the pakistan accountant aug 2009

Magazine of The Institute of Chartered Accountants of Pakistan

Governance, Transparency, Disclosure The Holy Alliance

APRIL - JUNE 2009

April - June, 2009 01The Pakistan Accountant

Editor's Letter 2President's Page 3Join the Discourse 5

Governance, Transparency, Disclosure - The Holy AllianceNasim Beg 6

Corporate Enterprise: The Interrelationships of Governance, Transparency and DisclosureMuntazar Bashir Ahmed 8

ICAP Elections 2009 in Pictures 36Best Corporate Report Awards 2008 40

Contents

Governance, Transparency, Disclosure

National Finance Commission (NFC) AwardS.M. Shabbar Zaidi 11

Investment Analysis of the Financial Markets - A New DimensionM. Saood Hashim 15

IFRS Versus US GAAP: Key DifferencesSyed Athar Hussain Zaidi and Saima Batool 20

More iTax RevenueAbdul Wahid 22

Interest Rate SwapsWaqas Farooq 24

Accountants' Role in Controlling Corruption and Fraud Saira Shamsie 29

Outsourcing of Tax Audits to Chartered Accountants Farheen Mirza 31

Smart Tips for Power Users - Microsoft EXCEL Part-II Zafar Badami 34

Other Articles

ICAP News

Dead Aid 44Test Your Investment Knowledge 45World in Focus 46Books 47Last Page 48

In-House

Volume 43 Issue 2 April/June 2009

Publications CommitteeChairman and Chief EditorAbdul Rahim Suriya, FCA

MembersAbdulwahid, FCAAbdul Rab, FCAAdnan Ahmad Mufti, ACAAhmad Saeed, FCAAhsan Ghaffar Mehanti, ACAAsif Jamal, FCAAyub Vohra, FCA Bilal Hashimi Faisal Habib, FCAFarzana, ACAFazal Mahmood, FCAHena Irfan, ACAJehan Zeb Amin, ACAJunaid Haji Zikar, ACAM. Arshad Siddiqui, FCAMalik Mirza, ACAMuhammad Amin Bhimani, ACAMuhammad Mahmood Marfatia, ACARaheel Abbas Rizvi, ACASophia Ahmed, ACA

Advisor Publications

Rana Mustansir

The CouncilPresidentSyed Asad Ali Shah, FCA

Vice PresidentsFarrukh Viqaruddin Junaidy, FCARashid Rahman Mir, FCA

MembersAbdul Rahim Suriya, FCAAhmad Saeed, FCAImran Afzal, FCAMohammad Abdullah Yusuf, FCANasim Hyder, FCARafaqat Ullah Babar, FCARazi-ur-Rahman Khan, FCAShahzad Hussain, FCAShaikh Saqib Masood, FCASyed Shahid Husain Jafri, FCASyed Mohammad Shabbar Zaidi, FCAWaqar Masood Khan

Executive DirectorMoiz Ahmad, FCA

SecretaryShoaib Ahmed, ACA

Publications Coordinator Asad Shahzad

Editorial Office

The Pakistan AccountantChartered Accountants Avenue, Clifton, Karachi-75600 (Pakistan) Phone: 99251636-39 Fax: 99251626 E-mail: [email protected] Website: www.icap.org.pk

THE PAKISTAN

ACCOUNTANTMagazine of The Institute of Chartered Accountants of Pakistan



Among many other things, the current global financial crisis has highlighted governance issues inareas, such as board practices, implementation of risk-management, remuneration process and theexercise of shareholder rights, where failures in corporate governance occurred. This crisis has alsohighlighted the importance of qualified board oversight and robust risk management which is notlimited to financial institutions. Furthermore, it has highlighted the fact that accounting standards andregulatory requirements have to be sufficiently enforced.

One such critical area relating to accounting standards concerns fair value of assets. The use bydifferent banks of very different valuations for the same asset contributed to reduced market integrity.Now, banks reporting according to US GAAP are using the FASB's classification on how assets have

been valued. The IASB is strengthening its standards to achieve better disclosures about valuations. The InternationalAuditing and Assurance Standards Board (IAASB) is also considering the lessons learned from the market meltdown and,where necessary, it will enhance the guidance for audits of valuations of complex or illiquid financial products and relateddisclosures.

High quality accounting and disclosure is an absolute essential for maintaining market integrity. It also provides the muchneeded comparability that helps investors, big and small, to make well-informed capital allocation decisions. Eachcompany should prepare its financial statements on a consistent basis, so that investors can analyze performance acrosstime periods. Also, reporting by different companies should be comparable. In this regard, I am proud of the fact that theBest Corporate Report Awards organized by your Institute for the last eight years, have come a long way in improving thequality of annual reports of listed entities.

A very important condition is that the professional standards which provide the benchmark for comparability andtransparency must be of ≈high quality∆ and must provide for full disclosure --- financial and non-financial. The disclosuremust also provide for fair, timely and cost effective access by users. Transparency requires that companies must reportcompliance with code of corporate governance and, where needed, give reasons for variation. Conversely, evidence ofgood corporate governance leads to increased shareholder value.

It is now evident that global capital markets will insist upon clear and relevant financial information. In a highly competitive,volatile global market we need unwavering commitment to high standards, constant improvement, and fast adaptation toan ever changing business environment. The only way forward is that we must begin to look at disclosure as more thanjust a compliance task, and at governance as more than just a hindrance.

Abdul Rahim Suriya


The importance of corporate governance disclosure for developing and transitional economies ismanifold because it improves their ability to attract investment capital by building investor confidencethrough accurate and timely disclosure. In this regard one of the prime objectives of the UnitedNations Committee on Trade and Development (UNCTAD) has been to identify and promote goodpractices in corporate governance disclosure.

UNCTAD's Intergovernmental Working Group of Experts on International Standards of Accounting andReporting (ISAR) publishes Guidance on Good Practices in Corporate Governance Disclosure whichhas become a benchmark for good governance practices. I strongly encourage all companies andtheir auditors to refer to this important guidance. This year ICAP is collaborating with UNCTAD oncorporate governance disclosure practices in Pakistani listed companies by examining the reporting practices, andcompliance with disclosure rules, of companies on the KSE30 Index. This report will be presented in the 26th Session ofISAR being held in October 2009.

Big investment decisions are made based on reliable, high quality financial reporting which contains investor usefulinformation and disclosure.

In this time of fluctuating markets and uncertain economic trends, transparency and disclosure have taken on even greatermeaning. In the current volatile economic climate, in addition to the adequate disclosures on company's performance andfinancial position, the disclosures relating to company's strategy, future plans, significant risks, governance and internalcontrol framework etc. will also be closely monitored by investors. Equally important is that financial reporting should beconsistent with the information presented to boards of directors and audit committees. While management has a key roleto ensure adequacy and completeness of such disclosures, auditors' (internal and external) role is mainly to ensure thereliability of underlying financial reporting and disclosure.

The Institute of Chartered Accountants of Pakistan has been playing a vital and leadership role in enhancing corporategovernance, disclosure and transparency of the Corporate Sector in Pakistan. Some of the major achievements of theInstitute in this context include:

w Adoption and Enforcement of International Financial Reporting Standards (IFRS) and Internal Standards onAuditing (ISAs);

w Drafting and enforcement of the Code of Corporate Governance;w Establishing an effective quality assurance system through an independent Quality Assurance Board;w Advising the Securities and Exchange Commission of Pakistan and the State Bank of Pakistan on adoption and

enforcement of matters of financial reporting, and relevant laws and regulations;w Establishment of the Pakistan Institute of Corporate Governance (PICG); andw Developing a soft Code of Good Governance for family owned entities in partnership with CIPE and PICG.

It is my conviction that ICAP's role for continued improvements in governance, accountability and disclosure is crucial, notonly for the corporate entities, but also for public sector and not for profit organizations. The Council, various Committeesand the Executive of the Institute have made enormous contribution to the above initiatives that have brought aboutsubstantial improvement in governance, transparency and disclosure in Pakistan. In order to maintain this leadership rolein the areas of governance and high quality financial reporting, I am confident that these areas will remain as highestpriority on the agenda of the Council and the Institute.

Syed Asad Ali Shah



Join the Discourse

Join the DISCOURSEThis issue»s topic is:Asia’s Export Dependence

Should Asian economies stop pursuing export-led growth strategies of the past and start boostingdomestic demand?

Nobel prize-winning economist Paul Krugman recently declared that, ≈China should producethings for itself instead of acquiring sterile claims on the US.∆

As export-dependent Asian countries reel from the global economic downturn, is it time for thesecountries to reorient their economies to boost domestic demand instead of pandering to the USconsumer who is no longer the buyer of last resort?

Comments

Members are requested to send in their comments with their name, town and membership number,via email in care of [email protected] with the word 'DISCOURSE' in the subject heading.

Responses will be edited for purpose of clarity and space.

With reference to the topic for the month, I would like to say that generallytoo much dependence on exports and particularly for the Asianeconomies during economic melt down is a too risky approach.

The first Para for discourse ends with a ? but has an inbuilt word ofadvice to stop thinking of thriving on exports and benefiting fromglobalization.

In the second Para words of wisdom for China from an economist (anoble man) is actually trying to protect U.S demands (Market) fromencroachment. This is protectionism.

I agree with the gist of third Para that in crises everybody-every country-every sector has its own house to be taken care of, first and lookingtowards others as buyer/lender of last resort, proves disappointing.

What to talk of Asian economies, there came a voice from the strongestperson in US in the month of March/April 2009 ≈To buy Americanprovisions is patriotic∆. There came another voice from British P.M ≈this isprotectionism∆.

These are hard facts and the Asian economies and all other smalleconomies should keep these facts in mind in hey days, as well as duringthe phase of recession.

RRaaffii HHyyddeerrKarachi

In my opinion when everythingoutside is failed then a nation musttry to do soul searching and identifythe capabilities they hold. Thisapplies to every thing fromeconomics to medicine and I agreewith a certain diversion with thediscourse that we as a nation shoulddevelop more wider base ofdomestic use and consumptionwhere economy of scale can beachieved. But in most of the Asianeconomies it is not an easy tasksince we need to revamp everythingto achieve such self sufficiency.Corruption, lack of education, socialbehaviour, legitimate and ethicalpractices, are much required virtuesto have a sense of confidence in ourown capabilities. Therefore, we musttry to achieve this but till such time,we need foreign assistance in formof export of services and goods.

SSaallmmaann HHaammeeeeddKarachi



Nasim Beg FCA

I believe that it is best to practice what one preaches and I have consequentlybeen committed to practicing good governance. The company I runcommenced its operations as an Asset Management Company in March 2002,when two Open-end Mutual Funds were launched simultaneously. Being oneof the pioneers of the Mutual Fund Industry in the private sector in Pakistan(there was one other), we were determined to follow international bestpractices in conducting our business with good governance, totaltransparency and full disclosure - Òthe holy allianceÓ. At times, our businesswas adversely affected due to one or the other competitor’s non-adherence tosuch principles but we were not deterred by such setbacks in the firm beliefthat only such practices would pay in the long run.

Governance,Transparency, DisclosureThe Holy Alliance



Ever since, we have earned thereputation of always 'doing the rightthing', building investor confidence,and resulting in the market putting adistinct premium on our staff for theirexpertise and ethics.

I would like to itemize below suchpractices and concepts, some ofwhich were being followed only by us,while some, in the meantime, havebeen incorporated in the law for all tofollow.

3-Year Change of Auditors

Right from the beginning,according to our self-imposed rule,the Auditors of ourselves (AMC), aswell as each of the Funds beingmanaged by us, were changedevery three years. This has beenmade mandatory for all by anamendment in the relevant law acouple of years ago. What shouldbe noted is that though the Fundswere launched in the year 2002,preparatory work started two yearsearlier and this change in auditorswas decided upon before 'Enron∆had happened and the world wokeup to this need.

