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October-December 2013

THE ROLE OF
Chartered Accountants
THE ROLE OF ACCOUNTANT'S IN NATIONAL ECONOMY

IN Wealth Creation
for National & Social Development
October-December 2013
CONTENTS
EDITORIAL BOARD Editorial
ISSN 1993-3649

2
President’s Desk 3

ARTICLES
The Role of Chartered Accountants in Wealth 5
Creation for National and Social Development
- M. Farhad Hussain FCA
Md. Abdus Salam FCA
Gopal Chandra Ghosh FCA The latest Corporate Governance 9
Akhtar Sohel Kasem FCA
Guidelines issued by Bangladesh Bank:
Masih Malik Chowdhury FCA
Analyzing the changes made with some
Nasir Uddin Ahmed FCA
observations and recommendations
Sabbir Ahmed FCA
- Abdullah-Al-Mamun ACA
Md. Sayeed Ahmed FCA
Mahmudul Hasan Khusru FCA
Md. Abu Bakar FCA New Issue and Amendments of IFRSs to 27
Md. Mahamud Hosain FCA Interests in Other Entities: A Comprehensive
Mohammed Jashim Uddin FCA Analysis of IFRS 10, 11, 12, IAS 27 (Revised)
Snehasish Barua FCA & 28 (Revised) and IAS 31 (Withdrawn)
Ajit Kumar Paul FCA - 1Md. Kishlur Rahman ACA, ACMA
Md. Abid Hossain Khan FCA - 2Shah Md. Jubaer ACA
Muhammmad Aminul Hoque ACA
Zareen Hosein ACA Revised IASB Conceptual Framework 39
Md. Shahidul Islam ACA -laying the foundation for future IFRSs
Dipok Kumar Roy ACA - Abu HM Kibria, ACA
Chairman DRC-ICAB
Chairman CRC-ICAB
Concept of Takaful and its challenges 47
- Kazi Md. Mortuza Ali
S M Abu Nayem Ahmed, psc
Corporate Governance Vs Corruption: 61
Sqn Ldr (Retd.)
Role of MNCs
Senior Deputy Secretary-ICAB
- Tanzina Haque

Membership of Bangladesh in Egmont Group: 69


An enduring example of success
- Raihan M Chowdhury

Bridging the US GAAP and IFRS Framework: 73


A Qualitative Study on Contradictory Accounting
Standards Towards the way of Convergence
- 1Fareen Zaman
- 2Rabita Sabah

DISCLAIMER
"The opinions expressed in this publication are those of the
respective authors themselves and do not necessarily reflect the
views of the Editorial Board of the Institute of Chartered Accoun-
tants of Bangladesh (ICAB) or the ICAB itself."
EDIT ORIAL
creation takes momentum, the their position has noble role to
function of Chartered Accountants play for the people who deserves
ultimately shape up the sustainable better products, better services.
and beneficial projects that is aimed And I truly believe, Chartered
at. The job of Chartered Accountant can help realizing that
Accountants is to bring financial aspiration.
discipline. Once the discipline in
It is at this backdrop, we chose the
terms of financial norms and
theme of the current issue as "The
To the essence, the wealth practices take place, social
Role of Accountants in Wealth
creation is understood as development is then ensured
Creation for National and Social
economic growth that benefits through economic emancipation.
Development".
most of the societies. It is an
In a fragile economy of ours, the
effective way not only to alleviate This issue of ‘Bangladesh
role of Chartered Accountants has
but also to solve the cause of Accountant’ will help to
been proved to be the best
poverty that most likely comes understand the need for our
mechanism to control oligopoly
with training and experience. inclusive engagement in managing
market of mobile operators and
the limited resources to meet the
The Chartered Accounting other multinational companies.
growing demand and create assets
Professionals in this regard has Their contributions I truly believe in
needed for the development of our
major role to play. A Chartered yet to discover in so many aspect of
socio economical development.
Accountant can represent a true our life.
and fair management information In fine, I would appreciate any
Organization should operate in an
with his professional expertise. comments/suggestions regarding
effective manner in current
Reliable and trust worthy any relevant matter of the
competitive business arena by
information can help making good publication of journal which will
reducing the risk level of property
decision by the investors in and help enriching the journal.
management with a view to
outside the country.
increase the value of the assets.
The institute of Chartered However, the accountants can't
Accountants of Bangladesh is solve the risk management totally
vested with the responsibility of unless they are rich with fair
creating highly trained and business information. So, they M. Farhad Hussain FCA
Chairman, Editorial Board
efficient world class accountants. It should always remain updated with
is recognized that our CAs have a the current business development.
wide range of experiences in the
As an accountant I must say, we are
development of financial services,
committed to support the
business organisation like
development of the business. A
companies, family trusts as well as
Chartered Accountant also has
partnerships, sole traders, tax
indirect role to enhance consumer
returns, etc.
protection. Their action should be
The Chartered Accountants are contributory so that the markets
well equipped with information to remain competitive, free of
ensure proper investment of distortion and manipulation. This
capital and other assets in the best will be always a challenge to them.
possible way. Once wealth Every professionals irrespective of

2 October - December 2013 The Bangladesh Accountant


PRESIDENT’S DESK
We mean duty of care
for the Accountancy
Profession

At the last quarter of 2013, I from Education, Training and cooperation for ongoing World
congratulate everyone involved Examination increased Bank financed project. Moreover,
with this journal for successfully significantly. we held several meetings with
cultivating and nurturing our ICAEW senior management team
intellect and wisdom to convey it Throughout 2013, ICAB upheld and discussed ICAB’s status,
to the readers. its network with IFAC, CAPA and progress and standards along with
SAFA in pursuit of its global other development matters. As per
Standing at the brim of the professional standards. ICAB has invitation of ICAEW, ICAB first
calendar year 2013, I could say been emphasizing on building time sent one representative to
my endeavor towards professional sustainable relationship with the attend ICAEW Annual Tutor
excellence will remain as it is. reputed organizations in and Conference. This Conference was
outside the country. ICAB has an invaluable opportunity to meet
As you know, I promised to already MoU with ICAEW and with ICAEW Examiners and see
enhance the image of ICAB in CPA Ireland. ICAB is the member how the ICAEW Advanced Stage
national and international arena of IFAC, CAPA and SAFA. ICAB papers are marked. It is to note
vigorously. The path towards has MOU and MRA with ICAEW that, for the first time from ICAB
progress and advancement was and CPA Ireland. Building mutual side, I gave a presentation
not even; hindered by many relationship with the professional “Concepts and Applications of
unexpected happenings. We were bodies from other developed Islamic Banking and Finance with
riddled with the FRA issue, which countries is also going on. ICAB Financial Reporting Implications”
forced us to divest our effort and has MoU with the Office of the to the audiences comprising of
energy from our routine affairs and Comptroller and Auditor General. experts and senior management
finally, we could come to a ICAB provides training to the team, ICAEW. I am happy to note
reasonable conclusion. officials of Central Bank of that a team of ICAEW visited ICAB
Bangladesh (BB), National Board recently and expressed their
As you are aware, numbers of of Revenue and other regulatory satisfaction on ICAB’s performance
ICAB Students and Members have bodies and commercial over the years since the World
been increasing sharply since organizations. ICAB has Bank funded Twining Project with
2010 after recognizing paper by implemented successfully the ICAEW.
paper results as guided by ICAEW World Bank Projects ‘Public
with a compatible curriculum and Private Partnership for Improved In 2013, we continued our effort
in line with International Audit Quality Assurance’. furthering the existing MoU with
Education Standards (IES). the Office of the Comptroller and
Currently, the total numbers of ICAB sincerely nurtured the Auditor General (OCAG) to
articled students are about 23,029 mutual relationship with ICAEW to strengthen both Public and Private
and members are about 1,442. ensure the standard that the sectors’ auditing capacity. A
ICAB’s financial strength is English Institute wanted. Now Knowledge Sharing Session was
stronger than before even without ICAEW become closer to ICAB organized in presence of
enhancing members fees and than before. We met ICAEW Representatives of National Audit
students charges during the year President and expressed the Office (NAO), UK, CIPFA,
2013. Specially after importance of ICAEW’s support OCAG’s DGs, ICAB Council
implementing the new curriculum under MoU for strengthening the Members and Past Presidents.
and exam system, the incomes capacity building of ICAB and Under the signed MoU with Local

The Bangladesh Accountant October - December 2013 3


Government Division, we tried do is that to pay profound care for others and for the
our outmost to support the Annual gratitude to the Council Members, Accountancy Profession, at large
External Audit, Performance all Members of the Institute and in our every work and thoughts.
Assessment and Fiduciary & the ICAB employees who have
Safeguard Compliance Assessment worked day and night to achieve Now about the theme of the
of Union Parishad for Local our purpose. Truly, our initiates current issue of journal, I can say
Governance Support Project II have made people aware about that it is the Chartered
financed by the World Bank. We the professional roles/ functions of Accountants who can provide the
did extensive homework on CAs serve the Nation with their best services to create wealth and
formulating suitable MoU and true contributions. We received resources for national and social
MRA with different issues for huge supports and responses from development. They are
future cooperation with ICA the electronic and print media. instrumental to economic
Australia and CPA Australia. It development. The stakeholders
received special momentum, However, we cannot maintain should be able to utilize them
especially after signing the MRA ‘wait and watch’ policy. We must properly for the greater economic
with CPA Ireland. We look be able to rise against any emancipation.
forward to have benefit of these shortcomings we have, amongst
efforts in near future. the professionals and prove once Lastly, I urge everyone to
again that we are the best of the contribute more and put quality
I am confident that we are being best professionals who care social thoughts in their professional
able to make the concerned that responsibility. Standing at the last aspects through this journal to
much is needed to do before such month of the year 2013, I believe reach thousands which will be
enactment of proposed the that I left no stone unturned to their noble service out of love for
Financial Reporting Act. It became contain and uphold the image of the profession.
clearer that FRA was drafted on our noble profession. However, I
wrong “Public Perception” which believe, there is always better way
came to the notice of all the of doing things. It is important that
responsible assigned. Our rigorous we pursue our objectives with
intellectual efforts have finally wisdom. We must be able to
Md Abdus Salam FCA
paid off. Now, the minimum I can reflect that we truly owe duty of President, ICAB

4 October - December 2013 The Bangladesh Accountant


The Role of Chartered Accountants in Wealth
Creation for National and Social Development
M. Farhad Hussain FCA

Accounting is an instrumental means of organizational and political arenas. In


order to function effectively, these
determining financial stability.
different arenas need to communicate and
Accountants are responsible for
it is accounting information that facilitates
determining an organization’s overall
this communication. Accounting
wealth, profitability, and liquidity.
information serves many important
Accountants are practitioners of
purposes, for example assisting users in
accounting or accountancy. Without
making informed decisions, in relation to
accounting, organizations would have no
the effective allocation of scarce
basis or foundation upon which daily and
resources.
long-term decisions could be made. The
budgets for marketing activities, profit
Therefore, accounting information can be
reinvestment, research and development,
seen to be a potent influence in society,
and company growth all stem from the
which affects everybody. Accounting has
work of accountants. Accounting is one of
a long history and it is practiced by people
the oldest and most respected professions
for people and therefore it is more of an
in the world, and accountants can be
art rather than a science. Unlike other
found in every industry from
professions, which have a body of
entertainment to medicine.
theoretical knowledge to depend on to
make decisions, accounting has evolved
Accounting is concerned with collecting,
as a craft with few rules underpinning its
analyzing and communicating economic
practice and function.
information. However in order to develop
a broader understanding of accounting
However, society and business practice
and the central role it plays in society, we
have changed. The growth of global
need to consider it from a social
business and the emergence of new
perspective.
sectors such as ecommerce have led to
complex transactions being undertaken.
Individuals in society coexist by
This in turn has unearthed problems of
establishing relationships with each other.
subjectivity and inconsistency in the
Another way of viewing society is by
application of traditional accounting
segmenting it into different groups or
techniques. For example, changes in the
arenas, for example the social, economic,
nature of business assets to include

The Bangladesh Accountant October - December 2013 05


ACCOUNTING IS
AN INSTRUMENTAL
MEANS OF
DETERMINING
Power FINANCIAL STABILITY.
Management
ACCOUNTANTS ARE
RESPONSIBLE FOR
DETERMINING AN
Accountants ORGANIZATION’S
are every where!!
OVERALL WEALTH,
PROFITABILITY, AND
LIQUIDITY.
ACCOUNTANTS ARE
PRACTITIONERS OF
ACCOUNTING OR

intellectual property or the use of of imagery has been David Solomon ACCOUNTANCY.
leasing have led to the question of and Tony Tinker, Solomon was a WITHOUT ACCOUNTING,
how to account for these types of strong advocate of neutrality in
transactions? This fundamental accounting and used images of ORGANIZATIONS WOULD
change has led to loopholes in journalist, speedometer, telephone
HAVE NO BASIS OR
accounting and led to manipulations and cartography to illustrate his way
and scandals. The loopholes in of thinking. He suggests that FOUNDATION UPON
conceptual framework can be accountants should be like
illustrated by the collapse of Kmart journalists, reporting the news and WHICH DAILY AND
where the blame was partly placed not making it. Accountants should LONG-TERM DECISIONS
upon problems with FASB’s function like a speedometer, in
conceptual framework. However capturing the real economic speed of COULD BE MADE. THE
these manipulations and standards an entity. In addition accountants
BUDGETS FOR
are reduced to a great extent by the should convey information
various accounting frameworks, impartially like a telephone. Solomon MARKETING ACTIVITIES,
principles and standards. further suggests accounting should
function like cartography n producing PROFIT REINVESTMENT,
Accounting theorists and researchers maps of economic reality. These RESEARCH AND
have also played a role in attempting images give us greater insight into
to apply theory into accounting. The how accounting should function in a DEVELOPMENT, AND
use of imagery has enabled theorists real world.
COMPANY GROWTH ALL
to explore the nature of accounting
practices, by applying the Tony Tinker however argues against STEM FROM THE WORK
characteristics of the image in the Solomon’s use of metaphors, as being
context of accounting. unsuitable and problematic. Tinker OF ACCOUNTANTS.
suggests that journalists portray reality
Two contributors to the development by disregarding some of the facts.
of accounting theory, through the use Also according to Tinker, “Solomon’s

06 October - December 2013 The Bangladesh Accountant


ACCOUNTING IS
CONCERNED WITH
COLLECTING,
ANALYZING AND
COMMUNICATING
ECONOMIC
INFORMATION.
HOWEVER IN ORDER TO
DEVELOP A BROADER
UNDERSTANDING OF
ACCOUNTING AND THE
CENTRAL ROLE IT PLAYS
IN SOCIETY, WE NEED TO
CONSIDER IT FROM A
automotive speedometer analogy Accounting plays an essential role in SOCIAL PERSPECTIVE.
poorly reflects financial reporting” economic development. High-quality
and suggests drivers are likely to corporate reporting is key to
tamper with the speedometer to avoid improving transparency, facilitating
being caught out. He also argues that the mobilization of domestic and
the telephone doesn’t convey thought international investment, creating a
on but what people say, which leads sound investment environment and
to intentional and unintentional bias, fostering investor confidence, thus
as the telephone is selective. Tinker promoting financial stability. A strong
goes on further to criticize Solomon’s and internationally comparable
cartography metaphor and argues that reporting system facilitates
maps don’t represent facts as there international flows of financial
are distortions that effect our resources while at the same time
behavior. E.g. color and size. helping to reduce corruption and
mismanagement of resources. It also
As demonstrated by Solomon and strengthens international
Tinker no one image captures fully competitiveness of enterprises in
what accounting is all about. In my attracting external financing and
opinion different images in the debate taking advantage of international
provide different perspectives of market opportunities. In the wake of
accounting practices and introduce various financial crises continued
newer images to try to overcome efforts are being made towards
contradictions and influence future improving the quality of corporate
accounting developments. The reporting as an important part of
existence of such debates also measures towards strengthening the
represents the problematic nature of international financial architecture. In
accounting and the loopholes in its this regard the implementation and
theoretical development. application of internationally

The Bangladesh Accountant October - December 2013 07


recognized standards, codes and institutions. In the face of these institutional arrangements. It is
good practices in the area of challenges there is a need for a concerned with developing and
corporate reporting has been coherent approach to building upgrading certain skills,
strongly encouraged as a reflection capacity in this area, as well as for competencies and performance. It
of the increasing pace of tools to measure and benchmark is also about enhancing the
globalization and international progress and identify priorities for capacity of individuals, groups or
economic integration. However, further actions. institutions that are to carry out
the effective adoption and corporate reporting, for it is
implementation of such standards Building an accountancy reporting and transparency that
and codes remains a challenge for infrastructure is a complex process often drive improvements.
many developing countries and because it is part of an economy’s
economies in transition as they legal and regulatory system. It
lack some of the critical elements needs to be attuned to the interests
of corporate reporting of many stakeholders and the
infrastructure – from weaknesses in availability of financial, The Author is a Council Member &
their legal and Regulatory educational and human resources. Past President of ICAB.
frameworks, to lack of human Capacity building helps reinforce
capacity and relevant support proper legal frameworks and

08 October - December 2013 The Bangladesh Accountant


The latest Corporate Governance Guidelines issued
by Bangladesh Bank: Analyzing the changes made
with some observations and recommendations
Abdullah-Al-Mamun ACA

Abstract Circular Letter No. 19 dated 27 October


2013 deals with the provisions regarding
contractual appointment of Advisor and
The objective of this article is to analyze Consultant of all banks doing business in
the latest corporate governance guidelines Bangladesh. As instructed by BB, these
issued by Bangladesh Bank (BB) through Circulars are issued with immediate effect
BRPD Circular No.11 dated 27 October and after these Circulars become effective,
2013, and BRPD Circular Letter No. 18 earlier all Circulars related to these issues
and 19 dated 27 October 2013 (mentioned specifically at the end of each
respectively (herein after referred to as Circular) shall be treated as void.
latest CG Guidelines). In this article the
writer has highlighted the changes made
Corporate governance: an
and new issues included in the latest CG
Guidelines. The writer has also made a overview
critical analysis of the latest CG
Guidelines and provides his observations Corporate governance is the system of
and recommendations upon it. The principles, policies, procedures and
intention of the writer is not to criticize clearly defined responsibilities and
the latest CG Guidelines but to highlight accountabilities framed by key
some areas which may be reviewed by BB stakeholders to overcome the conflicts of
and also provide some recommendations interest inherent in the corporate form.
which might be incorporated in the latest Corporate governance in today’s business
CG Guidelines. world is subject to a variety of conflicts of
interest due to its inherent complexities in
BRPD Circular No.11 dated 27 October forms and structures. So, two major
2013 deals with the provisions regarding objectives of corporate governance can
formation and responsibilities of Board of be:
Directors (BoD) of all bank companies
registered/ incorporated in Bangladesh. • To eliminate or mitigate conflicts of
BRPD Circular Letter No. 18 dated 27 interest particularly those between
October 2013 incorporates the provisions management and shareholders.
relating to appointment and
responsibilities of Chief Executive of all • To ensure that the assets of the
banks doing business in Bangladesh company are used efficiently and
except the specialized banks. BRPD productively and in the best interests of

The Bangladesh Accountant October - December 2013 9


CORPORATE
GOVERNANCE IS THE
SYSTEM OF
PRINCIPLES, POLICIES,
PROCEDURES AND
CLEARLY DEFINED
RESPONSIBILITIES AND
ACCOUNTABILITIES
FRAMED BY KEY
STAKEHOLDERS TO
OVERCOME THE
CONFLICTS OF
INTEREST INHERENT IN
THE CORPORATE FORM.
its shareholders and other Formation and responsibilities
stakeholders. CORPORATE
of board of directors (BoD)
GOVERNANCE IN
Corporate governance involves a set In accordance with the amendments
of relationships between a company’s made in the Bank Company Act 1991 TODAY’S BUSINESS
management, its board, its (amended up to 2013) in 2013 and
shareholders and its stakeholders. WORLD IS SUBJECT TO
consideration of recent financial
Corporate governance is only part of scams and irregularities occurred in A VARIETY OF
the larger economic context in which banking industry, Bangladesh Banks
firms operate that includes, for issued the latest CG Guidelines to CONFLICTS OF
example, macroeconomic policies protect the interest of depositors and
and the degree of competition in INTEREST DUE TO ITS
other stakeholders.
product and factor markets. The
INHERENT
corporate governance framework also Board of Directors of a bank
depends on the legal, regulatory, and should be comprised of competent COMPLEXITIES IN
institutional environment (ROSC). and professionally skilled persons
FORMS AND
with a view to formulating
The latest CG guidelines issued policy-guidelines and supervising STRUCTURES.
by BB business activities of the bank
efficiently as well as ensuring good
As mentioned earlier, BB issued three governance in the bank management.
Circulars broadly covering the The responsibilities of the Board of
following: Directors of a bank company are
more important than those of other
A. Formation and responsibilities of companies. It is essential for bank
Board of Directors (BoD). companies to acquire and maintain
confidence of the depositors as
B. Appointment and responsibilities bank’s business is mainly run with the
of Chief Executive. depositors' money.

C. Contractual appointment of As per BRPD Circular No.11 dated 27


Advisor and Consultant. October 2013 (herein after referred to

10 October - December 2013 The Bangladesh Accountant


as latest CG Guidelines), the with amendments made in Bank c) Declaration for confidentiality
following directives are given for Company Act 1991 (amended up by the nominated person (As
ensuring good governance to 2013). per Annexure C of BRPD
regarding constitution of Board of Circular No. 11 dated 27
Directors, their duties and 1.1 Appointment of New October 2013).
responsibilities and other related Directors
activities: d) In case of independent director,
As per Section 15(4) of Bank the approval letter from
1. Formation of BoD Company Act 1991 (amended up Bangladesh Securities and
to 2013), every bank company, Exchange Commission (BSEC).
The newly amended Section 15 of other than specialized banks, at the
Bank Company Act 1991 time of taking prior approval from e) In case of independent director,
(amended up to 2013) includes BB for appointing of Directors declaration about his related
provisions for prior approval of BB should furnish the following interest with the company as
before the appointment of new information along with the per Annexure D (he will also
Directors, as well as dismissal, application: have to submit declaration as
termination or removal of any per Annexure A, B and C).
Director from the post, a) Personal information of the
qualification and competency of nominated person (As per f) CIB report of the nominated
Directors, maximum number of Annexure A of BRPD Circular person.
Directors of the Board, No. 11 dated 27 October
appointment of independent 2013). g) Updated list of Directors.
Directors, appointment of
maximum 02 (two) members from b) Declaration of nominated These new clauses included in the
a family as Director etc. person (As per Annexure B of latest CG Guidelines in accordance
BRPD Circular No. 11 dated 27 with amendments made in Bank
This new clause included in the October 2013). Company Act 1991 (amended up
latest CG Guidelines in accordance to 2013).

The Bangladesh Accountant October - December 2013 11


interest under Section 46 of Bank
Coyanies Act 1991 and can also
dissolve the Board of Directors
of a bank company.

These new clauses included in the


latest CG Guidelines in accordance
with amendments made in Bank
Company Act 1991 (amended up
to 2013).

1.3 Removal of Directors from


office

In accordance with Section 108(2)


of Companies Act1994, with the
prior approval of Bangladesh Bank,
any Director of a bank company
other than specialized banks can
be removed from his office for the
reason specified in its Articles of
Association. In this regard, the
reason and grounds of the
dismissal/ removal and the copy of
such decision taken by Board and
a list of Directors shall be
submitted to Bangladesh Bank. It is
mentionable that such removal
shall be effective from the date
Bangladesh Bank’s approval.

