Khmer Accounting

Integrating ASEAN economies

2007-11-27T07:58:00.000-08:00

Opinion and Editorial - November 23, 2007

We should magnanimously acknowledge that we are the laggard in the marathon run to the ASEAN Economic Community in 2015 as our economy, though the largest of the ten member countries, accounting for 230 million of the region's 570 million population, is among the least efficient and least competitive.

The ASEAN Economic Community (AEC) Blueprint adopted at the summit meeting in Singapore on Tuesday therefore imposes on us a heavy load of homework to improve physical infrastructure such as roads, seaport, telecommunications and power supply as well as regulatory and bureaucratic frameworks.

We have only about seven years to gear up for the ASEAN single market -- the main foundation of the economic community -- which allows for the free flow of goods, services, investments and skilled professionals in order to integrate the ASEAN economies into a global economy through global supply chains.

Integration into the global supply chain is perhaps the most important intermediate goal of the AEC Blueprint, because unlike the European Union, ASEAN depends on the external world for more than 25 percent of its trade and for the bulk of its investment needs.

The basic idea has never been to build a European Union-modeled economic community. The main objective is to woo more foreign investment to the ASEAN region as businesses can use one of ASEAN's ten member countries as a regional base for production not only for that particular country but also for the region and the entire global market.

Different investment and trade regimes and different quality standards and regulations on business operations in ASEAN countries as they are now make them less attractive to such potentially giant economies as India and China, which offer huge economies of scale.

The rationale is that foreign investors will have advantages to establish regional production networks in ASEAN countries only if the region has become a reliable part of the global supply chain. That is because without superior logistics capabilities, companies will not be able to tap local comparative advantages and economies of scale.

Manufacturers now require an efficient supply-chain management to allow for lower storage costs, lean manufacturing and just-in-time delivery because they have to adjust to the changes in the whole demand cycle. Without such advances in logistics and supply capability, regional market integration through subdivision and dispersion of production processes among ASEAN countries will not be cost effective.

The groundwork for creating an efficient ASEAN single market is already an uphill challenge by itself because it requires efficient transport, expedient customs services and harmonized customs procedures, common production standards, efficient licensing bureaucracy and easy visa requirements.

ASEAN should make concerted efforts to facilitate the smooth transit of goods between two ASEAN countries through a third and open up air-cargo services, including express delivery firms.

ASEAN needs an independent dispute-settlement mechanism to resolve disputes between members within free-trade implementations, because there are many areas that could cause different views or disputes. Take for example the verification of the country-of-origin certificate with regard to the minimum 40 percent ASEAN content to make products eligible for the tariff-cut regime.

Assessing this minimum ASEAN content could become a major source of disputes because many factories in the ASEAN region still depend on input, parts or components from suppliers outside the region.

Unfortunately, when it comes to logistical arrangements, Indonesia is among the least efficient of ASEAN's six founding members, Brunei, Indonesia, Malaysia, Singapore, Thailand and the Philippines, as national and international surveys have often confirmed. The main reasons are crumbling basic infrastructure, red tape and corruption.

The Asian Development Bank rightly pointed out in a recent report that Indonesia's top-priority homework with regards to preparations for the AEC should be the development of good governance and improvement of basic infrastructure and the investment climate.

If our economy does not improve its overall efficiency and competitiveness it will be other ASEAN countries that will benefit greatly from the single market concept as foreign investors will set up their regional production bases in other ASEAN countries, such as Vietnam, Thailand or Malaysia.

Our economy will become simply the market outlet for products and services from other ASEAN countries. We will not even be able benefit from the free flow of skilled professionals between ASEAN. We may instead lose many of our best doctors, nurses, accountants, architects or other professionals to other ASEAN countries which can offer a better working atmosphere and remuneration.

Source: http://www.thejakartapost.com/yesterdaydetail.asp?fileid=20071123.G01

Law on Corporate Accounts, Their Audit and The Accounting Profession

2007-10-21T01:09:00.000-07:00

The Law on Corporate Accounts, Their Audit and The Accounting Profession, which is adopted by the National Assembly on the 24th May 2002 at its 8th plenary session of the second legislature and entirely approved by the Senate on its form and legal concepts on the 21st June 2002 at its 7th plenary session of the first legislature, and which has its full substance as follows: Read More

GOVERNANCE ACTION PLAN II 2005-2008

2007-10-21T01:01:00.000-07:00

FINANCIAL SECTOR DEVELOPMENT

The financial sector including banking and insurance sectors and other relevant activities are in their starting stage and have played their crucial roles and the development of the national economy. The Royal Government of Cambodia has made its efforts to reform the financial sector in Cambodia that has been successful and so far obtained many big achievements. The sector is developed and generated increasing confidence.

The Royal Government has successfully implemented the first step of the 2001-2010 Financial Sector Development Blueprint by mobilizing all the financial resources to meet the needs in manufacturing and support economic growth.

In the financial sector, the Royal Government has strengthen law enforcement and supervise commercial banks through the issuance of new licenses together with increased capital requirements, initiate monitoring and control mechanism to develop single account. The Government is drafting other legislation in order to strengthen the confidence in the banking sector. In the rural financial sector, the Royal Government has strengthened micro finance institutions requiring them to abide by the laws to facilitate control and monitoring as well as to reduce interest rates. As a result, a number of MFIs have expanded their financial services and become commercial banks.

Achievements made include:

*

Introduction and implementation of on and off-site inspections to financial institutions
*

Liquidation of non performing banks
*

Privatization of the Foreign Trade Bank
*

Revision and improvement of existing rules and regulations to ascertain better and effective law enforcement
*

Monitoring and control banks performance with the Uniform Chart of Accounts that is in line with the International Accounting Standards

Financial Industry Development

The financial industry has remarkably developed since its inception in the early 1990s. It is made of big sectors such as Insurance and Capital Market. The Insurance sector was established in the early 1990s starting with the Cambodian National Insurance Company (CAMINCO) and in 1994 it was under the direct supervision of MEF. In 2002, 4 insurance companies that invested in the sector include Indochine, Forte, Asia, and Pana.

To achieve development MEF has formulated legislations, Sub-decrees, and Prakas to supervise the financial industry. Insurance premium increased from USD 5,487,087 in 2002 to USD 8,821,708 in 2003 with an increase equivalent to about 60 percent. On the other hand, the sales of insurance policies increased from 23,120 in 2002 to 28,297 in 2003. At the same time, the supply of insurance services has subsequently increased: from property to general travel insurance.

Concerning the capital market, the Royal Government has made its efforts and decided to form a Capital Market Task Force. The team has been very active in laying the foundation for capital market including the establishment of Capital Market Monitoring Mechanism and developing the activities of the officials of the Capital Market Office. The team has conducted inter-ministerial meetings to discuss the draft Law on the Issuance and transactions of Public Bonds.

National Accounting Council Development

The Law on Enterprise Accounting, Auditing and Their Professions that became effective led to the submission of the Sub-decree on the Establishment of the National Accounting Council to the plenary session of the Council of Ministers that was approved and signed by Samdech Prime Minister HUN SEN on March 03, 2003. On March 27, 2003, MEF issued a Prakas on the Assignment of the Board of Directors to the National Accounting Council that comprises of 13 members from state institutions and private organizations. So far the Board of Directors have convened many meetings to review and to discuss the 15 Accounting Standards and 10 Auditing Standards and on many other provisions.

Similarly, the draft Sub-decree on the Establishment of the Khmer Institute of Certified Public Accountants and Auditors (KICPAA) was also approved at the plenary session of the Council of Ministers and signed by Samdech Prime Minister HUN SEN on March 19, 2003. Due to the efforts made by the National Accounting Council as well as the International Accounting Standards Research Committee (IASRC) with the collaboration and Assistance from NGOs and the private sector, the 15 Accounting Standards and 10 Auditing Standards were approved on October 16, 2003.

