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ReadingsCONTEMPORARY BUSINESS ISSUES

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ii | CONTEMPORARY BUSINESS ISSUES

ContentsReading 4.1 1Reading 4.2 12Reading 4.3 13Reading 4.4 14Reading 4.5 16Reading 4.6 21Reading 5.1 22

READINGS | 1

Reading 4.1

The socio-economic impacts of the adoption of iFRS: A study of the ASEAN countries of Singapore, Malaysia and indonesia

Diane Kraal, Prem Yapa and Mahesh Joshi1

Part A: impact of iFRS in Malaysiaintroduction Malaysia is gearing up for its reporting standards to be compliant with the International Financial Reporting Standards (IFRS). Harmonised Malaysian financial reporting standards (FRS) will be ready for adoption from 1 January 2012. Part A concerns this significant ‘accounting event’ in Malaysia, which prompted our team of Australian researchers to travel to Malaysia in July and September 2011 to interview 11 accounting professionals. The interviewees were: • two managers from the ‘Big 4’ accounting firms;• a representative of the Malaysian Institute of Accountants (MIA, the chartered

accountant body); • one member of the Malaysian Institute of Certified Public Accountants (MICPA);• two members of the Malaysian Accounting Standards Board (MASB); • one private practitioner; and • four accounting academics.

Part A is the first of three about the socio-economic impact of IFRS, with Singapore and Indonesia to be covered in the subsequent parts. The interviews in Malaysia are thus part of a larger project of 28 individual interviews conducted in three countries with academics, accounting professionals and accounting bodies.

Part A summarises the Malaysian interviewees’ views about the effects of the adoption and harmonisation of local accounting standards with IFRS on the corporate sector. The highlights of our inquiry on Malaysian impacts include insights by ‘Big 4’ accountants’ views on the ‘low impact’ of sharia law; and commentary on the most controversial and hotly debated IFRSs for adoption: Malaysia’s accounting standards for financial instruments, real estate and agriculture. Concerns were raised about adequate preparatory IFRS training and problems with low numbers of accountants in Malaysia were voiced.

1 Dr Diane Kraal is a lecturer with Monash University; Associate Professor Prem Yapa and Dr Mahesh Joshi are lecturers at RMIT University.

2 | CONTEMPORARY BUSINESS ISSUES

BackgroundThe Malaysian Accounting Standard Board (MASB) was established in 1997 to set accounting standards and oversee its governance. These powers were transferred from the local accounting professional bodies: the Malaysian Institute of Certified Public Accountants (MICPA) and the Malaysian Institute of Accountants (MIA). Malaysia is one of the early adopters of global reporting practices for it has been progressively incorporating the provisions of the international standards into local accounting standards since 2006, the year when MASB recommended that Malaysian accounting standards be aligned with standards issued by the International Accounting Standards Board (IASB). The MICPA vice-president and accounting educator interviewees referred to the strong involvement of MASB in the Emerging Economies Group (a sub-committee of the IASB) which aims at enhancing the influence of emerging economies in the development of IFRS.

From 2006 to 2009 the MASB and the IASB sorted out many divergent framework issues, which led to some harmonised standards being operative in 2009; for instance, FRS 8 Operating Segments. However, by 2010 a number of Malaysian accountants ‘panicked about the big bang’ adoption of the ‘difficult’ operative standards IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures. The year 2011 was lighter for listed entities in terms of new standards, for Malaysia adopted the simpler IFRS 3 Business Combinations. When the balance of IFRS harmonised standards start in 2012, one year of comparison will be required. So in effect the date of transition for many has been from 1 January 2011. Some interviewees stated that by 1 January 2012 there will only be minor GAAP differences between Malaysia’s FRS and IFRS. According to one ‘Big 4’ interviewee, the current perception of a ‘large impact’ on adoption of IFRS will be insignificant. This view about the ‘insignificant’ impact of IFRS was put to other interviewees, and is covered in the next sections.

impacts of iFRS on wider stakeholders in MalaysiaInterviewees noted the problematic issue of the ‘principles’ approach in FRS 139 Financial Instruments: Recognition and Measurement. It is predicted that auditors, in particular, will find fair value difficult to assess. More professional education and additional examples in the Malaysian FRS are required.

IFRS has no effect on access to financial information because listed companies in Malaysia already have their accounts on the public websites. Small to medium-sized enterprises (SMEs), by contrast, are the predominant form of business entity (about 300 000), but are not required to be IFRS compliant, or publicly disclose financial information. A professional body interviewee stated that the promotion of IFRS has been driven by the IASB, but to keep the IFRS impact in perspective, there are only around 1000 listed companies (most are family run) and financial institutions in Malaysia.

A positive impact of IFRS on wider stakeholders in Malaysia is expected to be the attraction of incoming capital, because of comparability of results across jurisdictions. Malaysians recognise that they do not want to be left behind in the harmonisation process. Entities with outward investment, such as the many Malaysian construction companies operating in Dubai, will also benefit. The perception is that investors currently see a lack of transparency in Malaysian financial reporting. However, one interviewee stated that investors rely on analyst reports rather than comparing financial reports at source.

Overall, it is anticipated that listed entity costs of compliance and finance will be lower. Other IFRS benefits are seen to be higher inward investment, which will translate to an increased standard of living for Malaysians, and more job opportunities for accountants in Malaysia and overseas. Academic interviewees, who were concerned about the IFRS impact, emphasised the need for a clear implementation plan and more stakeholder participation.

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Perceived tensions on the adoption of iFRSThe interviewees were probed about tensions arising from IFRS adoption, noting that the largest industries in Malaysia are banking and finance, plantations and property development. First, a key tension is with FRS 141 Agriculture. The MICPA vice-president was vocal about the current version of the agriculture standard and Malaysia’s issues in relation to fair value, the standard’s use of valuation models, and market volatility. Most interviewees saw FRS 141 as a challenge. Reservations with regards to fair value are perhaps exacerbated by a culture that is less inclined toward argument and discussion. Malaysia’s predominant industry is agriculture (palm oil, fisheries, timber) and so interviewees claim that the country needs more objective valuation models for biological assets.

Second, the property development standard FRS 15 Construction of Real Estate was also reported as hotly debated. FRS 15 recognises profits only on sale (the current standard prescribes the percentage completion method). Therefore, the property development and plantation sectors are likely to be exempt from the contentious FRS 141 Agriculture and FRS 15 Construction of Real Estate as at 1 January 2012.

Third, many interviewees stated that the global financial crisis (GFC) in 2008 did not affect Malaysia’s IFRS harmonisation. However, one interviewee (from a small consultancy) disagreed and claimed the GFC delayed the introduction of FRS 139 Financial Instruments: Recognition and Measurement until 2010, because of likely impairments to assets and its principles (rather than rules) format.

Fourth, the MICPA interviewee and two accounting academics (who have been associated with MASB) claimed that IAS/IFRS financial reporting requirements do not generally conflict with law. Therefore, the provisions of IFRS apply, unless there is a clear prohibition under sharia law, which these interviewees stated, ‘in the Malaysian experience is very rare’. Some interviewees observed that the Malaysian Government wants to promote Islamic financing. The most discussed issue is the law’s requirement that one cannot pay interest. Most interviewees saw no tension in this requirement, for ‘interest is just a terminology issue’. In sharia law there is always a profit element, which will give the same rate of return compared to interest. In other words, there is compensation for the time value of money. A contract may not mention interest in a transaction, but the accounting entries will treat profit like interest. One potential tension issue is leasing, because under sharia law one is not allowed to discount.

Finally, SMEs in Malaysia are currently exempt from IFRS compliance, and use another reporting framework called the Private Entity Reporting Standard (PERS). This may have to be replaced by IFRS and could be a future source of tension because of costs (e.g. the need for qualified staff).

iFRS knowledge and accounting education in Malaysia When interviewees were queried about primary sources of financial information, most stated that Malaysia’s Age Financial Daily was their favourite, widely read local newspaper for financial news, including developments in IFRS. The internet is the next source of financial news. The New Straits Times newspaper and television financial news were rated as low quality as both are government controlled. With regards to IFRS journal articles, the MIA publishes some of them in its journal Accountants Today, ‘but it is not doing enough’. Many interviewees did not notice IFRS related materials on the MIA website, although members can go to the International Federation of Accountants (IFAC) website and get materials on IFRS.