1.2 Vacancy of office of Director any financial institutions within 1.4 Appointment of Alternate
one year from the date of Director
a) The office of a Director shall be repayment of the total dues to
vacated as per the provision of the bank. It is mentionable here The provision regarding
Section 108(1) of Companies that the dues can be adjusted appointment of alternate Directors
Act 1994. Moreover, the office with the shares held by the in the latest CG Guidelines has
of a Director shall also be Director in that bank company. been kept same as mentioned in
vacated if he becomes When a Director of a bank the BRPD Circular No. 12 dated 10
loan-defaulter and does not company gets notice as per June 2003.
repay the loan within two Section 17 of Bank Company
months after getting a notice Act 1991, he cannot transfer his 2. Director from Depositors
from Bangladesh Bank as per shares of that bank company
Section 17 of Bank until he repays his all the The provision mentioned in Bank
CompanyAct 1991; provides liabilities of that bank company Company Act 1991 regarding
false declaration at the time of or financial institutions. appointment of Director from
appointment or observing his depositors has been amended in
disqualification as a Director. c) Besides, BB can remove 2013; appointment of Directors
Directors or Chairman of a bank from depositors is no longer
b) If the office of a Director is company other than the required. But, in compliance with
vacated as per Section 17 of state-owned banks for the provision of Section 15(9) of
Bank Company Act 1991, he conducting any kind of Companies Act 1991 (amended up
will not be eligible to become activities that is detrimental to to 2013), bank company may
Director of that bank company the interest of the banks consider the tenure of existing
or any other bank company or depositors or against the public Directors from depositors or may

12 October - December 2013 The Bangladesh Accountant


appoint them as the Independent bank management, it is required to of success/ failure in achieving the
Director of the company. define the scope of responsibilities business and other targets of the
and authorities among controlling bank in annual report and
This new clause included in the bodies over bank affairs. Under setting of Key Performance
latest CG Guidelines in accordance section 15B and 15C of Bank Indicators (KPIs) for the CEO
with amendments made in Bank Company Act 1991 (amended up and executives immediate two
Company Act 1991 (amended up to 2013); Board of Directors has tiers below the CEO have been
to 2013). been made responsible regarding kept same as mentioned in the
establishing and execution of BRPD Circular No. 06 dated 04
3. Information regarding policy of bank company, its risk February 2010.
Directors management, internal control,
internal audit and execution of the b) Loan and Risk management
In the latest CG Guidelines, the same.
provisions regarding the captioned i. In the latest CG Guidelines, the
clause i.e. keeping updated list of 4.1 Responsibilities and provisions regarding appraisal
Directors, sending Directors’ list to Authorities of Board of Directors of loan/ investment proposal,
other banks or financial institutions sanction, disbursement,
immediately after the appointment a) Work planning and strategic recovery, re-scheduling and
or release of Director and management write-off of loans have been
displaying of Directors’ list on the kept same as mentioned in the
website and updating of same on i. In the latest CG Guidelines, the BRPD Circular No. 06 dated 04
regular basis have been kept same provisions regarding chalking February 2010.
as mentioned in the BRPD Circular out of strategies, determination
No. 14 dated 22 April 2010. of goals and objectives have ii. In the latest CG Guidelines, the
been kept same as mentioned provisions regarding framing of
in the BRPD Circular No. 06 risk management policies and
4. Resonsibilities of dated 04 February 2010. compliance and monitoring
Directors thereof have been kept same as
ii. In the latest CG Guidelines, the mentioned in the BRPD
To ensure good governance in the provisions regarding inclusion Circular No. 06 dated 04

The Bangladesh Accountant October - December 2013 13


February 2010. Besides, in relation
to risk management, the Board
shall review the report made by
Risk Management Committee
and monitor the compliance of promotion, transfer, disciplinary
core risk management and punitive measures, human
guidelines issued by resources development with
Bangladesh Bank and these motivation and service rules
issues are newly inserted in this framing and approval have prudent appraisal of loan/
clause through the latest CG been kept under the authority of investment proposals, adoption
Guidelines. Board of Directors. Also, the of modern electronic and
Chairman or Directors shall in information technologies and
c) Internal Control Management no way involve themselves and the introduction of effective
interfere into or influence over Management Information
In the latest CG guidelines, the any administrative affairs System (MIS) have been kept
provisions regarding the captioned including recruitment, same as mentioned in the BRPD
subject have been kept same as promotion, transfer and Circular No. 06 dated 04
mentioned in the BRPD Circular disciplinary measures except February 2010.
No. 06 dated 04 February 2010 recruitment, promotion transfer
except the following: and punitive measures to the iii. The Board of Directors shall
immediate two tiers below the formulate Code of Ethics for all
The Board of Directors will CEO. All provisions under this executives and officers of the
establish such an internal control clause have been kept same as bank and they will follow it
system so that internal audit mentioned in the BRPD properly. For development of
activities could be conducted Circular No. 06 dated 04 compliance culture in the bank,
independently from the February 2010. the Board shall set better ethical
management. standards. This clause is newly
ii. In the latest CG Guidelines, the inserted in the latest CG
d) Human Resources Management provisions regarding Guidelines.
and Development development of skills of bank’s
staff in the different fields of its e) Financial Management
i. In the latest CG Guidelines, the business activities including
policies relating to recruitment, i. As per the latest CG Guidelines,

14 October - December 2013 The Bangladesh Accountant


the annual budget and the statutory guidelines issued by Bangladesh other responsibilities appropriately
financial statements shall be Bank. This clause is newly assigned by Bangladesh Bank
prepared with the approval of inserted in the latest CG which is same as mentioned in the
the Board. At quarterly rests the Guidelines. BRPD Circular No. 06 dated 04
Board shall review/ monitor the February 2010.
positions in respect of bank’s f) Appointment of Chief Executive
income, expenditure, liquidity, Officer (CEO) 4.2 Meetings of the Board of
non-performing assets, capital Directors
base and adequacy, As per the latest CG Guidelines, it
maintenance of loan loss is the responsibility of the Board to As per the latest CG Guidelines,
provision and steps taken for make appointment of an honest, the Board of Directors may meet
recovery of defaulted loans competent, experienced and once or more than once in a
including legal measures. All suitable CEO/ MD (Managing month upon necessity and not less
provisions under this clause Director) for ensuring strong than one meeting of the Board in
have been kept same as financial base three months to be held which are
mentioned in the BRPD of same as mentioned in the BRPD
Circular No. 06 dated 04 Circular No. 06 dated 04
February 2010. February 2010. Besides, in
the latest CG
ii. As per the latest CG Guidelines, holding of
Guidelines, the Board additional Board
shall frame the meeting has been
policies and discouraged.
procedures for
bank’s purchase 4.3
and procurement Responsibilities
activities and shall of the
accordingly Chairman of
approve the Board of
delegation of Directors
power for making
such expenditures. i. As the
The maximum Chairman of
possible delegation of the Board of
such power shall rest Directors or
on the CEO and his Chairman of any
subordinates. The decision Committee formed by
on matters relating to the Board or any
infrastructure development and Director does not personally
purchase of land, building, the possess the jurisdiction to apply
vehicles etc. for the purchase of bank and policy making or executive
bank’s business shall, however, obtaining confidence of depositors. authority, he/ she shall not
be adopted with the approval of The provision regarding participate in or interfere into
the Board. All provisions under appointment of such competent the administrative or
this clause have been kept same CEO of the bank shall be made operational and routine affairs
as mentioned in the BRPD with the approval of the of the bank. The said provisions
Circular No. 06 dated 04 Bangladesh Bank which is same as mentioned in the latest CG
February 2010. mentioned in the BRPD Circular Guidelines are same as those
No. 06 dated 04 February 2010. mentioned in the BRPD
iii. The Board shall review whether Circular No. 06 dated 04
the Asset Liability Committee g) Additional Responsibilities of February 2010.
(ALCO) has been formed and the Board
the said Committee is executing ii. The Chairman may conduct
its activities properly as per the As per the latest CG guidelines, the on-site inspection of any bank
Board shall ensure fulfilling any branch or financing activities

The Bangladesh Accountant October - December 2013 15


under the purview of the oversight office room, a personal secretary/ an Executive Committee, an Audit
responsibilities of the Board. He assistant, a peon/MLSS, a Committee and a Risk
may call for any information telephone at the office, a Management Committee with the
relating to bank’s operation or mobile phone usable inside the members of the Board. There shall
ask for investigation into any country and a vehicle in the be no other permanent or
such affairs; he may submit business interest of the bank temporary Committee or
such information or subject to the approval of the subcommittee of the Board can be
investigation report to the Board. The said provisions are formed except the said three
meeting of the Board or the almost same as mentioned in Committees.
executive committee and if the BRPD Circular No. 06 dated
deemed necessary, with the 04 February 2010. The issues regarding organizational
approval of the Board, he shall structure of the supportive
effect necessary action thereon 5. Formation of Supportive Committees, qualification of
in accordance with the set rules Committees of the Board members, roles and responsibilities
through the CEO. However, any of the Committee and conducting
complaint against the CEO shall In the earlier CG Guidelines, bank of Committee meetings have been
have to be apprised to companies were allowed to form described elaborately in the latest
Bangladesh Bank through the only two supporting Committees of CG Guidelines.
Board along with the statement the Board i.e. Executive Committee
of the CEO. The said provisions and Audit Committee. In the latest 5.1 Executive Committee
mentioned in the latest CG CG Guidelines, Bangladesh Bank
Guidelines are same as those instructed to form a Risk In the earlier CG Guidelines the
mentioned in the BRPD Management Committee in provisions regarding Executive
Circular No. 06 dated 04 addition to the said two Committee was not mentioned in
February 2010. Committees. an organized way and in detail
frame. But in the latest CG
iii. As per the latest CG guidelines, As per the latest CG Guidelines, Guidelines, the provisions
the Chairman may be offered an the Board of Directors of every regarding Executive Committee
bank company shall have to form have been described thoroughly in

16 October - December 2013 The Bangladesh Accountant


an organized way. should be noted in minutes. compliance culture by
As per the latest CG guidelines, an C.2 Audit Committee communicating the importance
Executive Committee is to be of internal control and risk
formed for taking decision on In most of the cases the provisions management to ensure that all
urgent and day-to-day or routine of Audit Committee mentioned in employees have clear
activities between the intervals of the latest CG Guidelines are same understanding of their
two Board meetings. The Executive as those mentioned in BRPD respective roles and
Committee shall perform according Circular No. 12 dated 23 responsibilities.
to the terms of reference December 2002. The Audit
determined by the Board. Committee shall be formed to • Review the arrangements made
assist the Board in fulfilling its by the management for
As per the latest CG Guidelines, oversight responsibilities including developing and maintaining a
the Executive Committee shall be implementation of the objectives, suitable Management
formed with maximum of 07 strategies and overall business Information System (MIS).
(seven) members which is same as plans set by the Board for effective
mentioned in the BRPD Circular functioning of the bank. The Audit • Consider whether internal
Letter No. 02 dated 15 February Committee will review the control strategies recommended
2010. The members of the financial reporting process, the by internal and external auditors
Committee shall be elected for 03 system of internal control, the audit have been implemented timely
(three) years. The Chairman of the process and the bank’s processes by the management.
Board can also become the for monitoring compliance with
member of the Executive laws and regulations and its own • Review the corrective measures
Committee. Each member should code of business conduct. taken by the management as
be capable of making valuable and regards to the reports relating to
effective contributions in the As per the latest CG Guidelines,
fraud forgery, deficiency in
functioning of the Committee. The the Audit Committee shall be
internal control or other similar
company secretary of the bank formed with maximum of five
issues detected by internal and
shall act as the secretary of the members and two of them shall be
external auditors and inspectors
Committee. Independent Directors. The Audit
of the regulators and inform the
Committee shall be constituted of
Board on a regular basis.
The Executive Committee shall such members apart from the
discharge responsibilities and take members of the Executive
Committee of the Board. This Financial Reporting
decision on the matters as
instructed by the Board except clause is also mentioned in Section
15B (2) of Bank Company Act • Review the Annual Financial
discharging of those responsibilities Statements and determine
and taking decisions that are 1991 (amended up to 2013). The
members of the Committee may be whether they are complete and
specifically assigned on full Board consistent with applicable
through Bank Company Act 1991 nominated for three years and the
company secretary of the bank accounting and reporting
or other related laws and standards set by respective
regulations. The decisions taken by shall act as the secretary of the
Committee. governing bodies and
the Committee shall be ratified in regulatory authorities.
the next Board meeting.
The roles and responsibilities of
the Audit Committee mentioned in • Discuss with Management and
Upon necessity the Committee can External/ Statutory Auditors to
call meeting at any time. The the latest CG Guidelines are almost
same as mentioned in BRPD review annual financial
Committee may invite CEO, Chief statements before their
Risk Officer or any executive to Circular No. 12 dated 23
December 2002. The roles and finalization.
attend the committee meeting. To
ensure active participation and responsibilities of Audit Committee
contribution by the members, a are as follows: Internal Audit
detailed memorandum should be
circulated to Committee members Internal Control • Evaluate whether the Internal
well in advance before each Audit functions are conducted
meeting. All recommendations/ • Evaluate whether management independently from the
observations of the Committee is adhering to the appropriate Management of bank.

The Bangladesh Accountant October - December 2013 17


• Review the activities and on quarterly rest to the Board exchange risk, internal control and
organizational structure of the mentioning any errors and compliance risk, money laundering
internal audit function and irregularities, fraud and forgery risk, information and
ensure that no unjustified and other anomalies pointed by communication technology risk,
restrictions or limitations are Internal and External Auditor operation risk, interest rate risk and
made. and Inspection Team from liquidity risk and keeping adequate
Bangladesh Bank. capital and provision against the
• Review the efficiency and risks identified.
effectiveness of internal audit • The Audit Committee will
function. submit the evaluation report As per the latest CG guidelines, the
relating to Internal and External RMC is to be formed with
• Review that findings and Auditor of the Bank to the maximum of five members and
recommendations made by the Board. they will be appointed for 03
Internal Auditors for removing (three) years. Each member should
the irregularities, if any, • This Committee will supervise be capable of making valuable and
detected are duly acted upon by other assignments delegated by effective contributions in the
the management in running the the Board and evaluate its own functioning of the Committee. The
affairs of the bank. performance regularly. company secretary of the bank
shall act as the secretary of the
External Audit Meetings of the Audit Committee.
Committee
• Review the performance of As per the latest CG guidelines, the
external auditors and their audit As per the latest CG Guidelines, RMC shall discharge the following
and management reports. the Audit Committee shall have to roles and responsibilities:
hold at least 4 meetings in a year
• Review the findings and and upon necessity, the Committee Risk identification and
recommendations made by the can call meeting at any time. The control policy
external auditors for removing Committee may invite CEO, Head
the irregularities, if any, of Internal Audit or any executive It is the responsibility of RMC to
detected are duly acted upon by to attend the Committee meeting. identify and assess risk of the bank
the management in running the All recommendations/ observations and guide management to
affairs of the bank. of the Committee should be noted formulate strategies for minimizing/
in minutes. controlling of risk. The Committee
• Make recommendations to the will review the risk management
Board regarding the Risk Management policy of the bank and modify the
appointment of the external same as per requirement.
auditors.
Committee (RMC)
The provision of Risk Management Formation of administrative
Compliance with existing Committee has been newly structure
laws and regulations inserted in the latest CG
Guidelines. This clause will ensure For controlling of risk, it is the
The Audit Committee shall review more accountability of Directors responsibility of RMC to ensure
whether the laws and regulations regarding risk management of bank suitable administrative structure at
framed by the regulatory companies. The Risk Management the bank. To ensure the
authorities (Central Bank and other Committee shall have to be formed compliance of risk management
bodies) and internal policy/ to mitigate impending risks which guidelines relating to credit risk,
regulations approved by the Board could be arisen during foreign exchange risk, internal
and Management have been implementation of Board approved control and compliance risk,
complied with. policies, procedures and strategies. money laundering risk and
The Risk Management Committee information and communication
Other Responsibilities is entrusted to examine and review technology risk, the RMC will form
whether management is properly separate Committees at the
• The Audit Committee will working on identifying and management level and also
submit a ‘Compliance Report’ mitigation of credit risk, foreign monitor their activities.

18 October - December 2013 The Bangladesh Accountant


Appointment and
Responsibilities of Chief
Executive

In order to strengthen the financial


base of the bank and obtain
confidence of the depositors,
appointing honest, efficient,
experienced and suitable Chief
Executive is one of the key
responsibilities of the Board of
Directors. Through BRPD Circular
Letter No. 18 dated 27 October
2013 (herein after referred to as
latest CG Guidelines), BB
aggregated the provisions of earlier
07 (seven) Circulars and Circular
Letters and also included some
new conditions/ provisions (by
considering the amendments made
in Bank Company Act 1991 in
2013 and recent irregularities
occurred in the banking industry)
Review and approval of risk Meeting of the RMC for appointment of CEO and his
management policy responsibilities.
The Committee is entitled to
RMC shall review the risk conduct at least four meetings in a As per the latest CG Guidelines,
management policy and guidelines year and call meeting at any time the following guidelines are given
of the bank at least once in a year, as per requirement. The for appointing the CEO and
make necessary modifications as Committee may invite the Chief devising the roles and
per requirement and submit the Executive, Chief Risk Officer or responsibilities and authorities of
same to the Board for approval. any executive to attend the the CEO:
Besides, lending limits and other committee meeting. To ensure
limits should be reviewed at least active participation and A. Provisions relating to
once in a year and should be contribution by the members, a appointment of CEO
amended, if necessary. detailed memorandum should be
circulated to Committee members 1. Moral Integrity
Storage of data and well in advance before each
meeting. All recommendations/
reporting system observations of the Committee
In the BRPD Circular Letter No. 15
dated 03 September 2002, four
should be noted in minutes. conditions were mentioned. In the
Adequate record keeping and
reporting system developed by the latest CG Guidelines, BB kept two
bank management will be Traini conditions unchanged, modified
approved by the Committee after ng of Directors one condition a little bit and
examination and review of the As per the latest CG Guidelines, repealed one condition totally.
same. The Committee will monitor the Directors of the Board will That is, for appointment of CEO,
the overall implementation of risk acquire appropriate knowledge of satisfaction in respect of the
management policy of the bank the Banking laws and other concerned person should be
and also examine whether relevant laws, rules and regulations ensured to the effects that:
remedial measures have been to effectively discharge the
taken for minimization of credit responsibilities as a Director of the a. He has not been convicted by
risk, market risk and operation risk bank which is same as mentioned any Criminal Court of Law.
of the bank. in the BRPD Circular no. 06 dated
04 February 2010.

The Bangladesh Accountant October - December 2013 19


b. He has not been punished for 03 September 2002 have been i.e. for 3 years (reappointment can
violating any rules, regulations kept intact in the latest CG be made) mentioned in the BRPD
or procedures/ norms set by any Guidelines with adding a new Circular Letter No. 06 dated 16
regulatory authority. clause in the second condition. March 2003. A new provision also
Also, a new condition included in has been included in the latest CL
c. He was not associated with any the captioned section. Details are which is as follows:
such company/ organization, as follows:
registration or license of which If the age of the candidate has less
has been cancelled. i. Or he is not a loan-defaulter than 3 years left to attain 65 years,
added with the second in that case, he/ she can be
2. Experience and Suitability condition of the Circular Letter appointed for that shorter period.
dated 03 September 2002.
In the latest CG Guidelines, BB 6. Guidelines in fixing the salary
kept all five conditions unchanged ii. He is not a tax-defaulter; this and allowances
which was mentioned in the BRPD new condition is included in
Circular Letter No. 15dated 03 the captioned section. The five guidelines stated in the
September 2002 and subsequently BRPD Circular Letter No. 03 dated
modified through BRPD Circular 4. Age Limit 01 February 2006 for determining
Letter No. 06 dated 16 March the salary and allowances of the
2013. The latest CG Guidelines The age limit i.e. no person Chief Executive has been kept
only added a new clause with the crossing the age of 65 years shall intact in the latest CG Guidelines.
second condition which is as hold the post of Chief Executive of A new provision also has been
follows: a bank mentioned in BRPD included in the latest CG
Circular Letter No. 03 dated 01 Guidelines which is as follows:
“At least he has been obtained February 2006 has been kept
post-graduation degree from a unchanged in the latest CG The annual increment of salary will
recognized university.” Guidelines. not be payable unless the related
key financial indicators of the bank
3. Transparency and financial 5. Appointment Tenure e.g. CAMELS has been improved.
integrity
The appointment tenure of Chief 7. Incentive Bonus
Three conditions mentioned in the Executive has been kept
BRPD Circular Letter No. 15 dated unchanged in latest CG Guidelines The provision regarding payment of

20 October - December 2013 The Bangladesh Accountant


incentive bonus to Chief Executive
mentioned in the BRPD Circular
Letter No. 06 dated 20 April 2010
has been kept unchanged in the
latest CG Guidelines i.e. the Chief
Executive will get incentive bonus
subject to paying incentive bonus
to all executives/ officers/ workers
of the bank and the said bonus
amount will not exceed BDT
1,000,000 in a year.