Dissemination ofInformation

We pioneered the practice ofsending to each and every one ofour Unit-holders a Monthly FundManager's Report, giving asynopsis of the activities in theEquity and Money markets and howour Funds fared during thepreceding month. I am happy tosay that this practice was graduallyadopted by others (some, initially,purely copying our format) and hasnow become the market norm.

Furthermore: Statements ofAccount at every activity; NAVs onclient's cell-phone; highlyinformative website giving WeeklyMarket Reviews, Daily PerformanceSheets (comparative performanceof ALL Mutual Funds), Daily FactSheets (performance of ourIncome/Money Market Funds aswell as targeted returns) and muchmore.

Investment Committee

Since inception, decisions for allinvestments, on behalf of the Fundsbeing managed by us, are taken byan Investment Committee insteadof an individual Fund Manager. Thishas now been made mandatory forall by a relevant insertion in thelaw.

Regular and ConsistentNAV Announcements

Due to the importance of this, wehave, since inception, calculatedand published the NAVs of ourFunds on a daily basis. This wasnot being done by others in 2002and has, since, become mandatoryunder law.

Forward Pricing

Since inception, the Unit Prices ofall our Equity Funds are on forwardpricing basis. In 2002, this was notthe case for some of the otherMutual Funds then in existence.Forward Pricing avoids arbitrageagainst the Fund (i.e. one investorbenefiting at the cost of others)and it is now the norm, not only forEquity Funds but for most IncomeFunds also. More recently it hasbeen made mandatory by theRegulator.

Cut-off Timings andTime-stamping

We have always enforced thisconcept stringently, to pre-emptany client taking unfair advantageof the Unit Prices to the detrimentof the other Unit-holders. This notonly became an issue in the US afew years ago but has also beenmade mandatory for all by arelevant directive from SECP.

Employees’ Trading

In order to obviate any conflict ofinterest, our employees, theirspouse(s) or children are notallowed to trade in shares exceptfor shares of our Group companies(our funds did not as a policyinvest in Group companies thoughthe law now allows it). An

employee's trade orders must beplaced through our main Dealerand executed through onedesignated Broker only, so as toensure that there is no frontrunning.

Advertising Policy

We have consciously tried to followinternationally accepted norms forMutual Funds advertising byensuring that our ads are notmisleading in any way, particularlyavoiding to advertise our Funds'returns for short, selective periodsor giving anticipated future returns,etc. This policy is now followed bythe industry association.

Daily Compliance Audit

Since March, 2002, we have aself-imposed daily complianceaudit, by external Auditors, of ourflagship Funds, The scope of theAudit is to determine, on a dailybasis, whether the Funds' businesshas been conducted in accordancewith the law, the Fund's ConstitutiveDocuments and any policydirectives issued by our Board ofDirectors. The compliance auditreport is issued directly to thetrustees of the funds and theauditors are not even allowed todiscuss the draft with our staff. Weget to look at it after it has beenissued.

The practices stated above are onlysome of the ones unique to ourcontributions to The Holy Alliance.We have not included thosepractices of good governance,satisfactory transparency andadequate disclosure that are alreadymandated by law and being followedby all. It is of utmost necessity thatall stakeholders adhere truly, in letterand spirit, to The Holy Alliance forthe common good of the Mutual FundIndustry.

One thing that I can state withconfidence is that it is the ≈holyalliance∆ that has held us in goodstead and helped us retain customerconfidence even during a majorupheaval in the markets.

Disclaimer: The views, opinions and conclusions expressed herein are those of the individual authors. They do not reflect the views ofThe Institute of Chartered Accountants of Pakistan. The Institute does not endorse any views expressed herein.

This paper provides anillustration of therelationships betweenthe components ofgovernance by applyingthe same framework as anearlier PAIB research study, oncase studies of Pakistani listedcompanies. There is no attempt to concludeor pass judgement on either effective or ineffective handling of amanagerial situation by the respective companies on whom case studieswere developed.

The Professional Accountants inBusiness Committee (PAIB) of theInternational Federation ofAccountants Committee (IFAC) wasasked by the IFCA Board in October2002 to explore the emergingconcept of enterprise governance. Aparticular focus of the project was toconsider why corporate governanceoften failed in companies and, moreimportantly, what must be done toensure that things went right.

Introduction

The report of the PAIB project definedenterprise governance as ≈ the set ofresponsibilities and practicesexercised by the board and executivemanagement with the goal of

providing strategic direction,ensuring that objectives are achieved,ascertaining that risks are managedappropriately and the organization»sresources are used responsibly∆.

Enterprise governance constitutes theentire accountability framework of theorganization. There are twodimensions of enterprise governance-conformance and performance, thatneed to be in balance.

Conformance is also called «corporategovernance». It covers issues suchas board structures and roles andexecutive remuneration. It has hadsignificant coverage in recent yearsfollowing the various corporatescandals and there will continue to bedevelopments in this area.

Performance dimension focuses onstrategy and value creation. Thisfocus is on helping the board tomake strategic decisions; understandthe risks and key drivers ofperformance; and indentify its keypoints of decision making.

The conformance aspect hasestablished oversight mechanisms forthe board to use and thesemechanisms are reviewed andreported on annually by the externalauditors. However the performancedimension does not lend itself to aregime of standards and audit.Instead a range of best practice toolsand techniques that can be appliedare required.


CorporateEnterprise:The Interrelationshipsof Governance,Transparency andDisclosure Muntazar Bashir Ahmed FCA




Case studies

In order to test the framework and toexplore what goes right or wrong incompanies the PAIB project chose todevelop a number of internationalshort case studies. Each case studywas based on published sources andfocused on corporate governancepractices and strategic issues suchas process of strategy developmentand resulting choice of strategy.

Principal findings

There were four key corporategovernance issues that underpinnedboth success and failure. Thesewere:

1. Culture and tone at the top 2. The chief executive3. The board of directors4. Internal controls

Similarly there were four key strategicissues underlying success and failure

1. Choice and clarity of strategy2. Strategy execution3. Ability to respond to fast

market changes4. Ability to undertake success

ful mergers and acquisitions

Case studies of companiesin Pakistan

The attached tables show theoutcome of the analysis using thePAIB framework, when applied to thethree case studies relating tocorporate governance that have beenwritten on Pakistani companies bythe author. The case studies havebeen refereed by at least twoprofessors of the Richard IveyBusiness School, The University ofWestern Ontario and are published byIvey Publications who have the solecopyright. These cases can beobtained from Ivey Publishing Canadaand are based on publishedmaterials on the following companies:

1. Crescent Standard Investment Bank Limited- Governance failure (CSIBL)

2. Callmate Telips (A) √ Choice of accounting policy(CTTL)

3. Callmate Telips (B) √ Orix

Investment Bank Pakistan Limited √ Callmate Risk Uncovered (OIBPL)

The tables attached contain theanalysis in a summarized form of thefindings in the three cases within theframework of Enterprise Governance.The various aspects of each case arespecific to the circumstances butthey all fit the model very well.

What went wrong

This overriding question is addressedbelow by examining the regimen ofgovernance, transparency anddisclosure in each case. The Table 1shows a number of factors and theirrelevance to governance of thecompany. The same set of factors isused to in Table 2 to see the affectunder a corporate governancestrategic framework of decisions.There was interesting commonality inthe factors that contributed to thefate of each of the companies.

Transparency

There is a saying is that≈Transparency is assurance∆

The saying perhaps reflects thecentral point of transparency, whetherit is related to the transparency offinancial statements or thetransparency of business operations.Transparency does not just deal withthe publication of numbers, facts andfigures -- indeed, all of these thingscan be used to obfuscate, unlessthey are accompanied by genuinetransparency. In other wordstransparency is the ability to conductbusiness in a clear and accountableway, especially associated with thehuman part of the business.Transparency is one of those thingsthat Quality Assurance programs tryto engender, but so manycorporations completely miss themark, because they do notunderstand the fundamental goal.

When we apply the above definition,then the conditions prevailing inCSIBL were clearly to obfuscate: theregulators investigation reportmentioned that there were a numberof different sets of accountingrecords, kept at different locations

and that numerous transactionsviolated various laws. The Chairmanof the Board of directors in astatement to the newspaper had saidthat the Board was unaware of all theviolations and the misrepresentationthat had been unearthed by theinvestigators. The fact that the Boardwas kept in the dark by themanagement does not absolve thedirectors of their responsibility butreflects on their inability to havetransparent records within theorganization in order to protect notonly the interests of shareholders butalso that of the creditors, especially ina financial institution.

In the case of CTTL the board wasextremely aggressive not only inmanaging the business but seemedalways to be keeping a close watchof the company share price. Thecompany was a hugely profitablecompany in an expandingtelecommunications market but yet itfailed to develop as the ordinaryshare holder would expect from aseemingly successful company. But itwas not transparent in its dealingswith the regulators nor with itsauditors and at one stage its sharetrading was suspended.

Governance

The concept of governance is asimple one, defined in the 1999OECD Principles of CorporateGovernance as: 'the system by whichbusiness corporations are directedand controlled.» The «holy trinity» ofgood corporate governance has longbeen seen as:

1. shareholder rights,2. transparency and3. Board accountability.

While corporate governance is overtlyconcerned with board structure,executive compensation andshareholder reporting, the underlyingassumption is that it is the board thatis responsible for managing thebusiness and controlling the risks.

The OECD principles of corporategovernance state that the governanceframework should promotetransparent and efficient markets,beconsistent with the rule of law andclearly articulate the division of



responsibility among differentregulators.

As we can see that the three words»governance, transparency anddisclosure are intertwined and eachone of them has to be discussedtogether with the others.

Each of the three companies had acode of corporate governance asrequired by the regulations and thecompliance with the code had beenreviewed and an opinion given by thestatutory auditors. Yet in the case ofCTTL the control of the directors overthe majority of voting shareholdersmade it simple to call anextraordinary meeting and remove theaudit firm they did not agree with. Intwo cases in which the firmscontinued to function the opinions ofthe auditors as to the compliance withthe code of corporate governancewere clean. Yet in one case thedirectors were found guilty of dealingand manipulating their companyshare price and in the other case aserious weakness in risk managementcontrols had eroded the companyequity that it had to seek new capitalor close down.

Disclosure

There are various meanings but themost relevant is that disclosure is thefundamental principle of accountingunder which all material facts (whosenon-disclosure may render a financialstatement misleading) must bedisclosed. The full disclosureprinciple states that any and allinformation that affects the fullunderstanding of a company'sfinancial statements must be includedwith the financial statements. Someitems may not affect the ledgeraccounts directly. These would beincluded in the form ofaccompanying notes. Examples ofsuch items are outstanding lawsuits,tax disputes, and company takeoverswhile in some cases the companymay have to opt for self disclosure inan effort to be transparent. Self-disclosure is not simply providinginformation to another person.Instead, scholars define self-disclosure as sharing information withothers that they would not normallyknow or discover. Self-disclosureinvolves risk and vulnerability on thepart of the person sharing theinformation.

Annual reports of listed companies byand large follow the regulations so itis not that compliance is missing butthat the selection of informationomitted is often serious i.e. there islack of self disclosure. As an examplein one case study the companydelayed making public a huge loss bysix months and even after all thetroubles that befell that company theboard of directors remainedunchanged. The defaulting customerof OIBPL had almost its entire boardof directors subject to an arrestwarrant after being convicted by theHigh Court of manipulating CTTLshare price. This company was verypopular among traders on the stockmarket and was a widely publicizedcase but the auditors also did notseem to notice what for them shouldhave been a material post balancesheet event, their report was clean. Inhindsight these appear to fall into lackof disclosure. My view is that, as thethree factors being examined arelinked, perhaps if one is violated thenall three will necessarily be violated.This is borne out by the brief reviewsof the three company case studies.