In terms of IFRS education, the ‘Big 4’ have strong in-house training programs. For accountants in industry there is IFRS training given by the MIA, MICPA, the Association of Chartered Certified Accountants (ACCA, UK) and CPA Australia. The MICPA official spoke very positively about training facilities and the availability of IFRS literature on MICPA/MIA/MASB websites. The corporate sector is supported by the government as companies can apply for training funding under the Skim Bantuan Latihan (SBL) scheme. The academic interviewees saw IFRS continuing education as the domain of the professional bodies. However, they also emphasised that accounting education in Malaysia is standardised by the Malaysian Qualifications Authority, which makes sure benchmarks for academic quality are met by Malaysian universities.

When interviewees were asked about IFRS surveys conducted by professional bodies, one respondent mentioned the MIA random reviews of listed company financial statements for IFRS compliance. There was also an MIA/IASB survey on the potential for FRS to be applied to Malaysian SMEs.

In Malaysia there is a high turnover of accounting staff in the ‘Big 4’ of about 30 to 40 per cent per annum. Despite staff leaving to go into industry, there is a shortage of accountants in Malaysia. It was claimed that the Enron case gave accountants a ‘bad name’ and parents are not encouraging this vocation. They would rather see their children in the IT industry where the working conditions are better. There is also the ‘brain drain’ of accountants to higher salaried locations, such as Singapore.

Industry claims that public university accounting graduates are not ‘trained ready for work’ and the standard is not high enough. Consequently, there is a need for further technical training for graduates to ‘contribute to the accounting cycle’. For SMEs that tend to rely on non-qualified staff, there is a big gap compared to those who are qualified. There is a need to explore a ‘train the trainers’ system for IFRS.

Viewpoints of accounting educators and the MICPA interviewee differed on Malaysian graduates’ knowledge of international accounting standards. The MICPA official argued that industry requires re-training of accounting graduates and advised that these graduates only have rudimentary knowledge/skills. However, accounting educators were confident about standards of accounting education in Malaysia and readiness for employment.

Conclusion The main purpose of Part A has been to enhance the understanding of the adoption of IFRS and its socio-economic impacts in Malaysia, which is officially adopting IFRS in 2012. Many interviews see benefits across the community, such as inward investment attraction and resultant increases in standards of living. The adoption of the IFRS framework has created some tension amongst practitioners and policy makers with regards to the accounting standards for financial instruments, real estate and agriculture. The latter two are likely to have a delayed implementation because of fair value concerns, whilst the ‘complexity’ of the principles approach has lowered confidence in the financial instruments standard. There are concerns about adequate preparatory IFRS training and the low number of accountants in Malaysia. This part seeks to contribute to the scant literature about:• impacts of IFRS on Malaysia’s wider stakeholders; • perceived tensions on the adoption of IFRS; and • IFRS knowledge and accounting education.

Some interviewees mentioned that IFRS is being introduced by authorities without taking into account cultural, religious and societal variations around the globe. While Part A provides some useful insights about the adoption of IFRS in Malaysia, more extensive research in the future is needed particularly examining the effectiveness of IFRS in Malaysia.

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Part B: impact of iFRS in indonesia introduction Part B concerns the impacts on Indonesia from the increasing push for harmonisation with international financial reporting standards (IFRS). It is the second in a series about the socio-economic impact of IFRS on the corporate sector in three selected ASEAN countries, with Malaysia already covered and Singapore to be the subject of Part C. The accounting standard harmonisation is important for all influential players in corporate Indonesia, whether regulators, accountants, business or academics. During 2009–2010 the Indonesian Accounting Standards Board issued some standards (and interpretations) to be effective from 2012 and revoked many local standards, which were not compliant with IFRS. As a G20 country, Indonesia is expected to align with IFRS; therefore, leadership from Indonesia’s standard regulators is vital.

Given the growing momentum for IFRS in Indonesia’s corporate sector, our team of Australian university researchers visited Indonesia in June and July 2011 to investigate issues arising from IFRS. A range of eight professionals were interviewed for the research, comprising: • two partners from the ‘Big 4’ accounting firms; • the president of the Indonesian Institute of Accountants (IAI), which is the main professional

organisation for accountants in Indonesia2; and• two accounting practitioners and three accounting academics.

The interviews in Indonesia were part of a larger project of 28 individual interviews conducted in three countries with academics, accounting professionals and accounting bodies.

Part B summarises the Indonesian interviewees’ comments on the socio-economic impacts of the adoption and harmonisation process of local accounting standards (Pernyataan Standar Atutansi Kenangan or PSAK) with IFRS on the corporate sector. The highlights of our inquiry include the impact of sharia law, and insights into resistance issues relating to IAS 39 Financial Instruments: Recognition and Measurement, IAS 11 Construction Contracts and IAS 41 Agriculture. There is division between the regulator and local accounting bodies about whether the local PSAK standards are ‘mismatched with IFRS standards’. Public university accounting education is also a major concern.

BackgroundIndonesia’s archipelago comprises nearly 13 700 tropical islands, which are rich in natural resources. It is a large producer of natural gas and is generally attractive to inward investment. Good financial reporting is the key to improving the Indonesian governance and transparency. Interviewees noted that since the early 2000s Indonesian listed companies have been considering the harmonisation of PSAK with IFRS through the standard setting body in Indonesia, the Financial Accounting Standards Board (Devan Standar Akuntansi Keuangan or DSAK). Government plans are for full adoption in 2012.

As prescribed by Indonesian law, both public and private companies should comply with accounting standards set by DSAK. With the introduction of IFRS, it is the listed companies that will face dramatic reporting changes in 2012. Indonesia is an Islamic country and recognises sharia law, which has affected the harmonisation with IFRS. Standards such as IAS 39 Financial Instruments: Recognition and Measurement currently have difficulties with regards to interest. IAS 17 Leases, which involves land and buildings, is problematic for the banking sector, as there are differences in timing of gain recognition in sale-lease back transactions.

2 The Indonesian Institute of Accountants is Ikatan Akuntan Indonesia (IAI).


As one of the interviewees revealed, the harmonisation poses ‘a mismatch between the local GAAP and IFRS’. These changes will directly affect tax policy, financial planning, performance-based compensation schemes and systems requirements. This view about the ‘GAAP mismatch’ with IFRS and its impact on wider stakeholders was discussed with other interviewees, and is covered in the next sections.

impact of iFRS on wider stakeholders in indonesiaMajor stakeholders are the government and the Islamic banking and corporate sectors. For instance, the government has paid special attention to IFRS harmonisation since the end of the President Suharto era (1967–1998). The standards IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement have a significant impact for financial institutions. The Islamic banking sector, which is familiar with the local PSAK standards, perceives IFRS to be creating uncertainties with regard to interpretations. As stated by one interviewee, Indonesia’s Muslims (who are the target market for Islamic banking) are about 80 per cent of the country’s 240 million population.

There are about six banks operating in Indonesia; for example, Bank Syariah Mandiri, Bank Syariah Mega, Bank Syaria Bukopin. Nearly 30 other banks have banking units such as, Bank Pertmata, Bank BNI and HSBC. According to the interviewees, the accounting standard setter, DSAK, seems to be divided by the sensitive issues of whether IFRS and principles can be reconciled. Many banks have faced significant challenges implementing IFRS, particularly regarding the conceptual question of how to implement the ‘time-value of money’ and ‘effective interest rate’, as prescribed in IAS 39 Financial Instruments. According to this standard, the effective interest rate has to be applied, but interest or ‘riba’ under law is prohibited. Interviewees pointed out that the DSAK has to find a way to comply with principles. Interviewees were of the opinion that a tripartite effort must be made between practitioners, Bank of Indonesia and Islamic scholars ‘to address the interest issue’ before the implementation of IFRS.