8. Honorarium for attending the i.e. the resume of the selected a. In terms of the financial,
Board Meeting person, and appointment business and administrative
condition (direct and indirect authorities vested upon him by
The provision for getting salary-allowances and other the Board, the CEO shall
honorarium for attending the Board benefits) remain unchanged. discharge his own
meeting mentioned in the BRPD responsibilities. He shall remain
Circular Letter No. 03 dated 02 ii. The selected person shall also accountable for achievement of
March 2008 has been kept have to submit declarations i.e. financial and other business
unchanged in the latest CG Declaration as per Attachment targets by means of business
Guidelines i.e. as the Chief A and Confidentiality plan, efficient implementation
Executive is a salaried executive, Declaration as per Attachment thereof and prudent
he will not get any honorarium for B of the latest CG Guidelines. administrative and financial
attending the Board meeting or In the Attachment A some new management. The said
Board formed Committee meeting. conditions have been added provisions mentioned in the
with the earlier ones. The latest CG Guidelines are same
9. Evaluation Report Confidentiality Declaration as as those mentioned in the
per Attachment B has been BRPD Circular No. 06 dated 04
The captioned provision is newly newly inserted in the latest CG February 2010.
inserted in the latest CG Guidelines.
Guidelines i.e. for reappointment b. The CEO shall ensure
of Chief Executive; the Chairman 11. Decision of Bangladesh Bank compliance of the Bank
of the bank shall have to submit a is final Company Act 1991 and other
Board approved evaluation report relevant laws and regulations in
to the Bangladesh Bank. The captioned provision discharging of routine functions
mentioned in the BRPD Circular of the bank. The said provisions
10. Prior Approval from Letter No. 15 dated 03 September mentioned in the latest CG
Bangladesh Bank 2002 has been kept unchanged in Guidelines are same as those
the latest CG Guidelines i.e. the mentioned in the BRPD
The captioned provision which decision of BB for appointment of Circular No. 06 dated 04
was included in the BRPD Circular the Chief Executive will be treated February 2010.
Letter No. 15 dated 03 September as final and such appointed Chief
2002 and BRPD Circular Letter No. Executive cannot be terminated, c. The CEO shall include clearly
17 dated 14 October 2002 released or removed from his/ her any violation from Bank
remained unchanged with office without prior approval from Company Act 1991 and/ or
inclusion of the following new Bangladesh Bank. other relevant laws and
conditions: regulations in the “Memo”
B. Responsibilities and Authorities presented to the meeting of the
i. The proposal shall be signed by of Chief Executive Board or any other Committee
the Chairman of the Board and (s) engaged by the Board. The
the Board approved copy of the The Chief Executive of the bank, said provisions mentioned in
proposal is to be submitted to whatever name called, shall the latest CG Guidelines are
the Bangladesh Bank. The discharge the responsibilities and same as those mentioned in the
attachments with the proposal exercise the authorities as follows:

The Bangladesh Accountant October - December 2013 21


BRPD Circular No. 06 dated 04 two tiers below the CEO, shall rest No.16 dated 09 August 2003 and
February 2010. on him/ her, which he/ she shall Circular Letter No. 07 dated18
apply in accordance with the September 2007. However, in
d. The CEO shall report to approved service rules. Besides, most of the cases, the provisions
Bangladesh Bank of issues in under the purview of the mentioned in the latest CG
violation of the Bank Company human resources policy as guidelines are same as mentioned
Act 1991 or of other laws/ approved by the Board, he/ she in the earlier guidelines.
regulations. The said provision shall nominate officers for
mentioned in the latest CG training etc. The said provisions Provisions regarding appointment
Guidelines are almost same as mentioned in the latest CG of Advisor
that mentioned in the BRPD Guidelines are same as those
Circular No. 06 dated 04 mentioned in the BRPD As per the latest CG guidelines,
February 2010. Circular No. 06 dated 04 bank companies are instructed to
February 2010. follow the guidelines stated below
e. The recruitment and promotion while appointing Advisor:
of all staff of the bank except Contractual Appointment of
those in the two tiers below Advisor and Consultant Experience and Suitability: For
him/ her shall rest on the CEO. appointment as advisor, the
He/ she shall act in such cases Sometimes bank companies need concerned person will have to
in accordance with the to appoint contractual Advisor and fulfill the following requirements
approved service rules on the Consultant in addition to the with regard to experience and
basis of the human resources permanent posts in the qualifications:
policy and approved delegation organization structure for
of employees as approved by performing any special or specific a. Experience in Banking or
the Board. The said provisions task. Bangladesh Bank issued Administration for at least15
mentioned in the latest CG BRPD Circular Letter No. 19 dated (fifteen) years or have a long
Guidelines are same as those 27 October 2013 (herein after experience in social activities.
mentioned in the BRPD referred to as latest CG
Circular No. 06 dated 04 Guidelines), regarding b. Higher academic education in
February 2010. appointment rules and guidelines the field of Economics, Banking
of contractual Advisor and and Finance or Business
f. The authority relating to transfer Consultant in bank companies Administration will be treated
of and disciplinary measures which repealed earlier two as additional qualification for
against the staff, except those at guidelines i.e. Circular Letter the concerned person.

22 October - December 2013 The Bangladesh Accountant


c. Satisfaction should be ensured or terms of reference, complete
that the concerned person was resume of the concerned person, In most of the cases the provisions
not dismissed from his service terms of appointment (mentioning mentioned in the latest CG
when he was Chairman/ remuneration and facilities) and guidelines regarding appointment
Director/ Executive of any copy of board's approval shall be of Consultant are almost same as
company. submitted to Bangladesh Bank. The mentioned in the BRPD Circular
nominated person has to make a Letter No. 07 dated 18 September
d. The person who is working in declaration as per Annexure A of 2013. The provisions regarding
any bank or financial institution the latest CG Guidelines. This appointment of consultant are as
or who has business interest in declaration shall also be submitted follows:
that bank will not be eligible for to Bangladesh Bank.
appointment to the post of Terms of reference of Consultant
Advisor. Remuneration and other facilities
of Advisor Consultant can be appointed for
e. Satisfaction should be ensured specialized tasks like tax, law and
that the concerned person is not The post of Advisor is not a fixed legal procedures, engineering and
a loan defaulter or tax defaulter or substantive post in the bank's technical works, information
and has never been adjudicated organization structure. Advisor will technology, etc. Consultants'
an insolvent by the Court. not be entitled to salaries and appointment should be avoided as
allowances as regular employee much as possible for those works
In the above conditions, only tax except gross amount of that could be done by regular
defaulter clause has been newly remuneration, transport and employees of the bank.
inserted in the latest CG telephone facilities. Remunerations
Guidelines. inconsistent with the terms of Responsibilities of Consultant
reference of the advisor will not be
Responsibility of the Advisor considered as acceptable to The responsibilities or term of
Bangladesh Bank. reference of Consultant should be
The roles and responsibilities of specified. He/she should not be
the Advisor should be defined Tenure of Advisor involved in any activities beyond
specifically. The Advisor can his/her terms of references and
advise the Board of Directors or The tenure of the advisor shall be he/she cannot exercise any kind of
Chief Executive only on those maximum 01(one) year, which is power in bank operation or cannot
matters specified in the renewable. An evaluation report participate in the decision making
appointment letter. The general (by the Chairman that is approved process.
and normal activities of the bank by the Board of Directors) of
will not be included in his terms of previous tenure should be Appointment of Consultant
reference. He will not be entitled submitted to Bangladesh Bank
to exercise any power or involve along with the re-appointment The Consultant can be appointed
himself in the decision making proposal. with the approval of Board of
process of financial, administrative, Directors. After such appointment
operations or other activities of the Appointment of Ex-executive the bank shall send the
bank. All these provisions Consultant's complete resume,
mentioned in the latest CG For ensuring good governance, any terms of reference and details of
Guidelines are same as those former Director, Chief Executive or remuneration to Bangladesh Bank
mentioned in the earlier any other Executive of the bank immediately.
guidelines. will not be eligible to become an
Advisor in the same bank Tenure of Consultant
Prior approval from Bangladesh immediately after their retirement
Bank or resignation. However, after one The tenure of Consultant should be
year from such retirement or consistent with the terms of
Prior approval from Bangladesh resignation, he/ she will be eligible reference, but would not exceed
Bank is mandatory before for appointment as Advisor. 02 (two) years. Normally the
appointing an Advisor. For such consultant will not be eligible for
appointment, the justifications of Provisions regarding appointment re-appointment. But to complete
the post of advisor, responsibilities of Consultant the unfinished tasks, his contract

The Bangladesh Accountant October - December 2013 23


may be extended for maximum appointment as a Consultant in the No clause regarding qualification
period of 01 (one) year with the same bank immediately after their required to become Directors of a
approval of Bangladesh Bank. The retirement or resignation. bank company have been included
Chairman of the bank upon However, after one year from such in the latest CG Guidelines issued
approval of the Board shall have to retirement or resignation, he/ she by BB on 27 October 2013. BB
submit the extension proposal to will be eligible for appointment as may include a clause mentioning
Bangladesh Bank with the Consultant. that a person who has sufficient
evaluation report of his last tenure. knowledge about banking business
The captioned condition is newly Observations and and its risk management, expertise
inserted in the latest CG Recommendations and having professional degree in
Guidelines. financial accounting and financial
• Performance Evaluation of BoD management can be able to
Remuneration / honorarium of become a Director of a bank
Consultant No provision regarding disclosure company. This clause can play an
of performance evaluation of Board instrumental role for managing a
The Consultant's remuneration of Directors (BoD) and Chairman bank company effectively and
should be in the form of monthly was included in the latest CG efficiently. However, the
or single lump-sum payment, and Guidelines issued by BB on 27 qualification issues have been
he is not entitled to any other October 2013. BB may include the described a littlie bit to become the
facilities. said issue in its CG Guidelines, member of supporting Committees
which may enhance the of the Board e.g. Audit Committee.
Appointment of Ex-executive accountability of the BoD of the
bank companies. • Chairman of the Audit
For ensuring good governance, any Committee
former Director, Chief Executive or • Qualification of Directors
any other Executive of the bank In the latest CG Guidelines issued
will not be eligible for by BB on 27 October 2013, it has

24 October - December 2013 The Bangladesh Accountant


not been specifically mentioned • Certification of Financial with the Annual Report on a yearly
who will be the Chairman of Audit Statements by CEO and CFO basis. BB may insert a clause in this
Committee. BB may include a regard like the clause mentioned in
provision under administrative The latest CG guidelines issued by the CG guidelines issued by BESC.
structure of Audit Committee that BB on 27 October 2013 did not
an Independent Director of the mention any clause regarding • No age limit for Advisor and
bank will be the Chairman of the authentication of financial Consultant
Audit Committee. This will make statements of a bank company by
Audit Committee more strong and its CEO and CFO and submitting The latest CG guidelines issued by
independent to execute its the same to the Board. BB may BB on 27 October 2013 did not
functions and also help to include such clause in its CG mention any clause regarding the
strengthen the overall internal guidelines, which will enhance the age limit for Advisor and
control mechanisms of the bank. credibility of financial statements Consultant. BB may insert a clause
However, the CG Guidelines of a bank company and ensure the similar to the age limit of CEO that
issued by Bangladesh Securities transparency and accountability a person crossing a certain age
and Exchange Commission (BSEC) from the viewpoint of cannot become an Advisor or
specifically stated that the management. The CG Guidelines Consultant of a bank company.
Chairman of the Audit Committee issued by BESC mentioned the
shall be an Independent Director captioned issue and the said issue • No Harmonization was made
and he shall remain present in the also covered in the corporate with BSEC Guidelines
Annual General Meeting (AGM). governance guidelines of
developed countries. No harmonization was made with
• Services provided by External/ the corporate governance
Statutory Auditors • Subsidiary Company of the Bank guidelines issued by BSEC for
listed companies in Bangladesh. If
No clause regarding restriction of The latest CG Guidelines issued by there is any conflict between two
other services which cannot be BB on 27 October 2013 did not guidelines, there should be a clear
provided by the external auditors mention any clause regarding specification regarding which
of a bank company mentioned in monitoring of activities of guideline or directive to be
the latest CG Guidelines issued by subsidiary companies established followed. Therefore, BB should
BB on 27 October 2013. BB may by a bank company. BB may insert make harmonization of its latest
include a clause mentioning a list a clause in its latest CG guidelines CG Guidelines with those of BSEC
of services, which would not be mentioning that at least one by sitting with BSEC Officials.
performed by External/ Statutory Independent Director of the bank
Auditors. The CG Guidelines shall be a Director on the Board of Concluding Remarks
issued by BSEC covered the said Directors of the subsidiary
issue and mentioned a list of company and the minutes of the The writer has observed that some
services which could not be Board meeting of the subsidiary leading bank companies in
provided by External/ Statutory company shall be placed for Bangladesh followed old CG
Auditors. review at the following Board Guidelines issued by BB on 24 July
meeting of the bank company. The 2003 for disclosing their
• Directors’ Report CG guidelines issued by BSEC compliance status in the Annual
covered the said issue in detail. Report (up to annual report 2012)
The latest CG guidelines issued by although that was subsequently
BB on 27 October 2013 did not • Certification on compliance of repealed by the CG guidelines
mention any clause in detail about CG Guidelines issued by BB on 04 February 2010.
the issues to be included in the The latest CG Guidelines issued by
Director’s Report of a bank The latest CG guidelines issued by BB on 27 October 2013 also
company. BB may insert a clause BB on 27 October 2013 did not repealed earlier all guidelines of
in this regard mentioning a list, mention any clause for obtaining CG issued by it which specifically
which must be disclosed in the of certificate from professional mentioned at the end of the latest
Directors’ Report of a bank accountant/ secretary regarding CG Guidelines. BB may develop a
company in its annual report. The compliance of conditions of CG checklist summarizing all
CG Guidelines issued by BSEC Guidelines of the BB and send the conditions mentioned in the latest
covered the said issue in detail. same to the shareholders along

The Bangladesh Accountant October - December 2013 25


CG Guidelines and instruct all However, the latest CG guidelines • BRPD Circular No. 05 dated 28
bank companies to mention their issued by BB is far better than January 2010.
compliance status in the checklist those of earlier ones. The latest CG • BRPD Circular Letter No. 12 dated
guidelines have been developed in 18 August 2008.
and disclose the same in the
• BRPD Circular Letter No. 10 dated
Annual Report. The concerned accordance with the amendments
23 July 2008.
department of BB may review and made in the Bank Company Act • BRPD Circular Letter No. 03 dated
examine the said disclosed 1991 (amended up to 2013) in 02 March 2008.
checklist in the Annual Report of 2013 and consideration of recent • BRPD Circular No. 11 dated 05
bank companies and may take financial scams and irregularities November 2007.
necessary actions based on the occurred in banking industry with • BRPD Circular Letter No. 07 dated
non-compliance of conditions of a view to protecting the interest of 18 September 2007.
latest CG Guidelines by bank depositors and other stakeholders • BRPD Circular Letter No. 03 dated
at a greater extent. If followed 01 February 2006.
companies, if any. As
• BRPD Circular Letter No. 16 dated
recommended by the writer in his strictly, the last CG Guidelines will
09 August 2003.
observation and recommendation ensure good health of the banking • BRPD Circular Letter No. 12 dated
section of the article, BB may sector and bring all banks under 10 June 2003.
include a section in the latest CG strict monitoring and control • BRPD Circular Letter No. 06 dated
Guidelines about obtaining of mechanism and finally improve the 16 March 2003.
certificate from professional overall corporate governance • BRPD Circular No. 12 dated 23
accountant/ secretary regarding culture in the banking industry. December 2002.
compliance of conditions of CG • BRPD Circular Letter No. 17 dated
14 October 2002.
Guidelines of the BB and send the References • BRPD Circular Letter No. 15 dated
same to the shareholders along 03 September 2002.
with the Annual Report on a yearly • Bank Company Act 1991 • Companies Act 1994.
basis. (amended up to 2013) • Mamun. A. Abdullah, (2013),
• BRPD Circular No. 11 dated 27 Corporate Governance
BB may consider the observations October 2013. Mechanisms in Bangladesh: A
and recommendations, which the • BRPD Circular Letter No. 18 dated Critical Analysis of BSEC’s latest
27 October 2013. Corporate Governance Guidelines,
writer mentioned in the
• BRPD Circular Letter No. 19 dated The Bangladesh Accountant, April -
observation and recommendation 27 October 2013. June 2013, 43-50.
section to enrich and strengthen its • BRPD Circular Letter No. 08 dated • SEC Notification No.
latest CG guidelines. BB is needed 19 June 2011. SEC/CMRRCD/2006-158/134/Admi
to observe the CG guidelines • BRPD Circular No. 14 dated 22 n/44 dated 07 August 2012.
issued by BSEC and should make a April 2010. • www.worldbank.org/ifa/
harmonization with the guidelines • BRPD Circular Letter No. 06 dated rosc_cg.html.
issued by BSEC, as most of banks 20 April 2010.
in Bangladesh are listed in the • BRPD Circular Letter No. 02 dated
15 February 2010. The Author is a Faculty & Associate
stock exchange. Member of ICAB and Senior Manager,
• BRPD Circular No. 06 dated 04
February 2010. Finance Division, Eastern Bank Limited

26 October - December 2013 The Bangladesh Accountant


New Issue and Amendments of IFRSs to Interests in
Other Entities: A Comprehensive Analysis of IFRS 10, 11, 12,
IAS 27 (Revised) & 28 (Revised) and IAS 31 (Withdrawn)
1
Md. Kishlur Rahman ACA, ACMA | 2
Shah Md. Jubaer ACA

Abstract: publication, consolidation has been


addressed by IAS 27 ‘Consolidated and
Separate Financial Statements’ (2008) and
IFRS 10 ‘Consolidated Financial SIC-12 ‘Consolidation – Special Purpose
Statements’, IFRS 11 ‘Joint Arrangements’ Entities’. There were some tensions
and IFRS 12 ‘Disclosure of Interests in between these pronouncements, with IAS
Other Entities’, had been published 27 (2008) focusing mainly on control
together along with IAS 27 (Revised) through powers such as voting rights, and
‘Separate Financial Statements’ and IAS 28 SIC-12 focusing more on exposure to risks
(Revised)‘Investments in Associates and and rewards of the investee. IFRS 10 aims
Joint Ventures’ in May 2011 along . to address these concerns with a new
Together these Standards form a principle-based, definition of control that
comprehensive package of material will be applied to all types of investee to
dealing with group issues and off-balance determine which are consolidated.
sheet activity. Objectives of our study are
to make the readers, especially persons Entities with interests in joint
working in the in the industry, accounting arrangements will need to consider the
& auditing practitioners practicing in the new terminology and classification
professional capacity, academicians in the requirements of IFRS 11 ‘Joint
relevant areas and other interested persons Arrangements’ .Where proportionate
as a whole, about the recent changes to consolidation has been used in the past
IFRSs that will affect companies’ financial under IAS 31, entities will often need to
reporting in the near future since these switch to equity accounting under IFRS
standards are effective for annual periods 11.
beginning on or after 1 January 2013. This
effort covers both new IFRS and IFRIC that IFRS 11 has been issued with the intention
have been issued recently and of addressing two perceived deficiencies
amendments taken place to the existing in IAS 31 ‘Interests in Joint Ventures’:
Standards.
• that the legal form of the arrangement
Introduction: was the critical determinant of the
accounting
IFRS 10 ‘Consolidated Financial
Statements’ is in part a response to the • that an entity had a choice of
global financial crisis of 2008. Prior to its accounting treatment for interests in

The Bangladesh Accountant October - December 2013 27


IN THE RECENT
ISSUES OF IFRSS
RELATING TO INTEREST
IN OTHER ENTITIES
(NAMELY SUBSIDIARY,
ASSOCIATES, JOINT
ARRANGEMENTS AND
OTHERS), IASB TRIED TO
STREAMLINE SOME
CONFLICTING AREAS
AND REDUCE THE
UNWANTED
ALTERNATIVE
TREATMENT WHICH
MAY LEAD TO MORE
RELIABLE AND
RELEVANT FINANCIAL
jointly controlled entities arrangement whereby the parties that INFORMATION. WE
(proportionate consolidation or have joint control of the
equity accounting). arrangement (ie joint ventures) MUST BE AWARE OF
have rights to the net assets of the THESE LAND-SLIDE
IFRS 11 aims to improve on IAS 31 arrangement.
by establishing principles that are CHANGES FOR
applicable to the accounting for all Unlike the other Standards, entities
joint arrangements (a joint are encouraged by the IASB to APPROPRIATE
arrangement being an arrangement provide some or all of IFRS 12’s ACCOUNTING AND
over which two or more parties have disclosure requirements early even if
joint control). they choose not to early adopt the REPORTING
entire package.
IFRS 11 replaces IAS 31’s three TREATMENTS OF THE
categories of ‘jointly controlled The Standard establishes disclosure TRANSACTIONS AND
entities’, ‘jointly controlled objectives according to which an
operations’ and ‘jointly controlled entity discloses: EVENTS RELATING TO
assets’ with two new categories –
‘joint operations’ and ‘joint ventures’. • Significant judgments and INTEREST IN OTHER
assumptions (and changes) made ENTITIES.
• a joint operation is a joint by the reporting entity in
arrangement whereby the parties determining whether it controls
that have joint control of the another entity
arrangement (ie joint operators)
have rights to the assets, and • The interest that the
obligations for the liabilities, non-controlling interests have in
relating to the arrangement. the group’s activities
• a joint venture is a joint

28 October - December 2013 The Bangladesh Accountant


• The effect of restrictions on the presentation and preparation of of the followings:
reporting entity’s ability to consolidated financial statements
access and use assets or settle when an entity controls one or • Power over the investee;
liabilities of consolidated more other entities.
entities • Exposure, or rights, to variable
Key Consideration: returns from its involvement
• The nature of, and changes in, with the investee;
the risks associated with the The new definition of control
reporting entity’s interests in • The ability to use its power to
consolidated structured IFRS 10 introduces the following affect the amount of the
entities, joint arrangements, revised definition of control investor’s returns.
associates and unconsolidated together with accompanying
structured entities. guidance on how to apply it. Specific thresholds (or ‘bright
lines’) have deliberately been
Analysis of IFRS 10, 11, 12, IAS 27 “An investor controls an investee excluded from IFRS 10, with key
(Revised) & 28 (Revised) and IAS when it is exposed, or has rights, to aspects being principles based.
31 (Withdrawn) variable returns from its This is likely to prevent a particular
involvement with the investee and accounting outcome being
IFRS 10 ‘Consolidated Financial has the ability to affect those achieved through structuring
Statements’ in Comparison with returns through its power over the which, to a limited extent, was
IAS 27 ‘Consolidated and Separate investee.” (IFRS 10.6) possible under previous guidance.
Financial Statements’ and SIC-12 However, this does mean that
‘Consolidation – Special Purpose The new standard introduces a judgment may be required in
Entities’ Consolidated Financial new single control model for all determining whether an investor
Statements entities. Under the new guidance should consolidate a particular
control is the sole basis for investee.
Objective: consolidation. The structure of the
investee is not relevant. An
The objective of IFRS 10 is to investor will be required to
establish principles for the consolidate an investee if it has all

The Bangladesh Accountant October - December 2013 29


Highlights of difference between requirements of IFRS 10 and IAS 27 (2008)
Sl Basis for IAS 27 (2008) IFRS 10
Differences
1. Basis for IAS 27(2008) identifies control as the IFRS 10 identifies control as the single basis
Consolidation basis for consolidation and focuses on for consolidation for all types of entities.
the power to govern the financial and
operating policies for assessing control
There is no separate guidance with a
of typical operating entities. different consolidation model for special
purposes entities; rather, this guidance is
In contrast, SIC-12 focuses on risks incorporated into the single consolidation
and rewards for assessing control of model in IFRS 10. The new control
special purpose entities. definition reflects that an investor can
achieve power over an investee in many
ways, not just through governing financial
and operating policies. The investor must
assess whether it has rights to direct the
relevant activities. Although exposure to
risks and rewards is an indicator of control,
it is not the sole focus for consolidation for
any type of entity.
2. Control without Although the idea that an investor IFRS 10 states that an investor can control
a majority of could control an investee while and investee with less than 50% of the
Voting Rights holding less than 50% of the voting voting rights of the investee IFRS 10
rights was implicit in IAS 27 (2008), it provides specific application guidance for
was not explicitly stated. assessing control (i.e. de-facto control) in
such cases.
3. Potential Only currently exercisable potential Potential voting rights need to be
Voting Rights voting rights are considered when considered in assessing control, but only if
assessing control. they are substantive. Potential voting rights
are substantive when the holder has the
practical ability to exercise its rights and
those rights are exercisable when decisions
about the direction of the relevant activities
need to be made. Deciding whether
potential voting rights are substantive
requires judgment. Potential voting rights
may need to be considered even if they are
not currently exercisable.
4. Delegation IAS 27(2008) has no specific guidance IFRS 10 contains specific application
creating regarding situations when power is guidance for agency relationships. When
Agency delegated by a principal to an agent. decision making authority has been
Relationships delegated by a principal to an agent, an
agent in such a relationship does not
control the entity. The principal that has
delegated the decision-making authority
would consolidate the entity. The
application guidance offers a range of
factors to consider and contains examples.
5. Reassessment There was no requirement in IAS IFRS 10 contains an explicit requirement for
of Relationship 27(2008) or SIC-12 to reassess investor/ investee relationships to be
on Continuous investor/investee relationships on a reassessed on a continuous basis.
Basis continuous basis, in practice the
existence of control was reassessed
when there was a change in facts and
circumstances.

