006. With 40 percent of British Muslims under the age of 25, there is clear potential for home ownership among the religious grouping. According to independent research carried out on behalf of Lloyds, 75 percent of British Muslims want Shariah-compliant financial services. And almost 18 months after Lloyds began offering Islamic finance on the high street, non-Muslims are also making use of the service. According to Barkatulla, some Sikhs and Hindus are signing up to Islamic banking. "It is perceived not as Islamic per se but as ethical," he explained. Islam's Shariah law also prohibits clients' money from being invested in companies linked with areas such as alcohol, tobacco and pornography. Noting the attraction of Islamic banking, British finance chief Brown has said London can be the financial location of choice for Muslim countries all over the world. The Scotsman made his comments during a speech last week to The Islamic Finance and Trade Conference held in the British capital. Muslim Council of Britain secretary-general Abdul Bari told the conference that trade and financial markets were an ideal place to promote peace and dialogue between Muslim and non-Muslim countries. Lloyds' move into Islamic banking followed the opening in September 2004 of the Islamic Bank of Britain (IBB). Based in London, the IBB was the first bank in Europe to specifically address the needs of the Muslim community.

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