Interviewees commented on tax regulation in association with Islamic principles. It is expected that withholding tax and corporate taxes may create some complications, hence a clear set of rules and regulations are needed. Some interviewees predict that adoption of IFRS will increase the cost of reporting and compliance. Many listed companies do not include financial information on their websites. SMEs (around one million) in future might face high costs of reporting issues as a result of IFRS adoption.

Perceived tensions on the adoption of iFRSInterviewees were asked about the perceived tensions emerging from the adoption of IFRS in Indonesia. A big issue revolving around law is the choice between equity and debt finance. According to sharia principles there is no debt finance (i.e. no interest component) in Islamic financial institutions. Understanding the complex interpretations of some IFRS standards is another source of tension—such as IAS 41 Agriculture and its fair value requirement for there is no adequate, centralised information for comparative purposes in Indonesia. Fair value implicitly assumes that the financial markets are efficient. One interviewee was adamant in stating, ‘in reality this is not true’.

Standards such as IAS 11 Construction Contracts and its lack of specific guidance on the accounting for revenue were mentioned as issues, but not to the extent of IAS 39. The IFRS 3 Business Combinations standard ‘will certainly create tension’ on the issue of ‘recognising and measuring the identifiable assets acquired’ as noted by some interviewees. They said ‘in some jurisdictions these matters are creating huge problems’. According to another interviewee, ‘the IFRS standards have been prepared without taking account of countries that use Islamic financial institutions for their economic decision making’.

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Other sources of tension include the following: • Transaction costs are recorded under IFRS as amortised using the effective interest rate.

These costs are directly attributable to the acquisition and are amortised using the straight line method.

• Indonesian GAAP does not provide a specific guidance on some aspects of the ‘share-based payments’ such as the nature and extent of payment arrangements, performance or market conditions. By contrast IFRS is far more prescriptive.

• Indonesian GAAP provides little guidance on the disclosure requirements of the fair value measurements. By contrast IFRS is far more prescriptive.

iFRS knowledge and accounting education in indonesiaAccording to interviewees, the provision of accounting education and training on IFRS and financial knowledge dissemination is quite unsatisfactory in Indonesia. Most interviewees mentioned that the few financial newspapers are not widely available, and were not rated highly. As an interviewee mentioned, ‘our daily financial papers, such as Investor Daily, Kontan, Bisnis Indonesia and Neraca are not providing much information’. In addition, local TV programs do not provide financial news programs on a daily basis.

The IAI has a website and journal that include standards updates. Most interviewees mentioned the nature of updates published needs improvement. The IAI is conducting regular workshops, surveys and seminars for their members that include the latest updates on IFRS.

There are nearly 10 top universities in Indonesia and all of them are offering accounting programs, but, as noted by an interviewee, they have not updated the curriculum with IFRS. There are about 10 private universities, and some of them have introduced IFRS-related subject material. The ‘Big 4’ have in-house training programs to equip their staff for IFRS. As stated by interviewees, many auditing firms prefer to hire internationally educated and trained graduates. For example, those graduates returning to Indonesia after completing their accounting degrees in Australia are assured of accounting or auditing positions. It seems that there is a dearth of accountants graduating in Indonesia.

ConclusionThe main purpose of Part B has been to enhance the understanding of Indonesia’s adoption of IFRS. Indonesia is officially adopting IFRS in 2012. The adoption of the IFRS framework has created some tension amongst practitioners and policy makers, including the Bank of Indonesia. Interviewees noted that the standard setter, DSAK, seems to be divided by the sensitive issues of whether IFRS and principles can be reconciled. The application of fair value has been a complex issue, which is mainly due to a greater degree of professional judgment being required. The IAI has urged DSAK to expedite the process in order to comply with the road map of IFRS for convergence in 2012. This was further stressed at the fifth IFRS Regional Policy Forum and IAA seminar that was held in Bali, Indonesia, in May 2011.

This part seeks to contribute to the scant literature about the impacts of IFRS on Indonesia’s wider stakeholders, perceived tensions on the adoption of IFRS, and IFRS knowledge and accounting education. Some interviewees mentioned that IFRS is being introduced by authorities without taking into account cultural, religious and societal variations around the globe. While this article provides some useful insights about the adoption of IFRS in Indonesia, more extensive research in the future is needed particularly examining the effectiveness of IFRS in Indonesia and in ASEAN.


Part C: impact of iFRS in Singapore introduction The forging of global markets has extended the harmonisation of accounting practices to Singapore. Part C concerns the increasing push in Singapore for the adoption of international financial reporting standards (IFRS) and the impacts on its socio-economy. This is the third part about the socio-economic impact of IFRS in selected ASEAN countries, with Malaysia and Indonesia already covered.

The adoption of IFRS was approved in Singapore in the early 2000s. Given the growing influence of IFRS in the corporate sector in Singapore, our team of Australian university researchers visited Singapore in June and September 2011 to interview nine professionals: two partners from the ‘Big 4’ accounting firms and seven partners/directors of practicing audit firms. The interviews in Singapore were part of a larger project of 28 individual interviews conducted in three countries with academics, accounting professionals and accounting bodies.

Part C summarises Singaporean interviewees’ comments on the socio-economic impact of the adoption and harmonisation of local accounting standards with IFRS on the corporate sector. The main concerns about the IFRS impact in Singapore include the complexity of the principles-based IAS 39 Financial Instruments: Recognition and Measurement, and the application of fair value in both IAS 11 Construction Contracts and IAS 41 Agriculture.

BackgroundIn 2010 the population of Singapore was five million people and of this figure about 3.7 million were Singaporean citizens. The per capita GDP was US$43 867, and annual growth 14.5 per cent.3 In that same year the Singapore Stock Exchange had 640 listed companies.4 The accounting standards for listed companies, co-operative societies and charities have been prescribed by the Accounting Standards Council (ASC) since 2007. The financial reporting standards issued by the ASC are largely aligned with the standards and interpretations under IAS/IFRS. The ASC is responsible for ensuring the reliability and comparison of financial statements of different companies to enhance the credibility and transparency of financial reporting in Singapore. As stated by an interviewee:

Officially Singapore has not adopted 100 per cent of IFRS, but we are unique for having adopted about 95 per cent of the standards. Also, full adopting of IFRS has not been a major exercise in Singapore. We did not want it to be a big challenge.

In contrast, another interviewee stated, ‘IFRS 9 Financial Instruments [about classification and measurement] was issued in 2009 and 2010 but is being delayed until after 1 January 2013’. It is interesting to note that the interpretations of some standards have also been delayed.

In late 2010, the ASC realised that it needed to address the reduction of the financial reporting burden for SMEs. Thus SFRS for Small Entities was adopted without any modifications. The interviewees raised some interesting issues about the IFRS impact on wider stakeholders in Singapore, as noted next.

3 Department of Statistics, Singapore 2010, see: http://www.singstat.gov.sg.4 Singapore Exchange Ltd 2011, see: http://www.sgx.com/wps/portal/sgxweb/home.

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impact of iFRS on wider stakeholders in SingaporeMain stakeholders in Singapore include shareholders, investors, financers, employees, and labour unions; all have been impacted differently by IFRS. For example, the employees of some companies have been advised to redesign their employee stock options plans or risk associated losses under the IFRS environment. One interviewee said:

I think IFRSs adoption in Singapore is important to improve the comparability of financial statements between companies that operate in Singapore and other parts of the world. This is good for investors and stakeholders who wish to invest and have an interest in Singapore. The mandatory adoption of IFRS in Singapore is based on the strength of legal enforcement in our country.

Another interviewee commented that Singapore was very positive towards the adoption of IFRS from the early stages. The government has paid special attention to harmonisation, and expects momentum to grow in business development, financial transparency and good governance, in and around neighbouring Southeast Asia. However, one interviewee contended that investors or stakeholders rely mostly on financial analysts’ reports rather than comparing IFRS-compliant financial reports. This implied a minimal impact of IFRS.

Perceived tensions on the adoption of iFRSThe Singapore interviewees were asked about the perceived tensions emerging from the adoption of IFRS. For instance, complexities in understanding the interpretations of some standards were repeatedly mentioned. Despite the fact that IFRS has been adopted since 2005 some tensions remain. The most contentious aspect of IFRS is the use of fair value, as it requires increasing professional judgment and subjectivity. An example of the subjectivity required can be found in IAS 39 Financial Instruments: Recognition and Measurement. It includes a section on ‘How to determine fair value’, which states:

The best estimate of fair value at initial recognition of a financial instrument that is not quoted in an active market is the transaction price, unless the fair value of the instrument is evidenced by other observable market transactions, or is based on a valuation technique with variables that include only data from observable markets.