30 October - December 2013 The Bangladesh Accountant


The accounting requirements for • Uniform accounting policies We would like draw some
consolidated financial statements are applied throughout the examples wherein the Group [JK
in IFRS 10 have been carried consolidated group. International Limited (Bangladesh)]
forward unchanged from IAS 27 • The financial statements of the has full control over its all
(2008) Consolidated and Separate parent and subsidiaries are investees, the single basis for
Financial Statements. This means required to be prepared to the consolidation through various
that: same reporting date. modes of control. The Group has
been consolidating all the
• Intra-group transactions are Examples with regard to Status of investees. Details are given below:
eliminated in full. control of a company in the
context of IFRS 10

Entity Type of Parent Power over Parent’s Linkage Consolidati


entity investee share- between on Status
holding power &
return
BD Microfinance Incorporated JK International Yes 85.44% Yes Yes
Ltd. Limited
(Bangladesh)
Fundamentals for NGO JK International Yes - Yes Yes
Rural People Limited
(Bangladesh)
H&E Australia Pvt. Incorporated JK International Yes 100% Yes Yes
Ltd. (Australia) Limited
(Bangladesh)
Peoples Financial Incorporated JK International Yes 72% Yes Yes
Services Ltd. Limited
(Canada) (Bangladesh)
Hope Cooperative Association - Yes Nil Yes Yes
Services (Brazil)
H&E Financial Incorporated JK International Yes 27% Yes Yes
Services Ltd. Limited
(USA) (Bangladesh)
H&E Argentina NGO JK International Yes - Yes Yes
(Argentina) Limited
(Bangladesh)
KYSOMAT Incorporated JK International Yes 76% Yes Yes
Limited
(Bangladesh)

Impact of IFRS 10 in respect of beginning of reported year. ability to use its power to affect the
consolidation of JK International Despite JK has no investment in amount of the investor’s returns, so
Limited Hope, it has power of control on it will be considered at the time of
its operational affairs. Moreover, all consolidation.
All entities that were consolidated members of Hope must undergo
in the financial statements as the an approval from JK before getting IFRS 11 ‘Joint Arrangements’ in
relationship fulfills all three a loan and investment transaction. Replacement with IAS 31
requirements of consolidation and Even JK gets commission from ‘Interests in Joint Ventures’
will be consolidated in reported Hope for providing management
year. services. Objective:
Hope Cooperative Services, Brazil Thus Hope fulfills the condition of The objective of IFRS 11 is to
(Hope) was incorporated in the power over the investee and the establish principles for financial

The Bangladesh Accountant October - December 2013 31


choice between proportionate
consolidation and the equity
method.

Under the new requirements the


accounting for joint arrangements
will be driven by a principle,
namely that parties should
recognize their rights and
obligations arising from the
arrangements. The parties’ rights
and obligations will result in either
the recognition of assets and
liabilities and corresponding
revenues and expenses or in the
recognition of an investment. IFRS
11 provides application guidance
to assist entities in determining
precisely whether they have rights
to assets and obligations for
reporting by entities that have an operations’ and ‘jointly controlled liabilities (in which case, the
interest in arrangements that are assets’ were arrangements in IAS parties have an interest in a joint
controlled jointly (ie joint 31 that did not require the operation) or whether they have
arrangements). existence of an entity. Parties were rights to the net assets of an
simply required to recognize arrangement (in which case, the
Key consideration: assets, liabilities, revenues and parties have an interest in a joint
expenses arising from the venture). An entity will be required
The accounting requirements in arrangements. However, when the to apply judgment when assessing
IAS 31 were driven only by same arrangements were structured its rights and obligations arising
whether the arrangements were through an entity, IAS 31 classified from the arrangements, because
structured through an entity. For them as ‘jointly controlled entities’ this will determine the
example: ‘jointly controlled and offered parties an accounting classification of the arrangements.

Key Difference between IFRS 11 Vs IAS 31with regard to recognition and accounting treatments:

IAS 31 IFRS 11

Line by line accounting No separate vehicle


of the underlying assets
JCO/JCA JO
& liabilities
Line-by-line accounting
of the underlying assets
A separate vehicle, but
& liabilities
separation overcome by
Choice: Equity method legal form, contract or JO
JCE
of accounting or other facts & circumstances
proportionate
consolidation
JCE A separate vehicle with Equity method of
separation maintained JV accounting

Elaboration
JCO/ JCA: Jointly controlled operation/ jointly controlled asset; JO: Joint operation
JCE: Jointly controlled entity; JV: Joint Venture

32 October - December 2013 The Bangladesh Accountant


IFRS 12: Disclosure of Interests in information is necessary to meet • the type of joint arrangement
Other Entities-Emergence of the objective. (i.e. joint operation or joint
one-stop Disclosure Requirements venture) when the arrangement
IFRS 12 is required to be applied has been structured through a
Objective: by an entity that has an interest in separate vehicle.
any of the followings:
The objective of IFRS 12 is to Interests in subsidiaries
require the disclosure of • subsidiaries;
information that enables users of An entity shall disclose information
financial statements to evaluate: • joint arrangements (joint that enables users of its
operations or joint ventures); consolidated financial statements
• the nature of, and risks to:
associated with, its interests in • associates;
other entities; • understand the composition of
• unconsolidated structured the group;
• the effects of those interests on entities.
its financial position, financial • understand the interest that
performance and cash flows. An entity discloses information non-controlling interests have
about significant judgments and in the group's activities and
Key consideration: assumptions it has made (and cash flows;
changes in those judgments and
Where the disclosures required by assumptions) in determining: • evaluate the nature and extent
IFRS 12, together with the of significant restrictions on its
disclosures required by other • that it controls another entity; ability to access or use assets,
IFRSs, do not meet the above and settle liabilities, of the
objective, an entity is required to • that it has joint control of an group;
disclose whatever additional arrangement or significant
influence over another entity;

The Bangladesh Accountant October - December 2013 33


• evaluate the nature of, and has made in determining that it is effects of its interests in joint
changes in, the risks associated an investment entity, and arrangements and associates,
with its interests in specifically where the entity including the nature and
consolidated structured does not have one or more of effects of its contractual
entities; the 'typical characteristics' of relationship with the other
an investment entity; investors with joint control of,
• evaluate the consequences of or significant influence over,
changes in its ownership • details of subsidiaries that have joint arrangements and
interest in a subsidiary that do not been consolidated (name, associates;
not result in a loss of control; place of business, ownership
interests held); • the nature of, and changes in,
• evaluate the consequences of the risks associated with its
losing control of a subsidiary • details of the relationship and interests in joint ventures and
during the reporting period. certain transactions between associates.
the investment entity and the
Interests in unconsolidated subsidiary (e.g. restrictions on Interests in unconsolidated
transfer of funds,
subsidiaries structured entities
commitments, support
arrangements, contractual
In accordance with IFRS 10 An entity shall disclose information
arrangements);
Consolidated Financial Statements, that enables users of its financial
an investment entity is required to statements to:
• information where an entity
apply the exception to
becomes, or ceases to be, an
consolidation and instead account • understand the nature and
investment entity.
for its investment in a subsidiary at extent of its interests in
fair value through profit or loss. unconsolidated structured
Interests in joint entities;
Where an entity is an investment arrangements and associates
entity, IFRS 12 requires additional • evaluate the nature of, and
disclosure, including the fact the An entity shall disclose information changes in, the risks associated
entity is an investment entity: that enables users of its financial with its interests in
statements to evaluate: unconsolidated structured
• information about significant entities.
judgments and assumptions it • the nature, extent and financial

34 October - December 2013 The Bangladesh Accountant


Disclosure Checklist as per IFRS 12
Sl# IFRS 12 Disclosure requirements
1 Significant judgments & assumptions made in determining control (if control varies than
shareholding)
2 Disclosure of interests of non-controlling interests (NCI)
i. Name of the subsidiary;
ii. Proportion of ownership interest held by NCI;
iii. Principal place of business
iv. Profit/loss allocated to NCI during reporting period;
v. Accumulated NCI of subsidiary at the end of reporting period;
vi. Dividend paid to NCI;
vii. Summarized financial information (current assets, non-current assets, current liabilities, non-
current liabilities, revenue, profit or loss).
3 Disclosure of the nature & extent of significant restrictions
i. Restriction on the ability of a parent or its subsidiaries to transfer cash or other assets to (or
from) other entities within the group;
ii. Guarantees or other requirements that may restrict dividends and other capital distribution
being paid, or loans and advances being made or repaid, to (or from) other entities within
group;
iii. The nature and extent to which protective rights of NCI can significantly restricts the entity’s
ability to access or use the assets and settle the liabilities of the group;
iv. The carrying amounts in the consolidated financial statements of the assets and liabilities to
which the restrictions apply.
4 Financial support to consolidated structured entities
5 Disclosure of changes in ownership interest
6 Details of material joint agreement & associates
7 Disclosure of financial information individually immaterial to joint ventures & associates
8 Disclosure of contingent liabilities relating to joint ventures & associates
9 Disclosure of interest in unconsolidated structured entities (SPE)

The Bangladesh Accountant October - December 2013 35


Points to Remember and Impact on Financial Statements:
Area Summary Frequency of Impact on Affected
Entities Affected Entities
IFRS 10  supersedes IAS 27 ‘Consolidated and All companies with We expect that in most
Separate Financial Statements’ and SIC-12 significant cases, conclusions as to
‘Consolidation – Special Purpose Entities’ involvement & what should be
 changes the definition of control and investment in other consolidated will be
applies it to all investees to determine the entities will need to unchanged. In some
scope of consolidation consider the circumstances, it will
 has the potential to affect the outcome of requirements of the however change the
many borderline and judgmental control new Standard. composition of a group
assessments as a consequence of
 expected to lead to few changes for reassessment of which
conventional group structures based on entities a parent
majority share ownership company controls. In
 where such a change these cases the impact
 does arise, however, the impact could be could be substantial.
very significant.

IFRS 11  supersedes IAS 31 ‘Interests in Joint IFRS 11 can be IFRS 11 eliminates the
Ventures’ expected to affect use of proportionate
 introduces two accounting categories many entities consolidation for joint
whose applicability is determined based on operating in the ventures. This will be a
the substance of the joint arrangement extractive industries, significant
 eliminates the option of using proportionate property and presentational change
consolidation for joint ventures construction sectors for the many ventures
 eliminates IAS 31’s ‘jointly controlled where joint ventures that chose this
operations’ and ‘jointly controlled assets’ and other joint accounting policy under
categories arrangements are IAS 31. Although net
 many of the arrangements that would have common. It may of assets will not be
been classified under those categories will course have a affected, the removal of
fall into the newly defined category ‘joint significant effect on that method of
operation’. individual accounting will affect
companies in other individual balance sheet
industries. and performance ratios.

IFRS 12  combines the disclosure requirements for Most entities can IFRS 12 specifies
subsidiaries, joint arrangements, associates expect to be affected minimum disclosures
and unconsolidated structured entities by the new that an entity must
within a comprehensive disclosure disclosure provide. Some of this
standard requirements of IFRS information will be new
 provides more transparency on 12. Parent and its preparation will
‘borderline’ consolidation decisions companies whose require planning.
 enhances disclosures about subsidiaries have System modifications
unconsolidated structured entities in which non controlling and enhancements may
an investor or sponsor has involvement interests and be required to address
 will help investors to assess the extent to businesses that the change in guidance
which a reporting entity has been involved operate through so- and to provide the
in setting up special structures and the called structured necessary information
risks to which it is exposed as a result. entities are likely to for the new disclosure
be especially requirements.
affected.

36 October - December 2013 The Bangladesh Accountant


Concluding Remarks: References Retrieved from
http://www.gti.org/Publications/ifrs-
In the recent issues of IFRSs IFRSs-Unaccompanied Standards and publications/index.asp#ifrsnews.
relating to interest in other entities their Technical Summaries (December
(namely subsidiary, associates, 2013). Standards (IFRSs), the IFRS Time for Transition: IFRS 10 Consoli-
joint arrangements and others), Foundation and the IASB. Retrieved dation (1 January 2013). IFRS Newslet-
IASB tried to streamline some from ters, KPMG IFRG Limited. Retrieved
conflicting areas and reduce the http://www.ifrs.org/IFRSs/Pages/IFRS.as from
unwanted alternative treatment px http://www.kpmg.com/Global/en/Issue
which may lead to more reliable sAndInsights/ArticlesPublications/ifrs-n
and relevant financial information. Baltazar, E., Beyersdorff, M., Bonham, ewsletters/
We must be aware of these M., Covic, A., Curtis, M., Danmola,
land-slide changes for appropriate T.,. . . Vaidison, S. (2012). Interna- Pages/TFT-IFRS10.aspx.
accounting and reporting tional GAAP 2012-Generally Accepted
treatments of the transactions and Accounting Practice under Interna- Time for Transition: IFRS 11 Joint
events relating to interest in other tional Financial Reporting Standards Arrangements (1 January 2013). IFRS
entities. Having awareness and (IFRSs), Ernst & Young and Wiley. Newsletters, KPMG IFRG Limited.
knowledge on the changes through Retrieved from
new issue of standards and amend- Navigating the Changes to IFRS: A http://www.kpmg.com/Global/en/Issue
ments in the existing ones would Briefing for Chief Financial Officers sAndInsights/ArticlesPublications/ifrs-n
create a focus on the transition of (December 2012). IFRS Publications, ewsletters/Pages/TFT-IFRS11.aspx.
the new standards effectively. Grant Thornton International.

The Bangladesh Accountant October - December 2013 37


Time for Transition: IFRS 10 Amend- Pages/TFT-investment-entities.aspx. http://www.kpmg.com/Global/en/Issue
ments (6 December 2013). IFRS Adopting the Consolidation Suite of sAndInsights/
Newsletters, KPMG IFRG Limited. Standards- Transition to IFRSs 10, 11 ArticlesPublications/IFRS-Practice-
Retrieved from and 12 (1 November 2013). IFRS Issues/Pages/IFRS practice-issues-
http://www.kpmg.com/Global/en/Issue Practice Issues, KPMG IFRG Limited. IFRS10-transition.aspx.
sAndInsights/ArticlesPublications/ifrs-n Retrieved from
ewsletters/

The Authors are


1
FAVP & Head, Finance & Planning and Basel Implementation, IFIC Bank Limited
2
Deputy Director (Accounts), ASA International N.V.

38 October - December 2013 The Bangladesh Accountant


Revised IASB Conceptual Framework
-laying the foundation for future IFRSs
Abu HM Kibria, ACA

What is Conceptual Framework out a public consultation on its future


and why is the revision? agenda. Many respondents to that
consultation identified the Conceptual
The Conceptual Framework provides the Framework as a priority project for the
foundation upon which accounting IASB. Consequently, the IASB resumed the
standards are set by the International project.
Accounting Standards Board (the IASB).
This also assists the preparers of financial This Discussion Paper (DP) is designed to
statements when accounting treatment of obtain initial views and comments on
a particular topic is not dealt with by an important issues that IASB will consider as
existing standard or other authoritative it develops an Exposure Draft of a revised
guidance. Conceptual Framework. The issues
include:
The IASB acknowledges that while the
existing Conceptual Framework has • definitions of assets and liabilities;
enabled it to develop high quality IFRSs • recognition and derecognition;
resulting in improved financial reporting, • the distinction between equity and
it is not comprehensive enough. liabilities;
• measurement;
In 2010, the IASB revised the chapters of • presentation and disclosure; and
the Conceptual Framework that describe • other comprehensive income (OCI).
the objective of financial reporting and the
characteristics of useful financial Commenting on the publication of the DP,
information. It also published an Exposure IASB Chairman Hans Hoogervorst said:
Draft on the reporting entity and
performed substantial work on other areas. “The Conceptual Framework underpins
the work of the IASB and affects all IFRSs
However, the IASB had to suspend the that we develop. This Discussion Paper
work on the Conceptual Framework in the gives people the opportunity to help us to
same year so that it could focus on more shape the future of financial reporting by
urgent projects that arose from the discussing the concepts that drive our
financial crisis. In 2011, the IASB carried work.”

The Bangladesh Accountant October - December 2013 39


IN KEEPING
WITH IASB’S STANCE
ON RECOGNISING ALL
ASSETS AND
LIABILITIES, IASB
BELIEVES THE FAILURE
TO RECOGNISE AN
ASSET OR A LIABILITY
IS NOT RECTIFIED BY
DISCLOSURE OF THE
ACCOUNTING POLICIES
USED NOR BY THE
NOTES OR
EXPLANATORY
MATERIAL. IN IASB’S
VIEW, IF SOME ASSETS
OR LIABILITIES ARE
NOT RECOGNISED, THE
RESULTING DEPICTION
What is changing? Assets and liabilities – revised OF THE ENTITY’S
definitions RESOURCES AND
The proposed changes will have
significant impact on the following According to IASB, assets and OBLIGATIONS WOULD
key areas of financial statements: liabilities are the basic building
BE INCOMPLETE AND
blocks from which the statement of
i) balance sheet financial position is constructed. WOULD THUS PROVIDE
ii) income statement including OCI
iii) disclosures With the proposals incorporated in A LESS FAITHFUL
the DP, the fundamentals of assets
The most significant impact is likely REPRESENTATION OF
and liabilities are being rejigged. The
to be on balance sheet items. change starts with a change in THE ENTITY’S
Accordingly this article will keep its definition, cascading down to
focus on proposed changes impacting recognition and derecognition FINANCIAL POSITION.
balance sheet items. principles, and to measurement
bases.
The contents of the DP, however, do
not talk about impact and The following table presents the “key
implications of growing prominence changes” in definitions of assets and
of Integrated Reporting (IR) on IFRSs. liabilities plus a snapshot of couple of
Aligning IFRSs with IR or vice-versa important definitions being
will perhaps be another project in its introduced:
own right.

40 October - December 2013 The Bangladesh Accountant


Definition Current requirements ‘Future’ requirements Key changes
Assets A resource controlled by An asset of an entity Introduction of the
the entity as a result of past is a present economic concept of “economic
events and from which resource controlled by the resource”.
future economic benefits entity as a result of past
are expected to flow to the events. Deletion of “…
entity. economic benefits are
‘expected’ to flow to the
entity”.
Liabilities A present obligation of the A liability of an entity Introduction of the
entity arising from past is a present obligation of the concept of “transfer of
events, the settlement of entity to transfer an an economic resource”.
which is expected to result economic resource as a
in an outflow from the result of past events. Deletion of “… is
entity of resources ‘expected’ to result in
embodying economic an outflow...”
benefits.
Economic N/A A right, or other source of Refer to ‘future
resource value, that is capable of requirements’ column
producing economic
benefits.
Control N/A An entity controls an Refer to ‘future
economic resource if it has requirements’ column
the present ability to direct
the use of the economic
resource so as to obtain the
economic benefits that flow
from it.

The Bangladesh Accountant October - December 2013 41


In IASB’s view, the revised traditional view around an asset. as a present obligation ‘to transfer
definitions of assets and liabilities For a physical asset, the DP an economic resource’ as a result
make them more consistent in that proposes, the economic resource is of past events. The phrase “to
both now include the term not the underlying object (e.g. a transfer an economic resource” is a
“present”, i.e. ‘present economic piece of property) but a right (or set change to the existing definition.
resource’ or ‘present obligation’. of rights) to obtain the economic An obligation to transfer an
Revised definitions retain the term benefits generated by the physical economic resource may result in
“as a result of past events”. This object. an entity paying cash, transferring
reinforces the fundamental assets other than cash, granting a
principle of accounting – you only The term “set of rights” is also right to use an asset, rendering
account for a transaction if it arises interesting and could be services or standing ready to make
as a result of a past event taking far-reaching. An entity may treat all a payment on the occurrence of a
into consideration the nuances of of the rights it holds in connection future event that is outside the
recognition principle. with an asset as a single asset. entity’s control.
However it may also treat some of IASB also attempts to clarify the
Proposed omission of the term the rights as one or more separate concept of ‘present’ obligation. A
‘expected’ from definition of assets assets if it is considered relevant to present obligation is one that exists
and liabilities is designed to take users of financial statements and at the reporting date. To meet the
out some uncertainty around provides a faithful representation of definition of present obligation, the
recognition of assets and liabilities. the entity’s resources. Potentially economic resource to be
Uncertainty plays a role in this could lead to changes in the transferred need not exist at that
definition as well as recognition of way lease assets are currently date, nor does the entity need to
assets and liabilities as the existing recognised. Lessees might start control it already at that date. In
definitions include the notion that booking just the right to use a lease many cases, an entity has a present
future economic benefits (or a asset – a slice of the asset obligation that it will fulfil with
future outflow of resources) must representing the lease, rather than economic resources that it will
be expected, and the existing the whole lease asset in entirety. acquire in the future. In this
recognition criteria specify that an context, IASB emphasises and
asset or a liability is recognised if it Setting the tone for “control” at the clarifies two important concepts –
is probable that any future framework will streamline the use present obligations and possible
economic benefit associated with and application of this concept in future obligations.
the item will flow to or from the future standards, the IASB believes.
entity. Some users had interpreted Currently control is defined A present obligation must arise ‘as
that the use of the term ‘expected’ differently in different standards. In a result of past events’. An entity
was intended to convey a line with the example above under typically incurs an obligation to
requirement that the probability of ‘economic resource’, in transfer an economic resource in
an inflow or outflow of economic determining whether an entity exchange for receiving a different
benefits must meet some minimum controls an economic resource, it economic resource (e.g. an entity
threshold or used in the is important to identify the incurs an obligation to transfer
mathematical sense of an ‘expected economic resource correctly. For goods and services to a customer
value’, i.e. a probability-weighted example, entities A, B and C may in exchange for consideration
average of the possible outcomes. jointly own a real estate on terms received from that customer) or as
IASB has considered the that provide them with 25 per cent, a result of conducting an activity
uncertainty – both existence 40 per cent and 35 per cent for which another party seeks
uncertainty and outcome respectively of the economic payment from the entity (e.g an
uncertainty, and is of the view that benefits flowing from that real entity may incur an obligation to
the notion that an inflow or outflow estate. In the absence of any other pay a tax or a levy as a result of
is ‘expected’ should not be retained agreements that modify control, earning revenue or profits).
as this might exclude many items each party controls its However it is not always clear
that are clearly assets or liabilities, proportionate interest in the whether a past event is sufficient to
for example many purchased underlying economic resource. No create present obligation to transfer
options or written options. single party controls the underlying an economic resource, i.e. at the
real estate in its entirety. reporting date, if it remains
The introduction of the concept – conditional on future events which
‘economic resource’ challenges the IASB proposes to define a liability are yet to take place.