IASRC, NAC, and KICPAA shall continue to study and research the remaining standards among the overall 43 accounting standards, and 20 auditing standards used worldwide to meet the requirement of the Cambodian Economy that is gradually taking off. Apart from that, a number of legal frameworks and institutions have been established as well, such as:

1.

The implementation of the Cambodian Accounting and Auditing Standards
2.

The establishment of a Commission to register licensed Certified Public Accountants and Auditors

Also, in order to develop and supervise the accounting profession so as to suit its development either within national or international framework, norms or rules are required for licensed certified public accountants and auditors, so that they can conduct these businesses in Cambodia. In response to such a need, NAC and KICPAA have jointly made efforts to produce the Code of Conduct for licensed certified public accountants and auditors through a Sub-decree that was approved at the plenary session of the Council of Ministers on June 03, 2005. Samdech Prime Minister HUN SEN signed the Sub-decree No. 83 on June 17, 2005.

The Sub-decree divided into 7 Chapters with 38 Articles with its major substance focused on Public Interests, Basic Principles for Accountants, Resolution of Conflicts on Code of Conduct, and Disciplinary Sanctions.

On top of that, NAC has tried to conduct training through a Perfect and Strict Training Program organized by CamEd which is a private vocational training organization. NAC and CamEd have conducted 6-generation trainings to 233 students (only for those who received scholarships from the Government). Of which, one session on Certified Accounting Technicians with 43 students and 5 sessions on Certified Public Accountants and Auditors with 190 students following ACCA’s curricula will receive their degrees from ACCA.

For Certified Public Accountants, training will require at least 3 years and go through a course of instructions directed at Accounting and Auditing Firms at least for 3 more years to become a CPA. Provisional results of generations 1, 3, and 4 have shown that there were at least 40-60 percent of civil servants who passed each course successfully and may receive the CPA degree in the near future.

In the short run NAC has much work to complete such as the verification of the name of registered companies and those that registered tax payments as the real regime; the dissemination of the Law on Enterprise Accounting, Auditing, and Their Professions, and Cambodian Accounting and Auditing Standards to students of tertiary education and companies that are conducting their business in the Kingdom of Cambodia; and the preparation of the Cambodian Syllabus for CPA.

Read More

Insurance firms see healthy growth

2007-09-09T21:14:00.000-07:00

CAMBODIA: Building a strong insurance industry

Source: Phnom Penh Post

"Insurance is viewed as an essential product for a well-functioning financial market. But Cambodia's insurance industry has had a stuttering start. Cambodia's current crop of insurers is small. As the government plans to introduce, among other advances, a Cambodian stock market, new insurance carriers are undoubtedly to be welcomed.

Cambodia's 'open, friendly investment policy' means there are few barriers towards setting up business in the country. The total insurance market in Cambodia, estimated to be worth less than $8 million in 2004, has now grown to $15 million and is expected to increase rapidly as its
potential is realized. But companies may find it difficult breaking into the personal insurance market. Until the last couple of years, not many individuals had bank accounts. The perception is that insurance is an expensive luxury product."

Full article:
http://www.phnompenhpost.com/TXT/current/stories/1616/insuran.htm

Sample Online Accounting Course

2007-09-08T22:44:00.000-07:00

This website is the best accounting tutorial for learning accounting principles, accounting terms, and accounting equation. Whether you attend a college, run a small business or seek an accounting refresher, you have come to the right accounting class online. Simplestudies.com covers major accounting principles in a set of free online accounting lessons, provides accounting problems to strengthen your knowledge and has solutions to check your accounting answers. Start below with the list of online accounting lessons and enjoy this free and easy tutorial!

Visit the site : Sample Online Accounting Course Website

Accounting Reform Website

2007-09-08T22:26:00.000-07:00

Dear Reader

I've found a very good website which is talking about the particle of International Financial Reporting Standard and International Accounting Standard. This website is funded by EU and support by ACCA.

You can find sample articles and worksheet about IFRS and IAS from there.

here is the link to Russian Accounting Reform Website: http://www.accountingreform.ru/en/main/

Ponlork

Incomplete records

2007-08-30T04:14:00.000-07:00

by Neil Stein
26 Aug 2004

Examiners like questions on incomplete records because they provide the opportunity to test a variety of bookkeeping and accounting techniques.

The two main instances in which incomplete records can be found are where:

there are no records at all
some records exist and information is available to calculate missing figures.

No records at all
It is still possible to calculate a profit or loss figure by using the fact that the profit of a business must be represented by more assets. We list and value the opening and closing net assets, then calculate the profit as the difference between the two:
Profit = Closing net assets - Opening net assets

Allowance must be made for proprietor's drawings and extra capital introduced, so the formula becomes:
Profit = Closing net assets - Opening net assets + Drawings - Capital introduced

There is little scope here for a major question, but it could form the basis of a two-mark multiple-choice question.

Incomplete records
This a more common scenario, both in exam questions and in practice. There are standard techniques for calculating missing figures:

Opening capital
Missing figures for sales and purchases
Missing figures for cash.

Opening capital
We need to have the opening capital of the business at the beginning of a period to provide a starting point - the capital in the balance sheet account. Questions will usually give us a list of opening assets and liabilities, and we use this to arrive at the opening capital.

Missing figures for sales and purchases
If we know the opening and closing debtors of a business, and the cash received from customers, we can calculate sales. All we need to do is set up a sales ledger total account (see Figure 1).

Figure 1: Sales ledger total account (figures invented)

	£		£
Opening debtors	38,600	Cash received	218,650

Sales (balancing figure)	221,250	Closing debtors	41,200
	259,850		259,850

If any three of these figures is known, the fourth can be calculated.

All we are doing here is using the sales ledger control account format, but instead of proving the accuracy of the sales ledger, we are calculating what the sales must have been in order for the other figures to be what they are. The same technique may be used to calculate credit purchases. If the sales figure is given we can calculate the cash received.

There is another way to calculate sales, purchases or stock figures, and that is to use the trading account format. We normally set up the trading account as (figures invented):

		£	£
Sales			100,000
Less:	cost of sales
	opening stock	10,000
	purchases	78,000
		88,000
	less: closing stock	13,000	75,000
gross profit			25,000

Suppose the closing stock has been destroyed by fire, along with all the stock records. Then we wouldn't have the closing stock total to include in our trading account. However, we can calculate it if we know the gross profit percentage on sales - or, of course, the mark-up on cost of sales.

In the example above, gross profit is 25 per cent of sales. If we are told this, we can insert the gross profit of £25,000 and so calculate the missing stock figure as a balancing item. We can also find a missing purchases figure, or even a missing sales figure.

Suppose we are given:

		£	£
Cost of sales
	opening stock	10,000
	purchases	78,000
		88,000
	less: closing stock	13,000	75,000

We are also told that gross profit percentage on sales is 25 per cent. If gross profit is 25 per cent on sales, cost of sales must be 75 per cent of sales. The sales total is therefore:
£75,000 x 100/75 = £100,000.

Whenever the gross profit percentage is given in an incomplete records question, you know that this technique is needed.

Missing figures for cash
We may be given details of cash receipts and payments plus details of opening and closing balances, but with one figure missing, often the proprietor's drawings. We can calculate the missing figure by setting up a cash account to find the balancing item required.