To comply with IAS 39 Financial Instruments and its fair value requirement is still problematic because Singapore has no adequate statistical data available for comparative purposes.5 Determining fair value in an active and inactive market is an issue. As stated by an interviewee:

The book value is the best, for it is reliable. The fair value is subject to professional judgment. It works extremely well in the market if you have observable data on markets. For example, IAS 41 Agriculture [requires fair value] but there is no observable data available in Singapore.

Interviewees consistently mentioned that it is important to grasp the technical issues. As put by another interviewee:

Accounting professionals have to learn new methods of valuation used in implementation for IFRS. There are many methods in IFRS, especially in asset valuation which have not been used before. I think this is a big change. Audit firms now have to think about expertise in valuation to sort out valuation exercises associated with fair value.

5 Fair value implicitly assumes that the financial markets are efficient.


The banking sector has tensions mainly due to the operations of its overseas branches. For instance, the ‘effective interest rate’, which is the rate that discounts estimated future cash payments or receipts through the expected life of a financial instrument. As noted by an interviewee, ‘effective interest rate’ impacts on customer statements and ‘back-end’ accounting. One of the benefits that IFRS was supposed to provide was a lower cost of capital, but due to difficulties, such as fair value and effective interest rate, ‘some companies have lost their competitive position’.

IAS 11 Construction Contracts was issued by the ASC in January 2009. Real estate developers and the Urban Redevelopment Authority of Singapore adopted this standard. IAS 11 requires that revenue is recognised using the percentage of completion (POC) method. As noted by one interviewee, an issue under the new standard is that the entity (developer) may have only partially completed a development, but can still on-sell the property. The major ambiguity is therefore the degree of ownership benefits and effective control over the property.

There were some concerns about IFRS 2 Share-Based Payments. As indicated by the interviewee, proper classification of share-based payments is ambiguous especially with joint ventures. Fair value in the income statement is not always possible because ‘what is the right answer?’ It needs a high level of professional judgment.

Interviewees were critical of the continuously changing nature of IFRS. They were also critical of the lead time, because financial disclosure means financial statements are not a timely source of information for potential investors. Investors are, therefore, relying on other information sources, such as financial analysts’ reports. Therefore, the major question raised by interviewees was about the actual usefulness of IFRS to potential investors. Reduction of the cost of capital was supposed to be one of the bonuses behind the adoption of IFRSs, but interviewees had some reservations about achieving a lower cost of capital for business in Singapore.

iFRS knowledge and accounting education in SingaporeAccounting education and training on IFRS is quite satisfactory in Singapore. Most interviewees mentioned that financial newspapers are widely available and financial information is updated on a daily basis for the general public. The Business Times is an online news paper and is the most widely read business newspaper. In addition, local TV stations run daily financial programs and were rated as ‘high’. In addition, stock market information from the Singapore Stock Exchange is displayed in all the major business centres.

The Institute of Certified Public Accountants of Singapore (ICPAS) publishes the CPA Singapore journal with regular updates on standards. Its vision is to develop Singapore into a global accountancy hub by 2020. Its website is updated with IFRS-related information.

All three major local universities (National University of Singapore, Nanyang Technological University and Singapore Management University) provide accountancy programs and are seen as satisfactory. The ‘Big 4’ and other second-tier auditing firms have their own in-house training programs to educate their staff.

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ConclusionThe main purpose of Part C has been to enhance understanding of the adoption of IFRS in Singapore and its socio-economic impact. Singapore officially adopted IFRS in 2005. The adoption of the IFRS framework has been seen to create a momentum for foreign investment in Singapore. Interviewees claim that most standards have been implemented without much difficulty, although the application of fair value has been problematic, mainly due to the requirement for greater professional judgment. In all, interviewees were varied in their responses as to whether the adoption of the IFRS regime over the last six years has been meaningful. While Part C provides some useful insights into the adoption of IFRS in Singapore, more extensive research in the future is needed particularly examining the effectiveness of IFRSs in Singapore and in ASEAN.


Reading 4.2

international accounting standards essential for growth

T. Ochi

Note: You can access this reading at: http://asia.nikkei.com/Markets/Capital-Markets/International-accounting-standards-essential-for-growth.

http://asia.nikkei.com/Markets/Capital-Markets/International-accounting-standards-essential-for-growth

http://asia.nikkei.com/Markets/Capital-Markets/International-accounting-standards-essential-for-growth

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Reading 4.3

State-owned assets—setting out the store

T. Ball

Note: You can access this reading at: http://www.economist.com/news/briefing/21593458-advanced-countries-have-been-slow-sell-or-make-better-use-their-assets-they-are-missing.

http://www.economist.com/news/briefing/21593458-advanced-countries-have-been-slow-sell-or-make-better-use-their-assets-they-are-missing

http://www.economist.com/news/briefing/21593458-advanced-countries-have-been-slow-sell-or-make-better-use-their-assets-they-are-missing


Reading 4.4

Background information about banking

A Key banking functionsBanks provide critical functions to the economy.

The key functions of a stable banking system, which fundamentally have changed very little since banking was first invented in the ancient world, are:1. Acceptance of deposits. This enables those with surplus funds to deposit them with a bank

and earn interest. The business of banking rests on the fundamental trust that banks are safe places to deposit funds, although there have been notable exceptions to this. Receiving interest and the perception of safety in depositing money in a bank encourages saving.

2. Grant of loans and advances. The rate of interest charged on loans and advances varies depending on the purpose and period of loan and assessed credit risk. Theoretically, a well-functioning credit system should encourage ‘good investment’ and discourage ‘poor investment’ by charging appropriate and differential interest rates. Ideally, banks enable the channelling of capital to productive investments via providing funds to credit-worthy borrowers. However, this does not always hold in practice.

3. intermediary mechanism between depositors (those with surplus cash) and borrowers (those with a deficit of cash).

Numerous associated functions have developed over the centuries and become more complex, but the key functions described above have remained fundamentally the same.

Secondary functions of banking, which have developed over the centuries and which form ancillary functions to the three key ones described above, include:• undertaking safe custody of valuables and important documents by providing safe

deposit vaults;• issuing letters of credit and travellers cheques;• foreign exchange facilities;• money transfers between locations and/or banks;• providing guarantees on behalf of customers to third parties;• collecting and supplying business information; and• providing reports on the credit worthiness of customers.

B Early history of bankingBanking in various forms has existed for many centuries. There is evidence that credit instruments and transactions were widespread around 4000 BC (Davies 1996, p. 1). Hundreds of thousands of credit receipts and monetary contracts have been discovered along the Tigris and Euphrates, confirming the existence of banking and credit operations as common and widespread throughout Babylonia. Depositary functions may have been available even earlier.

Religious temples of the ancient world were generally well built and well attended, and would have been perceived as safe places to store goods and money. They therefore became the logical places to serve as the first banks.

Initially, deposits consisted of goods such as grain, and later developed into precious metals such as gold, in the form of easy-to-carry compressed plates.

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A viable banking system relies on the quality and strength of the money base. Interestingly, banking in the ancient civilisations, such as ancient Egypt, emerged approximately 1000 years before a coinage system. In contrast, in the Anglo-Saxon and other northern European countries, coins preceded development of a banking system by a similar length of time (Davies 1996, p. 2).

In ancient Greece there is evidence of credit, whereby in return for a payment, a moneylender in one Greek port would write a credit note for the client who could ‘cash’ in the note in another city, saving the client the danger of carrying money with him on the journey.

In ancient Egypt state granaries functioned as banks. The Ptolemies, who ruled Egypt from 305 BC to 30 BC, united state granaries under a central bank in Alexandria, where the main accounts from all the state granaries were recorded. This enabled a nationwide circulation and transfer of credit (Davies 1996, p. 2).

In ancient Rome, charging interest on loans and paying interest on deposits developed and became competitive.