42 October - December 2013 The Bangladesh Accountant


Possible future obligations are For obligations whose occurrence in the financial statements, an item
future events on which an depends on the entity’s future that meets the definition of an asset
obligation remains conditional, actions, IASB proposes this view – or a liability and/or income or
and are classified as: ‘a present obligation must have expenses.
arisen from past events and be
(a) those whose occurrence is practically unconditional’. Under IASB proposes that an entity should
outside the control of the entity this, an entity might not have the recognise all its assets and
(also known as ‘stand-ready practical ability to avoid a future liabilities, unless:
obligations’); and transfer of economic resource. For
example in an industry where “a (a) recognising an asset or a
(b) those whose occurrence levy on revenues above a liability would provide users of
depends on the entity’s future threshold” is required, an entity financial statements with
actions. may not be able to practically information that is not relevant,
avoid paying the levy without or is not sufficiently relevant to
Stand-ready obligations are those significantly curtailing its justify the cost; or
obligations for which the entity has operations or leaving the market.
an unconditional obligation to In such situation a levy is a present (b) no measure of an asset or a
stand ready to transfer the obligation on ‘practicality’ ground. liability would result in a
resources if the specified future IASB expects more guidance in this sufficiently faithful
event occurs, e.g. a guarantor’s area in future. representation of both that asset
obligation to compensate a lender or liability and the resulting
if a borrower defaults. In IASB’s Assets and liabilities – income or expense.
view such unconditional revised recognition and
obligations are present obligations In line with the omission of the
which meet the definition of a derecognition criteria term ‘expected’, IASB also
liability. proposes to delete the term
Recognition of an asset or a
‘probable’ from the recognition
liability is the process of including,

The Bangladesh Accountant October - December 2013 43


criteria to address the uncertainty IASB’s view an entity should The DP discusses three
notion discussed earlier. derecognise an asset or a liability measurement bases:
when it no longer meets the
In keeping with IASB’s stance on recognition criteria (control (i) cost-based measurements;
recognising all assets and approach). IASB prefers full
liabilities, IASB believes the failure derecognition. However it seeks (ii) current market prices including
to recognise an asset or a liability is user’s views as to the appropriate fair value; and
not rectified by disclosure of the treatment if an entity retains a
accounting policies used nor by component of an asset or a liability (iii)other cash-flow-based
the notes or explanatory material. in case of partial derecognition. measurements.
In IASB’s view, if some assets or
liabilities are not recognised, the Assets and liabilities – There are some arguments that all
resulting depiction of the entity’s revised measurement assets and liabilities should be
resources and obligations would recorded using the same
be incomplete and would thus
principle measurement basis. However this
provide a less faithful is not going to be relevant for all
Measurement is the process of users of financial statements, and
representation of the entity’s
determining the amount to be in a number cases may not
financial position. IASB may
included in the financial statements faithfully represent the accounting
provide more guidance on
for an asset or a liability and/or transactions for the users. For
recognition in particular standards
income or expenses. example, while cost basis can be
when relevant.
The existing Conceptual highly relevant for measuring PPE,
Derecognition of an asset or a Framework does not provide it is less relevant for sophisticated
liability is the process of removing, detailed guidance on financial instruments like
from the financial statements, an measurement, nor does it discuss derivative for which fair value is
asset or a liability that has when a particular measurement likely to be more relevant.
previously been recognised. basis should be used. The DP Accordingly, IASB’s preliminary
attempts to describe detailed view is that a single measurement
The existing Conceptual guidance on measurement that basis for all assets and liabilities
Framework does not define could be included in a revised may not provide the most relevant
derecognition and does not Conceptual Framework. information for users of financial
describe when derecognition statements, and has kept all of the
should occur. Because there is no In order to enhance understand- above three options on the table
agreed conceptual approach to ability and comparability of for measuring assets and liabilities.
derecognition, different Standards financial statements it is suggested Preparers of the financial
have adopted different approaches in the DP that IASB should limit statements would need to choose
posing the risk of inconsistencies. the number of measurement bases the measurement basis that
IASB proposes guidance here in used. Importantly, the DP also represents the transactions
terms of derecognition and suggests that a single measurement faithfully and is relevant for users.
discusses full or partial basis for all assets and liabilities
derecognition using “control” and may not provide the most relevant
“risk and reward” approach. In information.

44 October - December 2013 The Bangladesh Accountant


Impact assessment quick summary for assets and liabilities:

The following table presents the summary of impact assessment from the above discussions:

Assets Liabilities
Definition and/or An asset can be a single asset or one or The proposed changes might require
recognition more separate assets in a set of an entity to recognise all liabilities in
rights/bundle of rights. This could allow the balance sheet regardless of
treatment of many non-financial assets to whether it can avoid fulfilling it with
be similar to the treatment of financial any uncertainty about the outcome
instruments, i.e. being sliced and diced being recognised in measurement.
from an accounting perspective.

Derecognition An asset potentially can be taken off the All liabilities are likely to remain on
balance sheet more easily if the entity the balance sheet as long as it is
loses control of legal rights (e.g. repo considered not practical for the entity
securities). to avoid fulfilling it.
Measurement Different measurement bases for assets and liabilities are to be continued. However
the number of bases are likely to be limited and streamlined including guidance on
how an asset contributes to future cash flows or
how a liability will be fulfilled or settled.

The Bangladesh Accountant October - December 2013 45


Summary of other proposed Disclosures Note: Detailed proposals on
changes possible changes can be viewed
IASB has received comments from from the Discussion Paper itself
Equity many respondents in recent past which is comprehensive and
that a framework for disclosure is discusses a number items in great
The DP suggests entities should needed to ensure information length.
use an enhanced statement of disclosed remain highly relevant to
changes in equity. An enhanced investors, and to reduce somewhat Source and useful links:
statement of changes in equity unnecessary burden on preparers.
would provide more information One aspect of the IASB’s response • www.ifrs.org
about different classes of equity is the development of disclosure
and show how wealth is concepts for the Conceptual • Discussion Paper: A Review of
transferred between those classes. Framework. Materiality in the Conceptual Framework for
disclosure tops the change agenda. Financial Reporting
Profit or loss and OCI
The IASB also plans other work on • Snapshot: Review of the
The DP suggests that the IASB disclosure including possible Conceptual Framework
should introduce principles to amendments to existing IFRSs.
decide which items of income and
expense should be recognised in Comment period:
The Author is Manager, KPMG
profit or loss, and which should be 10 Shelly St, Sydney, NSW 2000,
recognised in OCI, and whether, IASB is inviting comments on the
Australia
and when, items previously Discussion Paper and will accept
recognised in OCI should be them until 14 January 2014.
recycled.

46 October - December 2013 The Bangladesh Accountant


Concept of Takaful and its challenges
Kazi Md. Mortuza Ali

Takaful means joint guarantee, whereby risks. In a takaful arrangement the


participants contribute a sum of money as
participants in a scheme agree to mutually tabarru commitment into a common fund
guarantee each other against defined that will be used mutually to assist the
losses. Takaful Act 1984 of Malaysia members against specified loss or
defined takaful as, “a scheme based on damage”. The Accounting & Auditing
brotherhood, solidarity and mutual Organization of Islamic Financial
assistance which provides for mutual Institution (AAOIFI) defined “Islamic
financial aid and assistance to the insurance as a system through which the
participants in case of need”. However, in participants donate part or all of their
order to get any assistance and aid under contribution which are used to pay claims
the scheme, the participants mutually for damages or losses suffered by some of
should agree to contribute for that the participants”. In Bangladesh, Insurance
purpose. Under takaful scheme, the Act 2010, defines “Islami insurance
participants agree to donate a portion or business” as “insurance business” carried
the whole of takaful contribution to a on according to the “Islami Sariah”.
specific fund, which enables him to fulfill Details of Islami insurance are supposed
his obligation of mutual help. The fund, to be guided by Takaful Rules. Takaful has
thus created is used to meet the also been defined as a “contractual
commitment of joint guarantee should any arrangement between a participant
of the participants suffers from a defined (insured) seeking protection against a
loss. Thus, a takaful contract is basically a defined risk, from a takaful
contract of cooperation and mutual help. operator(insurer)” (Tobias Frenz 2010).
The fund belongs to participants and
takaful operators manage this fund as Takaful is a unique system of mutual risk
trustee to provide assistance or sharing, and concentrates on providing
compensation to the participants in the maximum assistance to the unfortunate.
event of a loss suffered by any of the Takaful provides that profits should be
participants. clean and non exploitative. The ethical
principle on which takaful is based bring
Islamic Financial Services Board (I.F.S.B.) the takaful operators close to their
has defined takaful as an arrangement, customers and to the true spirit of mutual
“whereby a group of participants agree cooperation, brotherhood and solidarity.
among themselves to support one another The ethics of cooperation among people
jointly for the losses arising from specified within the spirit of brotherhood, solidarity

The Bangladesh Accountant October - December 2013 47


IN
CONVENTIONAL
INSURANCE, FOR A
CERTAIN PREMIUM, THE
INSURED IS COVERED
FOR FINANCIAL LOSS ON
THE OCCURRENCE OF A
CONTINGENT EVENT. IN
THIS CONTRACT, BOTH
THE AMOUNT OF
FINANCIAL LOSS AND
WHETHER THE INSURED
EVENT WILL OCCUR ARE
and cooperation is very clearly said in any one of them is the essence of
the Quran. “Help you one another in takaful. Takaful resembles to UNCERTAIN. TO
goodness and piety but do not help solidarity of a group of people. Three
one another in sin and transgression basic ingredients of takaful are,
ADDRESS THIS ISSUE,
……………….” (Sura Maidah 5:2) brotherhood, solidarity and mutual CONCEPT OF TABARRU
Cooperation among a group of help. This is illustrated below:
people, for the sake of taking care of HAS BEEN
INCORPORATED IN THE
TAKAFUL SYSTEM.
CONCEPT
TAKAFUL AS ALTERNATE SYSTEM OF CONVENTIONAL INSURANCE
IS BASED ON THE CONCEPT OF BROTHERHOOD SOLIDARITY &
MUTUALITY.

TAKAFUL

BROTHERHOOD SOLIDARITY MUTUALITY

48 October - December 2013 The Bangladesh Accountant


Under takaful contract, the
policyholders pay a donation as
“tabarru” to a cooperative fund
with the intention that all the
participants of the scheme will be
entitled to receive financial help or
compensation from the fund. The
amount of contribution differs from
one participant to another based
on the degree of risk in general
takaful and actuarial calculation in
family takaful. Policyholders
(participants) are entitled to receive
any surplus resulting from the
operation of this common fund.
There is no unified system to
operate the treatment of
surplus/deficit. Takaful fund is a
separate fund that does not belong
to the Takaful operator ( the takaful
company) or its shareholders. From an actuary’s perspective, the permissible in Sharia is that there
Generally speaking, the fund is tabarru is the participant’s are elements of uncertainty (gharar)
owned by all the participants who contribution to a risk pool that in the insurance exchange
have donated financial ultimately will be used to pay contract. In conventional
contribution to the fund. Thus, specified claims of participants insurance, for a certain premium,
takaful is similar to mutual who contribute in the pool. The the insured is covered for financial
insurance. risk pool can pay for claim to loss on the occurrence of a
participants who has duly paid his contingent event. In this contract,
The concept of “tabarru” (takaful tabarru. The risk pool is not both the amount of financial loss
donation) is the pillar under the accessible to others. The amount of and whether the insured event will
takaful system. The word tabarru tabarru need to be determined by occur are uncertain. To address
literally means donation. It is a an actuary, who will determine it this issue, concept of tabarru has
“shared responsibility and by using a cash flow model from been incorporated in the takaful
guarantee” principle of takaful. observance of past experience and system, whereby a donation is
This is the most important factor mortality table. The amount of being paid into the takaful fund for
which distinguished takaful from tabarru is fixed by estimating the the purpose.
conventional insurance. It is risk that the participant brings to
“Amalus Saleh” (good deed) of the the takaful risk pool. The actuary Tabarru, under takaful system, is
participant, through helping each should try to ensure that all not a premium for meeting loss,
other. The underlying concept of participants contribute fairly to the but a donation i.e. gratuitous
tabarru in takaful contract is risk pool. The tabarru is calculated contribution for a noble purpose to
different from the literal mathematically as sufficient to help each other. The money
understanding of hibah (gift) or cover the risk in commensuration collected from each member or
sadaquah (charity). Tabarru is with the probability of claim. participant is to be used for the
actually a donation which is purpose of assisting fellow
conditional to provide assistance In “general takaful” and “family participants who require assistance
and compensation to participants takaful” business, tabarru is a according to the terms agreed and
of the takaful scheme. It is an contract where a participant agrees as long as these terms are not in
obligation and commitment to pay to donate a predetermined conflict with Shariah. It is the
the defined amount. Shariah allows percentage of his contribution to a principle of shared responsibility
that a donation may be restricted Takaful fund. This concept and shared guarantee of the
by or subjected to certain terms eliminates the element of gharar participants for a common cause.
and conditions, and may be (uncertainly) from the takaful Wherever, one of the members
allocated for specific purposes. contract. One reason, conventional suffers a defined loss and makes a
insurance is considered not legitimate claim, takaful operators

The Bangladesh Accountant October - December 2013 49


would settle the claim by using
funds from the tabarru pool. In
case of retakaful, the contribution
for retakaful shall also be paid from
this pool fund. In the meantime,
the funds in the pool are to be
invested in Shariah compliant
investment portfolio. Islam accepts
and allows this principle of
reciprocal compensation approach
and joint guarantee.

The objective of takaful is to pay


defined loss from a defined fund.
Each participant who needs
protection must have an intention
to donate to other participants
faced with difficulties. Therefore,
takaful system provides that each the operator and the participant the degree of risk. It is based on
participant contributes into a fund mutually agree to a lawful Shariah tenets which state that if
that is used to support one another cooperation. gain is desirable; loss should be
where each participant acceptable. There should be no
contributing sufficient amount to In principle, takaful system is ambiguity and there should be no
cover expected claims. Tabarru is based on mutual cooperation and deception due to ignorance or
basically discretionary. However, assistance between groups of absence of information.
commitment to donate in takaful participants who agree to mutually
pool is necessary in order to guarantee among themselves. This Mutuality or cooperative risk
promote cooperation which takaful concept per-dates the Islamic era sharing is the core of Islamic
aims to achieve. Commitment to when the tribes used to help the insurance (takaful). The first
pay tabarru is fundamental to needy on a voluntary and relationship is established through
Islamic insurance or takaful. gratuitous basis. The merchants of a mutual insurance contract
Makka used to pool funds for between policyholders
victims of natural disaster, piracy (participants) considering the
Concept of cooperation
etc. In any society, an individual concept of donation (tabarru). The
feels the necessity of cooperation second relationship is established
Takaful is based on the concept of
in realizing peoples social and between the participants and the
“Tawoon” or cooperation.
economic well being. Cooperation takaful operators through a concept
Participants mutually agree to assist
among a group of people, for the of trustee and agency contract
each other financially in case of
sake of taking care of any one of wherein, takaful operators are to
certain defined needs of takaful
them who may be subject to any manage the investment fund and
contract by contributing to a
mishap is expected and much tabarru fund. To ensure
common fund. By jointly
desired. compliance with Shariah, any
guaranteeing each other, the
takaful company (operator) need to
participants are in fact both the
Takaful is a form of cooperative have a formal mechanism in the
insurer as well as insured at the
risk sharing using charitable form of an independent Shariah
same time. The takaful system
donations. The policyholder or Supervisory Board (S.S.B) which
stresses the spirit of cooperation
insured called participant, pay a will provide Shariah guidelines to
and joint responsibility among
premium (contribution) to a fund the operators. The S.S.B. is not
participants. The basic notion of
as donation for those who suffer involved in any day to day
takaful is to provide an avenue to
losses. The policy holders are then operations. It delegates and
share responsibility, solidarity and
entitled to receive a surplus/profit supervise the tasks to executive
mutual cooperation. Takaful is
from the cooperative insurance called Murakib (Shariah
founded on the basis of
fund. They will also make up for compliance and audit team). This
cooperation and mutual help. The
any deficits. The premium or can be shown from the following
emphasis is on togetherness in
contribution will differ, based on diagram:-
striving for common good. Both

50 October - December 2013 The Bangladesh Accountant


(normally one year) providing
mutual compensation in the event
HOW TAKAFUL SCHEME OPERATES? of specified type of loss. The
schemes are designed to meet the
needs for protection of individuals
REGULATOR and corporate bodies in relation to
material loss or damage resulting
from different man made and
BOARD S.S.B natural disasters inflicted upon real
OPERATOR estates, assets and belonging of
participants. The entire takaful
contribution of participants in
these cases are pooled into the PRF
COOPERATION SOLIDARITY FUND TRUSTEESHIP under the principle of tabarru. A
takaful operator is supposed to be
the Mudarib/Wakil or both
PARTICIPANTS depending on which model of
takaful is adopted. T.O.
administers the PIF and or PRF on
behalf of the participants, and in
The main role of the Shariah Board Types of Takaful return will be remunerated via fees
is to ensure that all takaful and or profit share arising under a
operations are in accordance with Takaful can be divided into general partnership contract (Mudarabah).
Shariah principles. The Shariah takaful (non-life insurance) and
Board trusts that the takaful family takaful (life insurance). A family (life) takaful operator
operator (the Board of Directors Family takaful deals with the manages three funds i.e.
and the Management) would abide provision of financial help to the shareholders’ fund, participants’
by the Shariah rulings and participants and/or their family in investment fund and participants’
principles in conducting its the event of misfortunes that relate risk fund. While a general takaful
operations. to the old age, death or disability operator manages two funds viz
of the participants. In this case, shareholders fund and participants’
The whole objective of takaful is to T.O. is engaged in a long-term risk fund. Shareholders’ fund
establish “tawoon” (cooperation) relationship over a defined number consists of paidup capital,
which protects the participants of years with the takaful subsequent capital injections,
against the perils of losses. While participants. In family takaful, the management fees and share of
managing the risk fund, the takaful paid contribution is segregated into profit from investment fund. All
operator is supposed to act as a two accounts. The first is the management expenses and
cooperative rather than a profit participants’ investment fund (PIF) shareholders dividends would
maker. However, the operator can and the second is the Participants’ normally have to be borne by this
generate income by investing the Risk Fund (PRF). The term P.R.F. is fund. Participants’ investment fund
funds as per Shariah guidelines. In also referred to as Participants’ constitutes a part of participants’
takaful system, shareholder’s fund Special Account (P.S.A.). The contribution after deducting the
and policyholder’s fund are kept purpose of PIF is capital formation tabarru amount. This fund is
separate. The operators through regular savings. There are managed by the operator and they
relationship with the shareholders several short-term family takaful are remunerated for this purpose
is equity based. The operator acts products without savings element by way of fees and or share of
as agents or managers while (group, term etc), wherein all profit. Participants’ risk fund is the
managing the tabarru fund and as takaful contributions are takaful donation of all the
mudarib or wakil while investing considered as tabarru and credited participants to mutually assist all in
the funds. Takaful operator acts as direct to P.R.F. the scheme (when one suffers a
Mudarib/Wakil or both for misfortune). In a family takaful
underwriting, investment and General Takaful Schemes are operation both participants’ fund
administration. basically contracts of joint and shareholders’ fund are
guarantee on a short term basis managed separately as follows:

The Bangladesh Accountant October - December 2013 51


surplus distribution to participants.
First one is the pro-rata mode,
wherein it is distributed to the
SHAREHOLDERS
FAMILY TAKAFUL participants in proportion to the
PARTICIPANTS
OPERATOR contribution made by them,
irrespective whether one has
received any claim or not. Another
mode suggests to distribute the
PARTICIPANTS’ CONTRIBUTION surplus amongst those participants
SHARE PARTICIPANTS’
INVESTMENT PARTICIPANT only who did not make any claim
HOLDERS FUNDS RISK FUND FUND from the risk fund.

In Malaysia, Mudarabah was the


first operational model. The
In general takaful also the operator provision or condition for profit
manages two funds (shareholders’ distribution between Mudarib and
Distribution of Surplus participants in takaful is one pillar
and participants’) separately. In this
case entire contribution is treated of Mudarabah contract. It is
Surplus arises form takaful
as tabarru and constitutes the necessary for the validity of the
fund/participants risk fund after
participants’ risk fund (PRF) or contract that the parties agree on a
paying incurred claims,
takaful fund (TF). The takaful fund definite portion of the profit to be
reinsurance contribution and
is owned by the participants jointly shared. When Mudarabah is
setting aside contingency reserve.
as opposed to the shareholders in a applied in a takaful contract, a
The question arises how should the
conventional non-life insurance profit sharing has to be embedded,
surplus be distributed and to
company. The profit of participants otherwise the contract will be
whom. Surplus distribution is a
investment fund (PIF) in case of invalid. However, some
contentious issue in takaful. Two
family takaful operation will controversy had arisen regarding
juristic views have surfaced and
usually be distributed to distribution of profit from tabarru
dominated the takaful world in the
participants’ and also may be fund as the very purpose of tabarru
Middle East and South Asia. One
shared with operator under is not to make profit.
view is that the underwriting
Mudarabah contract. The surplus surplus should not be shared
of participants’ risk fund is Therefore, practitioners have been
between the takaful operator and
generally used to build up a claim using the word surplus instead of
the participants. The other view
contingency reserve (CCR) within profit for distribution from takaful
validates the sharing. It is argued
the risk fund to smooth claim fund (risk fund). When Wakalah
that there is nothing wrong in
experience over a time. The claims model came into practice, the issue
sharing the underwriting surplus in
contingency reserve (CCR) acts as a of surplus distribution was
the absence of any textual Shariah
buffer against an adverse claim discussed again as under Wakalah
principle disapproving such a
experience in future. This is contract the operator is not
practice.
necessary to provide protection for supposed to participate in surplus
participants. Any possible deficit in or profit from risk fund (tabarru).
Those who agree for prohibition of
the PRF will be met first from the However, in practice, takaful
sharing underwriting surplus with
CCR before “karje hasana” (interest operators distribute surplus to
the TO, states that shariah allows
free loan) is sought from SHF. participants and in many cases to
sharing of profit (return of
When profit/surplus form PIF is shareholders also. This is done as
investment) of participants’
shared between shareholders and incentive to operator. It is argued
investment fund as well as
participants the rate is usually 10% that surplus be treated as
participants’ risk fund under
for shareholders and 90% for performance fees as it is the result
Mudarabah contract. The
participants as per relevant of excellent management of risk
underwriting surplus should go
Insurance law. If and when surplus portfolio.
back to the participants or be used
of takaful fund (general takaful) or to establish new reserves or to
PRF (family takaful) is shared, it So far the family takaful is
lower the tabarru (takaful
varies as per contractual terms of concerned, profit sharing of
donation). Presently, takaful
the scheme. Mudarabah fund (participants own
operators use several modes of
fund) is perfectly all right. But, in

52 October - December 2013 The Bangladesh Accountant


case of general takaful, there is no
savings element and, therefore,
there is no scope of profit
distribution to operators. The only
pool managed by a takaful
operator is the risk pool or the
takaful fund. In general takaful,
there is no guarantee that good
results in any particular year will
be followed in the coming years.
So, the operators create reserves
for bad years. Only after several
years, one can asses precisely as to
whether a surplus has arisen for
distribution amongst the
participants. Even, if there is
surplus, it may create difficulties is
deciding the fairest way of
distributing surplus among
participants.