LLeeggeenndd::X this issue had minor significance in the case studyX X this had moderate significance X X X the issue was of major significance

TTaabblleess ssuummmmaarriizziinngg tthhee rreessuullttss ooff tthhee tthhrreeee ccaasseess::

ParametersIdentified

CRESCENT STANDARD INVESTMENT BANK LIMITEDCALLMATE TELIPS TELECOM LIMITEDORIX INVESTMENT BANK PAKISTAN LIMITED

Table 1 What went wrong - Corporate Governance Issues Ethics / Culture

at the Top

XXXXXX

CEO

XXXXXX

X

Board ofDirectors

XXXXXXX

Internal Control /Compliance / Risk

Management

XX

XXX

AggressiveEarnings

Managements

-XXXXX

EXHIBIT

ParametersIdentified

Table 2 What went wrong - Business Governance - Strategic Factors Choice / Clairity

of Strategy

XXXXXX

StrategyExecution

XXX

XXX

MarketConditions

-XXXXX

AbruptChanges

-XXX

X

Mergersand

Acquisitions

XXX-X

CRESCENT STANDARD INVESTMENT BANK LIMITEDCALLMATE TELIPS TELECOM LIMITEDORIX INVESTMENT BANK PAKISTAN LIMITED

Disclaimer: The views, opinions and conclusions expressed herein are those of the individual authors. They do not reflect the views ofThe Institute of Chartered Accountants of Pakistan. The Institute does not endorse any views expressed herein.


National FinanceCommission (NFC)AwardNFC - DISCUSSION &DIALOGUE

w National Finance Commission[NFC] a constitutional body,under Article 160 of theConstitution, inter alia advises thePresident of Pakistan on thematter of ''ddiissttrriibbuuttiioonn'' of taxrevenues between the Federationand the Provinces and amongstthe Provinces.

w That distribution formula istermed as the National FinanceCommission (NFC) Award.

w This is a primary economic issuewhich has been politicized to alarge extent. This confusion andlack of consensus has seriouslyeffected the growth and correctpolicy framework for thecollection of tax revenues.

TWO SIDES OF THEPICTURE

Revenue Collection andDistribution

w In principle, NFC is restricted todistribution of revenue. However,in order to understand the issueproperly specially in Pakistan'scontext, where there is a debateon the manner of collection ofrevenues, the determination ofthe body [Federation or theProvince] that should collect taxhas direct bearing on thedistribution.

w In all constitutions there is alwaysa division for the revenues to be

collected by the Federal or theProvincial or local governmentsas the case may be. In ourConstitution there is transition aswell as confusion on this matter.This relates to the right to tax VAT[Sales Tax and Excise Duty]. Theconcurrent list that was supposedto be amended after 10 years ofthe Constitution still remains thesame. The issue is to understandthe matter in a pragmatic andpractical sense.

Revenue

w The issue with regard to revenuesis the fundamental question ofdevolution of sales tax on goodsto Federation [as conceivedoriginally by the Constitution] ortransferring the sales tax onservices to the Federation also.These are two exactly oppositeapproaches. A debate andpractical discussion is required.

w Generally on account of this

reason there is no VAT in thosecountries which operate asFederations like the USA. VATessentially requires a central tax.Even India is facing seriousproblems on this account. We arepractically better of.

CAN WE DISTURBTHE PRESENT TAXCOLLECTION SYSTEM?

w Whether rightly or wrongly wehave developed a sales taxsystem totally based on thesystem that can only work wherethe tax is a Federal tax. It is amajor revenue earner.

w Notwithstanding the capacities ofthe Provincial governments, isthere any possibility of a vibrantVAT on provincial basis?

w This primary question is a verycrucial point and it becomes allthe more relevant when servicesare yet to be brought in the net.

NFC IS NOT TABOO

w In the past, primary financialaspects have beenovershadowed by politicization.

w Very few Pakistanis know the realsubject and the underlyingissues.

w Even in academic circles, it istaken to be taboo and isconsidered to be an issue thatcan not be resolved amicably.The reality is otherwise.

S. M. Shabbar Zaidi FCA

REVENUE

TOTAL COLLECTION

MMaajjoorr CCoolllleeccttiioonn SSoouurrcceess

Income Tax on IncomeSales Tax on GoodsFederal Excise DutyCustoms


DISTRIBUTION

w Out of total revenue only 50.50per cent is 'Net Divisible Pool'. The balance 49.50 per cent is'Non Divisible'.

w Direct transfers are specificcollections and distributions tospecific Provinces, e.g. royaltyon gas and crude oil.

w Remaining amount is beingdistributed in the Ratio ofPopulation as per latest census.

MAIN ISSUES- DISTRIBUTION SIDE

Size of Non-Divisible Pool -Federation versusProvinces

Criterion for Distribution ofDivisible Pool- Population

w The primary issue with NFC, nowis determination of 'Divisible Pool'and its restriction to 50 percent oftotal taxes collected.

w In earlier periods such 'DivisiblePool' was up to 80 per cent.

w In order to understand it fully, wewould have to understand theissue of utilization of funds by therespective governments. IfFederation is to restrict itself todefense and foreign affairs thenthere are serious issues withregard to 50:50 ratio.

NON - DIVISIBLE SUM

Size and Utilization

w So, our basic issue is todetermine distributionmechanism rather than disturbingthe current collection system. Inother words, even in theforthcoming future bulk ofrevenues would be collectedunder the Federal Taxes.

w This also leads to the issue of'Encroachment' whereFederation, in addition to itsexisting constitutional rights (likesales tax on goods) taxes forwhat is actually taxable byProvinces. This at times is not inline with the ConstitutionalProvisions where the Federationhas the right to tax consumptiontax on goods only. The past caseis 'Octroi' and the present case is'Sales Tax on services' and 'CVTon immovable properties'.

w The second question is that such'Encroachment', if good for thecountry, should be curtailed ornot. The other issue is capacityand capability of the ProvincialGovernment.

%Total Revenues of the FederalGovernment 100.00Less: Non-divisible Pool 49.50

Divisible Pool 50.50

DISTRIBUTIONThe distribution system works as under:

DDiirreecctt TTrraannssffeerrss

w Excise Royalty on Gas and Crude Oil

w Duty and Gas Development Surcharge

w Net Hydal Profit

Subvention Allocation -Grant-in-aid

Balance allocation on the basis ofpopulation [say 45]


DEVOLUTION

Utilization

w On the distribution side, at the moment, the system istilted towards Centralism and not Federalism.

w If 50 per cent of tax collection is retained by theFederation then this raises the issues of:

l Utilization and the priorities of the Federal Government;

l Size of the Federation; and l Financial Dependence of the Provinces.

w We are in a strange 'trap' where there is a CentralGovernment like UK with a Federation like USA. Thisunique model needs to be tailored not destroyed. Wecan tailor it.

w The first answer is to study the fixation of 50 per centCAP for the divisible pool.

w In the past, and even at present, in certain mannerlike children (Provinces) the parent (Federation)provides incentive for collection by the Provinces byway of matching grants. The concept is clear,however, there is a need to convince the Provinces togenerate their own revenues.

w In this aspect we are in another trap. If the Provinces'share is increased and the divisible pool is extendedthen so much money is available with the Provincesthat they do not have incentive to collect more. Wehave to look for the way that Provinces are incentivewise to collect more. At the moment, their resourcesare meager and their argument for stagnation (thoughnot correct) is encroachments, etc. There is a need fora technical, not political, solution for the trap.Matching grant is a good idea.

w Provincial resources generation can only be achievedif it works in coordination with the Federal system.Provincial and Federal Tax Systems have to be'complementary' as both are working on same peopleand same assets.

CRITERION FOR DISTRIBUTION BETWEEN THE PROVINCES

Balanced Distribution Criterion

w At present the sole criterion is population. This doesnot exist anywhere in the world.

w There are arguments, for and against, that the solecriterion of 'population', as per an old census, shouldnot be used for allocating the 'divisible pool' betweenthe provinces.

w The criteria other than population that can be

incorporated are:

l Place of Collectionl Area of Provincel Level of Development etc.

RESOURCES GENERATION

- Local Level

w In Pakistan, one of the main features leading to abuseof taxation system is lack of apparent utilization. Thesolution lies in 'Devolution' in the real sense. Thisleads us to the question of:

w Sense of ownership can only arise if local revenuegeneration is improved. This is a technical andacademic, not a political issue. This does not meanthat generation at Federal level be disturbed.

WAY FORWARD AND SUGGESTIONS

w Independent National Finance Commission includingprofessionals like in India;

w Cut down in non-divisible pool;

w Review of the functions of the Federation;

w Compulsory review after every five years;

w Establishment of Provincial Boards of Revenue;

w Representation of Provincial Boards of Revenue in thePolicy Board of Federal Board of Revenue; and

w Distribution between provinces to be on weightedaverage taking into account:

l Populationl Place of collectionl Area of the provincel Level of development

w Federal 97.5%w Provincial 2.5%w Local almost 0%

100%

%% ooff TToottaall CCoolllleeccttiioonn


Fundamental Analysis

Being professional accountants, mostof us would find nothing new inInvestment Analysis. When some oneasks us our advice on themethodology to analyze a particularmarket based investment (e.g. somelisted company) we respond asfollows:

First of all we will analyze the generaleconomic conditions;

secondly, we will evaluate the specificindustry environment in which the

intended company operates; and

finally we will assess the companyitself with particular emphasis on thefinancial health and projections.

Fairly straightforward. This is what iscommonly referred to as FundamentalAnalysis.

Fundamental analysis looks at theunderlying (or intrinsic) value of acompany and compares it to thecurrent market price. If the intrinsicvalue is greater then the price canreasonably be expected to increaseand vice versa.

Technical Analysis

Technical analysis is a method ofevaluating securities, by analyzinghistoric prices and volume trends(which are plotted on charts).Technical analysts are not concernedwith the security's intrinsic value;instead they look for the market'sresponse to the forces of supply anddemand.

The Rationale behindTechnical Analysis

Technical approach to investmentanalysis is based on the followingthree premises:

(i) Market Discounts Everything

Based on this premise any information- be it economical, political,psychological or otherwise - that caninfluence the price is already reflectedin the price. Accordingly it follows thatthe study of price action is all that isrelevant. The technician sees the pricemovement as a result of some (knownand/or unknown) changes infundamentals. In a way he is indirectlystudying the fundamentals. However,he does not concern himself directlywith the fundamentals since they arealready reflected in the price andknowing about the specificfundamentals is an unnecessary stepin the forecasting process.

M. Saood Hashim ACA

InvestmentAnalysis ofthe FinancialMarkets A New Dimension

Traditionally investmentanalysis of the financialmarkets has been focusedaround fundamentalanalysis. To many amongus, fundamental andinvestment analysis are twonames for the same thing.Though in the developedworld, in addition tofundamental analysis,technical analysis has takenroots as an alternativemethod of analysis, it is stillin its infancy in Pakistan.Although my focus istowards technical analysis, itwould be convenient to startwith a refresher onfundamental approach.


Figure 1 - Daily KSE-100 index bar chart showing the index values and volume. The chart perfectlydemonstrates that the market moves in trends. From November 2004 to March 2005 you can see a verystrong up trend, and from March 2005 to May 2005 a visible down trend.

(ii) Prices Move in Trends

The sole purpose of charting is toidentify trends in the early stages oftheir development and then tradethose trends. Without the validity ofthis assumption, a substantial part oftechnical analysis would becomeworthless.

(iii) History Repeats Itself

Much of the study of market actionhas to do with the study of humanpsychology. Chart patterns (refer tothe addendum), for example, reflectcertain pictures that appear oncharts. They reveal the bullish orbearish psychology of the market.They are based on the study ofhuman psychology, which tends toremain unchanged and accordingly itis safe to expect that the historicalresults will be repeated.