After the fall of Rome (arguably caused by financial chaos, resulting from unproductive defence and welfare spending), development of banking in Europe stalled and did not revive until the time of the crusades.

Beginning around the 1100s, the need to transfer large sums of money to finance the crusades stimulated the re-emergence of banking in Western Europe. In 1156, the first known foreign exchange contract took place in Genoa.

Perhaps the most famous of the medieval Italian banks was the Medici bank, set up by Giovanni Medici in 1397. The Medicis became the main bankers to the Pope, and enjoyed significant influence though to the 18th century.

Modern Western economic and financial history is usually traced back to the coffee houses of London. The London Royal Exchange was established in 1565, as the centre of commerce for the city, and the Bank of England was founded in 1694.

Figure 1: Sealing of the Bank of England Charter (1694)

Source: Wikimedia Commons, ‘Sealing of the Bank of England charter (1694)’, accessed May 2011, http://en.wikipedia.org/wiki/File:Bank_of_England_Charter_sealing_1694.jpg.


Reading 4.5

Background to the Eurozone sovereign debt crisis

Background to the Eurozone sovereign debt crisisThe recession in the Eurozone caused by the Global Financial Crisis (GFC) started to moderate in 2009. Following the contraction of almost 3 per cent in Q1 of 2009, the Q2 contraction was much smaller (0.2%) followed by a return to positive growth of 0.4 per cent in Q3 (see Figure 1). The average quarterly Eurozone GDP growth in the three-year period of 2005–2007 was 0.7 per cent, so the return to positive growth experienced in 2009 was still very tentative, relative to that.

Figure 1: Euro area 12 (EA12) GDP quarterly change

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The start of the Global Financial Crisis(collapse of Lehman BrothersSeptember 2008)

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Note 1: EA12 is the group of the first 12 members of the Eurozone—being the 11 countries which adopted the euro in 1999 plus Greece, which adopted the euro in 2001. EA12 GDP is being used here as a proxy for the Eurozone GDP.

Source: Based on data available at European Commission 2011, ‘Euro area GDP revision triangles’, EuroStat, Quarterly Accounts, accessed July 2012, http://epp.eurostat.ec.europa.eu/portal/page/portal/

national_accounts/methodology/quarterly_accounts.

In November 2009, at a time when the economy in the Eurozone was appearing to start to recover, the newly elected Greek government revised its budget deficit estimate for 2009 from 6 to 12.7 per cent of GDP (OECD 2011, p. 37). This event led to significant fluctuations in financial markets, a decline in investor confidence, large financial interventions in Greece and other countries, and radical fiscal policy responses, which led to a political crisis in Greece. These events together have been referred to as the ‘Eurozone sovereign debt crisis’.

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Build-up to the Eurozone sovereign debt crisisIn the decade prior to 2009, a number of European governments, including Greece, had been building up significant levels of borrowings fuelled by expansionary fiscal policies and relatively cheap sources of debt.

In theory, membership of the European Union (EU) required the members to abide by the rules in the Stability and Growth Pact, which required that annual government debt deficits be limited to 3 per cent of GDP and total level of government debt be limited to 60 per cent of GDP (Holinski & Kool et al. 2012, p. 1). Contraventions of these rules were to face fines of up to 0.5 per cent of GDP (Veggeland 2012, p. 10).

EU rules such as these initially promoted investor confidence in economies which were traditionally weaker, such as Greece, and allowed them easier and cheaper access to debt. Although the EU monitored the accumulation of debt in its member states and reprimanded them if they contravened the rules, no financial sanctions have yet been imposed on any of its members for violating the rules. Due to the absence of enforcement, the policy aimed at containing sovereign debt levels proved to be ineffective.

The levels of government debt in the Eurozone increased further during the financial crisis of 2008–2009 due to decreased tax revenues, fiscal policies to stimulate growth and bank bail-outs, from the pre-crisis levels, which were already high (see Figure 2). On average, the level of government debt as a percentage of GDP in the Eurozone increased by more than 10 per cent, from 68 per cent in 2001 to 79 per cent in 2009.

Figure 2: Total level of government debt as a percentage of GDP

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Source: Based on data available at European Central Bank 2012, ‘EuroSystem, Statistics dashboard’, accessed July 2012, http://www.ecb.int/stats/gov/html/dashboard.en.html.

Greece—The focal point of the crisisGreece became the focal point of the crisis. Its economy was where the absolute level of government debt, government debt as a percentage of GDP, the current account deficit and the budget deficit all reached unsustainably high levels. The country required significant assistance in 2010–2012 from the EU and the IMF to prevent defaulting on its debt obligations.


Whilst several other EU member states also came to require assistance as the crisis unfolded, Greece was the first one to do so and has required the most assistance thus far (as of the time of writing, in July 2012).

Since adopting the euro in 2001 Greece’s current account deficits and budget deficits have consistently exceeded the Eurozone average (see Figures 3, 4 and 5).

Figure 3: Government budget deficit as a percentage of GDP—Greece v. Eurozone

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Figure 5: Current account balance as a percentage of GDP—Greece v. Eurozone

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2011, p. 202, accessed July 2012, http://www.imf.org/external/pubs/ft/weo/2011/01.

Greece’s economy is relatively small in the context of the EU, accounting for about 3 per cent of the Eurozone’s GDP, (Neumann 2010, p. 27) yet its indebtedness became so high that it threatened to destabilise the European financial markets.

The features of the Greek economy which have contributed to an unsustainable level of government debt are as follows:• Greece’s development has been consumption rather than investment-driven. Private

consumption accounted for 73 per cent of GDP in 2009 compared to 57 per cent in the Eurozone. Public and private consumption together accounted for 89 per cent of GDP in 2009 compared to less than 77 per cent in the Eurozone (Neumann 2010, p. 27).

• Low savings ratio, of less than 0.5 per cent of disposable personal income on average over 2000–2009 (Neumann 2010, p. 27).

• Endemic tax evasion. Significant undeclared or ‘black’ economy which goes untaxed, numerous tax exemptions and lax enforcement rules.

• Costly and inefficient public administration. As an example, in 2009, the Greek government expenditure represented 50 per cent of GDP, and 75 per cent of this spending, excluding interest expense, was related to public sector wages and social benefits. This represents the highest percentage of public expenditure consumed by administration in the OECD, with no evidence that the scope or quality of services provided was better than those of Greece’s OECD peers (Nelson & Belkin et al. 2011, p. 2).

• Complex business regulations hampering business growth. According to an OECD report, the Greek private sector is suffering from complex, incoherent and unsystematic regulations (Nelson & Belkin et al. 2011, p. 2).

• Relatively high level of corruption, hindering business development. Transparency International ranked Greece as the most corrupt country in the EU in its 2010 Corruption Perception Index.


ReferencesHolinski, N., Kool, C. & Muysken, J. 2012, ‘Persistent macroeconomic imbalances in the euro area: Causes and consequences’, Federal Reserve Bank of St Louis Review, vol. 94, no. 1, January/February, pp. 1–20.

Nelson, R., Belkin, P. & Mix, D. 2011, ‘Greece’s debt crisis: Overview, policy responses, and implications’, CSR Report for Congress, Congressional Research Service, 18 August.

Neumann, M. 2010, ‘Managing the sovereign debt crisis’, CESifo Forum, March, pp. 27–32.

OECD 2011, ‘Economic surveys: Greece 2011’, OECD, Paris.

Veggeland, N. 2012, ‘Tracing the political-economy background of the contemporary crisis’, Journal of Management Research, vol. 4, no. 2, pp. 9–31.