Here are the incomplete records techniques:

Construct	To calculate
1 Opening assets and liabilities	Opening capital
2 Sales or purchases ledger total accounts	Any missing figure
3 Trading account (gross profit percentage must be given)	Any missing figure
4 Cash account	Any missing figure

There is only one way to develop fluency in incomplete records questions, and that is to practise as many questions as you can. Here are three short exercises:

The net assets of Altese, a trader, at 1 January 2003 amounted to £128,000. During the year to 31 December 2003, Altese introduced a further £50,000 of capital and made drawings of £48,000. At 31 December 2003, Altese's net assets totalled £184,000. Using this information compute Altese's total profit for the year ended 31 December 2003.

Senji does not keep proper accounting records, and it is necessary to calculate her total purchases for the year ended 31 January 2004 from the following information:

		£
Trade creditors
	31 January 2003	130,400
	31 January 2004	171,250
Payments to suppliers		888,400
Cost of goods taken by Senji for her personal use		1,000
Refunds received from suppliers		2,400
Discounts received		11,200

Compute the figure for purchases for inclusion in Senji's financial statements.

Aluki fixes prices to make a standard gross profit percentage on sales of 331/3%. The following information is available for the year ended 31 January 2004 to compute her sales total for the year:

		£
Stock
	1 February 2003	243,000
	31 January 2004	261,700
Purchases		595,400
Purchases returns		41,200

Calculate the sales figure for the year ended 31 January 2004.

Answers

	£
Opening capital	128,000
Capital introduced	50,000
	178,000
less: Drawings	48,000
	130,000
Closing capital	184,000
Profit is therefore	54,000

See Figure 2.

Figure 2: Purchases total account

	£		£
Payments to suppliers	888,400	Balance brought forward	130,400
Discounts received	11,200	Goods taken by Senji	1,000
Balance carried forward	171,250	Refunds from suppliers	2,400
		Purchases (balancing figure)	937,050
	1,070,850		1,070,850

		£	£
Cost of sales
	Opening stock		243,000
	Purchases	595,400
	less: Returns	41,200	554,200
			797,200
	less: Closing stock		261,700
			535,500
Sales figure is therefore: £535,500 x 3/2 =			803,250

These three examples are quite elementary, but they illustrate techniques that you will find in nearly all incomplete records questions.

Neil Stein is examiner for Paper 1.1

2007-03-23T23:19:00.000-07:00

សាលារៀន

Fundamentals of Investments

2006-01-28T23:58:00.000-08:00

iNFO: Fundamentals of Investments was written to: 1. Focus on students as investment managers, giving them information they can act on instead of concentrating on theories and research without the proper context. 2. Offer strong, consistent pedagogy, including a balanced, unified treatment of the main types of financial investments as mirrored in the investment world. 3. Organize topics in a way that makes them easy to apply--whether to a portfolio simulation or to real life--and support these topics with hands-on activities. The approach of this text reflects two central ideas. First, there is a consistent focus on the student as an individual investor or investments manager. Second, a consistent, unified treatment of the four basic types of financial instruments--stocks, bonds, options, and futures--focusing on their characteristics and features, their risks and returns, and the markets in which they trade.

Book : http://rapidshare.de/files/2710051/FundInvest.rar.html
A Solutions Manual: http://www.missouri.edu/~fincc/Solutions.pdf
PowerPoint slides for all chapters: http://www.uky.edu/~bjordan/BDJWeb/Fin450/invest.html

ESSENTIALS of Financial Analysis

2006-01-14T23:59:00.000-08:00

Title : ESSENTIALS of Financial Analysis
Authors: George T. Friedlob and Lydia L.F. Schleifer

Contents
Preface
1 Understanding Financial Statements and Annual Reports
2 Analyzing Profitability
3 Analyzing Liquidity and Solvency
4 Analyzing Activity with Financial and Non-financial Measures
5 Quality of Earnings and Cash Flows
6 Earnings Releases and EVA Analysis
7 E-Business

Click on the Cover or Title to download the book in PDF.

Preface

The financial analysis of companies is usually undertaken so that investors, creditors, and other stakeholders can make decisions about those companies.The focus of this book is on the financial analysis of companies that are publicly traded and therefore make public the data and information needed by stakeholders, who can then use the analytical procedures included in this book.

The primary objectives in this book are to
• Provide an overview of financial statements and where and how to obtain them.
• Explain how to use the information provided in annual reports and Securities and Exchange Commission (SEC) filings, to examine a company’s profitability, liquidity, and solvency.
• Examine various techniques for evaluating the market value of companies based on their financial reports and stock prices.
• Discuss issues related to the quality of earnings and financial reporting.
• Describe several ways of examining the cash flows of companies.
• Describe new developments in areas like pro forma reporting, economic value added (EVA), and discounted cash flow methods.

Chapter 1 starts by looking briefly at how accounting for resources began. Then, an example of a set of financial statements (for Coca-Cola Company) is included and their content explained. Following that is a comparison of cash-basis and accrual-basis accounting.

Chapter 2 looks at profitability from many angles. Profits are reported on the income statement, so we start with a look at the categories of earnings on the income statement. The chapter discusses operating income and comprehensive income and where to find that information. Because revenue recognition is so much in the spotlight lately, the basics of that principle are discussed. Four of the main analytical
techniques used by financial analysts are included: return on assets (ROA), return on equity (ROE), earnings per share (EPS), and the price/earnings (P/E) ratio.

Chapter 3 examines the concepts of liquidity and solvency and how to evaluate those attributes for a company. The primary focus is on the balance sheet. However, also included are some cash flow adequacy ratios, since lack of cash flow can force companies to declare bankruptcy. The chapter discusses how leverage can affect a company. Also included is a discussion of the auditor’s decision process when evaluating going concern status. Finally, we include a demonstration of the use of Altman’s Z score.

Chapter 4 examines the activity, effectiveness, and productivity measures that can be used to evaluate companies. The chapter discusses several turnover ratios, like accounts receivable and inventory turnover. It also discusses a method of analyzing capacity usage and how to calculate operating leverage and examine its impact on profitability.

Chapter 5 discusses the issue of quality of earnings and how certain aspects of financial reporting enhance or detract from that quality. Because quality is related to how predictive of cash flows the information is, the chapter also includes several cash flow ratios and what information they provide. Common-size cash flow statements take the cash flow analysis one step further. Common-size income statements and balance sheets are also included.

Chapters 6 and 7 discuss relatively recent developments in financial analysis. Chapter 6 includes pro forma reporting and EVA. Chapter 7 discusses e-business and includes several methods for analyzing the value of Internet businesses. As more and more people make the decision to control their own investment decisions, the need for explanations of financial analysis tools becomes greater. The intent of this book is to provide helpful explanatory information to financial statement users and company stakeholders of all sorts. If you are one of these stakeholders, we hope that this book will help you to make good decisions regarding the businesses in which you have or want to have a stake.

IAS 10: Events after the balance sheet date

2006-01-03T21:13:00.000-08:00

IAS 10, Events after the balance sheet date
by Neil D Stein

Professional Scheme
Relevant to Paper 1.1, Paper 2.5, Paper 2.6

The International Accounting Standards Committee (IASC) issued a revised IAS 10, Events After the Balance Sheet Date, in May 1999. The original IAS 10 dealt with contingencies as well as events after the balance sheet date. IAS 37, Provisions, Contingent Liabilities and Contingent Assets, replaced the sections of IAS 10 covering contingencies. IAS 10 (Revised) now updates the remainder of the original IAS 10. The date of issue of IAS 10 (Revised) means that it is examinable in papers 1, 6, 10 and 13 (International) from December 1999.

Events after the balance sheet explained

Events after the balance sheet date and before financial statements are issued can have important effects on the financial statements. For example, the bankruptcy of a major customer would normally be evidence that the trade receivable should be written off or an allowance made as at the balance sheet date.