Technical Analysis Tools

Justice can not be done if I try tocover the discussions regarding themany technical analysis tools in use.Complete books have been writtenand can be written on just one ofsuch tools. However, for the benefit ofthe reader I have briefly touchedupon some of the basic tools oftechnical analysis in the addendum.

Fundamental versusTechnical Analysis

While technical analysis focuses onmarket action, fundamental analysisexamines all the relevant factorsaffecting the price of the security.

Although both these approachesattempt to resolve the same problemof determining the direction the price

is likely to move in, they approach theproblem from different angles. Thefundamental analyst studies thecause of market movement, while thetechnical analyst studies the effect.The technical analyst believes that theeffect is all that is to be studied andthe reasons or the causes areunnecessary. However, thefundamental analyst always has toknow why.

The Balanced Approach

Often fundamental analysis sayssomething which is 180 degrees offthe true trend of the market.Frequently we encounter securitiesheading south when these analysesforecast a northward direction and atother times we come acrosssecurities rising when these analysespredict a collapse.


The answer to this lies in timing themarket. To be successful in themarket a high percentage of the time,you must know what direction thegeneral market and the intendedsecurity are heading and then go inthat direction.

In a trending market, generally thefundamental and technicalapproaches are confirming eachother. It is at the beginning ofimportant market moves that they areusually in conflict since thefundamentals do not seem to explainthe price movement. Usually theycome back into sync at some pointlater.

One explanation for this apparentdiscrepancy is explained by technicalanalysts who view that market priceleads the fundamentals orconventional wisdom of the moment.

Technical analysts believe thatfundamental information generallyavailable is already impounded in theprice and the prices are now reactingto the generally unknownfundamentals. See figure 2. (Also seefigure 4 in the addendum).

If investment decisions were solelybased on fundamental analysis, youcould frequently encounter the 180degrees problem. Adopting technicalanalysis on the other hand will enableyou to pick much of the move earlyon. Smart investors (includinginstitutions) will be taking positions insecurities (due to knowledge of somegenerally unknown fundamental)when the general public is closingtheir positions. This move by thesmart investors could be picked upquite early by employing technicalanalysis methods.

Some enthusiastic technical analystsgo to the extent of labelingfundamental analysis as nothing butopinions (often based on personalbias and emotions) on futureexpected values which may differfrom one analyst to another. Thoughthis may be true to an extent, it wouldbe too harsh to completely discardthe conventional wisdom offundamental analysis. Fundamentalanalysis has stood the test of timeand its acceptance in the financialcircles speaks for itself.

Through fundamental analysis we canform an opinion on the intrinsic valueof a security and if we figure out thatits market price is significantly belowits intrinsic value we can enlist it as apotential candidate for investment.Technical analysis can then beemployed to find the right time tocommit money to this candidate.

Figure 2 - Weekly KSE-100 index bar chart showing index values and volume. At the recent index highof over 15,500, all the fundamentals were pointing towards a big bull run. However, it actually ended ina major collapse. After the collapse, fundamental news poured which confirmed the bearish spell.However, one technical indicator was pointing towards an imminent danger. The weekly index valueswere rising, but the weekly volumes were drying up suggesting that the force to drive the marketupwards was losing strength. (See figure 4 also).


Employing fundamental analysis inaddition to technical analysis givesthe added advantage of having anexit target price (the intrinsic value)and having an idea of the potentialreturn on the investment. This returncan then be compared with the riskinvolved and if the risk-return balanceis tilted towards the return side of theequation, funds can be committedsubject to the timing affirmation fromthe technical analysis.

Conclusion

It would be enough to conclude thattechnical and fundamental analysesare complimentary wherefundamental analysis is used to selectwwhhaatt to buy and technical analysis isused to determine wwhheenn to buy.

Addendum to InvestmentAnalysis of the FinancialMarkets - A New Dimension

Charts

Technical analysis is almost entirelybased on the analysis of price andvolume. The price and volume areplotted on various types of chartsincluding line, bar, candlestick chartsand many more.

The bar chart plots the opening, high,low and the closing prices for the day(or week, month, hour, minute etc.).Each bar on the chart is plotted in thefollowing manner:

Volume is plotted as a histogram atthe bottom of the chart. An exampleof a bar chart with a volumehistogram can be viewed in Figure 1and Figure 2.

Patterns

Based on the premise that historyrepeats itself, certain patterns havebeen seen to appear frequently oncharts and after their appearancethey end up most likely in a similarfashion as they have been endinghistorically. Some of the patternsinclude double top, head andshoulders top, double bottom, headand shoulder bottom and many more.

Head and shoulders top is a chartformation that rises to a peak andthen declines, then again rises abovethe former peak and again declines,and then once again rises but doesnot cross above the second peak andagain declines. The first and thirdpeaks are shoulders, and the secondpeak forms the head. The low madein each case becomes the base, alsoreferred to as the neck line. When theneck line is violated the third time, thispattern is said to be complete andsignals the start of a bearish move.

Figure 3 - Example of a head andshoulders top

Indicators and MovingAverages

An indicator is a mathematicalcalculation that can be applied to asecurity's price and/or volume fields.The result is a value that is used toanticipate future changes in prices.There are countless indicators beingused currently. One such indicator isa moving average.

A "simple" moving average iscalculated by adding the security'sprices for the most recent "n" time

periods and then dividing by "n." Forexample, adding the closing prices ofa security for most recent 20 daysand then dividing by 20. The result isthe security's average price over thelast 20 days. This calculation is donefor each period in the chart and thenplotted on the same chart as theprice. A simple technical tradingsystem would be to buy when thesecurity's price rises above its movingaverage and sell when the price fallsbelow its moving average.

Other famous indicators are RelativeStrength Index and Moving AverageConvergence Divergence.

Support and Resistance

Support levels indicate the pricewhere the majority of investors believethat prices will move higher and forthat reason jump in to buy, andresistance levels indicate the price atwhich a majority of investors feelprices will move lower and hencerush to sell,

It is quite possible thatthese support andresistance levels arebroken. However, quitefrequently it is seen that arising security halts at itsresistance level afterwhich it may or may notmove on to a higherlevel. Similarly a fallingsecurity halts at itssupport level and thenmay or may not movedownwards.

There are variousmethods for arriving atpotential support andresistance levels. One ofthe best ways is toexpect support andresistance at previouslows and highs.

M. Saood Hashim is a member of the Institute and has been closely following market activity at the KarachiStock Exchange since 2000. His main focus has been towards technical analysis.


Figure 4 -KSE-100 index bar chart showing daily index values. Notice how effective the 20 days moving average has beenin identifying entry and exit points. Also observe the accurate prediction of the May 2008 collapse (See figure 2 also)

Figure 5 - Azgard Nine Limited (ANL) bar chart showing the daily prices. Notice how effective is thesupport.near the 20-21 level (the previous low).

Figure 6 - Dawood Lawrencepur Limited (DLL) bar chart showing the weekly prices. Once again notice howeffective is the resistance near the 100-105 level (the previous high). Also notice that at the end of 2007, theprice did stop for a while before breaking past the 100 levels.


IFRS Versus US GAAP:Key Differences

IFRS is a comprehensive, globallyaccepted set of accounting standardsusing a principles-based approachwith a greater emphasis oninterpretation and application of thoseprinciples, aiming at best reflectingthe financial reality of transactions. Itis a less extensive compendium ofliterature than US GAAP with limitedindustry guidance and less detailedapplication guidance.

In November 2008, the US Securitiesand Exchange Commission (SEC)released a proposed roadmapoutlining milestones that, if achievedby 2011, could lead to the mandatorytransition to International FinancialReporting Standards (IFRS) starting infiscal years ending on or afterDecember 31, 2014. It also outlinesadditional criteria that would allowcertain other issuers to elect to useIFRS as early as 2009. The roadmapfollows previous action by the SEC inDecember 2007, when they amendedrules to allow foreign private issuersto file financial statements under IFRSwithout reconciliation to United StatesGenerally Accepted AccountingPrinciples (US GAAP).

A large number of countries eitherpermit the use of IFRS or require strictreporting under IFRS for their listedcompanies. More than 40 percent ofthe Global Fortune 500 use IFRS.Stock exchanges in the 85 countriesthat require IFRS comprise 35 percentof the global market capitalization,compared to 25 percent of the globalmarket capitalization held by USexchanges.

The European Union (EU) requirement

for member countries to use IFRSbegan in 2005 and several majorcountries have plans to adopt orconverge to IFRS in the near future,including Brazil by 2010 and Canada,India, Japan, and South Korea by2011. A recent survey of over 200finance professionals showed thatgiven a choice, 42 percent wouldconsider adopting IFRS before 2014.

There are over 200 key differencesbetween the two standards IFRS andthe US GAAP. Examples of pervasivedifferences are the lack of 'bright-line'rules under IFRS, such as whenaccounting for leases, and IFRSrevenue recognition guidance beingsignificantly less extensive than USGAAP, which can pose manychallenges as revenue recognition isthe number one financial statementfraud risk.

The time is now for companies, andalso for professionals that serve them,to understand the impact of IFRS.

The Impact of IFRS

The transition to IFRS in the US willhave wide-reaching consequencesfor corporate clients and accountingprofessionals. Continued interactionat various stages of transition,implementation, and subsequentmonitoring will be essential to ensurea successful outcome. This could beparticularly critical given thepervasive impact across companies,including finance and accountingprocesses, controls, internalreporting, tax structures, treasurymanagement, compensation

arrangements and contracting,among others. Several areas ofprofessional practice may beimpacted as follows:

w Corporate legal professionalsand accountants who servemanagement and boards shouldalready be involved in IFRSdiscussions or plan on doing soin the near future. Strongdocumentation, policies,procedures, and protocols will benecessary to ensure consistentand uniform application of IFRSacross organizations to reducethe risk of litigation based uponthe application of principles, anduse of management's judgmentsand estimates.

w Professionals involved in draftingcontracts with accountingprovisions will need to considerthe impact of IFRS on earn-outs,credit agreements, purchaseagreements, sales contracts, andbonus plans, among others, asthe key drivers of these, such asreported profits, may differ underIFRS compared to US GAAP.

w Contracts drafted to supportspecific accounting results forleases, derivatives, andsecuritizations will have to becarefully analyzed, as therequirements will change.

w Additionally, contracts withexisting US GAAP or local GAAPprovisions, such as debtcovenants or income-sharingarrangements, would need to berecalculated if they included

Mandatory transition to IFRS will translate in to more opportunities forICAP members in the US and other countries as IFRS becomes theprofession’s common language

Syed Athar Hussain Zaidi FCA

and Saima Batool


profit before interest, taxes,depreciation and amortization orother earnings-based calculation.

w Moreover, volatility of earnings asa result of greater fair valuereporting under IFRS couldtrigger ≈material adverse change∆provisions in contracts.

w Finally, contracts with ≈frozenGAAP∆ provisions, wherefinancial statements are requiredto be prepared applying thesame GAAP used at the time theinitial agreement was enteredinto, would need to be assessedif transitioning from oneaccounting method to another inorder to avoid maintaining twosets of books and records.

w Accountants involved in mergersand acquisitions may witness anincrease in cross-bordertransactions or an increasingnumber of deals where IFRS isthe predominant prescribed

accounting method. In addition,the structure of businesstransactions may be impacted bythe difference in classification ofdebt versus equity under IFRS.

w White-collar defences andcorporate investigation and anti-fraud professionals may see ashift in cases to IFRS-basedregulatory proceedings ordisputes. The level ofdocumentation to supportmanagement's judgments andestimates employed to supporttheir reasoning may be key inthese cases.

w Accountants and malpracticeprofessionals will need to preparethemselves for the change in theway audits are performed underIFRS and the requisite newauditing methodologies andprocesses. Tax lawyers andaccountants will need to workwith their clients to strategize andreorganize tax structures that

may be significantly impacted byIFRS.

w It should, however, be noted thatIFRS requires a much greaterexercise of judgment, supportedby contemporaneous analysisand documentation than USGAAP. IFRS totals approximately2,330 pages. If you printed outboth sets of standards - the IFRSand the US GAAP, the IFRS stackwould rise to just above yourankles while the US GAAP stackwould be several feet over yourhead. Having reported the latestfacts both about IFRS and USGAAP, we feel a challenge liesbefore ICAP to help its memberstap in to more opportunities byseeking full recognition of theirqualification in the west,particularly in the United Statesof America, as the US GAAPwould remain of academicsignificance only.