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Reading 4.6

Building sustainability into investment decisions

J. Purcell

Note: You can access this reading at: http://www.gaaaccounting.com/building-sustainability-into-investment-decisions.

http://www.gaaaccounting.com/building-sustainability-into-investment-decisions

http://www.gaaaccounting.com/building-sustainability-into-investment-decisions


Reading 5.1

Building a better rat trap: Technological innovation, human capital, and the irula

Siri Terjesen

This case follows Sethu Sethunarayanan, Director of the nonprofit Center for Development of Disadvantaged People, which is dedicated to the improvement of the Irula tribe in rural villages of southeast India. The Irulas specialize in catching rats, an activity which provides the bulk of their income and food. Following a routine visit to a local village, Sethu recognized an opportunity for a ‘better rat trap’ to aid the Irula rat catchers. With feedback from rat catchers, Sethu developed an innovative new trap. His innovation won the prestigious Global Development Marketplace award from the World Bank which provided the funding necessary to commercialize the new technology. The venture’s implementation involved site visits to identify beneficiaries, health checks and treatment, preparatory workshops, factory establishment, factory training, production, women’s micro-credit collectives, distribution, and project evaluation. The case focuses on the relationship between human capital and technological entrepreneurship, considering the knowledge and skills required to commercialize technology for the rural poor and the positive impact on this greatly disadvantaged population.

Sethu Sethunarayanan, Director of the nonprofit, nongovernment organization (NGO) Center for Development of Disadvantaged People (CDDP), beamed as World Bank President James Wolfensohn presented him with the prestigious Global Development Marketplace grant to develop innovative technologies to alleviate poverty. At the podium, Sethu provided a brief overview of his winning project,

There are 3 million poor Irula indigeneous tribal people of untouchable status in India who make their income by catching rats in agricultural fields. They use a clay pot filled with burning straw to smoke these rats out of their burrows. Their mouths and hands touch the pot, and they are severely affected by heart, skin, eye, and respiratory problems. They are only successful 40% of the time and are in poverty and unable to send their children to schools. We developed a new hand-operated steel rat trap which eliminates the health hazards completely and enables the Irula to double their income. With this award, we can implement our project and make a complete socioeconomic change in the lives of millions.

As Sethu returned to his seat in the World Bank auditorium, he thought about how this journey began, on a morning walk through impoverished Irula villages in Tamil Nadu, India.

introductionOn a sticky morning in January 2003, Sethu walked briskly, anxious to check on the progress of a new drinking water pump well installed in a remote Thiruvallar district village. Sethu wanted to make sure that the new pump was installed properly, so that the Irula people who live in the village would no longer have to bring water from several miles away.

Seeing Sethu, a tall, stout man wearing a long white mundu robe shuffling down the dusty road, the Irula villagers greeted him eagerly and escorted him to the well. Sethu was pleased to see that the pump worked perfectly, but exhausted from his 2-mile hike. He asked a lady villager for some water to drink. While she went inside her mud hut to retrieve a cup, Sethu glanced at a clay pot in front of the hut door and noticed a similar pot in front of most of the huts.

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Thinking he might be able to drink out of this pot, he picked it up, but noticed that, in addition to the top opening, there was a small hole at the base of the pot. He put the pot down and picked up a neighbor’s pot which also had an extra hole. Sethu recalled the subsequent conversation,

I asked, ‘How will you carry water in the holed pot?’ She replied with a sarcastic smile, ‘This is not for carrying water, but for killing rats … My husband carries this pot when he goes rat catching. He looks for a rat burrow and places the pot at its entrance. He stuffs wet straw into the hole and lights it, creating smoke. On this little hole at the bottom, he places his mouth and blows air through, pushing the smoke out the other side of the pot and into the rat’s burrow. The smoke traps the rat. Then my husband digs into the earth and gets the trapped rat. He brings it home and I cook it for dinner. But sometimes he also comes home with burned lips and hands from handling the pot when the straw is burning …. He doesn’t always catch a rat.’

See Figure 1 for an illustration of the clay pot rat-catching technique.

Figure 1: Traditional rat trap: Pot fumigation

Sethu handed the pot back to the woman, but he did not stop thinking about the inefficiency of this pot and the resulting health problems. As he walked back the dirt path, he contemplated this latest challenge to help the Irula. Sethu had 25 years of experience in developing innovative solutions to improve the quality of life for poor and disadvantaged rural people. From a young age, Sethu admired Mahatma Gandhi’s efforts to alleviate poverty, liberate women, create economic self-sufficiency, and end untouchability and caste discrimination in India. Sethu studied at India’s only Gandhian university, focusing on Gandhi’s methods for developing and unleashing human potential, resolving conflict, and introducing new ideas. Upon completion of his studies, Sethu joined an NGO where he specialized in developing collective self-help, needs-based ventures. In 1998, the then 38-year-old Sethu established his own NGO, the CDDP.

Negotiating the byzantine maze of philanthropic management regulations in India is not easy (Sidel 2001); however, CDDP is one of only a handful of Indian NGOs to be recognized by both the United Nations and the World Bank. CDDP’s mission is ‘To develop those who are disadvantaged educationally, economically, socially, and culturally through self-help and self-governing collective development activities.’ Or as Sethu says, ‘In short, to help them to help themselves.’ The activities are undertaken along Gandhian lines of organizing constructive development actions through mobilization of human and local resources and often involve technological innovation and entrepreneurship. CDDP’s target areas are 80 villages in the Thiruvallur and Kancheepuram districts of the Tamil Nadu state and five villages in the Andhra Pradesh state of India. The programs are aimed at helping women and children belonging to socially and economically weak sectors, unorganized agriculture labor, small and marginal farmers, youth, destitutes, orphans, physically challenged, and other socially and economically disadvantaged people. In 1998, CDDP received the best rural development


organization award from the Indian government. CDDP has 23 employees and 56 volunteers, including Sethu’s 26-year-old son, Karthick Sethunarayanan, who is an expert in the effective use of information technology for the rural poor. He holds a Bachelor’s degree in Business Administration from Madras University and a Master’s degree in Information and Communication from Bharathidasan University. Karthick also runs his own IT company which has an alliance with Microsoft and clients in India and abroad. When driving to the villages, Karthick uses a wireless card in his laptop to access the Internet, providing a striking contrast to the road outside, populated by beggars, wandering cows, and women selling giant baskets of produce. A dynamic and engaging spirit, Karthick is keenly aware of the role of technology in transforming the world and the great potential for the world’s poor. He is also a talented classical Tamil singer and the villagers often ask him to sing for them.

National, local and community context

india

A global survey revealed that India is the world’s second most entrepreneurially active country with 17.9% of the adult population involved in some type of entrepreneurship (Reynolds, Bygrave, Autio & Hay 2002), although this activity is largely confined to members of certain castes and ethnic groups (Dana 2006). Tamil Nadu is one of the most industrialized states in India (mostly due to the success of its capital, Chennai, India’s fourth largest city and the world’s 34th largest metropolitan area); however, the rural areas which the Irula populate are extremely impoverished (TNG 2002).

irula

An estimated 3 million Irula people live in India, including 150 000 in Tamil Nadu and 250 000 in the bordering Andhra Pradesh state. The term ‘Irula,’ used for centuries, is thought to refer to either the dark complexions of the people, or to their spotting in forests as silhouettes. The Irula people are considered indigenous and DNA tests reveal their close ancestry to African populations (Watkins et al. 2005). Until recently, the Irula lived in forests and eked out an income by bartering or selling honey, wax, and firewood to local villages in exchange for village products. They obtained food by hunting for vegetation and wild animals in the forests. The 1976 Forest Protection Bill made the Irula lifestyle illegal, forcing moves into villages of mud huts with straw roofs and dirt floors. Most Irula people do not have the official right to occupy their lands, and the villages do not have electricity or roads. Sethu described the situation,

Irula are tribals and considered to be untouchables and unequal in society. For example, they are not allowed to use the wells of upper castes. They live in interior locations from which it is hard to reach towns and cities, and they do not interact with the community outside.

The Irula have a life expectancy of approximately 45 years. Only 95% of Irula children under 15 attend school and as a community they are 99% illiterate. Today, Irulas in Thiruvallur and other districts make their income by performing physical labor for land owners. For example, men, widows, and destitute women catch rats in agricultural fields. The farmers pay per rat and the rat catcher’s average income varies from $15 to $30 per month. The rat may be the Irula’s only source of meat and grains, usually consumed as one meal per day. In the past, some Irula people have starved.