There is another type of event after the balance sheet date — one that does not affect the position at the balance sheet date, but which still needs disclosure in some way to prevent users being misled. An example of such an event might be a material fall in the market value of investments.

General provisions

Events after the balance sheet date are divided into two types, corresponding to the two examples just given. The definition in IAS 10 is:

Events after the balance sheet date are those events, both favourable and unfavourable, that occur between the balance sheet date and the date when the financial statements are authorised for issue.

Two types of events can be identified:

(a) those that provide evidence of conditions that existed at the balance sheet date (adjusting events after the balance sheet date); and

(b) those that are indicative of conditions that arose after the balance sheet date (nonadjusting events after the balance sheet date).

Material adjusting events require changes to the financial statements.

Examples of such events given in IAS 10 (Revised) are:

(a) the resolution of a court case, as the result of which a provision has to be recognised instead of the disclosure by note of a contingent liability;

(b) evidence of impairment of assets:

(i) bankruptcy of a major customer;

(ii) sale of inventories at prices

suggesting the need to reduce the balance sheet figure to the net value actually realised.

Nonadjusting events do not, by definition, require an adjustment to the financial statements, but if they are of such importance that non-disclosure would affect the ability of users of the financial statements to make proper evaluations and decisions, the enterprise should disclose by note:

— the nature of the event;

— an estimate of its financial effect, or a statement that such an estimate cannot be made.

Examples of such events given in IAS 10 (Revised) are: (Items (a) to (e) only are relevant for paper 1).

(a) decline in market value of investments;

(b) announcement of a plan to discontinue part of the enterprise;

(c) major purchases and sales of assets;

(d) expropriation of assets by government;

(e) destruction of a major asset by fire etc;

(f) a major business combination after the balance sheet date;

(g) sale of a major subsidiary;

(h) major dealings in the company's ordinary shares;

(i) abnormally large changes in asset prices or foreign exchange rates;

(j) changes in tax rates with a significant effect on current and deferred tax assets;

(k) entering into significant commitments or contingent liabilities;

(l) commencing major litigation arising solely out of events after the balance sheet date.

Further provisions of IAS 10 (Revised)

(a) Authorisation for issue of financial statements

An enterprise should disclose the date when the financial statements were authorised for issue and who gave that authorisation. If the owners or others have the power to amend the financial statements after issue, that fact should be disclosed.

(b)

Going concern

If the management decides after the balance sheet date that it is necessary to liquidate the enterprise, the financial statements should not be prepared on a going concern basis.

(There was a provision in `old' IAS 10 that the financial statements should be adjusted if events after the balance sheet date showed that a part of the enterprise was no longer a going concern. This requirement is withdrawn in `new' IAS 10 on the grounds that under IAS 1, Presentation of Financial Statements, the going concern assumption applies to an enterprise as a whole.)

(c)

Dividends

The big change in `new' IAS 10 is that proposed dividends may no longer be recognised as liabilities if, as will normally be the case, they are proposed or declared after the balance sheet date.

IAS 1, Presentation of Financial Statements, requires the disclosure of proposed dividends and IAS 10 states that this disclosure may be given in one of two ways:

(a) by note;

(b) on the face of the balance sheet as a separate component of equity.

For examination purposes the disclosure by note will be simpler, unless the question specifies the use of the other method.

Conclusion

The requirements of IAS 10 (Revised) are broadly the same as the previous version with the important exception of those for proposed dividends, which are now to be treated as in the USA. (Under the original IAS 10, there was an option to recognise them as liabilities, which has now gone).

Note to CAS 2: Inventory

2005-12-30T18:17:00.000-08:00

Cambodian Accounting Standard 2

CAS 2: Inventory

By : Ou Chandara
Koy Ponlork

Objective of CAS 2

The objective of CAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of inventories and for subsequently recognizing an expense, including any write-down to net realisable value. It also provides guidance on the cost formulas that are used to assign costs to inventories.

Scope

Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for sale in the ordinary course of business (work in process), materials and supplies that are consumed in production (raw materials) , and rendering services.

However, CAS 2 excludes certain inventories from its scope:

work in process arising under construction contracts, Construction Contracts

financial instruments

producers' inventories of livestock, agricultural and forest products, and mineral ores to the extent that they are measured at net realizable value in accordance with well established practices in certain industries.

Accounting Treatment

Inventories should be measured at the lower cost or net realizable value in accordance with the prudence concept.

Cost Measurements

Cost of Inventory: costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

Purchased Cost: purchase price, import duties and other taxes, transportation, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase.

Cost of Conversion: costs that is directly related to the units of production and they also include Fixed and Variable costs.

Direct Labor

Production overhead

Variable Cost : indirect costs of production that vary directly, or nearly directly, with the volume of production, such as indirect materials and indirect labor.

Fixed Cost : indirect costs of production that remain relatively constant regardless of the volume of production, such as depreciation and maintenance.

Other costs are included in the cost of inventories only to the extent that they are incurred in bringing the inventories to their present location and condition. For example, it may be suitable to include non-production overheads or the costs of designing products for specific customers in the cost of inventories .

Cost of Service

Cost of services consists primarily of the labor and other staff costs directly engaged in providing the service, including supervisory personnel, and attributable overheads.

Labor and other cost related to sale are not are not included in the cost of inventory, but they are recognized as expenses within the period.

Techniques for the Measurement of Cost

The following techniques maybe used to measure the cost of inventories:

Standard Cost take into account normal levels of materials and supplies, labor capacity. They are regularly reviewed and, if necessary, revised in the light of current conditions.

The retail method is often used in the retail industry for measuring inventories of large numbers of rapidly changing items.

Apply when it is impracticable to use other costing method.

Reduce sale value of inventories by percentage of gross margin.

Inventory is marked down to below its original selling price.

Average percentage is used for group of products.

Cost Formulas

The cost of inventories may be assigned by using the following cost formula;

The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects should be assigned by using specific identification of their individual costs.

FIFO : items which were purchased first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced.

Weighted Average: cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. Cost may be calculated on a periodic basis, or goods is received.

Net Realizable Value (NRV)

Net realizable value is the estimated selling price less the estimated cost of completion and costs necessary to make the sale.

The cost of inventories may not be recoverable if those inventories are damaged and if the estimated cost of completion have increased.

Inventory are usually written down to net realizable value. NRV estimates should be based on the most reliable evidence available and it should be written down to NRV on an item-by-item basis, stock losses, abnormal wastage and non-allocated production overhead

Dealing with debtors

2005-12-29T21:13:00.000-08:00

Dealing with debtors
by Graham Holt

Professional Scheme, Certified Accounting Technician scheme
Relevant to Paper 1,Paper 3,Paper 6, Paper 1.1, Paper 2.5, Paper3.6

This article sets out the accounting treatment for the impairment of trade receivables/debtors. The provision for bad debts is now, in effect, governed by IAS 39, Financial Instruments: Recognition and Measurement for International stream students or FRS 26, Financial Instruments: Measurement for UK stream students. Adapted papers generally follow the content of IAS 39. This article covers the general accounting principles and then outlines its applicability to CAT Scheme Papers 1, 3 and 6, and Professional Scheme Paper 1.1.

General accounting principles (relevant to Professional scheme papers 2.5 and 3.6)
Trade receivables are financial assets falling under 'loans and receivables' in IAS 39 and FRS 26. According to these standards, loans and receivables are measured at amortised cost using the effective interest rate method. Initially, they will be carried at fair value at the time of recognition, which in the case of trade receivables/debtors will be the invoiced amount.