Syed Athar Hussain Zaidi, FCA currently heads finance at the General Secretariat of the Parliamentary Union of the OICMember States in Iran.

Saima Batool is a staff member at AGN Azmoudekaran, Certified Public Accountants in Iran. She is an Educator Memberof the Association of Certified Fraud Examiners USA.


MoreiTax RevenueAbdul Wahid FCA

Government wants more revenue tostrengthen its defense, law and order,health, education, developmentprojects and to meet the rising cost ofliving. Only very few tax payers arewholeheartedly tax payers. Every taxevader has a different way, trick oftrade and scheme of avoiding tax. Nostrict formula can be framed out. Itrequires experience, common sense,familiarity with tax evasion, honesty tothe government and loyalty to thecountry, which is very rare.

In the following lines, we shall take upthe proposals for increasinggovernment revenue. Every subjectdiscussed here is a complete topic in itself, sufficient for seminars for days,

Budget is annual regular item for thefirst week of June every year.Decades ago when the governmentfinancial year was closed in March,the budget used to be announced inthe end of February or early March.Before the budget, stocks ofproductions are stored and held bythe dealers, in expectation of rise in

price, due to more tax, sales tax,custom duty, excise

duty, etc.


books, arguments, discussions andstill no consensus. No doubt, everytax payer has a question as to whathe is getting for the payment ofincome tax, when they also seeseveral rich men getting lots ofincome, free of tax or with little tax,like agriculture landlords.

1. WWiitthhhhoollddiinngg ttaaxx oonn tteelleepphhoonnee::Up to last two years withholdingtax on electricity was adjustableand refundable but last year itwas restricted to only few.Similarly, if withholding tax ontelephone is also made nonadjustable / refundable this year,sufficient more revenue can alsobe expected.

2. Withholding tax is almost acompulsory deduction at differentrates for various items. Inpractice it is not strictly followed.Considering it to be a burden onthe seller, the rates are increasedor withholding tax is notdeducted. Provision in the lawshould be made that if awithholding tax is not deducted, itshall be payable by the companyor payer responsible forenforcing WHT.

3. 66%% oonn pprrooffeessssiioonnaall sseerrvviicceess::Only two years ago, it wasintroduced. Prior to it all theprofessionals were paying taxaccording to their incomes. Theplea for fixing 6% was thatincome from professionals ismuch more relative to the taxcollection on it. No doubt, theargument appears quiteconvincing but no oneconsidered the hardships toprofessionals with low incomesand extra savings to theprofessionals with big incomesand lesser income tax, now @ 6%only. Instead of introducingcompulsory 6% tax onprofessional incomes, FederalBoard of Revenue (FBR) shouldhave taken up detailed inquiry,investigation and audit into thecases of lower- or non-paymentof tax. At the most, this 6% limitshould have been mademinimum tax rate without anyupper limit.

4. Adjustable withholding tax ondomestic air tickets and airconditioned railway sleepers mayalso be considered.

5. SSaallaarriieedd AAsssseesssseeee::They are the largest group ofassessees. Salaried persons areclaimed and so considered themost pitiable taxpayers. It is saidthat they have no chance ofevading taxes. They are givenlenient treatment, avoidancesand relief in many fields. Actuallyspeaking, drafting of the FinanceOrdinance, Budget, Amendmentsand issue of SROs are allhandled at all the stages by theassesses of this category.Following aspects would bring upsome short comings:-

(a) Not all, but few especially good government servants have part time jobs, generally as an employee but sometimes as consultants or advisors. Theyare classified here as good because to meet their expenses, they prefer to work extra. There is no way to get both their salaries brought together for tax calculation.

(b) In a salary circle, if there arecases in many thousands it ishumanly impossible for anofficer and his three or fourstaff members to keep theirrecord intact to say nothingof reading and checkingthese in about 278 days ofthe year.

(c) If not all, at least one third ofthe salaried assesses wouldbe having other sources ofincome such as part timejobs, bank profit, dividend,property income, agriculturalincome, share in otherbusiness etc. For the last fewyears, salary certificate fromthe employer is considered tobe sufficient as return. Thenew salary income tax returnform, if modified to includeother sources of income cancover this shortcoming.

(d) For NGOs and otherorganizations supported andfinanced from foreigncountries, a little vigilance willshow that most of the foreignworkers are working free anddo not get any remuneration

here. They live here alone oreven with families. They payfor food, clothing and rent.Actually, most of them arepaid in their home countriesout of which they take outtheir expenditure. These areshown as honorary workers,which is not the fact. Theymay not be taxed in theirhome country or financingcountry as under the doubletaxation agreements they areworking here.

(e) Bank statement is not acompulsory part of anyone'sreturn but if once only it ismade compulsory for thesalaried persons then lots ofother financial activities shallcome to light.

6. MMoorree TTaaxx PPaayyeerrss

SSuuggggeessttiioonnss::

(a) On electricity and telephonebills there is space for CNICand NTN but generally theseare not filled in correctly. Itshould be made mandatoryfor these companies to fill upNTN numbers.

(b) Rates of all sorts of incomeshould be same includingproperty income, prizes onbonds, dividend, bank profitsetc.

(c) Differential treatment forlottery, import, export,farming etc. should be atsame rate with similarexemption.

(d) For schools, colleges andeducational institutionscharging high fees, say, morethan Rs.1,000 per child permonth, must also provideCNIC/NTN of the father orguardian.

(e) Similar, to electricity,telephone, WHT be chargedon gas bills above an amountthat may be fixed.


Interest Rate Swaps

Introduction

An interest rate swap is a contractbetween two counterparties toexchange periodically interestpayments (fixed for floating andfloating for fixed). The payments arein the same currency (other than incross currency interest rate swaps inwhich payments in differentcurrencies are exchanged) and arecalculated on a notional principalamount (this amount is called notionalas this is used only for thecomputation of interest payments andis not exchanged betweencounterparties). As per the contract,on each payment date (also referredto as reset date/settlement date)during the swap period, the cashpayments based on difference infixed and floating rates areexchanged by the parties from oneanother. The party incurring anegative interest rate differential forthat leg pays the other counterparty

(this is called net cashsettlement/netting).

Example

On 30 June 2007, Party A (≈A∆) takesRs. 50 million long term loan facilityfrom XYZ Bank (≈XYZ∆) at 6 monthsKIBOR (Karachi Inter-Bank OfferRate) plus 2% spread with thematurity of 4 years. A is concernedabout rising trend of KIBOR and itsimultaneously initiated an IRS on 30June 2007 with ABC Bank (≈theBank∆). As per the terms of the IRS, Aagrees for a period of 4 years to payABC Bank interest at 7% per annum(with semi-annual payments) on Rs.50 million (notional principal) in returnfor receiving interest on Rs. 50 millionat 6 month KIBOR, payments to bemade semi-annually. The first payment would beexchanged on 31 December 2007(i.e. 6 months after 30 June 2007). Awould pay the Bank Rs. 1.75 million,

this is the interest on the Rs. 50million principal for 6 months at 7%per annum, and the Bank would payA interest on Rs. 50 million principalat the 6 month KIBOR rate prevailingon 30 June 2007. Suppose that 6month KIBOR on 30 June 2007 is6.2%, the Bank would pay Rs. 1.55million (Rs. 50m x 6.2% x _). In netsettlement case, A would pay theBank Rs. 0.2 million (Rs. 1.75m - Rs.1.55m).

In total there are 8 exchanges ofpayment on the swap. The fixedpayments to be made by A arealways Rs. 1.75 million. The floatingrate payments on a payment date arecomputed using the 6 month KIBORrate prevailing six months before thepayment date. If KIBOR is greaterthan 7% ABC Bank will pay thedifference between KIBOR and 7% toA, and if KIBOR is less than 7% partyA will pay the difference to ABC Bank.

This article analyzes the peculiarities of one of the most importantderivative products ÒInterest Rate Swaps (IRS)Ó. Effort has been made toanalyze both the structural and valuation intricacies of the product.

Waqas Farooq ACA


Valuation of IRS

After discussing the basic structure ofIRS and its market information bothglobally and in Pakistan we divert ourattention to the more complex areathat is the valuation of IRS.

Below is a summary of the principleswhich are generally adopted in themark to market of IRS. The principles

are based on the internationaltheories and practices which may notbe applicable completely to thePakistani environment where thederivative market is still at the infancystage. The principles mentionedbelow are then aligned to the Pakistanenvironment. The valuation modeldiscussed below is one of the manysynthetic models that can be used tovalue IRS.

The revaluation of an IRS involvescalculating the net present value ofthe future cash flows under the swaparrangement discounted atappropriate rates of interest. IRSinvolves a stream of interest rate cashflow receipts and a separate streamof interest rate cash flow payments.These two streams are generally revalued separately and the results combined to determine the overall

Financial derivative business made itsway to Pakistan in 2003. Before thepromulgation of Financial DerivativesBusiness Regulations (FDBR) in 2004by State Bank of Pakistan (SBP),banks were required to obtainspecific transactional approval fromSBP. Under FDBR banks are allowedto undertake derivative business

provided they meet the eligibilitycriteria as specified in the regulationsand obtain Authorized DerivativesDealer (ADD) or Non Market MakerFinancial Institution (NMI) status fromSBP. FDBR contains the regulatoryframework for derivatives businessand specific requirements forpermissible derivative products.

The permitted types of transactionsinclude G7 Foreign Currency Options,PKR Forward Rate Agreements (FRA)and PKR Interest Rate Swaps (IRS).However, banks/DFIs can undertakeany other type of transaction withSBP's prior approval.

Dec 2008 Sep 2008 June 2008 Mar 2008

IRS 105 109 99 96FX Options 38 80 88 183Cross Currency Swap 146 157 174 172

Forward Rate Agreement 2 7 3 -

Source: State Bank of Pakistan website

Statistics of Financial Derivatives Market in Pakistan:

Notional Amounts Outstanding (In billion of PKR)

Jun 2008 Dec 2007 Jun 2007 Dec 2006 Jun 2006

IRS Contracts 458,304 393,138 347,312 291,582 262,526Total derivative contracts 683,725 595,341 516,407 414,845 370,178

Share of IRS 67% 66% 67% 70% 71%

Source: Bank for International Settlement website

IRS Market

Notional Amounts Outstanding (In billion of US Dollars)

As per the data of the Bank for International Settlements IRS accounts for the largest proportion of the Over theCounter derivatives market.

Reasons for enteringinto IRS

After understanding the basicconcept the question arises as to whyone should enter into IRS. One of theprimary reasons for entering into theswap arrangement is reducinginterest cost (hedging interest rate

position). One way in which interestrate position can be hedged throughIRS is by fixing the interest cost. Aswe have seen in the above exampleParty A has fixed its interest cost at9% p.a (7% fix rate under IRS and 2%spread over KIBOR as specified inthe loan agreement with XYZ Bank).No matter what the KIBOR 6 month

would be A would be paying 9%interest per annum. This will benefit A incase KIBOR increases more than 9%.