Building a better rat trapBack in the office, Sethu decided that there might be an opportunity to develop a better rat trap. With the help of a local mechanical engineer, he set about looking for a solution. Together they fashioned a steel cylinder and hand-crank to generate air for pushing smoke into the burrow and a door on the cylinder for straw and a wooden handle to eliminate direct contact with the hot areas of the trap. Sethu provided sample traps to fifteen Irula rat catchers whom he met with

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regularly to get feedback. After six iterations over an 8-month period, Sethu was satisfied that the trap met the villagers’ rat catching and safety needs. See Figure 2 for an illustration of the new trap.

The rat catchers brought Sethu to the fields. He remembers watching the men, I asked the catcher, ‘How do you find the rat?’ He said, ‘The rat keeps his house like my wife does—very tidy, including the area outside the door. So I know when I come across a burrow hole with a clean entrance, there is a rat inside.’

Sethu observed as the rat catchers filled the steel trap with straw. The men located a hole on the bank between two fields, and two other holes about five feet away, which they covered with dirt to prevent the rat’s escape and to cause its suffocation. The lead rat catcher dug a larger entrance to the first hole, and put the trap’s pipe inside. The other two men guarded the covered holes and watched as the lead rat catcher opened the trap’s door, lit the straw, and cranked the handle. The trap chortled as smoke filtered down the hole, emerging from another hole in the earth, which was then quickly covered. It became clear that if there was a rat inside the hole, it had been deprived of oxygen. The lead rat catcher then removed the trap and began to dig on the side of the hole, following the winding burrow. He reached down the hole and pulled out a dazed rat, stunned by smoke. The rat was then humanely killed with a blow to its head. Sethu and the rat catchers were excited—the trap was a success!

Figure 2: A better rat trap

Sethu realized that he had identified a suitable technology for this opportunity and decided to seek funding for its commercialization. From past experience, Sethu knew that he would need to convince outside organizations of the merits of such an investment. He outlined the problems with the traditional pot method and the advantages of the steel trap and the project objectives. See Figures 3 and 4.


Sethu applied for a grant from the annual World Bank Global Development Market place. Since 1988, the World Bank has distributed over $40 million to 1100 projects in more than 60 countries. Sethu presented the rat trap project at the marketplace in December 2003 and received a grant for $98 500, enabling him to implement the project.

implementationThe rat trap project was undertaken from January to December 2004 and incorporated the following key components: site visits to identify beneficiaries, health checks and treatment, preparatory workshops, factory establishment, factory training, production, establishment of women’s microcredit collectives, distribution, and project evaluation.

Figure 3: Disadvantages of traditional fumigation method and advantages of new trap technology

Disadvantages of traditional fumigation methodOccupational health: When mouth blowing, the rat catcher inhales heavy amounts of smoke, leading to severe respiratory, heart, eye, and other health problems. Forty percent have one or more health complications, particularly burns to lips, hands, and fingers. Poor efficiency and limited income: The method is only effective in 40 of 100 attempts due to the limited air pressure and lack of constant or even distribution of smoke. Thus, the rat is more liable to escape. Irulas are paid per rat and income ranges from $15 to $30/month, less than the $35/month required to meet their familys minimum requirements for food, shelter, medicine, and education.

Mud pot break: In the course of their work, the Irula carry the pot over long distances. The pot breaks about once every 2 months and a new pot costs 50¢.

Drudgery of work: The rat catcher’s lack of success makes work a drudgery, leading to disinterest in the work, which in turn leaves him impoverished.

Rat menace in agriculture fields: Fewer kills lead to greater rat menace. Rats destroy about 25% of grains in gricultural fields. This is economically devastating in a country where 85% of the population is involved in agriculture. One estimate indicates that if the rat menace were alleviated. India would be able to feed its entire population thrice a day.

Advantages of new trap technologyComplete elimination of occupational health hazards: The hand-operated, wooden-handled trap eliminates burns to the lips and hands. No problems with smoke inhalation.

Doubled work efficiency: Rat catchers achieve 95% success. The rat is instantly stunned and unable to escape. The trap is easier to operate, enabling participation by older men and widowed/destitute women who do not have the stamina for mouth blowing. Doubled income: The success rate improvement more than doubles rat catchers’ income to $60, enabling the Irula to send their children to school and attend to health-care needs.

No breakage: The steel trap is impossible to break.

Release from work drudgery: The rat catcher is able to undertake his work with ease, comfort, and efficacy. The Irulas take pride in working with a machine, rather than a dirty pot. They are willing to work and earn more.

Social and educational change: The additional income enables the Irula to send their children regularly to school. Members of higher castes in neighboring communities may develop respect due to the decent professional type of device.

Reduction of rat menace: The rat menace is reduced although it is impossible to eliminate entirely as each female rat produces up to 1000 offspring in her lifetime.

Affordable cost: The new trap costs just $25 and is affordable for the rat catcher.

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Figure 4: Project objectives

1. To remove the occupational health hazards of tribals undertaking rodent control activity through pot fumigation method by introducing new trap technology.

2. To improve the income levels of the poor tribal rat catchers through the use of the new trap technology.

3. To undertake a comprehensive occupational health check-up and follow-up treatment for the severely affected beneficiaries.

4. To organize a collective income generation self-employment micro-enterprise venture for the poor tribal women and youth in the making of the new device and also to produce other types of agriculture tools and instruments.

5. To conduct nonformal life education activity for the beneficiaries in order to increase their education and awareness levels.

6. To promote self-help groups and micro-credit activities among the beneficiaries.7. To disseminate the information and technology of the project to other interested individuals and

organizations.8. To help farmers reduce the rat menace in their agriculture fields, through tribal rat catchers using

upgraded technology.

Source: CDDP.

Site visits to identify beneficiaries

Sethu and CDDP volunteers began by visiting 170 Irula villages in order to identify the most needy individuals. The visits were conducted simultaneously in order to reach the target deadline, but the visits were not without their problems. As Sethu explained,

We needed to take extra time to explain the project to the villagers. The Irula are especially sensitive to political matters, and at first they thought the CDDP volunteers were politicians … We encountered this problem in every new village.

The selection criteria were health and socioeconomic need, with priority given to those suffering health problems from the old pot fumigation method and whose entire income is based on rat catching. Destitute, deserted, and widowed women were also a priority and comprised 15% of the beneficiaries. The selectors included members of the local government and community and farmer groups. A total of 1500 beneficiaries were identified. One volunteer reported,

The enthusiasm and interest among the beneficiaries is more than we had expected. They feel this device is going to be a turning point in their impoverished life conditions. The response was really exemplary so we added 278 more beneficiaries in our reserves in case the others dropped out.

Health check and treatment

A basic health check was completed for 1500 beneficiaries. In some cases, special tests for tuberculosis and diabetes, as well as electrocardiogram, X-ray, and optometry exams were conducted. Treatment was begun for all affected villagers.

Preparation workshops

Individual and collective meetings were held in the villages. From his experience working on the water pump and other projects, Sethu knew that he would need to work closely with the Irula to elicit interest in the new technology. Sethu explained,

In the past, the Irulas have been given things by other NGOs and the government, but these things have basically been useless. So they do not like to get things for free. The only things they consider useful are those that they work for. Irula want to be involved and to express their needs … We ask about their health. We try to find out if the pot fumigation method was causing problems and to get them to see the link between the old method and their health troubles. We ask them if they would like to solve these problems. We talk about how important it is to be healthy and how the new technology can help them. Sometimes it takes weeks to reach a level of understanding and commitment.


Factory establishment

A factory was established in a 60-square foot building adjacent to CDDP’s field office in the Nedumbaran village. Based on 50 workers, 8 hours a day, the factory has a monthly capacity of 400 traps, but can easily be expanded. Sethu calculated that each trap would cost $30 to produce, including $25 for raw materials and $5 for labor. Karthick negotiated wholesale prices from Tata Steel, lowering costs by $3, a savings which was reinvested in the factory. In the event of a drop in demand for traps, the factory is equipped to make other steel items to be sold to farmers, including knives, sickles, ploughs, grill gates, chairs, and benches.