The effective interest rate method spreads the interest income or expense over the life of the financial asset or liability. Obviously, such a method does not seem to be relevant to trade receivables/debtors where normally there is no interest payment to spread. FRS 26 and IAS 39 therefore allow short-term receivables/debtors with no stated interest rate to be measured at the original invoice amount, if the effect of discounting is immaterial. This would apply to trade receivables/debtors and therefore, they will still be carried at the invoice amount.

However, FRS 26 and IAS 39 state that an entity must assess at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets is impaired. If there is objective evidence that an impairment loss on the financial assets has been incurred, the loss must be recognised in profit or loss. Since trade receivables/debtors are financial assets, annual impairment assessments must be performed. The amount of the loss is determined by looking at the carrying value of the trade receivable/debtor and comparing it with the present value of the estimated cash flows discounted at the effective interest rate. As previously outlined, trade receivables will not normally be discounted and will not normally have an effective interest rate.

IAS 39 and FRS 26 detail a quite specific methodology for calculating an impairment loss. The use of old provisioning matrices such as age analysis and general provisions may not produce the correct answer under IAS 39. The implications are, for example, that if an entity applies a flat percentage of 50% of receivables in 90 days, and 100% of receivables/debtors in 120 or more days for example, in order to estimate the impairment loss, this will not comply with the requirements of IAS 39/FRS 26. This will only be acceptable if the formula can be shown to produce an estimate sufficiently close to the method specified in IAS 39/FRS 26 which requires an estimate of the cash which will actually be received.

Impairment of individually significant balances must be separately assessed and an allowance made when it is probable that the cash due will not be received in full. Impairment of individually non-significant balances can be measured on a portfolio or group basis. Any receivables that are not thought to be impaired are included in the group assessment. If information becomes available that identifies losses on a receivable in the group then it is removed and individually assessed.

The collective assessment of impairment requires the splitting of the list of receivables into groups of trade receivables that share similar credit risk characteristics. The credit risk groups are to be assessed for impairment using historical loss experience for each group. Such historical loss experience would be adjusted to reflect the effects of current conditions. An individual receivable/debtor impairment factor is likely to be specific to that receivable/debtor - pending liquidation of the entity, for example.

A collective impairment factor is likely to be as a result of past economic events that affect the receivables in general (eg interest rates). Impairment losses will be recognised only when they are incurred. Thus, if there is deterioration in the credit quality of the financial assets as a result of a past event, then an impairment loss may have occurred.

The recognition of future losses based on possible or expected future trends is not in accordance with the IASB Framework and IAS 37/FRS 12, Provisions, Contingent Liabilities and Contingent Assets. General provisions would therefore not be allowed as the historical experience is zero and it is unlikely to produce an acceptable estimate of the cash flows to be received.

Conclusion
Trade receivables/debtors fall into the category of loans and receivables under IAS 39/FRS 26. They will be valued at fair value initially - which will be the invoiced amount. Because they are short-term receivables they will not normally be subject to discounting, nor will they normally have an effective interest rate. They will have to be assessed for impairment at each balance sheet date, and will be impaired if the present value of the cash flows is less than the carrying amount.

The assessment can be on an individual or group basis. The old methods of calculating bad debt provisions are unlikely to produce a correct figure for the present value of the future cash flows and general provisions will not comply with the methodology set out in the IAS/FRS. IAS 39/FRS 26 states that the carrying amount of the asset should be reduced either directly or through the use of an allowance account (para 63). The amount of the loss should go to profit or loss. An allowance for impairment losses is possible, but it must be determined in a more logical and systematic way than has often been the case in the past.

Applicability to CAT scheme papers 1, 3 and 6, and Professional scheme paper 1.1
The main differences that will affect these exams are those in terms of terminology. The terms 'bad debts' and 'irrecoverable debts' will still be used and will relate to specific debts which are not considered to be collectible and so are written off to the income statement/profit and loss account. Effectively, they are 100% impaired.

General allowances/provisions are in effect no longer allowed. However, allowances are still allowed if they are based on past experience, and on the amount of cash which will be collected. The effect on the CAT Scheme papers and Professional Scheme Paper 1.1 is limited. Questions and answers will be similar to past examination questions.

Exampe 1
Note that the differences in terminology or narrative are in bold.

At 31 December 2004, a company's trade receivables/debtors totalled £864,000, and the allowance for receivables/debtors was £38,000. It was decided that specific debts totalling £13,000 were to be written off as the cash was considered to be irrecoverable, and the allowance for receivables/debtors was to be adjusted to the equivalent of 5% of the trade receivables/debtors based on past experience.

Question
What figure should appear in the balance sheet for trade receivables/debtors and in the income statement/profit and loss account for the total of bad debts and the allowance for trade receivables/debtors?

Answer
Balance sheet
Trade receivables/debtors £808,450
(£864,000 - £13,000 - £42,550)
Income statement/Profit and loss a/c
Bad debts £13,000
Allowance for trade receivables/
debtors (£42,550 - £38,000) £4,550
[(£864,000 - £13,000) x 5% = £42,550]

The calculations are exactly the same as for the existing questions. There is little need to worry as the change is really in the terminology and not in the method of calculation for CAT and Paper 1.1 students.

Re: Cambodian Accounting Standard

2005-12-25T02:18:00.000-08:00

Dear Darren

You can get the Cambodian Accounting Standard from bookstore in Phnom Penh or from the Ministry of Economic of Finance (you will get both hardcopy and softcopy).

This standard was produced base on International Accounting Standard. Currently, there are only 15 standards has been enact.

PECE

Send instant messages to your online friends http://au.messenger.yahoo.com

The taxation of trusts and trust beneficiaries

2005-12-24T02:29:00.000-08:00

The taxation of trusts and trust beneficiaries
by Richard Thornton
01 Nov 2005

Professional Scheme
Relevant to Paper 2.3(MYS), Paper 3.2(MYS)

The taxation of trusts and trust beneficiaries is a wide-ranging and rather complicated topic, and comes under Part 4 of the syllabus, Taxation of Special Persons. Heading (a) refers to trusts and settlements. Unit trusts and property trusts, which are referred to under heading (b), will be covered in a future article.

The recommended reference text is Malaysian Trust Law by Mary George (ISBN 9 679 78691 9). It is not necessary for candidates to know the law in detail, but an understanding of the basic concepts is required when tackling questions on this topic.

For all practical purposes there is no difference between a trust and a settlement. In referring to ordinary taxation of ongoing trusts and their beneficiaries, the word 'trust' is used in this article. The word 'settlement' will only be used in referring to the anti-avoidance provisions of Section 65 of the Income Tax Act 1965 ('The Act').

What is a trust?
Unlike a company or a co-operative, which are brought into existence and registered under the provisions of a specific law, a trust has no separate existence in law. The Act contains detailed provisions dealing with the taxation of trusts but it does not define a trust. The concept is recognised under Malaysian law but we still need to use English law to find out what a trust is, and to gain an understanding of some of the terminology used.

A trust can be defined as: 'An equitable obligation, binding a person (who is called the trustee) to deal with property over which he has control (which is called the trust property) for the benefit of persons (who are called the beneficiaries or cestuis que trust) of whom he may himself be one, and any one of whom may enforce the obligation.' (Underhill, quoted with approval in Green v Russell (1959) 2 Q.B.226)

In short, it means that legal control of some property is given to the trustee (or trustees if more than one) to look after for somebody else for a time. Normally the trustee will have no right to take it or use it for himself.

A trust can be created in a number of different ways. Usually it will be made during the lifetime of the person who gives the property (called the settlor) but it might come into existence on a death, by the operation of law or under a will, or it might be created by some other law.