Apart from above IRS are also usedfor speculative trading purposes andavailing the opportunity of creditquality arbitrage in the different creditmarkets.


market value of the swap. BBoonnddpprriicciinngg mmeetthhoodd with the derivation ofzzeerroo ccuurrvveess is used commonly torevalue the IRS. This can be acomplex process and there are avariety of practices used.

Under the bond pricing method twolegs of the IRS (i.e. fixed and floatinglegs) are considered as the fixedand floating leg bond issued /purchased according to the positionsheld in the swap transaction. Theparty having long position in thefixed leg and short position in thefloating leg (i.e. receiving fixed ratefrom the counter party) will beassumed to have purchased a fixedrate bond and issued a floating ratebond. The party which is long infloating leg and short in fixed leg (i.e.receiving floating rate from thecounterparty) will be assumed tohave purchased a floating rate bondand issued fixed rate bond. In caseof above example Party A isconsidered to have purchased afloating rate bond from the Bank andissued a fixed rate bond to the Bank.Vice versa is the position of theBank.

Net present value of the IRS is computed as follow:

w The value of the fixed leg iscomputed by discounting thefixed leg cash flows, in the aboveexample Rs. 1.75 million every sixmonths and Rs. 50 millionnotional at maturity, using theappropriate discount rate which iscommonly the rate on zero curveof the relevant maturity.

w There is no need to value thefloating leg on the premise andcommon logic that floating ratebonds (floaters) are alwaystraded at the par value becausethere is no difference in themarket interest rate and couponrate on the floater. Floaters aretraded at above or below parvalue only in following cases:

w Between two reset dateswhere the coupon rate isdetermined and marketinterest rates are changedbetween the reset dates; and

w There is a change in themarket sentiment regardingthe credit spread of theissuer.

The difference between the value offixed and floating leg is the value ofthe swap. It should also be notedthat the notional principle amountsincluded in the fixed and floating legrevaluation offset each other as thenotional principal is deducted in oneleg and added on the other.

Zero coupon bonds are the type ofbond that is issued below par value(i.e. at discount) and redeemed atthe par value on maturity. There is nointermediate coupon payments onthe zero coupon bonds. In case ofPakistan, Treasury Bills issued bySBP are the best example of zero-coupon bonds.

The zero rate is the rate of interestearned on an investment that startstoday and lasts for n number ofyears. All the interest and principal isrealized at the end of n years andthere are no intermediate payments.

Many of the interest rates weobserve directly in the market are notpure zero rates. Consider a 5 yearPakistan Investment Bond (PIB) thatprovides 8 % coupon. The price(yield) on this PIB does not exactlydetermine the 5 year zero ratebecause some of the return on thebond is realized in the form ofcoupons prior to the end of year five.

The question arises as to why usethe zero coupon rate and not themarket yields on the bonds havingvarious maturities? In other words,why there is a need to plot a zerocoupon curve and why we cannotuse the yield curve? There is aconceptual difference between theyield of 5 year PIB makingintermediate coupon payments andthe zero coupon bond of the samematurity. The yield on the five yearPIB represents the IRR (weightedaverage yield commonly termed asyield to maturity) of the instrumentand assumes that all the cash flowsof the bonds during its tenor havethe same level of risk includingreinvestment risk. This is the reasonwhy all the cash flows arediscounted at the same yield to

arrive at the market price. On theother hand zero coupon rates takeinto account the differing level of riskassociated with the cash flows in thedifferent maturity band i.e. itrecognizes that a cash flow in year 1is not worth the same as an equalflow in year 2 solely because of thetime value of money but alsobecause of the relative risk (mostimportant being the reinvestmentrisk) associated with each flow. It isalso to be noted that the zerocoupon method also automaticallyaccounts for the reinvestment risk byusing different discount rates fordifferent maturity bands.

Internationally, zero coupon rates fordifferent maturities are determinedusing following variables / quotedinterest rates:

w Treasury spot rates (quoted yieldson securities issued by thegovernment)

w Interest rate futures

w Swap rates (internationallyquoted by the investment banksto make the swap markets)

In the context of Pakistan onlytreasury rates are available i.e. therates on the treasury bills and PIBsissued by SBP, the yields on thesame represents the marketsentiments on the interest rates inthe economy. So any model for thevaluation of derivatives must derivethe discount rates using yields ontreasury securities.

Complexity arises as to how the zerorates should be computed? Zerorates can be computed from theprices of the instruments traded inthe marketi.e. T-bills and PIBs. Zerocoupon rates upto the maturityperiod of 1 year are directly availablefrom the secondary market in theform of yield on on-the-run treasurybills. For maturity period of morethan one year zero-coupon rates arecomputed using Bootstrap Method. Bootstrapping is a method forconstructing a zero-coupon fixedincome yield curve from the prices ofa set of coupon bearing products byforward substitution. The most


important assumption while using thebootstrapping method is that theprices of the coupon bearinginstruments in the secondary marketare determined using the arbitrage-free valuation model (i.e. each fixedincome security is considered as apackage of zero-coupon bond andaccordingly its price cannot bedetermined using single yield) andnot the traditional model in whichsingle rate is used to discount all thecash flows of the security.Reconstitution and stripping oftreasury securities in a developedmarket like USA ensures thatarbitrage free valuation model isfollowed; to date this practice is notbeing followed in Pakistan. Followingis the general methodology ofbootstrapping:

w Define set of yielding products;these will generally be couponbearing bonds like PIBs.

w Derive discount factors for allterms; these are the IRR of theabove bonds. The IRR / yield arequoted on the Reuters /Bloomberg.

w Bootstrap the zero coupon curvestep-by-step.

In the case of 6 months and 1 yearsecurities where the couponpayments are zero (i.e. they are zero-coupon bonds); there is no need tobootstrap as the IRR on the samerepresents the zero-coupon rate ofthat maturity. In the case of otherbonds which are making semi-annualcoupon payments we need to derivethe zero-coupon rate using thebootstrapping method. Below is thecomputation of zero coupon rate of3.5053% for the bond with 1.5 yearsof maturity:

As the bond is trading at par annualyield is same as the coupon rate.Bond will pay interest of Rs. 1.75every 6 months and principal of Rs.100 will paid at the end of 1.5 years.As we have assumed that the price ofRs. 100 is determined using arbitragefree valuation model following formulawill represent the bond price:

100 = 1.75/(1+3.00/2)0.5 +1.75/(1+3.3/2)1 + (100+1.75)/(1+X)1.5

Solving the above equation we willget the rate of 1.7527% (annualized3.5053%). This is the rate that themarket would apply to a 1.5 year zerocoupon security.The above approach can be followedto derive the zero-coupon rate for

subsequent maturities. It is to benoted that the zero-coupon ratesderived above can only be used tovalue the default free cash flowsbecause they are derived from thesecurities issued by the SBP andthese securities are considered risk-free (i.e. no credit and liquidity risk).This indicates that the rates derivedabove cannot be used directly tovalue the IRS and adjustments needto be made to the above rates forcredit and liquidity risks. There arevarious approaches to make the saidadjustments. The method generallyused in Pakistan is to take thehistorical spread between the yield ongovernment securities (commonlyreferred to as the PKRV rates) andKIBOR.

Now its time to apply the valuationmethodology discussed above to ourexample of Party A and ABC BankIRS. The valuation date is 31December 2007 and there are 7interest payments to be exchanged inthe future.

Mr. Waqas Farooq is an Associatemember of ICAP and currentlyworking with Ernst & Young Bahrain inits Assurance and Advisory BusinessServices (Financial Sector).

MarketPrice

(in Rs.)

100

100

‘100

100

100

100

100

100

Time toMaturity

(in years)

0.5

1

1.5

2

2.5

3

3.5

4

Annualizedyield to

maturity (%)

3.00

3.30

3.50

3.90

4.40

4.70

4.90

5.00

Zero CouponRate(%)

3.00

3.30

3.5053

3.9164

4.4376

4.7520

4.9622

5.0650

Example of Valuation of IRS

The following example sets out the calculations of the ≈zero-coupon∆ discount factors.


Date

30-Jun-08

31-Dec-08

30-Jun-09

31-Dec-09

30-Jun-10

31-Dec-10

30-June-2011

30-June-2011

Period to NextCash flows

(Years)

0.5

1

1.5

2

2.5

3

3.5

3.5

Fixed rateCash flows

1,750,000

1,750,000

1,750,000

1,750,000

1,750,000

1,750,000

1,750,000

50,000,000

Zero CouponRate (%) *

3.00

3.30

3.5053

3.9164

4.4376

4.7520

4.9622

4.9622

DiscountFactor

0.985329

0.968054

0.949634

0.926044

0.897135

0.869988

0.844082

0.844082

Value of Fixed Leg

Value of Floating Leg

**

Value of Swap

53,474,578

50,000,000

3,474,578

Present Value

[A] [B] = A - 31 Dec2007

[C] =(50,000,000*

7%*1/2)

[D]** E] =1/(1+D/100)^B

[F] = C * E

1,724,326

1,694,095

1,661,859

1,620,578

1,569,986

1,522,478

1,477,144

42,204,112

The swap has positive fair value of Rs. 3,474,578 to ABC Bank and negative fair value of the same amountto Party A.

* In the above valuation example zero-coupon rates are not adjusted for credit and liquidity risks.** At any reset date value of the floating leg is always equal to the notional amount.

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Accountants' Role inControlling Corruptionand Fraud Saira Shamsie ACA

The impact of corruption on oursociety cannot be overstated. Itincreases the risks and costs ofbusiness, damages investorconfidence, hampers economicdevelopment, and reduces countrycredit ratings. It brings the integrity ofprofessions and of business into

question. It deprives government andregulators of credibility and weakensthe forces of law and order. In such ascenario, public morale inevitablysuffers and social hardship -particularly in developing andemerging economies - can be theinevitable result.

Corruption anditÕs Impact

Corruption haspervaded allsectors of oursociety. It may bemore prevalent ormore obvious insome countriesthan others. But intoday's businessenvironment, theimplications ofcorruption at alocal level reachfar beyond nationalboundaries.Corruption hasbecome a majorglobal concern.


What is corruption? Bribery, fraud,illegal payments, money laundering,smuggling - all these come to mindas obvious examples. But corruptiondoes not always involve money: it canpresent itself in the guise of specialfavors or influence. In today'scomplex and rapidly changingenvironment, the potential variationsof corruption are as many as there arecriminal minds to devise them. An all-purpose rulebook is inconceivable:the fight against corruption must takethe broadest possible approach if it isto have real impact.

Accountants’ role as whistle blowers

Ultimate responsibility fordiscouraging and preventingcorruption, whether within thebusiness world or in the public sector,rests with management. Byintroducing proper systems ofcorporate governance and "settingthe tone at the top," management cansignificantly reduce the opportunitiesfor malpractice.

But accountants have a key role insociety's efforts to reduce corruption.First, as professionals with a duty toprotect the public interest, they arebound by rigorous codes ofprofessional and personal ethicscalling for the highest levels ofintegrity and objectivity. Second, theirkey strategic positions within anenterprise or organisation - whether inan internal position or as an externalauditor or adviser - mean that theyvery often have access to highlyprivileged and confidentialinformation.

National and international standardsof practice already alert members ofthe accountancy profession, whetheror not in public practice, to thepossibility of fraud or otherirregularities and require them toreport any such findings to internalmanagement. But what should theaccountant do if management fails totake appropriate action to remedy thesituation? In theory, the accountantcould take matters further byreporting the misdeed to externalauthorities. But is it fair to expect theaccountant to expose himself orherself to the potential repercussionsof such action: job insecurity or loss,professional victimisation, personal

danger, threats to family or other thirdparties? Until such time asappropriate legal infrastructures havebeen put in place to protect the"whistle-blower" and to raiseexpectations of responsible action byother professions or sectors ofsociety, is it realistic or reasonable toplace this burden on members of theaccountancy profession?