Factory training

Sethu faced an important decision regarding the manufacturing of the traps: which Irula should run the factory? Rat catching is predominantly undertaken by men, sometimes accompanied by their sons, while wives and older women have a historical role cooking and caring for family members. Selecting men, boys, or wives for factory work would upset traditional tribal roles and create friction in the community. Sethu opted to create new opportunities for young, unmarried women who were unemployed. Fifty young women were invited to work in the factory. The women organized themselves into the ‘Tribal Women Technotrapper Producers Society’ and registered as a small industries cooperative. They appointed officers and took responsibility for the factory’s daily operations. CDDP transferred whole ownership of the factory to the workers so that the women could control the profits. CDDP hired two technical people to provide three months of training in manufacturing, marketing, and finance. The young Irula women, who did not have any business or manufacturing training, took great delight in their new roles. They were paid $35–$70 a month, very high for village standards and were able to provide for their siblings and parents. Sethu shared in a progress report,

To our surprise, the tribal women who were illiterates and totally new to industrial type of work grasped the industrial techniques very quickly …. It is a source of great pride among all the villagers that the devices are made by their own women. The villagers can go to the factory anytime to watch them make traps.

Production

To make the trap, the young women first trace rectangular shapes on the sheet metal. A compass and chalk were then used to mark a 15-inch diameter circle. Next, a team of young women pull a heavy handle to cut the metal and drilled holes for smoke ventilation. The rectangle piece of steel is rolled through a machine to make it cylindrical. From here, two young women work together to weld the cylindrical rectangle to the circle. Finally, the door and hand crank are added. See Figure 5 for an illustration.

Women’s microcredit collectives

In parallel, CDDP launched a number of women’s microcredit funds, each comprised of 12–15 women. The fund enabled the women to obtain small loans for urgent household needs or to begin self-employment activities, reducing dependence on exploiting money-lenders. Each micro-credit group had a revolving fund collected from their monthly savings and also from the interest accrued from the loan. Each woman’s initial contribution was $1–$2. Fund availability ranged from $200–500 depending on each group’s prerogative. The micro-credit groups were often used to purchase the new trap. Once a woman raised 50% of the payment for the trap, she received the trap and paid the remaining half in loan installments according to a timeline agreed by the group.

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Figure 5: Trap manufacturing in the factory

Distribution

The trap was distributed in special village ceremonies. As most Irulas are illiterate, Sethu began by reading a 10-commitment pledge. This pledge included a promise that their families will use the rat trap or else return it to CDDP for distribution to other families. One by one, villagers’ names were read and they came forward, signing the pledge with a thumbprint and receiving the new rat trap.

Project evaluation

An evaluation committee, composed of local World Bank employees, government officials, and development experts met with beneficiaries, staff, and concerned communities to ascertain the impact of the project. The committee learned that many families are now able to send their children to school. Based on the evaluations, the World Bank considers CDDP’s rat trap venture to be a success and used the knowledge exchange to share lessons learned with other projects and to suggest appropriate policy responses. In the final progress report to the World Bank, Sethu shared,

We estimated that the income of the tribal rat catchers would be doubled. To our surprise, income is more than tripled. There is great enthusiasm among the families. Another important unexpected positive development is that the rat catchers could use the trap for catching rabbits, foxes, and other small animals which live in burrows. This fetches very high income for them.

The total project expenses is provided in Figure 6.

ConclusionDriving back from an Irula village visit with the case author, Sethu and Karthick discussed the future challenges for the rat trap project and their development work.


Figure 6: Project expenses for January–December 2004 (in US$)

Materials and equipment: machinery and raw materials to make 1500 traps $67 197

Training: making traps and other steel items to be sold to farmers $9 435

Health and self-help groups: identification and treatment of health problems, formation of micro-credit groups, societies, and workshops

$7 529

Personnel $7 053

General administration $2 930

Travel $2 300

Information dissemination $2 056

Total expenses $98 500

Quoting Gandhi, Sethu said, ‘I do not wish to study history, I wish to make it.’ Sethu and Karthick identified the following major challenges: factory expansion, NGO alliances, micro-credit developments, providing support for special projects, continuing to develop technology-based solutions, fundraising, and spreading Gandhi’s message.

With more than 100 million small farmers in the Tamil Nadu and Andhra Pradesh states seeking the Irula rat catchers’ help, the trap is in great demand. CDDP has taken orders for over 2000 devices. Sethu considered the factory expansion options,

We could expand the factory to more than 50 employees, but then it would need to be registered under the Big Industries Act and we would incur enormous taxes and other bureaucratic problems. Instead, we could create a number of small factories across the villages. Each could cater to the needs of people in those locations. We would also reduce transportation costs and the local people would be employed … If the demand for traps ever falls, these small factories can produce steel products for farmers instead … We also need to figure out a way to lower our overall costs to make the traps so we can have more profit.

CDDP has received requests for assistance and alliances from over a dozen NGOs, based locally and as far afield as Sri Lanka. Sethu contemplated the best way forward,

This technology is the best available to control rats and the project will boost agricultural community living anywhere. But we want to make sure that we identify and train good partners. It is not easy to organize.

A third challenge is to determine the best loan structure that will enable the Irula to buy new traps and repay their loans. Relatedly, Sethu is eager to explore other possibilities with the micro-credit.

Fourth, CDDP would like to continue to devote resources toward special projects such as the release of children who are bonded laborers in other villages. CDDP has already helped some children attain their freedom. These children now attend special programs and holiday camps, including competitions in literature, dance, drama, and sports. Some special projects are not planned in advance. For example, when the December 2004 tsunami devastated oceanfront villages in Tamil Nadu, Sethu immediately organized CDDP assistance in the form of food, shelter, grief counseling, and self-help collectives.

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Sethu and his team continue to use technology to create innovative solutions for the poor, including a smokeless oven and a natural water purification system that uses materials, such as indigenous plants, which are easily found in impoverished areas.

Karthick noted the need to attract fundraising to expand the projects, ‘What we have achieved is very little and the demand on us is so heavy that we have to continuously seek patronage from various quarters.’ CDDP has received other international funding, including the 2004 $50 000 San Jose Tech Museum Innovation Award and a $10 000 grant from the Rachel Golden Foundation.

This case concludes with comments from the villagers whom the author interviewed, using a Tamil translator, during her site visit 18 months after the completion of the World Bank initiative:

As a man living with severe respiratory problems due to mouth-blowing for rat catching, I found the new device to be a God-sent property. I wish this device to be given to more people of our community.

My husband brings more rats home, which I skin and cook. It tastes very good. The grains that the rat kept in its hole also taste very good. Because the rat has chewed on them a little, they have a special taste which is better than ordinary grains. Would you like to come to my house for dinner with me and my family?

My son and daughter now go to school in the evening. When they come home, sometimes we learn something from them.

ReferencesDana, L. P. 2006, Asian models of entrepreneurship, Singapore: World Scientific.

Reynolds, P., Bygrave, W. D., Autio, E. & Hay, M. 2002, Global entrepreneurship monitor report, Kauffman: Center for Entrepreneurial Leadership.

Sidel, M. 2001, Recent research on philanthropy and the nonprofit sector in India and South Asia, Voluntas: International Journal of Voluntary and Nonprofit Organizations, 12(2), 171–180.

Tamil Nadu Government (TNG) 2002, Tamil Nadu human development report, New Delhi: Social Science Press.

Watkins, W. S., Prasad, B. V., Naidu, J. M., Rao, B. B., Bhanu, B. A., Ramachandran, B. et al. 2005, Diversity and divergence among the tribal populations of India, Annals of Human Genetics, 69, 680–692.

Siri Terjesen is an assistant professor at Texas Christian University and a visiting senior lecturer in the Brisbane Graduate School of Business at Queensland University of Technology in Australia.

The author is grateful for the hospitality of Sethu, Karthick, and the Irula villagers during her visit. The case benefited from many conversations with Sethu, Karthick, and other CDDP team members, as well as the Irula villagers, Dr. Rachel Golden, representatives of the World Bank, and leaders of local and international NGOs operating in the region.

Please send correspondence to: Siri Terjesen, tel: (+61) 7-3138-1105; e-mail: [email protected].

Source: S. Terjesen 2007, ‘Building a better rat trap: Technological innovation, human capital, and the Irula’, Entrepreneurship Theory and Practice, vol. 31, issue 6, November, pp. 953–63.

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