The terms of a trust will usually be set out in a written document (called the trust deed). Trust provisions can vary widely but two basic aspects are important: certainty as to what is the trust property, and certainty as to the intended beneficiaries. Beneficiaries might be named specifically or as a class of persons. Frequently, a beneficiary will be given a right to income only, and the capital will pass to somebody else.

In addition to unit trusts and property trusts, there are several other different kinds of trust used in Malaysia. A common form is the quasi-public trust or foundation, often established by a state government or a government body. This form of trust carries on business activities and may be wholly or partly benevolent in nature. We are more concerned with trusts established by, or for, private individuals to benefit family members for a term of years, and which invest the trust property for income and/or capital gain. We need not concern ourselves with what is called a 'bare trust'. Such a trust is really no more than a nominee for the person owning the property.

Method of taxing
The Act, in Sections 61-63, sets out specific rules for taxing the income of trusts. These cover the trust body itself and the beneficiaries, who are assessed and charged to tax separately from the trust body.

From time to time the trustees are known as 'the trust body' and, as such, are regarded as a single and separate person for all tax purposes (except the penalty provisions).

Trusts, whether carrying on business or not, have to comply with the self-assessment system in the same way as companies.

The basis period will be the period covered by any accounts made up by the trust, otherwise the year to 31 December.
The return of income must be submitted within seven months of the end of the basis period.
Any tax due must be paid without further demand within seven months of the end of the basis period.
The trust must provide an estimate of tax payable within one month before the commencement of its basis period and make instalment payments.

Taxing the income of the trust body
The first step in dealing with the tax position of the trust body and of the beneficiaries is to ascertain the total income of the trust body computed in accordance with Section 44 of the Act.

The normal rules for computation of income, including the source rules, continue to apply. Income of the trust body consists of income from any source comprising property of the trust, including a trustee's share of any partnership income which is also trust income.

Deductions can be made from income gross in ascertaining the adjusted income from each source, but these follow the normal rules of deduction under Section 33 etc, of the Act. Capital allowances may also be available where the trustees carry on a business activity. Any expenses would have to qualify in relation to a particular source of income. There is no general deduction for administration expenses, such as trustees' fees. Cash and other gifts specified under Section 44 of the Act can be deducted in ascertaining the total income of the trust.

Subject to one important exception (see below), the trust body is assessed and charged to tax by reference to the whole of its total income.

Example 1
The trust body of ABC Trust is resident in Malaysia. Accounts are made up to 30 June each year. The trust had the following amounts of income for the basis period 1 July 2003 to 30 June 2004. This forms the total income of the trust body for the year of assessment 2004:

	RM
Statutory income
Property	16,000
Dividends	8,000
Total income	24,000

Subject to any set-off for tax paid by instalments, the trust body will have the following liability to tax due for payment no later than 31 January 2005:

	RM
Tax on RM24,000 at 28% (the rate applicable to trusts)	6,720
Less section 110 set off re dividends RM8,000 at 28%	(2,240)
	4,480

Taxing the income of a beneficiary
A beneficiary entitled to income from a trust is deemed to have a source of income in relation to the trust. This is equivalent to the total income of the trust for the year of assessment concerned or, in the case of several beneficiaries, a fraction of the total income equal to his fractional entitlement to the distributable income in the basis year for the year of assessment concerned. This is known as his ordinary source. Distributable income means the actual income available for distribution by the trustees. That is not necessarily the same as the total income for tax purposes. The basis year is a calendar year but it is not necessarily the same as the basis period. In the case of ABC Trust in Example 1, the basis period for the year of assessment 2004 is the year to 30 June 2004, but the basis year is the year to 31 December 2004.

The beneficiary is allowed a credit under Section 110 for the amount of tax chargeable on the chargeable income of the trust body, or for a proportion of it if he is entitled to less than the whole of the distributable income. This proportion is calculated by dividing his ordinary source income from the trust for the year of assessment concerned by the total income of the trust for that year. Note that the tax chargeable on the trust is not necessarily the same as the tax payable by the trust.

Example 2
Continued from Example 1. Beneficiary D, a Malaysian resident, is entitled to 50% of the distributable income of ABC Trust for the basis year to 31 December 2004. Assuming he is a single man with no other income or deductions to claim, his tax position for the year of assessment 2004 is:

	RM
Statutory income ordinary source 1/2 x RM24,000	12,000
Personal relief	(8,000)
Chargeable income	4,000
Tax payable RM4,000 - RM2,500 = RM1,500 at 1%	15
Rebate - RM350 limited to	(15)
Less section 110 set off 12,000/ 24,000 x RM6,720	(3,360)
Tax repayable	3,360

In fact, there is no need for the ABC Trust to make any tax payment in respect of D's share of the total income. The Director General has a power, which is usually exercised in such cases, to deduct the income entitlement of a resident beneficiary in ascertaining the chargeable income of a trust body.

Example 3
Continued from Examples 1 and 2. Assuming that D's share of the total income of the trust, but not that of the other beneficiaries, is allowed to be deducted in ascertaining the chargeable income of ABC Trust, the position for the year of assessment 2004 would be as follows:

Trust
	RM
Total income as in Example 1	24,000
Less amount deducted re: D	(12,000)
Chargeable income	12,000
Tax at 28%	3,360
Less Section 110 set off re: dividends RM4,000 (1/2 x RM8,000) at 28%	(1,120)
Tax due for payment no later than 31 January 2005	2,240

Beneficiary D
	RM
Chargeable income as in Example 2	4,000
Tax on chargeable income	-
Less Section 110 set off re: dividends RM4,000 (1/2 x RM8,000) at 28%	1,120
Tax repayable	1,120

When the fractional entitlement of a beneficiary changes during the basis year, the total income is apportioned between the different periods on a time basis. A beneficiary's entitlement is then calculated separately for each time period and his ordinary source income for the year is the aggregate of the fractional entitlements.

Example 4
Continued from Examples 1 to 3. Beneficiaries E and F were each entitled to 25% of the distributable income of ABC Trust until 31 March 2004 when E passed away.

F then became entitled to a full one-half share. Apportionment of total income:

1.1.04 to 31.3.04	3/12 x RM24,000 = RM6,000
1.4.04 to 31.12.04	9/12 x RM24,000 = RM18,000

E's ordinary source income 1/4 x RM6,000 = RM1,500
F's ordinary source income 1/4 x RM6,000 + 1/2 x RM18,000 = RM10,500

Note: For simplicity, the apportionments have been calculated by reference to months rather than days.

Trusts intended to benefit minors frequently provide that income is to be accumulated by the trustees for a period of time, rather than being distributed year by year. The trust will bear any tax attributable to the income. On subsequent distribution, such income is not treated as income of the recipient. Where some of the income is to be accumulated and some distributed, an appropriate part of the total income of the trust body will be disregarded in calculating the share of income of a beneficiary entitled to income distribution.

Example 5

	All income RM	Accumulated RM	Distributed RM
Statutory income
Property	24,000	8,000	16,000
Dividends	12,000	4,000	8,000
Total income	36,000	12,000	24,000

Tax on RM36,000 at 28%	10,080	3,360	6,720
Less Section 110 set off re: dividends RM12,000 at 28%	(3,360)	(1,120)	(2,240)
Tax payable (ignoring any reduction for D)	6,720	2,240	4,480

Note: The full amount of tax payable by the trustees is RM6,720 but only the amounts in the third column are taken into account in respect of beneficiaries D, E and F.

This example is continued from Examples 1 to 4 and is shown above. In fact, in ABC Trust, one-third of the trust income was being accumulated for a minor during the basis year 2004, and only the distributable income is revealed in Examples 1 to 4.