Many experts feel that there is of loss, if and when loss arises, he profit with less risk involved in
nothing wrong with surplus is not remunerated in any way. investment. Observers suggest that
distribution as far as Shariah restricted Mudarabah is more
compliance and regulation is Mudarib is free to take any suitable for takaful or Islamic
concerned. There is no specific decision to manage the business insurance, as this would ensure
Shariah ruling that prohibits for the betterment of the cautions investment of the takaful
surplus distribution under takaful, Mudarabah contract, wherin assets. Moderate and stable profit
as long as it is distributed among provider of capital is in real sense a is more desirable in takaful
the parties entitled to and without sleeping partner only. However, business than adopting policies
exploitation by one party over the the Mudarib must exercise which aisus at maximum profit at
other. prudence, due diligence, business high risk.
norms, customs, rules and lows
Mudarabah (partnership) relating to the Mudarabah contract. Although loss under Mudarabah
Model There can be of course restricted contract is borne by the capital
Mudrabah contract wherein the provider, the Mudrib can be held
The Mudarabah principle of trade provider of capital restricts the responsible for such loss, if he fails
as per Shariah is a partnership operation under contractual terms to abide by the terms of the
between two parties where one relating to product, type of contract, or do not exercise due
party provides capital (rab-ul-mal) investment, market etc. In this case diligence mouse fund, or act
and the other party extends the provider of capital should not negligently. The profit sharing ratio
necessary management to operate interfere in day-to-day operation of between the takaful operator
the business venture in the the business. (Mudrib) and the participants as
capacity of trustee or manager of provider of capital need to be set
the fund to earn profit for the The Mudarib, as trustee needs free clearly in advance in the contract.
venture by investing the capital. hand in decision making and Duration of Mudarabah
Second party is the Mudarib ( manage the operation to bring best investment, mode of fund
managing the capital under output and ensure reasonable utilization (restricted/unrestricted),
contract) i.e. partner to share profit profit. Restricted Mudarabah is the mode of operation of the fund
without providing capital for the permissible in Mudarabah as it under Shariah principles should be
venture. The Mudarib can claim helps the provider of capital to clearly spelled out in the
share of profit only and not salary, protect his/her fund from engaging Mudarabah contract to ensure
commission or any other into high risk venture. The capital accountability and transparency of
remuneration. Mudarib bears share owner may target moderate or low the system.

The Bangladesh Accountant October - December 2013 53


Wakalah (Agency) Model to act as per the directions of the
principal. This distinguishes the
As an alternate to Mudarabah , role of the Mudarib who acts
Wakalah contract can be used to independently and the capital
operate takaful system. Wakalah owner has no right to control or
means agency. In the Wakalah supervise the Mudarib. Another
contract the takaful operator acts as important distinction is risk and
wakeel on behalf of the Muwakkil profit sharing. Mudarib has right to
(participants). The Wakil is share profit whereas Wakil is
supposed to protect the interests of entitled to wakalah fee only on
the principlal ( Muwakkil) under commission basis or on lump-sum
Shariah guidelines. The wakeel can basis, irrespective of profit or loss
act to transact business on behalf in investment. This means a
of participants as per permissible pre-determined cost is involved in
modes and process of investment. Wakalah model. The Mudarib
He does not take share of profit but shares in the risk of investment as
receives commission upon he/she is not remunerated when
performance of the contractual there is a loss. The agent does not
terms. The terms of the contract take any risk, in case of loss.
and operational guidelines should However, the agent should be held
be clearly spelled out with full responsible for loss or damage of
transparency. Agent act, as assets or money because agent acts
representative of the principal and as trustee, but the agent cannot be
is supposed to act as per authority held liable to compensate. towards a Wakalah model for
given to him. The principal is underwriting and the Mudarabah
liable for the consequences of the Hybrid Model model for the investment part. This
acts of the agent, so far the hybrid model is accepted by the
authority has been entrusted to the Considering pros and cons of vast majority of Shariah scholars.
agent. If the agent acts beyond his Wakalah and Mudarabah, hybrid
authority, the principal is not system (model) has evolved in In Bangladesh, in the proposed
liable. An agent cannot delegate takaful market, although some Takaful Rules, it has been stated
his/her authority, unless he/she is experts feel that restricted that unless otherwise stated, the
permitted by the principal. Mudarabah is more suitable for model to be followed by the
takaful operation, in comparison to takaful operator shall be based on
An agent under Wakalah contract pure Wakalah. On the other hand, the combination of Wakalah and
acts as trustee and not a guarantor. it is argued that a key advantage of Mudarabah. It is perhaps a sensible
Therefore, the agent is not liable wakalah over a Mudaraba is that choice specially for family takaful
for loss or damage of takaful assets the wakala fee can be collected savings products. When Sudan
unless he is found negligent and or upfront and support acquisition launched its takaful operation
acts irresponsibly. The agent is cost of new business. This also based on the “tawoon” principle, it
supposed to use reasonable care to does not help to increase business, adopted the wakala model.
serve and protect the interest of the because high wakalah fee will be However presently, in most of the
principal and as such should unattractive to participants and it Middle-east, the hybrid model is
ensure best investment at the least may hinder sales ultimately. being used. This is also the case for
risk. If the agent fails to perform his Mudarabah model, on the South Asian countries like
duties and discharge his other-hand, might be more Malaysia, Indonesia, Brunei etc,
responsibilities properly, he will be attractive as the profit is shared, but although when takaful was
liable to the principal for any it becomes very difficult for the launched in those countries, they
losses incurred thereupon. takaful operator to bear the cost of used to follow pure Mudarabah
acquisition. If significant new model. From the operation point of
The main distinction between business is written or if the view, hybrid model is more
Wakalah and Mudarabah is the company is in its early years with attractive to takaful operator, as it
extent of control of operation by no income from existing inforce ensures three sources of income,
the Rab-ul-mal (capital owner). In business to subsidies the shortfall. comprising, wakalah fee, profit
wakalah concept, the agent agrees This is why there has been a trend from Mudarabah investment and

54 October - December 2013 The Bangladesh Accountant


profit from shareholders fund. The
participants will get share of
DIAGRAM - A (Hybrid Model) underwriting surplus as well as
General Takaful profit from the investment of
Takaful fund/Mudarabah fund.
Takaful
Operator Operational flow charts of family
takaful and general takaful under
hybrid model can be seen in the
following two diagrams:-
Profit Participants Contribution Wakala Fee Shareholders
Challenges of Takaful

There are a number of practical


Surplus Shareholders Fund
challenges that need to be
addressed in order to ensure the
Investment Takaful Fund Investment Profit success of takaful industry. The
practical challenges relate to the
managerial efficiency of the
operator who need to be more
Retakaful Management competitive in order to offer a
Claims Reserve
Cost Expenses commercially viable alternative to
conventional insurance. In order to
Flow Chart
compete with conventional
market, a takaful operator would
need to have a range of products to
attract a wide range of consumers.
DIAGRAM - B (Hybrid Model) There is still the great need to
Family Takaful educate the general public about
takaful. Identification of halal
Takaful investment sources both within
Operator Islamic countries and in
non-Islamic countries can help
takaful operators to improve their
competitiveness and investment
Claims Surplus results, which can help them
effectively, spread their investment
risks. Takaful industry must reach
Participants Contribution Tabarru (PRF) Investment to a consensus on adopting a
standard business model globally.
The Islamic Financial Services
Board (IFSB), the ASEAN Takaful
Maturity Mudarabah Wakalah Retakaful Group (ATG), the International
Benefit (PIF) Fee Cost Profit
Takaful Association (ITA), and the
Accounting & Auditing
Profit Investment Organization of Islamic Financial
Institution (AAOIFI) need to work
together to promote standard
Share Holders Share Holders Fund practices within the industry.

Takaful is a profit-sharing
Management Exp arrangement. Takaful operators are
expected to exercise prudence in
Flow Chart making investment decisions and
not to subject such funds to

The Bangladesh Accountant October - December 2013 55


potentially high return and policyholders. Apart from that, independent directors be
high-risk situations. Takaful Family Takaful Operators should appointed in the Board to ensure
operators would desire to maintain a risk sharing pool for its corporate good governance and to
maximize higher investment members to meet the death claims protect all stakeholder’s interest,
income because their during the term of the policy. specially that of policy
compensation is directly related to holders(participants).
their own investment performance. Management of a takaful operator
There must be also a formal is to play crucial role in this regard. Takaful operators are not charitable
supervisory system that monitors Providing policy or risk cover at a institutions; neither they are purely
takaful operations efficiently. The lower rate of premium commercial. While the principles
mere existence of a Shariah (contribution) than conventional of mutuality and cooperation are
supervisory board within a takaful insurers ought to be a prime goal the essence of takaful operation, it
operation may not be all effective of takaful operator. This can be has to be also commercially viable,
in this regard. The operators must done by increasing overall and transparency should be the
strengthen their financial managerial efficiency through core feature. Operators are trustees
capabilities and improve other proper motivation of the human of people’s fund and they need to
essential skills in providing resource. Reducing cost and clarify at the outset, how the profit
insurance services. Focusing on increasing productivity are the and surplus be distributed from
quality of coverage as well as main two principal processes of investment and underwriting
competitive price are required for reaching the goal. Increasing surplus. Different models have
efficiency in operation and underwriting surpluses is another different guidelines of sharing
enhancing competitiveness with way to increase financial surplus. surplus. In Mudaraba (partnership)
conventional insurers. In takaful, in the event of model, the shareholders are
underwriting losses, shareholders entitled to participate in both
Challenges of takaful need provide Karje-hasana (interest free investment and underwriting
primarily be met by the loan) to takaful fund/Participants surplus. Management expenses be
professionals involved in the Risk Fund to meet emergency. A borne by the operator out of these
operation of takaful. It is an part of the underwriting surpluses surpluses. In the Wakala (agency)
accepted fact that takaful differs can also be kept as emergency model, investment return and
from traditional insurance models “Reserve” for future unusual underwriting surplus are not shared
and fostering takaful business for deficit, if any. The future of takaful by the shareholders; instead the
the betterment of the society is a industry depends much on how operator takes only wakala fees.
worthwhile endeavour. The joint the takaful operators are able to
stock model and the mutual or make a happy marriage between In the hybrid model of Wakala and
cooperative model have been the higher rate of profit to Mudaraba the takaful operator
traditional ways of delivering policyholders and cheaper rate of (shareholders) apart from fixed
insurance. Takaful model has now products without any compromise wakala fees is entitled to have
emerged as the new unique model with quality in products and share from investment profit. In
wherein both the shareholders and services. This means takaful some cases underwriting surplus is
policyholders interests need to be operators must ensure good also shared by the shareholders. In
protected more equitably. In joint governance and transparency to the pure cooperative model all
stock model, the shareholders are the highest degree. profits and or surpluses belong to
supposed to look after their own policyholders only. These aspects
interests. Mutual companies look Maintaining Highest Degree of surplus distribution methods and
after the interests of the policies need to spelled out clearly
of Transparency
policyholders only. In takaful, the in the policy documents.
management is supposed to pay Policyholders (participants) need to
Different takakul models have
reasonable dividend to be educated about the Shariah
evolved during last three decades.
shareholders as well to pay high guidelines regarding distribution of
All the models emphasize that
rate of bonus or profit to surplus under Mudaraba model,
transparency has to be maintained
policyholders. Therefore, to Wakala model and different hybrid
to ensure equity and justice. While
maintain equity and justice, takaful models.
shareholders are represented in the
operators need to have separate set
Board of directors; the
of accounts and assets; one for its Unfortunately, in most of the
policyholders are not represented
shareholders and the other for its countries there is no regulatory
in the Board. Therefore,

56 October - December 2013 The Bangladesh Accountant


framework or guidelines as to regulatory framework. Malaysia is applicable to business contract
which model to be followed and a glaring example. From the outset, (Fiqh Muamalat). Unfortunately,
what are the basic requirements Malaysia has had a separate law many of the professionals have
from Shariah view point and regulating takaful. In Malaysia, little or no knowledge about
regulatory aspects. Bahrain’s there is no restriction on the takaful business laws of Shariah.
regulatory framework sets out models to be followed. However Therefore, there is a feeling
explicitly the need to use the no takaful windows are allowed. amongst several regulators that
Wakala model for underwriting Some of the important features of takaful can be regulated by the
and the Mudarabah model for takaful regulations in Malaysia are conventional rules and regulations
investment returns. Malaysia as follows: applicable for insurance business.
allows all the different models, but This concept seems not correct. It
have separate law and regulations a) An actuary is to certify pricing of is evident that takaful is inherently
for takaful. In Bangladesh, takaful products. more transparent than
Insurance Act 2010 and the b) Shariah certification is required conventional insurance as the
proposed takaful Rules provide that on the operation of takaful operator has to disclose to all
takaful operators should maintain companies. participants how much tabarru is
two separate funds viz participants c) A supreme Sharia Rules making being deducted and why, how
takaful fund and shareholders fund. body for takaful has been munch fee is to be charged and its
It is, therefore, necessary that the formed by the regulator. basis, in what proportions the
Board of Directors and the d) There are limitations on the surpluses are to be distributed.
management ensures that all commission to be paid to Regulations need to specify these
employees of takaful companies intermediaries. aspects and obligations of the
embrace and follow takaful e) There are specific regulations for operator to maintain fairness and
principles in all aspects of the investment of takaful assets. equity for all the stakeholders.
operation, be it underwriting,
claims, accounts, and so on. The most important ingredients for Risks should be clearly elucidated
Corporate governance and takaful to succeed are regulations and risk should be allocated to the
regulations are very important for in the relevant Jurisdiction. appropriate stakeholder. Regulators
maintaining transparency. However, it is not appropriate need to ensure the long-term
Regulators need to take a strong simply to copy the regulation of sustainability of the takaful
position to protect the one country. The regulators and operation. Therefore, they need to
policyholders. the operators need to understand provide instructions and guidelines
the implication of Shariah to the Board, Shariah Board and
Takaful contracts need to be interpretation of the Islamic laws as the Actuary as to how they perform
simple, transparent and standard.
In most countries there is no
standardized policy document for
Takaful. The relationship between
policyholder and the takaful
operator should be made clear.
Regulation should ensure that the
basis of operators fee, sharing of
profits/surpluses are properly
disclosed. All operators of takaful
must also treat the policyholders
fairly. It is, therefore, necessary to
disclose, how the operator
distribute underwriting surplus and
to whom it should be distributed.

Ensuring Good Governance

The unique characteristics of


takaful make its success somewhat
dependent on a supportive

The Bangladesh Accountant October - December 2013 57


their responsibilities to discrimination to any of the operators are facing extreme
shareholders, policyholders, stakeholders and ensuring complete difficulties for not having access to
management team and the public compliance of Shariah guide lines. appropriate Islami Bonds.
in general. The Board must ensure
corporate good governance and Mitigating Inherent Risks in Takaful Operational risks and expense risks
advise the management team to Takaful operators ought to be very of takaful operator are borne by
comply with rules, regulations and careful to ensure that enterprise shareholders as the management is
the Shariah law as applicable to risks are managed prudently. This responsible for business on behalf
takaful operation. For this purpose can be ensured by setting and of the shareholders. But
a supreme Sharia Council or Board maintaining. underwriting risk and investment
need to be established by the a) Capital adequacy, risks under takaful operation are
regulator to ensure uniformity in b) Adequacy of Loss Reserves, borne by the policyholders,
Shariah interpretation of takaful c) Quality of Assets, although they have no say in the
operation. Further it is necessary to d) Pragmatic underwriting Policy decision making process. Tabarru
oversee that management ensure and rate or the risk premium is
fair and sound pricing of products. e) Monitoring & Managing determined on the basis of
It is also necessary to ensure that Enterprise Risks. estimated likelihood of a loss of
solvency rules are being followed. property or as determined by the
The shareholders expects to earn Furthermore, the operators need to Actuary on the basis of Mortality
reasonable dividend and the maintain appropriate levels of risk Table. In the real world, there will
participants or policyholders based capital. There is also a need be fluctuations and volatility in the
expect cheaper price and more to expand the variety of Shariah amount of claim. It become,
benefits from the savings and compliant assets to mitigate the therefore, necessary that a
protection schemes of takaful. investment risks inherent in Family reasonable amount is kept reserved
Takaful (long-term savings and for the unusual years. A
While management is supposed to protection products). The success complication arises if the
meet all these expectations, they of takaful is likely to be materially shareholders share in underwriting
need to meet long-term liability and dependent on having access to surplus, but not in underwriting
ensure financial soundness of the wide range of Islamic Bonds losses.
company, without any (Sukuk). In Bangladesh, the takaful

58 October - December 2013 The Bangladesh Accountant


In family takaful, an Actuary takes about the applicable Shariah laws suggestions so that it is decided
care of product pricing and tabarru and their implications in the takaful finally as to what is Shariah
rate can be periodically reviewed. operations. One cannot be Shariah compliant and what is not.
However in non-life (general compliant, unless he/she is Regulating takaful is different from
takaful) business it has been conversant with Shariah regulating insurance. This stems
recommended that underwriting knowledge. Furthermore, all the from the hybrid nature of its set up.
surplus should be paid out only stakeholders must be willing to be A risk-based approach along-with a
after keeping a reasonable amount Shariah compliant. Operation of well-thought-out rules-based
into a reserve fund. Therefore, takaful business purely on business regulations may be appropriate. An
deficits if any can be made good motive cannot fulfill the desires of important decision for the Shariah
first from the reserve fund and, if vast majority of Muslims people and the regulators is
that is not sufficient by throughout the world. A Shariah whether to allow Takaful windows.
“karj-e-hasana” from the compliant takaful operator cannot There are several other issues
shareholders fund. The basis of charge or earn interest and they where consensus is required and
underwriting surplus should be must not invest in non Shariah need regulatory support.
regulated or reviewed by the compliant assets. To avoid
Regulator to reduce the possibility confusion among the Muslim Ensuring Regulatory Support
of over payment or wrong population, there should be a
payment. consensus among Shariah scholars Regulatory support is one of the
as to how takaful is to be key factors for the continued
Ensuring Shariah structured and implemented under development and growth of
Compliance Shariah guidelines. In this respect, takaful. A good example is
local Shariah scholars must try to Malaysia which has become the
Compliance of Shariah rules is the agree among themselves and then biggest takaful market worldwide.
essence of takaful. Structurally, to come to consensus regarding This is due to the comprehensive
takaful company is a combination structure and operational takaful regulations and continuous
of stock company and mutual guidelines. support by the Regulator, “Bank
organization. However, there are Negara Malaysia”. Bank Negara’s
significant variations in takaful In Malaysia, there is no restriction goal is to put takaful operators on
operation in comparison to stock on the takaful models to be an equal footing with conventional
companies and applied. However, the operation insurers. New regulation in
mutuals/cooperatives engaged in framework sets the maximum fees Malaysia is the introduction of the
insurance business. Mutuals, to be charged to the participants Islamic Financial Services Act. This
cooperatives and the conventional and the maximum share of surplus will accelerate the consolidation
companies are not supposed to an operator can take for itself. In process further as it will require
comply Shariah guidance, which a Bahrain, all takaful operators must takaful operators to have separate
takaful operator must abide by. On organize and operate their business licenses for general and family
the surface, takaful appears to be according to the wakala model. takaful instead of composite
similar to mutual insurance However, the takaful operator can operation. In Indonesia, the
however, the vast majority of use the Mudaraba model from the regulator allows conventional
takaful companies operate as stock investment portfolio. It is observed insurers to set up takaful windows.
companies. The key difference is that Takaful industry practice is However, a new regulation is
that takaful operators must have a gradually converging toward a expected to come into effect
Shariah Board to supervise and hybrid business model, which requiring takaful windows to
monitor the operations of takaful combines a fixed fee model for convert to a full-fledged takaful
regarding Sharia compliance. underwriting (wakala) with profit operator.
sharing for investment activities
Takaful is guided by the Shairah (Mudaraba). Recently, the regulator in Pakistan,
law of “Muamalat” (commercial issued new takaful rules allowing
law). Therefore, belief in religion In Bangladesh, takaful (Islamic conventional insurers to set up
of Islam is not a precondition for Insurance) has been defined in the takaful windows. However,
participants, executives, share Insurance Act, but no existing takaful companies have
holders and so on. But this does rules/regulations have been made opposed to this venture as they felt
not mean that the stakeholders can so far. Sharia scholars have to that it puts them at a disadvantage
remain ignorant or indifferent come forward with their position compared to their

The Bangladesh Accountant October - December 2013 59


competitors in the conventional Besides the legal and regulatory not been resolved finally. There are
market. In Bangladesh, Insurance issues, there are a number of debates about surplus distribution,
Act 2010 allows Conventional life practical challenges those also management expense, karje
insurance companies to open need to be addressed in order to hasana, wakala fee, tabarru and so
takaful windows but non-life ensure the success of this nascent on. At the same time, takaful
conventional companies are barred industry. For example, there is a operators can not play on a level
to open takaful windows. Thus, it great need to educate the general playing field because of shortage
appears that the issue of window public about insurance and takaful. of Shariah compliant assets for
operation of takaful is now being Further it appears that the so called investment, shortage of Shariah
debated and also controversial. social elites and the modernists are experts on takaful, shortage of
Regulators need to have strong allergic to Islam and they are not in takaful professionals, shortage of
logic for allowing or not allowing favor of allowing a separate retakaful operators, absence of
takaful windows. insurance system based on Shariah Shariah compliant capital market
principles. Amidst all these etc.
In takaful, the shareholders are unfavorable environment, it is
expected to provide the initial necessary to adopt a standard The global takaful industry is still
capital, but ultimately the takaful model nationally, if not in its early stages of development.
participants (policyholders) are globally. Regulator needs to play While the number of takaful
expected to build up the necessary the key role in this regard. operators have risen and
solvency capital. The challenge of expanding into new territories, the
setting solvency standard for Concluding Remarks: industry is still small when
takaful operator need to be compared to the nearly US$ four
handled very carefully by the Takaful operators follow different trillion of premium seen in
Regulator. The International models of takaful operations. conventional insurance. Majority
Financial Services Board (IFSB) has Shariah scholars feel that more of conventional insurance
set a standard with regard to perfection in the operating process consumers are from Europe,
solvency requirements for takaful. is required to make it best in America and Oceania. This is
The standard envisages separate comparison to conventional simply because insurance
ring-fenced shareholder’s and insurance system. Current models consciousness and people’s ability
policyholder’s, funds, where each of takaful are acceptable to Shariah to buy insurance is more in
fund would need to have sufficient scholars because it is better than western countries in comparison to
assets to meet the solvency conventional insurance and it is third world Muslim countries.
obligations. It has been assumed being developed towards more Despite this lopsided high position
that the shareholders would be perfection. Scholars and of conventional insurance, it is
obliged to extend interest free loan professionals throughout the world heartening to note that Islamic
to the policyholders fund when it are now trying to develop takaful insurance (takaful) is one of the
is needed. The standard is silent on and make it more Shariah fastest growing areas of
how takaful products will be compliant. international Islamic finance today.
priced and what happens to the The great obstacle in the way of
contributing policyholders, if the perfection is the environment
fund created by them is used to where we live and operate. Takaful
finance future policyholders. The The Author is Managing Director,
companies operate in an Prime Islami Life Insurance Ltd.
regulator needs to introduce environment which is not 100%
creative and positive solutions to Shariah compliant. Furthermore,
these issues. there are several issues which have

60 October - December 2013 The Bangladesh Accountant


Corporate Governance Vs
Corruption: Role of MNCs
Tanzina Haque

Abstract highest priority by the corporate sector as


well as by the government, particularly in
the emerging economy. Good governance
Changes in the global marketplace over and controlling corruption is really a
the past several years have made bribery fundamental basis for growth and
and corruption one of the central issues in development of any country. This paper
international business today. Though the mainly seeks to contribute to the debates
Corporations are expected to conduct about the questionable relationship
their operations responsibly with between corporate governance and
accountability to wider society, the real corruption and what role the business
world picture is quite different. The firms particularly MNCs play to address
objective of this paper is to highlight these both issues. The paper also draws
issues by reviewing the academic attention to a variety of strategies and
literature in relation to Multinational processes used by MNCs to deal with
Corporation’s responsibility to fight those subject matters. The paper is the
against corruption through the tool of extensive review of the existing literature
corporate governance. Here corruption is on the field of MNC’s responsibilities
considered under one dimension i.e. towards good corporate governance and
bribery or questionable payments. The corrupt practices.
study seeks to shed light on different
initiatives taken at business, government Before going to detail analysis, brief
and multilateral level to deal with this overviews of the two terms are given
problem. And individual firm action is a below for clarification.
vital component of the ultimate mix of
policies and strategies that is likely to
Corporate governance
make a significant difference in the
practice of making corrupt payments.
Corporate governance is an emerging
issue in today’s world. According to
Introduction literature, corporate governance is a set of
mechanisms which act to enhance the
Corporate governance and corruption, two performance of corporations. In other
interrelated concepts which are very much words we can say ‘corporate governance
controversial in modern economy, get the is the system by which companies are

The Bangladesh Accountant October - December 2013 61


directed and managed (ASX area including legal, cultural, CORPORATE
principles)’. It is evident that the ownership and other structural
development of corporate differences. According to John Farrar GOVERNANCE AND
governance concept is a global the structure of corporate governance
occurrence therefore it is a complex is as follows:
CORRUPTION, TWO
INTERRELATED
CONCEPTS WHICH ARE
Stock exchange listing
requirements & statements VERY MUCH
of accounting practice
CONTROVERSIAL IN
MODERN ECONOMY,
Legal
GET THE HIGHEST
regulation Codes of conduct
Guidelines Statement PRIORITY BY THE
of best practice
CORPORATE SECTOR
AS WELL AS BY THE
GOVERNMENT,
Business ethics
PARTICULARLY IN THE
Fig: The structure of corporate governance
EMERGING ECONOMY.
GOOD GOVERNANCE
Corporate governance is a broad Corporate governance has become a AND CONTROLLING
theory concerned with the alignment top priority for the regulatory bodies
of management and shareholder with the objective of providing better CORRUPTION IS REALLY
interests (Grant, 2003). Arthur Levitt and effective protection to all A FUNDAMENTAL
defines corporate governance as “the stakeholders and also to make the
relationship between the investor, the market confident as research reveals a BASIS FOR GROWTH
management team and the board of positive correlation between
directors of a company” (Levitt, 2002: corporate governance and share AND DEVELOPMENT OF
209). So Corporate governance is the prices (Ahmad, 2004). Another ANY COUNTRY.
control rights to influence the important reason is that poor
activities of managers to ensure governance leads corruption. James
efficient use of resources entrusted at Wolfensohn, the president of World
their disposal. It specifies the Bank says "The governance of the
distribution of rights and corporation is now as important in the
responsibilities among the different world economy as the government of
actors inside the corporation – CEO countries." There are two guiding
(Chief Executive Officer), board principles for corporate governance
members, managers, shareholders
and stakeholders (Goyer, 2001). - Transparency- related to the
disclosure issue of corporation
Why the concept of corporate regarding the event made by the
governance exists? Or why it is so corporate people
important? In this regard, Sir Adrian
Cadbury perfectly said, “corporate - Accountability- says that the
governance is considered withholding corporate people (directors and
balance between economic and social other officers) should be
goals and between individual and accountable for their actions
community goals.” (Cadbury, 2003).