The way forward

The International Federation ofAccountants (IFAC) urgesaccountancy bodies worldwide tounite with various professions, thebusiness community, governments,regulators and other organisations toeliminate corruption. Further,Accountants are urged to developrelationships with legislative andregulatory authorties, the legalprofession and other groupsinterested in improving the frameworkfor good governance, transparencyand accountability.

The accounting profession's individualrole in curbing corrupt practices isemphasised by exercising'professional skepticism' whenestablishing business relationshipsand in reviewing transactionsbetween related parties. Further effortis required to strengthen auditcommittees role and function in linewith international best practices.The elimination of corruption is anambitious target. Only with a dramaticincrease in public awareness will it bepossible to begin the fight.Accountancy profession both atinstitutional and individual level needs

to play its part in the campaign tocreate a culture in which corruptioncannot survive.

The author is Manager of Directorateof Techinical Services, ICAP

Malaysia is the first Asian country toimplement legislation to protectwhistleblowers. The legislation is aimed atprotecting directors, management andauditors of public listed companies whoreport breaches.

LLooccaall DDeevveellooppmmeennttThe Institute and Federal Board of Revenuehave signed an MOU for development andimplementation of ≈Tax Audit Framework∆ forconduct of tax audit by FBR through CharteredAccountants. This will ensure a fair, transparentand equitable tax administration which willenhance public confidence in the tax systemand deter tax frauds.


Outsourcing ofTax Auditsto Chartered Accountants

History of Tax Audit byChartered Accountant’sFirms

Section 4A of the Income TaxOrdinance, 1979, inserted in 1996provided for outsourcing of audit toprivate agencies. Vide Finance Act1998 private agencies weresubstituted by firms of CharteredAccountants (CAs). Income TaxOrdinance, 2001 contained theconcept of audit through CAs sinceits inception. Sub section (8) ofsection 177 of Income Tax Ordinance2001 and section 32A of Sales TaxAct, 1990 provides for conduct ofaudit by CAs.

Background Facts andCircumstances

Accounting income of companies isaudited annually by CharteredAccountants. Accounting income isadjusted as per the provisions of theIncome Tax Ordinance, 2001 to arriveat taxable income. Relevantinformation is required to arrive at thetaxable income and to verify thecorrectness of the taxable income.Under the current provisions of thetax laws (Income Tax Ordinance,2001, Sales Tax Act, 2000 and ExciseDuty Act 2005), there is a system ofself assessment, that enables the taxpayer to determine his own taxliability. Under this system, there ismajor reliance on the tax payer to fileaccurate and reliable tax return.However, with all the provisions in thetax laws the results are not veryencouraging.

Prevalent Practices in OtherCountries

In India there is a well laid downsystem of tax audit. Section 44AB ofIndian Income tax Act provides forAudit by CAs in certain cases. Incertain developing countries likeTurkey, there is an independent bodycreated by the government thatperforms tax audit.

Reasons to Develop TaxAudit Framework

The Institute of CharteredAccountants of Pakistan (ICAP) andthe Federal Board of Revenue (FBR)

desired that there should be aframework that would result increating a more transparentassessment process and to developand agree upon an objective of auditso that there is no 'disagreement' and'disillusionment' for the results.

Main purpose behind outsourcing oftax audit through CharteredAccountants is to establish an

objective and effective tax auditsystem that will create deterrence tomis-declarations in the tax returnsfiled by the tax payers. Such asystem is expected to contribute indeveloping a culture of compliancewith tax laws over time that will help inimproving the tax collections as wellas to improve the tax to GDP ratio.Tax audit by professionals areconducted to create an environmentof 'deterrence' rather than collectionof revenue in the short run. The realimpact on collection is achievable inthe long run.

The purpose of tax audit is to ensurethat declarations made by the taxpayers are accurate and reliable.

Main objective of the tax audit is tocreate deterrence for under orincorrect declarations of income bythe tax payers

Salient Features of the TaxAudit Framework

a. The tax auditor may beappointed at any time after thefiling of tax returns;

Farheen Mirza

FBR and ICAP have entered into a Memorandum ofUnderstanding (MoU) for development andimplementation of ≈Tax Audit Framework∆ for theconduct of tax audit by FBR through charteredaccountants.

Outsourcing of tax audit to chartered accountants firmsclearly demonstrates the confidence of the Governmentof Pakistan/FBR in ICAP and the CharteredAccountancy (CA) profession.


b. There would be three sets ofdocuments subject to tax auditnamely, the income tax return,monthly sales tax cum federalexcise duty returns andstatement of additionalinformation (collectively referredto as tax statements);

c. The FBR would have the solediscretion for selecting thecompanies and the auditors forconducting tax audit. ICAP wouldprovide all information availablewith it relating to the charteredaccountant firms, at the requestof the FBR;

d. The auditor would issue anengagement letter to the FBRspecifically setting out the nature,scope and timing of the tax auditengagement;

e. Statement of additionalinformation would be preparedand submitted by the tax payerto the tax auditor duly signed bythe Chief Executive Officer andChief Financial Officer of thecompany. In the absence ofeither of them, signed by adirector of the company,supporting the return of incomefiled. Such statement wouldeffectively provide details relatingto the line items in its balancesheet and profit and losscomponents. In view of the variednature of businesses and sectorsof economy, under this framework, separate models ofstatement of additionalinformation have been developedto make these relevant forrespective sectors. Suchstatement of additionalinformation would serve to createa bridge between the accountingincome and the taxable incomeand also between production andsales as reported in accountsand tax returns. The audit ofthese statements would provide areasonable assurance regardingthe fairness of the taxableincome.

f. The auditor would issue tax auditreport and give his opinion on theinformation required to arrive atthe taxable income and sales taxand federal excise duty payable.

The tax audit report would beaddressed to the FBR andinclude a clear expression ofopinion on the fairness of thereturn of income, sales tax cumfederal excise duty returns, andstatement of additionalinformation. The tax audit reportwould explicitly state:

i. whether or not the income taxreturn and sales tax cumfederal excise duty returnsare in agreement with thedetails provided in thestatement of additionalinformation;

ii. whether or not the statementof additional informationcontains information asrequired by the Tax AuditFramework applicable to thetaxpayer; and

iii. whether or not theinformation contained in thestatement of additionalinformation is fairly stated inall material respects.

g. The auditor's responsibility wouldbe to issue a report on the taxstatements based on the resultsof audit procedures performed byhim and using his professionaljudgment. The responsibility offinal assessment of income andtax payable remains with therelevant tax officials of the FBR.

h. The relevant officer of taxdepartment would issue the ordereither accepting or altering thetax return submitted by thetaxpayer, and the tax auditorwould not be responsible for thecontent of the order issuedexcept to the extent of the auditreport issued by him.

i. Selection of audit firm would bedone by FBR without any director indirect involvement of ICAP.To ensure independence of thetax auditor, the statutory auditoror tax advisor of a companywould not be appointed as TaxAuditor of that particularcompany. The decision ofselection of auditor would lie withthe FBR having regard to particularcircumstances of each case.

j. A tax auditor appointed underthis framework would not expressan opinion on the amendmentsemanating from difference ofopinion between the taxdepartment and taxpayer on thetax treatment for any item asdisclosed in the return of income.However, the auditor wouldprovide information relating tofacts of the matter to theCommissioner of Income Tax /Collector of Sales Tax & FederalExcise including a scheduleexplaining the history of the saidmatter in the past year(s).

k. The role of tax auditor wouldstand completed with thesubmission of final tax auditreport. There will be norequirement for presence inperson or furnishing anyinformation during the course ofadjudication / appeal and in anyother subsequent proceeding.

Responsibility of theManagement

Management is responsible for thepreparation and fair presentation ofthese ≈Tax Statements∆ in accordancewith the requirements of Income TaxOrdinance 2001, Sales Tax Act 1990and Federal Excise Act 2005. Thisresponsibility includes: designing,implementing and maintaining internalcontrol relevant to the preparation andfair presentation of tax statements thatare fairly stated, selecting andapplying appropriate accountingpolicies, and making accountingestimates that are reasonable in thecircumstances.

≈Tax Statement∆ will be prepared bythe management from its books andrecords. The accounting principleswill be the same as used in thepreparation of financial statementsand Statement of AdditionalInformation in accordance with therequirements of Income TaxOrdinance 2001, Sales Tax Act 1990and Federal Excise Act 2005.

It is essential to note that it is theprimary responsibility of the taxpayerto prepare the information in suchmanner so that the tax auditor canverify the compliance thereof.


Responsibility of the TaxAuditor

Audit of Tax Statements wouldencompass examination of the returnof income, sales tax cum federalexcise duty returns and statement ofadditional information with theaudited financial statements, booksof account, related records anddocuments by performing such auditprocedures as consideredappropriate under the circumstancesby the tax auditor in accordance withthe Tax Audit Framework.

The auditor would issue report onsuch return of income / sales at theconclusion of the audit to the FBRand include a clear expression ofopinion on the fairness of the returnof income, sales tax cum federalexcise duty returns and statement ofadditional information. Such auditor'sreport may form the basis for theDeputy Commissioner of Income Taxand Deputy Collector of Sales Tax &Federal Excise to frame taxassessment. After receiving thereport of the auditors, respective taxofficials would issue a notice to thetaxpayer and finalize the assessmentin accordance with the laid downprocedure.

In designing the audit procedures,the tax auditor would consider thepossible audit procedures (asconsidered appropriate by theauditor keeping in view therequirements of InternationalStandards on Auditing, hisknowledge of the business of thattaxpayer), together with the specificinstructions, if any, regarding anyareas of examination that needspecial focus, specified by the FBR.

Amendment in Finance Act2009 for Conduct of TaxAudit By CharteredAccountants

In Finance Act 2009, followingamendment has been made insection 176 and 210 of Income TaxOrdinance 2001:

176 (c) The firm of charteredaccountants, as appointedby the Board, to conductaudit under section 177, forany tax year, may with theprior approval of theCommissioner concerned,enter the businesspremises of a taxpayer,selected for audit, to obtainany information, requireproduction of any record,on which the requiredinformation is stored andexamine it within suchpremises; and such firmmay if specificallydelegated by theCommissioner, alsoexercise the powers asprovided in sub-section (4).

210 (1B) The Commissioner maydelegate the powers to afirm of charteredaccountants appointed bythe Board, to conduct theaudit of persons selectedfor audit under section 177.

Signing of MoU forDevelopment andImplementation of Tax AuditFramework

In order to achieve the aboveobjectives, FBR and ICAP haveentered into a Memorandum ofUnderstanding (MoU) fordevelopment and implementation of≈Tax Audit Framework∆ for theconduct of tax audit by FBR throughchartered accountants. Thisframework is aimed at laying downnecessary requirements andproviding guidance to the firms ofChartered Accountants and theofficials of the FBR with regard to thescope of work, the reports to beissued by the tax auditors and otherrelevant matters for effective andefficient conduct of such audits.

The MoU is effective from July 1,2009 and FBR will determine inconsultation with ICAP the date ofimplementation of Tax AuditFramework. The framework at thisstage is for 'Company Cases' only.

Outsourcing of tax audit to charteredaccountants firms clearlydemonstrates the confidence of theGovernment of Pakistan/FBR in ICAPand the Chartered Accountancy (CA)profession. The proposed scheme oftax audit outsourcing through CAswill increase the responsibility as wellas the quantum of work for ourmembers in audit profession. Thus,this is a great opportunity for ouraudit firms and our members inpractice should capture thisopportunity with a great deal ofresponsibility and due care, which isexpected of us in performing suchfunctions. In order to ensure effectiveliaison and necessary qualitycontrols, ICAP is also consideringdeveloping an oversight mechanismto monitor the effectiveimplementation of tax audits carriedout by our members.