The full amount of the trust total income for the year of assessment 2004 is RM36,000. The full position is shown above.

Residence and non-residence
The trust body, as a separate person, is distinct from its beneficiaries, and the residence position of each is determined independently. The taxability of a beneficiary will usually be affected by his own residence position and, to some extent, by the residence position of the trust body. On the other hand, the residence position of the trust body has little or no effect on its own taxability.

There is a special rule to ascertain the residence position of a trust body. In general, a trust body is resident for a basis year for a year of assessment if any one or more of the trustees is resident for that year. However, the trust body will not be resident for that year if:

the trust was created outside Malaysia by a non-citizen
the trust income for the basis year is wholly derived outside Malaysia
the trust is administered for the whole of the basis year outside Malaysia, and
at least half the trustees are not resident in that basis year.

The tax residence of a beneficiary is determined under Section 7 of the Act in the usual way, as is the residence of any individual trustee. The residence of a corporate trustee is determined in accordance with Section 8 of the Act.

Sources of income
For a trust body, whether resident or not, it is important to know the rules applicable to sources of income. Income which accrues in, or is derived from Malaysia, or is deemed to be derived from Malaysia, is income of the trust for tax purposes. Foreign source income is not within the scope of charge. Even if it is received in Malaysia, it is exempted by paragraph 28 of Schedule 6 of the Act.

Example 6
Taken from Question 4(b) of Paper 11 for December 1998. A non-resident trust had the following income for a year of assessment (the basis period being the year to 31 December):

	RM
Dividends from Malaysian-resident companies, after deduction of tax at 28%	21,600
Dividends from other countries, after deduction of tax	63,000
	84,600

The Malaysian dividends constitute the total income of the trust body, which is deemed to be derived from Malaysia in accordance with Section 14 of the Act. The tax position of the trust is as follows:

	RM
Gross dividends RM21,600 x 100/72	30,000
Tax chargeable at 28%	8,400
Less Section 110 credit RM30,000 at 28%	8,400
Tax payable	Nil

Note: The foreign dividends are not part of the total income whether received in Malaysia or not.

In the case of a beneficiary, his share of the total income of a trust, determined in accordance with his fractional entitlement to the distributable income of the trust, is deemed to be a source of income for him and it is deemed to be derived from Malaysia. This applies whether the beneficiary is resident or not and whether the trust body is resident or not.

Example 7
Continued from Example 6. Sam and Nick were entitled to one-third each of the income of the trust for the basis year concerned. The other one-third was accumulated under the terms of the trust. Nick was resident in Malaysia for that year but Sam was not.

Sam and Nick both have deemed income from the trust of RM10,000 (2/3 of RM30,000 x 1/2). Sam, as a non-resident, is liable to tax at 28% on his share of income. Nick is taxable as a resident according to his personal circumstances. They are both entitled to a Section 110 set-off for a proportion of the tax chargeable on the trustees in respect of the distributable income (RM8,400 - 1/3 = RM5,600/2 = RM2,800).

Further source income of a beneficiary
The Act provides for the matching of trust income actually received by a beneficiary during a basis year for a year of assessment with his ordinary source income, calculated in accordance with his fractional entitlement.

A beneficiary's income from his further source is defined as the excess of the following over his statutory income from his ordinary source:

all sums of income received in Malaysia from the trust in the basis year for year of assessment, plus
all sums of income received outside Malaysia from the trust in any year and remitted to Malaysia in that basis year.

Example 8
Continued from Examples 6 and 7. Nick received the following amounts from the trust during the basis year concerned:

Distribution of income	RM15,000
School fees paid on his behalf	RM5,500

All of these amounts were remitted to Malaysia from overseas by the trustees. Without any exemption, Nick's further source income would be:

	RM
Sums received in Malaysia from the trust (RM15,000 + RM5,500)	20,500
Less ordinary source income	10,000
	10,500

Note: Income disbursed by a trust body on behalf of a beneficiary is treated as being received by the beneficiary.

Paragraph 28 of Schedule 6 exempts income derived from a source outside Malaysia and received in Malaysia. The non-resident trust is a source outside Malaysia so the income received from the trust is exempt and can be ignored. As a result, there is no further source income. The same would apply if the trust income had been received by Nick outside Malaysia and then remitted to Malaysia. However, the ordinary source income remains in any case because the Act deems it to be derived from Malaysia. Although the further source is also deemed to be income of the beneficiary, there is no provision to deem it to be derived from Malaysia.

The further source concept applies to all trusts where the beneficiaries are entitled to the income or a share of it. A further source can arise due to the late distribution of income, or to the receipt of income which is not taxable.

Example 9
A resident trust had a total income of RM20,000 for the year of assessment 2004. One beneficiary was entitled to all of the distributable income. The beneficiary received a payment of RM3,000 in respect of 2003 income in March 2004, and a payment of RM22,000 on account of 2004 income in November 2004. The beneficiary's deemed income for the year of assessment 2004 consists of:

	RM
Ordinary source	20,000
Further source: (RM3,000 + RM22,000 - RM20,000)	5,000
Less: attributable to 2003	3,000
	2,000

The further source income of the beneficiary in Example 9 includes RM3,000 which relates to the year of assessment 2003. Provided that this was an ingredient of the beneficiary's ordinary source income for that year, the further source income can be reduced accordingly.

There is still an unexplained excess of income distributions of RM2,000. The reason might be that the trustees were able to distribute more income than the total income for tax purposes due to having received exempt income such as exempt dividends. Although Section 61(1A) provides for a 'two-tier' exemption for a unit trust holder in such circumstances, there is no provision for an ordinary beneficiary to be exempted.

Discretionary trusts
A discretionary trust is one in which the trustees are given power to allocate income between members of a class of beneficiaries in varying proportions, or not at all. This requires a different method of calculating the beneficiary's share of income.

The starting point is the total income of the trust body for a year of assessment. This amount is compared with the total of all sums of an income nature received in Malaysia by the beneficiary from the trust in the basis year for that year of assessment.

The lower of the two sums becomes the beneficiary's ordinary source income from the trust. Where two or more beneficiaries have received income distributions during a basis year, the amounts are totalled in order to make the comparisons. The lower figure is then divided in proportion to the respective income distributions.

Example 10
The following applies to the RST Trust for the years of assessment stated:

	Year of assessment
	2003	2004
Total income	12,000	12,000

Income distributed to beneficiaries in the basis year
X	10,000	6,000
Y	-	3,000
Z	-	9,000
Total	10,000	18,000

Ordinary source income divided in proportion to distributions
X	10,000	4,000
Y		2,000
Z	-	6,000
Total	10,000	12,000

Where a trust is partly discretionary and partly for beneficiaries in fixed shares, the income is divided and the two parts are dealt with separately. The same thing can apply where there is an income accumulating part, so it is possible to have one trust segmented into three different parts.

Paragraph 28 of Schedule 6 exempts income derived from a source outside Malaysia, and received in Malaysia, and it appears that a discretionary beneficiary of a non-resident trust will not be taxed whether he himself is resident or not. As income received in Malaysia is exempt, the amount of it would be nil and, as that would be less than the total income, the ordinary source income would be nil.

Trust annuities
The terms of a trust might provide that a person should be paid an annuity of a stipulated sum out of the trust income. This is dealt with by Section 63 of the Act in rather a different way from a share of the trust income.

For a trust body resident in Malaysia, or for a non-resident trust body with all of its income derived from Malaysia, the amount of any annuity payable for the basis year for a year of assessment can be deducted in full in arriving at total income for that year.

Any other non-resident trust body can only deduct the annuity payment up to the amount of its Malaysian source income.