62 October - December 2013 The Bangladesh Accountant


Corruption are decentralized at the level of some undue influence then it is
lower officials. In this form of active. Unfortunately bribery
There are plethoras of definition in corruption, the chief of state is practices have several hidden costs
literature regarding corruption. simply one among many collectors that may dwarf any immediate
According to Macrae (1982) of corruption rents. gains from such practices (Xun Wu,
corruption is ‘an arrangement that In the era of globalization, as 2005 p.154). Bribery should be
involves an exchange between two business firms expanded their distinguished from common
parties (demand and supply) which operations across the national practices involving social gifts and
has an influence on the allocation boundaries, governments, entertainment and cases where
of resources either immediately or managers and scholars all grew payment may constitute an
in the future and involves the use more aware of the magnitude of authentic and accepted method of
or abuse of public or collective corruption and the need to compensation.
responsibility for private ends.’ understand and address it. For
Corruption may be in different analysis purposes this paper Cost of corruption
forms and occurred at different considers corruption under the
levels. According to Waller Verdier scope of bribe or questionable The effects of corruption on firms
& Gardner, 2000, we can think of payments. are similar regardless of any
two structures of corruption: national nature. But some
top-down and bottom-up (Gardner Bribe/questionable payments researchers, suggest that the nature
and von Hagen [1996], Cheung of corruption varies appreciably
[1998]). Top-down corruption Bribery can take place in a wide across countries (Schleifer and
refers to a setting where corruption scale of business activities. And it Vishny,1993), In some countries,
decisions are centralized in the can be active or passive in that corruption is hierarchical,
chief of state, who then monitors sense after doing something wrong organized and predictable e.g
lower level officials in an attempt when the business pay bribe to developing countries In other
to collect corruption rents. avoid future unfavourable events countries, corruption is
Bottom-up corruption refers to a then it is passive but when disorganized, independent and
setting where corruption decisions business initiate bribe to make

The Bangladesh Accountant October - December 2013 63


The level of CG is inversely
related to the level of corruption

From the literature, it is evident


that different researchers at
different times have tried to
develop relationship between
corporate governance and
corruption. In this respect one
prominent research study
conducted by Xun Wu, to make
linkage between corporate
governance and corruption across
different countries taking only the
demand side of the corruption
(receiver of bribe) that is the
corrupt government officials. The
supply side (offerer or payer of
bribe) ignored here. Based on
fundamental two principles of
corporate governance i.e.
transparency and accountability,
the research hypothesis was
developed as:

HP 1: Corruption Will Be Lower in


Countries Where Corporate Boards

Are More Accountable to


Shareholders (accountability)

HP 2: Corruption Will Be Lower in


Countries that Have Higher

unpredictable like developed Standards for Accounting


countries (Herrera & Rodriguez, Relationship between Information Reporting
2003, p.2). Whatever the nature, (transparency)
Corporate governance and
corruption involves costs both
explicit and implicit (hidden). As a Corruption Corresponding to the two
result the operational cost of the hypotheses regarding corporate
business increases. Have an impact It is hard to say whether the governance and corruption, two
on the profitability or the overall corporations are corrupt because measures of corporate governance
creditworthiness of the firm. Not they have the poor corporate that are taken a) efficacy of
only has the business organization, governance, or they are corporate boards in representing
corruption imposed cost on the unfortunate to establish good outside shareholders
society indirectly by limiting the corporate governance because they (SHAREHOLDER), and b) the
ability of the government to are corrupt, but it is clear that quality of accounting practices
perform effectively and efficiently, something need to be done about (ACCOUNT) among 75 major
Which ultimately has a negative the high levels of corruption to economies around the world
impact on the standard of living of enjoy any kind of growth and (sample size). And corruption
that nation. That's why it is prosperity by the corporation as perception index from TI is taken
important to apply good corporate well as nations. as measure of corruption as
governance practice to reduce dependent variable plus some
corruption. To establish the relationship, here other control variables. Regression
it is assumed that: analysis is used to prove the above

64 October - December 2013 The Bangladesh Accountant


then we can determine country
position in terms of corporate
governance.

Countries having higher scores are


cleaner in terms of applying good
corporate governance and
countries having lower scores are
more corrupt. In a modern
globalized economy, the top
ranking countries in CPI are doing
business to the lower ranking
countries and those multinational
are somehow involves in the
bribery payments to those nations.
The interesting fact is that clean
countries according to CPI of
Transparency International are
responsible for the bottom side
corrupt countries for exporting
corruption. But it’s really difficult
to determine which countries are
producing the greatest supply and
demand of corruption.
Transparency International's "The
Global Corruption Barometer
2013" which is a survey of
114,000 people in 107 countries,
shows corruption is widespread.
The survey said that 27 per cent of
respondents had paid a bribe.
According to the survey, many
people regard corruption as a very
serious problem for their societies.
hypothesis. The results provide level of corrupt practices of firms On a scale of one to five, where
convincing evidence in favour of from nations ranked in the Bribe one means "corruption is not a
the two hypotheses. ‘The Payers Index. Firms from countries problem at all" and five means
coefficients on two measures of with lower corporate governance "corruption is a very serious
CG have the expected effects on are more likely involve with
corruption and they are statistically corrupt practice like giving bribe Countries Rank CPI scores
significant. There will be less (Wo, 2005).
Denmark 1 91
corruption in a country where
corporate boards truly represent According to the World bank, Finland 1 91
the interests of shareholders; the governance indicator measure six New 3 89
prevention of accounting dimension of governance: a)voice Zealand 3 89
irregularity such as keeping profits and accountability b)political
Sweden 5 86
and wages off the books can also stability and absence of violence,
play a positive role in the battle c)government effectiveness, d) Norway
against corruption.’ The research regulatory quality, e) rule of law, South Sudan 73 14
study also conducted using Bribe and f) control of corruption,
Sudan 74 11
Payer Index (BPI) as dependent covering 213 countries. If consider
variable and that result also only one dimension that is control Afganistan 75 8
indicate ‘the two corporate of corruption and taking top 5 and North Korea 75 8
governance measures have the bottom 5 countries from Somalia 75 8
expected effects on the perceived Corruption perception index (CPI)

The Bangladesh Accountant October - December 2013 65


K¬ve
`gb
Z x©w
`~b

problem", the average score across Nigeria and Africa because of our cope with this questionable
the countries surveyed was 4.1. collapsed systems.’ And this is the practices
picture of most developing
MNC’s role in CG and countries.  Some instances of bribery are
the result of extortion. The
corruption
It has been argued that companies, morality of extorted payments
especially multinationals, are the depends on the nature and
Do the business organizations
biggest perpetrators using a circumstances surrounding the
contribute to the reduction of the
sophisticated network of notional payments.
corruption in a particular country
companies and corporate structure
by exporting good corporate
to facilitate corrupt practices in  In extreme cases MNC’s
governance? It is evident that
developing countries (Kapoor, inability or unwillingness to
presence of foreign owned
2005, Martens, 2007). Firms from control rogue employees also
subsidiaries, on average, reduce
countries where domestic contribute to corrupt practices.
the level of corruption of the host
corruption is minimal play a major
country (Chuck & Solomon, 2006).
role as bribe payers into corrupt But the use of bribery and
That is MNCs play a major role in
environments (Dunfee 2000). inducement to secure competitive
combating corruption and boost up
Some factors can be identified as advantages is primarily a matter of
good corporate governance,
responsible for explaining this type executive discretion rather than
because they have the opportunity
of inconsistent behavior of MNCs. any legal or moral compulsion
to exchange good corporate
(Otusanya 2012). So it is possible
practice across the country. But is
 Firms may involve in corrupt by the firms to control themselves
it the whole story? Sorry to say-
practices due to competitive from this type of dishonest
No. Though they can do something
necessity. They may find activities.
better, they are actually taking
themselves at a serious
advantage from corrupt economy.
disadvantageous position if they Combat corruption through
The Head of Nigeria’s Economic
refuse to pay bribes while CG
and Financial Crime Commission,
others continue to do so.
Nuhu Ribadu said, ‘I have seen
 MNC’s need to show respect for Remember that one corruption
multinationals and big oil
local cultural norms. As a result gives birth to another one. The
companies play by the rules
sometimes they are bound to second transaction may lead to
elsewhere, but behaving badly in

66 October - December 2013 The Bangladesh Accountant


another corrupt action. Then what
is the ultimate end? It is endless. Company A
What should be the policy to deal
with the corruption in the No bribe bribe
corporate sector? Xun Wu used a No bribe 4,4 0,3
simple coordination game to 1st scenario 2nd scenario
illustrate firms’ choices in the Company B
situation of giving bribe or not to bribe 3,0 1,1
give bribe. Assume that two firms 3rd scenario 4th scenario
compete for a public contract, and
the firm involved in bribery may Fig: Pay-off matrix of two firms competing for contract
have an undue advantage over the
other firm if other firm does not
pay bribe but such gain should be
offset by the potential loss. The
scale is taken from 0 to 4 and the Anti corruption strategy
payoff matrix is shown in the figure
below: Adequate Inadequate
Commitment Strong Effective Ineffective
When both firms offer bribe then Of strategy strategy 2
this create an equilibrium position political
Weak Ineffective Hopeless
that no firm gains competitive leadership
strategy 1 strategy
advantage (4th scenario). In other
extreme point when no one give
bribe, the firms are in another
equilibrium position (1st scenario),
So the best strategy for the firm is bank, ASX etc.), donor forces for opinion and shield the business
to follow either bribe-bribe or no economic and political stability from a hostile external
bribe-no bribe condition. and ensure ethical behaviour. environment (Baken 2004, Sikka
2010).
According to Jon Quah the In response to the lack of
ultimate consequences of government initiatives, the private Perhaps the most significant fact of
corruption can be minimized by sector’s role in the anti-corruption all anti-corruption efforts and
taking appropriate strategy by the movement increased considerably. trends is that the general public
government, business people, As a driver of economic growth appears to have lost its tolerance of
social groups or multilateral and development, the private corruption and bribery. Research
organization. He provides a matrix sector plays an invaluable and study reveals that though in the
of anti-corruption strategy taken by evolving role in rooting out short run bribery gives a positive
the government to reduce corruption, especially when return for streamlining business
corruption. working in countries with weak operation, in the long run it
institutions. ultimately has a negative effect.
Government should take the Spending money or time on
initiative to apply effective strategy, Hess and Dunfee offer an effective bribery, facilitation payments, or
with strong political commitment instrument for the business to extortion represents a blatant
implement adequate rule and combat corruption through misuse of corporate assets and
regulation to ensure less corporate governance by C2 increases the risk on the rate of
corruption. In modern days some Principles which is a voluntary return on invested money.
of the measures are taken to deal approach to prevent payment of
with this situation e.g. Foreign bribes and to publicly disclose Conclusion
Corrupt Practice Act (The FCPA their progress and efforts towards
has had an enormous impact on these ends. It has been argued that In conclusion it can be said that
the way American firms do such codes of conduct and the relationship between corporate
business), International Code of statement of responsible and governance and corruption is
Conduct or Corporate Governance ethical conduct are used as really a controversial issue. It is
Principles (OECD, AIMA, World strategic resources to mould public very difficult to identify the perfect

The Bangladesh Accountant October - December 2013 67


cause-effect relationship between Goyer, M. 2001, ‘Corporate
them. Sometimes we can say that governance and the innovation system Benz, Patrick. 2007, “A Framework for
corporate governance is the cause in France: 1985-2000,’ Industry and Sustainable Development: With case
Innovation, 8(2): 135-159 studies in global warming, corruption
for ultimate effect of corruption i.e.
and organized crime.” Diss. New York
good corporate governance Grant, G.H. 2003, ‘The Evolution of University.
reduces the level of corruption or Corporate Governance and its impact
bad one increases corruption. But on modern corporate America’ Otusanya, O. J. (2010) An
we can also say that due to the Management Decision,41(9) Investigation of Tax Evasion, Tax
cause of corruption, the level of Avoidance and Corruption in Nigeria,
Ahmad, J. U. 2004, ‘Draft Code of Unpublished Doctoral Thesis,
corporate governance is affected. Corporate Governance-Bangladesh’, University of Essex, United Kingdom.
In a highly corrupt environment, it The Bangladesh Accountant,
is very tough to ensure good October-December, Quarterly journal Otusanya, O. J. (2011a) ‘The Role of
corporate governance. The truth is of the Institute of Chartered Multinational Companies in Corrupt
that interdependent relationship Accountants of Bangladesh. Practices: The Case of Nigeria’,
exists so initiative should be taken International Journal of Critical
Cadbury, A. 2003, ‘Corporate Accounting, 3 (2/3): 171-203.
simultaneously to reduce Governance – An Indian Perspective:
corruption and improve corporate Diverse Demands; Disciplined Otusanya, O. J. (2011b) ‘Corruption as
governance practice. Approach,’ The Institute of Chartered a Obstacle for Development in
Accountants of India (Publication of Developing Countries: A Review of
And in this respect Multinational the 125th All India Conference of Literature’, Journal of Money
Corporations can play a significant Chartered Accountants, January, Laundering Control, 14 (4):387-422.
Delhi).
role because MNCs have the Sikka, P. (2010) ‘Smoke and Mirrors:
capacity to shape up the regulatory Levitt, A. 2002, Take on the Street Corporate Social Responsibility and
framework through private (New York: Pantheon Books). Tax Avoidance’, Being Paper Presented
payments to public officials which at Essex Accounting Centre, Essex
Wo, Xun 2005, ‘Corporate Governance Business School, University of Essex,
in turn skews the policy making and Corruption: A Cross-Country
process in favor of particular firms. UK.
Analysis’, Governance: An
So MNCs have the major International Journal of Policy, Sikka, P. and Hampton, M. (2005) ‘Tax
responsibility to deal with the Administration, and Institutions, Avoidance and Global Development:
corruption by exporting/ importing Vol.18, No. 2, pp.151-170 An Introduction’, Accounting Forum,
good corporate governance 29(3): 245-248.
Schleifer, A. & R.W. Vishny 1993,
wherever it is required. ‘Corruption’, Quarterly Journal of http://www.nber.org/
Economics 108, p.599-617.
www.transparency.org
References: Herrera, Ana María & Rodriguez,
Peter July 24, 2003, ‘bribery and the www.worldbank.org/wbi/governance
Farrar, John 2005, ‘Corporate Nature of Corruption’ p. 1-26
Governance: Theories, Principles & http://www.asx.com.au/
Quah, Jon S. T. Jon, 1999, ‘Corruption
Practices’, 2nd Edition, Oxford
in Asian Countries: Can It Be
University Press.
Minimized?’ Public Administration
Chuck, CY Kwok & Solomon, Tadesse Review, Vol. 59, No. 6 The Author is Assistant Professor
2006, ‘The MNC as an agent of
Nwabuzor, Augustine. 2005
Department of Accounting &
change for host country
“Corruption and Development: New Information Systems,
institutions:FDI and corruption’, Dhaka University
Initiatives in Economic Openness.”
Journal of International Business
Journal of Business Ethics 59 :
Studies, 37, 767-785
121-138.

68 October - December 2013 The Bangladesh Accountant


Membership of Bangladesh in Egmont Group:
An enduring example of success
Raihan M Chowdhury

Obtaining the membership of The Group operates a global dragnet


against money laundering and other
Bangladesh in Egmont Group, a global financial frauds as part of the campaign
network of financial intelligence units, is against illegal narcotics, activities of
another achievement in our growing organised crime and terror financing.
financial sector. It will certainly help the
country combat cross-border money Increasingly, corruption related crimes
laundering and potential terror financing. appear in the statistics of FIUs and of law
With this inclusion, Bangladesh will have enforcement agencies, as a major category
access to sensitive information on the of predicate offences.
Egmont Group website.
The US Department of State 2011 Money
Thanks to the membership, Bangladesh Laundering and Financial Crime Report
will be able to detect money laundering names corruption as a ‘major predicate
only through the banking channel. offence’ or as a serious obstacle to fighting
Another major benefit that Bangladesh money laundering, a document on the
will get from the membership is training Egmont Group website shows.
from international experts and sharing of
expertise among members. “We’ll now exchange information among
the member countries to detect money
Bangladesh first sought membership in laundering and terror financing,” Mr Atiur
2008 and received it at Egmont’s meeting Rahman, Governor of Bangladesh Bank
held recently in Toronto, Canada. said in a press briefing.
Malaysia and Thailand sponsored
Bangladesh for the membership. In fact, Bangladesh Bank’s years of hard
work culminated in success through
The Financial Intelligence Unit of obtaining the Egmont membership. The
Bangladesh Bank will act as the national Relevant Departments of Anti Money
centre for all work. Laundering and Combating Financing of
Terrorism of Bangladesh Bank- Bangladesh
Established in 1995 at the Egmont Financial Intelligence Unit and Central
Arenberg Palace in Brussels, Egmont Bank Strengthening Project Cell-performed
Group is an informal organisation of a series of jobs during the last few years.
financial intelligence units of 139
member countries in the Group.