For the recipient, the annuity represents a source of income. It is deemed to be derived from Malaysia when the trust body is resident in Malaysia, or when all of the income of the trust body is derived from Malaysia. This applies even if the trust body has no total income for the year. For non-resident trusts deriving part of their income from Malaysia, the annuity is also deemed to be derived from Malaysia but only to the extent that it is deductible in arriving at the total income of the trust.

A Malaysian-resident recipient of an annuity payable by a non-resident trust has a foreign source of income. Although such income would come within the scope of tax when it is received in Malaysia, it would be exempt from tax by paragraph 28 of Schedule 6, except to the extent that the annuity is deemed to be derived from Malaysia.

For a non-resident recipient, any annuity deemed to be derived from Malaysia would not be exempt from tax.

Example 11
Madam L, who is resident in Malaysia, receives an annuity of RM24,000 per annum from a trust resident in Switzerland. The annuity income is remitted to her in Malaysia as it becomes due. For the year of assessment 2004, RM15,000 of the trust total income was derived from Malaysia and the rest from overseas.

Only RM15,000 of the annuity can be deducted by the trust body, leaving it with a total income and chargeable income of nil.

Out of Madam L's annuity income, RM15,000 is deemed to be derived from Malaysia. The balance of RM9,000 represents foreign source income which is exempt. Madam L will be chargeable to tax on her annuity income of RM15,000.

Anti-avoidance and settlements
The use of trusts for tax planning purposes has become widespread in some jurisdictions to counter the effect of high tax rates, inheritance taxes and capital gains tax. In Malaysia, however, little use has been made of trusts for tax planning, particularly since the repeal of estate duty in 1991 and the virtual halving of tax rates on income. Nevertheless, anti-avoidance provisions designed to combat aggressive tax planning still exist. Any attempt to use a trust for tax mitigation must do so with regard to the general anti-avoidance provisions contained in Section 140 of the Act. These empower the Director General to disregard certain transactions which have the effect of avoiding tax as well as to the specific provisions.

Section 65 contains specific anti-avoidance provisions dealing with trusts (or settlements as they are referred to in the section). It works by deeming the income of a settlement to be income of the settlor where certain conditions apply. The obvious intention is to prevent wealthy individuals from passing over their assets or income to family members who have nil or low tax rates. In Malaysia's benign tax climate few settlors will be tempted to use settlements to mitigate their taxes. Even so, students should not ignore the anti-avoidance provisions because they can easily affect a settlement made for non-tax reasons. The reason is that a beneficiary entitled to a share of income might not be a taxpayer in respect of that income, because it is taxed as the income of the settlor.

There are three circumstances in which the section comes into play and the income of a settlement is deemed to be the income of the settlor, instead of the income of the trustees or of the legal beneficiary.

The first situation is where, in consequence of the settlement, income will or may become payable or applicable in the basis period for a year of assessment for the benefit of a relative of the settlor who at the beginning of that year is under the age of 21 and is unmarried. Note that there are some absolute defences to this:

the settlor is no longer alive at the time when the income arises
the relative is married at the beginning of the year of assessment
the relative has reached the age of 21 at the beginning of the year of assessment
the person is not a relative of the settlor
the relative has no right to income at the relevant time.

A 'relative' is one of the following:

a child of the settlor
a stepchild
a child of whom the settlor has custody or who is maintained by the settlor at his own expense
a child adopted by the settlor or by the settlor's spouse
a wife, grandchild, brother, sister, uncle, aunt, nephew, niece or cousin of the settlor.

The second situation is where the purported gift is incomplete so that, under the terms of the settlement, there is a possibility of the settled property (or the income from it) passing back to the settlor or to a husband or wife of the settlor. The following are good defences:

the settlement no longer contains the offending terms (ie they have lapsed or been removed)
the settlor is no longer living.

Example 12
Adapted from Question 5 of Paper 3.2 (MYS) - June 2003. Mr C H Lee, who passed away on 31 May 2002, made a settlement on
1 January 1997, putting into the settlement part of his substantial holding of shares in his family company.

One of the named beneficiaries was his daughter Ruth who was born on 1 June 1982. She married on 31 December 2000. Under the terms of the settlement, the income share of any beneficiary who is a minor is to be accumulated until that person reaches the age of 18. After that, the person is to receive the income until age 30 and then the capital.

In making his settlement, C H Lee retained a power, exercisable during his lifetime, to appoint the whole or any part of the capital and accumulated income in favour of his wife or any child of his. The power of appointment was never exercised. C H Lee's wife passed away on 30 April 1998. The position with regard to Ruth is as follows:

1 January 1997 to 30 April 1998: all income of the settlement, including Ruth's share, will be treated as income of the settlor because there is a power under which the settlor's wife can become entitled to the property or income of the settlement.
30 April 1998 to 1 June 2000: Ruth's share of income cannot be treated as income of the settlor because (i) the settlor's wife is no longer alive and (ii) the income is being accumulated and it cannot be paid to Ruth or applied for her benefit during this time.
1 June 2000 to 1 January 2001: Ruth is entitled to the income but she has not turned 21 or married so the income can be treated as that of the settlor (and not as income of the settlement or of Ruth).
1 January 2001 to 31 May 2002: Ruth's share of income cannot be treated as income of the settlor because she was married at the commencement of the year of assessment.
31 May 2002 onwards: Ruth's share of income cannot be treated as income of the settlor from that time onwards, even if she is not married, because the settlor is no longer living.

A further, and rather rare, situation in which Section 65 may come into play is where the settlor, or any relative of his, or any company controlled by him or by them together, makes use of any income of the settlement by borrowing or otherwise. The consequence is that the income concerned is treated as that of the settlor.

Real property gains tax
For the purpose of this tax, the trustees, as a body of persons, are assessable and chargeable on a joint and several basis with the tax on any chargeable gains accruing to the trust. Otherwise the usual provisions apply in relation to chargeable gains.

Richard Thornton is examiner for Paper 3.2 (MYS)

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Understanding Data Management and Data Security

2005-12-23T22:32:00.000-08:00

Understanding Data Management and Data Security

Companies today have so much data that flows in and out of the office that they need an effective system in place to manage all this data in a way that makes sense and from which all employees benefit. Data management is becoming more and more important as the volume of data that a company deals with on a daily basis needs to be sorted, delivered, and utilized. For small companies this usually isnt an issue as they can easily manage and store their data on computer servers. However, large companies have too much data to store in one place so that all employees can access it when necessary. This is where data management becomes crucial to the company.

There are many ways to achieve data management in these days of high technology. One of the most common methods of data management is to purchase software that does the managing for you. There is software available that will organize data into categories and divisions that have been designated by the company. This software can be installed on as many company computers as needed so that no data has the potential to get lost. Many companies will also update the education of several employees by having them earn a certificate in data management. This means that one or more employees are responsible for the management of data. They need to learn effective ways to sort and store this information so that it is accessible and findable by all other employees. Part of data management is knowing what information to keep and what information is irrelevant to the successful operation of a company.

There are many ways that a company can have their employees earn a certificate in data management such as online courses offered that an employee can complete either on company time or on weekends. There are also data management courses that are offered at community colleges around the country.

James Hunt has spent 15 years as a professional writer and researcher covering stories that cover a whole spectrum of interest. Read more at http://www.data-management-guide.com

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Welcome To Khmer Accounting Community

2005-12-21T01:13:00.000-08:00

HI friends,

If you are looking for a place to talk about accounting pratice in Cambodia, here is the right place for you.

You can express your opinion or ask other friend to help your problem about Accounting, Finance and even Legal issues.

Your involvement can make cambodian accounting pratice more transparency and accuracy.

PECE