The Bangladesh Accountant October - December 2013 69


IT IS GRATIFYING
THAT BANGLADESH’S
ASSET RECOVERY
INITIATIVES ARE IN
GOOD SHAPE WITH
GLOBAL EFFORTS, AS
PART OF OUR
OVERARCHING AML CFT
INITIATIVES GUIDED BY
THE NATIONAL
COORDINATION
COMMITTEE CHAIRED BY
THE HONORABLE
FINANCE MINISTER.
ASSET RECOVERY
INITIATIVES IN
Money Laundering Prevention Act Minister, approved the strategy paper
(MLPA), 2012 was promulgated on 30 April, 2011. BANGLADESH ARE
repealing the Money Laundering
Prevention Act, 2009 and the Anti BFIU has performed vital role with BEING OVERSEEN BY AN
Terrorism (Amendment) Act, 2012 Anti Corruption Commission to INTER-AGENCY
was declared amending the Anti conduct AML/CFT risk and
Terrorism Act, 2009 to meet the vulnerabilities assessment on COMMITTEE HEADED BY
international standards and to make Bangladesh to identify the AML/CFT
an effective anti-money laundering risks and vulnerabilities in THE ATTORNEY GENERAL
(AML)/ CFT (combating the financing Bangladesh and drafted a report on it. AND ASSISTED BY THE
of terrorism) regime in Bangladesh.
A National Coordination Committee BFIU.
The Bangladesh Financial Intelligence (NCC) was formed headed by
Unit (BFIU) has performed a major honorable Finance Minister,
role in drafting both of the Acts. comprising Attorney General,
BFIU performed key role in drafting Chairman of Anti Corruption
Mutual Legal Assistance Act on Commission, Principal Secretary and
Criminal Matters (MLA Act), 2012 secretaries of all relevant ministries to
aiming to gain better international formulate top level policy on
cooperation. AML/CFT issues and to determine the
work procedure to implement the
BFIU developed 'National Strategy for policies. Governor of Bangladesh
Anti Money Laundering and Bank is one of the members and
Combating Financing of Terrorism Deputy Governor (Head of BFIU) is
2011-2013'. The strategy paper the member secretary of the
contains 12 (twelve) strategies against committee.
12 (twelve) strategic objectives. The
National Coordination Committee, A Working Committee was formed
headed by honorable Finance comprising 21 (twenty one) members

70 October - December 2013 The Bangladesh Accountant


to support the NCC and to of 11 countries among which 7 by APG, Bangladesh was under
implement the decisions of NCC. MoUs were signed during May International Cooperation and
The convener of the committee is 2009- May 2012 for sharing Review Group (ICRG) process
the Secretary of Bank and Financial information and intelligence on since October 2010. As part of the
Institution Division, Ministry of ML/TF issues. ICRG process Bangladesh has
Finance. developed a time bound action
BFIU later successfully arranged plan to upgrade its AML/CFT
‘Primary Contact Point’ has been the APG (Asia Pacific Group on regime at par with the international
established in the relevant 21 Money Laundering) Typology standard and the honorable
(twenty one) Workshop, 2010 on AML/CFT Finance Minister extended high
ministries/Division/Organization to attended by about 160 level political commitment to the
ensure seamless flow of representatives from 40 member FATF. Bangladesh with the
information on ML/TF issues. countries and other donor dynamic leadership of BFIU of BB
agencies. Honorable Prime has completed almost all the
BFIU has drafted a notification to Minister of the country, Sheikh actions properly
share related/required information Hasina inaugurated the workshop
with it and accordingly the and declared ‘zero tolerance’ Participants from all the financial
notification has been issued by the against ML/TF issues. The sectors have been brought under
Bank and Financial Institutions successful completion of the event AML/CFT regime including
Division, Ministry of Finance has been applauded by APG and Insurance Companies, Money
instructing all the related agencies. other international organizations. Changers, Money Remitters,
Securities market intermediaries,
Bangladesh Financial Intelligence According to the rating of the 2nd NGOs/NPOs etc.
Unit already inked MoU with FIU Mutual Evaluation Report prepared

The Bangladesh Accountant October - December 2013 71


BFIU has issued separate Guidance Prevention of Hundi and public recovery etc., may be needed
Notes on Prevention of Money motivation thereon to boost foreign under various situations in different
Laundering for the insurance remittance through legitimate jurisdictions. Regulators,
companies and money changers. channel, Agricultural Credit Loan investigating law enforcement
and SME Financing. It was a agencies, and adjudicators need a
BFIU issued a comprehensive unique countrywide event which holistic understanding of the entire
circular for NGO/NPOs on 15 helped to raise awareness on sequence of the processes
June, 2011. AML/CFT among the common involved.
people. The Government of the
BFIU has already taken initiatives People’s Republic of Bangladesh It is gratifying that Bangladesh’s
against the Multi Level Marketing recognized the road show as a asset recovery initiatives are in
success story for attaining financial good shape with global efforts, as
(MLM) companies suspected to be inclusion. part of our overarching AML CFT
involved in defrauding their initiatives guided by the National
customers. Coordination Committee chaired

BFIU has been maintaining a rich


BENEFITS by the honorable Finance Minister.
Asset recovery initiatives in
database of financial information Bangladesh will have access to Bangladesh are being overseen by
relating to Suspicious Transaction information from financial an inter-agency committee headed
Reports (STRs) and Cash intelligence units of 131 by the Attorney General and
Transaction Reports (CTRs) and assisted by the BFIU. Besides
data received from other sources.
member nations enacting amendments updating the
Necessary security and AML CFT statutes in line with UN
confidentiality have been ensured Detect cross-border money conventions and other global best
in this regard. laundering, corruption and practices, our Government has also
terror financing enacted in 2011 a statute
BFIU has already finalized the indemnifying disclosure of
procurement process of ‘goAML’ information in the public interest,
Help recover laundered assets
software for online reporting of protecting interalia the whistle
CTR and STR. BFIU has established blowers about corrupt practices in
MIS to preserve and update all the Local officials will get training public institutions. At the
information and to generate from international experts Bangladesh Bank, BFIU’s
necessary reports using the MIS. manpower skills and physical
facilities have undergone major
BFIU has continued its effort to The processes involved in asset upgrading, and the Mutual Legal
create awareness among the bank recovery are necessarily complex, Assistance in Criminal Matters Act
officials; furthermore it has since the assets to be recovered are 2012 has facilitated BFIU’s signing
included officials of other reporting located in different jurisdictions of mutual assistance MOUs with
organizations under this awareness under different legal systems with FIUs in other jurisdictions. The
programme. It has encouraged the varying degrees of access to interagency Asset Recovery
banks to conduct massive training appropriate legal services. Committee headed by the Attorney
programs for the officials on Successfully tracking down the General of Bangladesh already has
AML/CFT throughout the country stolen assets through the trails of one success story in its bag, a
each year and provided support in transfer require close interactive milestone event.
56 districts to make the program cooperation within the source
successful. BB also arranged countries, effective cross border
workshops for other law enforcing cooperation between FIUs of The Author is Business Editor of
agencies. different jurisdictions on the The Financial Express
transfer trails of the funds, and help
BFIU also arranged a 13 (thirteen) from international agencies like the
days-long country wide road-show Interpol. After ascertaining the
from 26 March 2010 to 2 April locations of the assets to be
2010 to build massive public recovered, different legal methods
awareness focusing four issues: like criminal confiscation, civil
Prevention of Money Laundering, forfeiture, non-conviction based

72 October - December 2013 The Bangladesh Accountant


Bridging the US GAAP and IFRS Framework:
A Qualitative Study on Contradictory Accounting
Standards Towards the way of Convergence
1
Fareen Zaman | 2 Rabita Sabah

Abstract Memorandum of Understanding (MoU)


between the boards known as the
Norwalk Agreement. The base of the
The main objective of this work is to conceptual framework has been formed
highlight the FASB-IASB Convergence, as by the objective of general purpose
the authors are highly interested in a financial reporting. Convergence
qualitative presentation of the rule-based continued to be a high precedence on the
& principle-based natures of US GAAP & agendas of both the US Financial
IFRS respectively. The body of the paper Accounting Standards Board (FASB) and
describes the elaborations of the standards the International Accounting Standards
& convergence issues, the remarkable Board (IASB) (jointly, the Boards) in 2012.
differences between the subject matters However, the convergence process is
throughout a comparative analysis and planned to deal with only the most
some suggestions regarding convergence significant differences and/or areas that the
based on the authors’ analysis. The total Boards have recognized as having the
study is aimed at a theoretical & analytical greatest need for up-gradation. While the
presentation of convergence of the converged standards will be more similar,
worldwide prescribed accounting differences will continue to exist between
standards in practice. US GAAP as promulgated by the FASB
and International Financial Reporting
Introduction Standards (IFRS) as promulgated by the
IASB.
The International Accounting Standards
Board (IASB) and the U.S. Financial The FASB framework holds two kinds of
Accounting Standards Board (FASB) as the objectives relating to business entities &
main world’s accounting standards-setters non-business entities. The IASB framework
have been working on convergence of contains only objectives in the context of
U.S. Generally Accepted Accounting business entity. Both frameworks bring
Principles (U.S. GAAP) and International into play the qualitative characteristics of
Financial Reporting Standards (IFRS) since financial information in terms of attributes
2002. In September 2002, the IASB and that ensure the information usefulness for
the FASB agreed to work together to the users in making economic decision.
remove the divergences between IFRS and There are parallel characteristics used in
US GAAP. This decision was embodied in both frameworks. Both use similar

The Bangladesh Accountant October - December 2013 73


constraints of accounting information. 2010; 2011; 2012). All at once, the THE EUROPEAN
The divergences are in the form of combined efforts by FASB and IASB
setting out the characteristics. together (henceforth, ‘the Boards’) to UNION HAS ALREADY
unite these two sets of accounting
SWITCHED TO IFRS,
Understanding the importance of one standards keep on trimming down the
set of accounting standard, SEC has accounting differences and getting STARTING FROM 2002,
announced its plan to switch from US better their overall quality. The option
GAAP to IFRS, as the world mostly is between adoption of IFRS and ENDING ON 2005.
following the IFRS, making it convergence with IFRS, as well as
COUNTRIES LIKE
gradually difficult for uniformity in their relative benefits and costs, has
financial reporting. So, convergence fascinated a great deal of JAPAN, INDIA, CHINA,
of IFRS and US GAAP is inevitable. concentration and produced debates
among accounting regulators, AND CANADA ARE
Literature Review standard setters, practitioners, and
ALSO IN ALTERATION.
academics.
Previous studies came across to the A number of studies (e.g., Barth et al., THESE COUNTRIES
fact that adoption of International 2012; Yip and Young, 2012; Cascino
Financial Reporting Standards (IFRS) and Gassen, 2012) build upon HAVE ALREADY
has led to an increase in DeFranco, Kothari, and Verdi
UNDERSTOOD THE
comparability among European firms (2011)’s comparability measure.
(Yip and Young, 2012). Again in DeFranco, et al. (2011) argue that ADVANTAGE AND
2012, a study by Barth, Landsman, accounting is fundamentally the
Lang, and Williams ended in the mapping of economic transactions to SIGNIFICANCE OF IFRS.
same result like the prior one financial statements and therefore
THE CONVERGENCE OF
between non-U.S. and U.S. firms (, label comparability as the similarity
2012). Most of the studies mainly of firms’ accounting functions in IFRS AND US GAAP IS
focus on the impact of a switch from translating economic transactions into
non-U.S. domestic standards to IFRS. accounting data. IMPORTANT FOR A
To the best of our knowledge, no NUMBER OF REASONS;
studies have investigated whether a The FASB framework sets them out in
mandatory switch from U.S. GAAP to a hierarchy, treating the LIKE: RELEVANCE,
IFRS increases comparability and, if understandability come apart from
so, whether adoption of IFRS the others, relevance and reliability as UNDERSTANDABILITY
provides an incremental effect on the the primary qualities and
AND COMPARABILITY,
increased comparability beyond comparability as a secondary quality
continued convergence between U.S. while the IASB framework consider WHICH ARE FEW OF
GAAP and IFRS. Henry, Lin, and all these characteristics as primary
Yang (2009) find that the accounting characteristics (H. Bohusova, 2011). THE QUALITATIVE
differences between IFRS and U.S. CHARACTERISTICS OF
GAAP significantly trim down after IFRS could come at the cost of lower
the convergence projects between accounting quality for certain FAIR FINANCIAL
IASB and FASB. Similarly, Barth et al. German firms. In addition, a
(2012) find that the junction between transition to IFRS would impose a REPORTING.
U.S. GAAP and IFRS has played a significant and immediate financial
vital role in the augmented financial burden on adopting U.S. firms
information comparability between (Roadmap, 2008). However, it could
non-U.S. firms reporting under IFRS be less costly to converge between
and U.S. firms. IFRS and US GAAP because
convergence may not essentially lead
These remain significant questions to striking changes in U.S. GAAP.
since U.S. regulators and standard Additionally, convergence spreads all
setters persist to think about a costs linked with changes to the
compulsory change from U.S. GAAP accounting system over a certain time
to IFRS for publicly listed firms (SEC period. Therefore, the financial
Roadmap 2008; SEC’s Work Plan impact may be more convenient.

74 October - December 2013 The Bangladesh Accountant


Moreover, compared to ongoing standards in financial reporting, Methodology
convergence between U.S. GAAP unlike the rest of the world, is
and IFRS, it would likely be more creating problems in terms of This paper is just concerned with
costly for U.S. firms to return to comparing the performance and the most momentous divergences
reporting in accordance with U.S. financial statements throughout the between the IFRS and the US
GAAP after adopting IFRS if the world. GAAP from the context of
Securities and Exchange qualitative characteristics of
Commission (SEC) determines not The European Union has already accounting information & other
to allow or necessitate U.S. issuers switched to IFRS, starting from financial reporting standards
to utilize IFRS (Roadmap 2008). 2002, ending on 2005. Countries regarding to the diversified
like Japan, India, China, and choices.
Having a worldwide language for Canada are also in alteration.
financial reporting and disclosure These countries have already The configuration of the paper is
is becoming more and more understood the advantage and alienated to two significant parts.
important with the passage of each significance of IFRS. The Towards the way to convergence
day. Since the market place is not convergence of IFRS and US GAAP shows the IAS/IFRS and US GAAP
domestic anymore, understanding is important for a number of convergence in general as well as
accounting in a global level is reasons; like: relevance, the comparison focusing on the
mandatory, especially for understandability and qualitative characteristics with pros
companies operating worldwide. comparability, which are few of & cons. At the end, based on the
In a situation like this, one major the qualitative characteristics of fair results of the total analysis, the
player in the world economy, USA, financial reporting. fundamental doctrine for a
using separate accounting common conceptual framework in

The Bangladesh Accountant October - December 2013 75


the area of purpose of financial According to GAAP, financial By including this factor as a
reporting, and qualitative reports are said to be fair if there condition for fair financial
characteristics, which could be are relevance, reliability, reporting by IFRS, managers will
pertinent, are described. consistency and comparability. On provide an extra care while
the contrary, IFRS requires preparing the statements as t has to
The paper uses the standard understandability, relevance, be understandable.
methods of scientific analysis, like reliability, materiality and
the method of description was comparability. A convergence will • Relevance gives financial
used to explain the progress in the create a better judgmental basis for information predictive value
area of IAS/IFRS and US GAAP fair financial reporting as being and feedback, where the first
convergence. Then, a comparative discussed below: one helps users to forecast
analysis was used to discuss the future events based on present
divergences between conceptual • Understanding financial information and the latter one
frameworks the IAS/IFRS and US statement for users with little gives confirmation to the prior
GAAP. or no accounting knowledge expectation.
may prove to be challenging By applying relevance the
Towards the Way to while decision making. Like company can provide information
Convergence Deegan said: in due time to the users, when the
‘Understandability will make information is actually required in
The convergence will make the the financial statements easily decision making. Because
financial reports of understandable for users with information is only relevant at the
multinational/national companies reasonable business and right time, it loses the relevance if
easily comparable. Having one set accounting knowledge.’ But it the time is expired that required
of accounting standard will make it does not necessarily mean the the information for timely decision
easy to understand the accounting omission of complex but making.
practices and performance of the relevant information. Rather it
company. Lastly, applying a global develops a reasonable • Reliability provides error free
accounting standard will make the procedure for understanding and unbiased information. To
financial statements up to date and the complexity of underlying be reliable accounting
relevant with the rest of the transactions or events. information must be verifiable
competitors in the global market. i.e. provable that the

76 October - December 2013 The Bangladesh Accountant


information becomes relevant to
the decision making needs of
the users. Basically, it is the
measure of the probable effect
that the existence or
nonexistence of an item of
information may have on the
precision or validity of a
statement. Materiality
consequently relates to the
significance of transactions,
balances and errors contained
in the financial statements.
Information contained in the
financial statements must
therefore be complete in all
material respects in order for
them to present a true and fair
view of the affairs of the entity.

Materiality is relative to the size


and particular state of affairs of
individual companies. Irrelevant
amounts need not be recorded and
reported according to the GAAP
rules. But this does not indicate
that insignificant items cannot or
information is free from error and compared with the information of should not be recorded and
bias. It also requires faithful other companies and also prior reported according to the rules of
representation, i.e. the actual and prospective information. GAAP, here is a choice for the
purpose and facts of that users. But, in reality, only the
information and lastly the The present market place is very material information remains
information must be neutral much competitive with number of applicable while being reported or
i.e. the information is not players in it and all of them used.
prepared or presented to favor provide financial information
one over another individual or through the financial statements to Again, lapse or misstatement of
group of people. get the potential investors in their an important piece of information
favors. So while decision making impairs users' capability to make
Reliability is essential because the investor will always analyze accurate decisions taken on the
users must have the faith to rely the performance of these basis of financial statements in that
over the information provided by competing companies, as a result way upsetting the reliability of
the company because present and the preparation and presentation of information.
future decision of the user is financial information and
dependent on that information. So statements should be comparable, Information enclosed in the
it must be reliable. so that the investor can compare financial statements must be
performance and decide. complete in all material respects in
• Comparability gives more order to present a true and fair
preference to accounting • The materiality concept is a view of the dealings of the
information by making it time-honored, accepted company.
comparable with that of the accounting convention.
other competitor company. Materiality defines the The discrepancy about the
Investors and users can make a threshold or cut-off point convergence is mostly based on
better use of accounting following which financial the controversy between the
information if it can be principle based and rule based
decision making followed by

The Bangladesh Accountant October - December 2013 77


formal legal requirements. Formal
standards organizations such as the
International Organization for
Standardization or the American
National Standards Institute are
independent of the manufacturers
of the goods for which they
publish standards.

In social sciences, including


economics & accounting too, the
thought of standardization is close
to the way out for a coordination
problem, a situation in which all
parties can comprehend mutual
gains, but only by making
reciprocally dependable decisions.
Standardization implies the
elimination of alternatives in
accounting for economic
transactions and other events.
Globalization also carries the
connotation that things were once
considered the authority and
financial reporting. IFRS is said to especially when they have invested responsibility of each country is no
be principle based, where US in companies operating in diverse longer possible are not affected by
GAAP is more rule based. As a countries. Financial statements are the international community;
result there are more scopes for source of information to the similarly, financial reporting and
condemnatory decision making in investors and these sources can be accounting standards. One of the
financial reporting, using IFRS than proved useless if it creates qualitative characteristics of
US GAAP. US GAAP also creates discrepancies just because of two accounting information is
scopes to hide out and misinterpret separate sets of accounting comparability including
diverse argumentative and standards. There should be international accounting
unwanted events and outcomes standardization and information must be compared as
under the rules. harmonization. it is essential in the world of global
trade and venture. In the event
The example of Enron can be taken Standardization is a term appears wanted to obtain full comparability
into account in order to explain the to imply the imposition of a more is mostly applicable worldwide,
situation. The aftermath of Enron rigid and narrow set of rules than required standardization of
shows that the huge amounts of harmonization. (Nobes & Parker). international accounting standards.
difference in the balance sheet was Standardization is the course of Concept is more popular than
hidden by treating liabilities as off mounting and approving upon standardization to link the wide
balance sheet items using GAAP procedural standards. The standard variety of accounting standards in
rules. But if they had followed is a deed that establishes different countries is the concept of
IFRS, this hide out of liabilities homogeneous engineering or harmonization. Harmonization of
would have been judged based on technical provisions, criteria, accounting standards is defined as
principle and the vast difference in methods, processes, or practices. minimizing the differences in
the balance sheet would have been Some standards are compulsory accounting standards in various
cleared. while others are deliberate. countries (Iqbal, 1997:35). There
Voluntary standards are accessible are many prospective returns
In this same way, different if one chooses to use them. Some associated with harmonization of
accounting rules can create are de facto standards meaning a accounting standards. The world
different results from identical custom or necessity which has a economy could gain through
information. This raises problem in casual but foremost status. Some progressively sophisticated
making decisions by the investors standards are de jure meaning investment decisions which would

78 October - December 2013 The Bangladesh Accountant


direct to overall global economic accounting standards, because they as a hazard to their nationalism
growth. Accounting information would not have to invest resources and view conformity as surrender
can be interpreted by experts to creating and regulating national to the force of other countries. A
reduce the risk of investment. accounting standard-setting major censure of harmonization
agencies. comes from underdeveloped
One of the main tools used in countries who view harmonization
financial analysis is the In order to be listed on credible as an obligation placed on them by
comparability of financial stock exchanges, businesses must countries with superior economies.
information for similar businesses abide by the financial reporting Another drawback of
in competition. Internationally requirements of the stock exchange harmonization is the enormous
adopted accounting standards it wishes to sell securities through. amount of inequality that exists
would increase this ability to Stock exchanges around the world between different countries
contrast similar industries and could profit from a harmonization accounting practices. The
make investment decisions less of accounting standards, as more abundant differences in accounting
risky through greater aptitude. companies begin to adopt the practices world-wide would
international standard, they will definitely show the way to
Another impending benefit from become eligible for listing. significant changes for any country
the harmonization of international who adopted the international
accounting standards would be the Although there are many promising standard. These substantial
reduced costs associated with advantages of harmonization, there changes would lead to many
multi-national corporations who are also many potential expenses for businesses in
must reconcile their accounting disadvantages. One possible countries meeting the requirements
information for multiple disadvantage of harmonization can of a new international standard.
accounting standards. (Diaconu be seen through the role culture
2007) Countries with scarce plays in developing national Another common criticism of
resources could also take accounting standards. Countries harmonization is the argument that
advantage of international may view compliance with an international accounting
international accounting standards standard will not be elastic enough

The Bangladesh Accountant October - December 2013 79


to deal with all the dilemmas faced international companies adopt US variables to account for and too
by nations with conflicting troubles GAAP financial statement to boost many groups of people in political
and circumstances. National the ability to trade with the US power with too much to mislay.
accounting standards can be Companies in the US must always (Weber 1992).
customized as situations change, do the accepted thing to US GAAP
and policies can be implemented and settle any other financial Findings and Suggestions
without sanction of all the nations statements to meet the GAAP
involved in a global accounting requirements. After having detailed empirical
system. (Diaconu 2007). study on the convergence issues
One possible solution to the between U.S. GAAP and IFRS
After having done with the problem of setting international framework, we can move towards
discussion about the budding pros accounting standards would be to a solution regarding a uniformed
and cons of international provide a choice between the two set of standards to be followed in
harmonization of accounting most popular systems: the US worldwide accounting practices.
standards, there are various GAAP or the European IAS/IFRS.
obstacles too restricting the As more companies favor one Converging to the U.S. GAAP and
implementation of this. Many method over the other that method IFRS framework may assist in
companies in the European Union will eventually become the solving some of the controversial
submit to International Accounting international standard. (Diaconu issues like: lease, financial
Standards, and many other 2007) There are many probable statement presentation, revenue
corporations reconcile financial solutions to execute recognition etc. which are usually
information to provide IFRS harmonization, but in the end, are not solved using any of these
financial statements as well as US intact harmonization of accounting frameworks individually. Following
GAAP. Since the US is the largest principles will possibly never be a single set of accounting
economy in the world many realized. There are too many standards, will allow maintaining

80 October - December 2013 The Bangladesh Accountant


Conclusion

Though the already adopted


accounting standards vary from
country to country, none of these is
complete. From our analysis, we
have tried to focus on the necessity
of following a single set of
standard, as it can provide an
entirety to the present shortened
financial reporting and decision
making process. We cannot help
making a uniformed framework as
we are not the standard setters, can
just share our thoughts and
understanding regarding the issue
form our practical study.

References
Barth, M. E., W. R. Landsman, M.H.
Lang, and C. Williams. “Are
IFRS-Based and US GAAP-Based
amounts Comparable?” Journal of
Accounting and Economics,
Forthcoming

the essential qualitative making by different parties like Bohusova H. (2011) “General
characteristics of accounting investor, creditors, suppliers, Approach to the IFRS & US GAAP
information internationally, which auditors, govt. and even the Convergence” Acta Universitatis
may lead to a harmonized practice general people. Agriculturae et Silviculturae
for all stakeholders. Mendelianae Brunensis: 59: 27-36
Comparability not only in case of
Cascino, S. and J. Gassen. (2012).
Having on set of standard also accounting events, but also in “Comparability effects of mandatory
provides a great deal of context of the economic events, IFRS adoption.” Working Paper,
comparability and continuity may be ensured, whether we want London School of Economics.
especially to the multinational to know about the economy of
organizations, with business spread different countries of the world DeFranco, G., S.P. Kothari, and R.S.
over different countries. For from the same aspect. Verdi. (2011). “The Benefits of
example, the preparation of Financial Statement Comparability.”
multinational organizations listed In the light of above findings, it is Journal of Accounting Research: 49:
895-931
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throughout the world would two would exist alone in the long Deloitte, 2008, “IFRS and US GAAP –
become more synchronized. run without making any A Pocket Comparison”, Deloitte
Moreover, exchanging staffs and convergence. That’s why the Development LLC
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and efficient. the other stakeholders regarding Accounting Harmonization.”
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Accounting: A Global Perspective, Accounting Standards (2000).
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The Authors are


1
Lecturer, Department of Business & Economics, United International University
2
Lecturer, Department of Accounting & Information Systems, Jagannath University

82 October - December 2013 The Bangladesh Accountant


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84 April - June 2013 The Bangladesh Accountant

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