ICAP has agreed to assist theGovernment and FBR's endeavors tobuild a strong tax base and cultureof compliance for achievingsustained economic growth andmacroeconomic stability. ICAP willalso assist in all manner so that itsmembers and firms participate andcollaborate in conducting thatfunction.

It is hoped that this process will helpin establishing a robust system of taxaudit that will help in achieving FBR'sobjectives of enhancing tax base,increasing tax revenue andimproving tax to GDP ratio essentialfor sustained economic growth. Forthe profession it represents acontribution to the economy and asource of additional sustainedrevenue.

ICAP has circulated Tax AuditFramework to members forcomments by email on June 23,2009 and it is also available on ICAPwebsite at:http://www.icap.org.pk/web/links/0/taxation.php.

Members are requested to study thesame in detail before undertakingany tax audit and seek guidancefrom ICAP, wherever required.

The author is Assistant Manager of Directorate of Techinical Services, ICAP


Smart Tips forPOWER USERS -Microsoft EXCEL Part-IIZafar Badami FCA

Ability to work with data in multipleworksheets is a essential skill forExcel users. For example, you mayrequired to enter the same data intomany worksheets without retyping orcopying the text into each one. Or,how can you easily sum the cellvalues across multiple worksheets?Or, how can you list the names of theworksheets in your workbook?

These five tips for Excel power userswill help answer those questions andmore.

Enter data in multipleworksheets at the same time

As an example, let's say you want toput the same title text into differentworksheets. One way to do this is totype the text in one worksheet, andthen copy and paste the text into theother worksheets. If you have severalworksheets, this can be very tedious.

An easier way to do this is touse the CTRL key:

w Start Excel. A new, blank workbook appears.

w Press and hold the CTRL key, and then click Sheet1, Sheet2, and Sheet3.

w Click in cell A1 in Sheet1, and then type:

TThhiiss ddaattaa wwiillll aappppeeaarr iinn eeaacchh sshheeeett..

w Click Sheet2 and notice that the text you just typed in Sheet1 also appears in cell A1 of Sheet2. Thetext also appears in Sheet3.

Sum the value of a cellacross multiple worksheets

Another common Excel task is to sumthe value of a cell in multipleworksheets and then displaying theresult in another cell. For example,you may want to sum the number of aparticular product that customershave ordered over a period of time,such as by quarterly periods. Ifworksheets are formatted in the sameway for each period, the total salesfor the product always appears in thesame cell in each worksheet.

Finding the sum in thissituation is simple. You canuse a formula:

w Start Excel. A new, blank work-book appears.

w In cell B3 in Sheet1, type 2200..w In cell B3 in both Sheet2 and

Sheet3, type 3300..w In cell A1 in Sheet1, type the

following formula:=SUM (Sheet1:Sheet3!B3)

w Press ENTER. Notice that cell A1 displays 8800,, which is the total sum of the cells in the three worksheets.

Run the spelling checker onmultiple worksheetssimultaneously

You can check your spelling inmultiple worksheets simultaneously:

w Start Excel. A new, blank workbook appears.

Worksheets provide asound and instinctiveway to manage yourdata in MicrosoftExcel. Many times,multiple worksheetsare used to furtherseparate data intocategories such assales or production.


w In cell A1 in Sheet1, type any text you want. Repeat this step for Sheet2 and for Sheet3.

w Press and hold the SHIFT key, and then click Sheet1,Sheet2, and Sheet3.

w On the Tools menu, click Spelling..

Spell checking is performed on each of the worksheets youselected.

List the names of worksheets

In some instances, it is useful to be able to determine andlist the names of the worksheets in your Excel workbooks.For example, you might want to create an index to catalogthe worksheets in your workbook. You could then store theresults in a separate worksheet. That way, you can quicklyfind the location of a particular worksheet. Try it out:

w Start Excel. A new, blank work-book appears. w Add a command button to the worksheet:

q Select Sheet1. q On the View menu, point to Toolbars and then

click Control Toolbox..q Click the Command Button..q Click somewhere on the worksheet to insert the

command button, and then click and drag the borders of the command button to size it.

w Now, add Visual Basic code to the command button:

q Right-click the command button, and then click View Code on the shortcut menu.

q In the Microsoft Visual Basic® Editor, enter thefollowing code between the Private SubCommandButton1 statement and the End Substatement:

q Set NewSheet = Sheets. Add(Type:=xlWorksheet)q For i = 1 To Sheets.Countq NewSheet.Cells(i, 1) Value = Sheets(i).Name Nexti

w On the File menu, Click Close and Return toMicrosoft Excel.

w On the Control Toolbox, click EExxiitt DDeessiiggnn MMooddee toquit design mode and enable the command button.

w Click the command button on Sheet1.

A new worksheet is created, listing the names of all theworksheets in the workbook.

Test to see which worksheets have beenselected

You can select multiple worksheets by holding down theSHIFT key, and then clicking each worksheet name.Sometimes, you may want to know which worksheetshave been selected so you can use that information for

other purposes. For example, you may want to makecalculations for just those worksheets that the user hasselected. The following steps expand on the exampledemonstrated when we summed the value of cellsacross multiple worksheets.

w Start Excel. A new, blank workbook appears. w Select Sheet1. w On the View menu, point to Toolbars and then click

Control Toolbox..w Click the Command Button. w Click somewhere on the worksheet to insert the

command button, and then click and drag the borders of the command button to size it.

w Right-click the command button, and then clickView Code on the shortcut menu.

w In the Visual Basic Editor, enter the following codebetween the Private Sub Command Button1 statement and the End Sub statement: q Dim Sht As Objectq Dim arSheetNames() As Stringq Dim i As Integerq i = 0q For Each Sht In ActiveWindow.SelectedSheetsq i = i + 1q ReDim Preserve arSheetNames(1 To i)q arSheetNames(i) = Sht.Nameq Next Shtq startSheet = arSheetNames

(LBound(arSheetNames))q endSheet = arSheetNames

(UBound(arSheetNames))q Worksheets ("Sheet1").Range("A1") .Formula =

"=SUM (" & startSheet & ":" & endSheet & "!B3)"w On the File menu click Close and

Return to Microsoft Excel..w On the Control Toolbox,, click Exit

Design Mode to quit design mode and enable the command button.

w In cell B3 of Sheet1, type the value 20. w In cell B3 of Sheet2, type 30, and then in cell B3 of

Sheet3, type 40 Click Sheet1..w Hold down the SHIFT key, and then click Sheet1 and

Sheet2 to select just those worksheets. w Click the command button on Sheet1 and notice that

the value displayed in cell A1 is 50. This is the sum ofcell B3 for Sheet1 and Sheet2.

w Hold down the SHIFT key and click Sheet3 so that allthree sheets are selected. Notice that the total in cellA1 is now 90, which is the sum of cell B3 for all three worksheets.

The author is Director of Education and Training, ICAP.


ICAP News

ICAPElections 2009 in Pictures

ICAP electoral staff at Facilitation Center ICAP electoral staff with Election CommitteeChairman Majeeduddin Khan

ICAP ladies out in full force Final Touches! Executive Director ICAPMoiz Ahmad in consultation with EC Chair

The Day Begins

We make a mistake assessing an election campaign as if we were judging a prize fight --- focusingonly on the skills of the contestants and what is happening in the ring. An election more resemblesthe process at an art auction. To determine whether bidders will prefer a Rembrandt or a Picasso,you need to factor in the taste of the customers --- their beliefs, their values. Indeed, the value of apainting, or the quality of a candidate, lies in the eyes of the beholder.

AAllaann BBaarroonn

ÒÓ

Election Committee and Election Officers oversee final arrangements ICAP IT staff responsible for conducting E-voting


ICAP News

Candidates queue up to welcome voters

Female members were equally enthusiastic

A view of the gathering

Great Voter Turnout


ICAP News

President ICAP Syed Asad Ali Shah Executive Director ICAP Moiz Ahmad

Council Member Ahmad Saeed

Chairman Board of Studies Fazal Husain Saifee

Ahmed D. Patel Ebrahim S. H. Dahodwala Najam I. Chaudhri

M. Afzal Munif Pir Mohammed A.Kaliya Masoud Ali Naqvi A. Husain A. Basrai

Council Member Abdul Rahim Suriya

Past Presidents

ICAP Elections


ICAP News

ICAP Elections

M.Yousuf Adil

Shabbar Zaidi and Farrukh Junaidy share a light moment

All's well that ends well. Shoaib AhmedSecretary ICAP heaves a sigh of relief

Shaikh Saqib Masood and Pervez Muslim Syed Asad Ali Shah with M. Yousuf Adil

S.M.Shabbar Zaidi Zafar Iqbal Sobani

Softer Sides


ICAP News

Best CorporateReport Awards 2008

Syed Asad Ali Shah, President ICAP,Mr. Hasan Bilgrami, President ICMAP,Mr. Muhammad Rafi, Chairman ofICAP and ICMAP Joint Committee andMr. Abdul Rahim Suriya, Chairman ofEvaluation Committee expressedhope that regular presentation of BestCorporate Report Awards will go along way in improving disclosures,quality and transparency ofinformation in annual accounts.

Syed Salim Raza said that the BestCorporate Report Awards arepromoting greater and more effectivecommunication of financial and otherinformation by companies to theirstakeholders through the publicationof timely, informative, factual andreader friendly annual reports. It alsoaims fostering a spirit of

competitiveness amongst companiesin striving for excellence in corporatereporting.

Syed Asad Ali Shah highlighted theimportance of transparency in annualaccounts. He said that the annualreports are the single most importantsource of information that the publicrelies upon in making soundinvestment decisions. Investorsequate high quality annual reports asan integral part of high qualitymanagement and CorporateGovernance and the purpose of BestCorporate Report Award is torecognize those companies who haveprovided most appropriate informationin their annual reports that is useful tothe investors.

The Joint Committee of theInstitute of CharteredAccountants of Pakistan(ICAP) and Institute of Costand ManagementAccountants of Pakistan(ICMAP) announced thefinal results for BestCorporate Report Awards2008. The ceremony washeld on June 15, 2009.Chief guest Syed SalimRaza, Governor, State Bankof Pakistan distributed theawards and certificates tothe winning companies ofseven sectors.


ICAP News

1 Askari Bank Limited2 Allied Bank Limited3 Faysal Bank Limited4 Meezan Bank Limited5 MCB Bank Limited

1 Siemens (Pakistan) Engineering Co. Limited2 Crescent Steel & Allied Products Limited3 International Industries Limited4 Hinopak Motors Limited5 Atlas Honda Limited

1 Pakistan Petroleum Limited2 Pakistan Oilfleds Limited3 Attock Petroleum Limited4 Oil & Gas Development Company Limited5 Attcock Refinery Limited

Financial Sector - NBFCs

Miscellaneous Sector

Textile Sector

1 Rafhan Maize Products Company Limited2 Pakistan Tobacco Company Limited3 Shakarganj Mills Limited4 Security Papers Limited5 KSB Pumps Company Limited

1 Fauji Fertilizer Company Limited2 ICI Pakistan Limited3 Glaxosmithkiln Pakistan Limited4 Dawood Hercules Chemical Limited5 Sanofi Avantis Pakistan Limited

1 Certificate of Merit was awarded to Kohinoor Mills Limited

1 IGI Insurance Limited2 Atlas Insurance Limited3 Arif Habib Securities Limited4 Adamjee Insurance Company Limited5 New Jubilee Insurance Company Limited

Siemens (Pakistan) EngineeringCompany Limited got over all topposition in the competition of the BestCorporate Report Awards 2008.

i) Financial Sector a) Banksb) NBFC s

ii) Non-Financial Sectora) Engineeringb) Fuel and Energyc) Chemical and Fertilizers

d) Textilef ) Miscellaneous

In each sector five best reports had been short-listedexcept for Textile Sector in which there was only onecompany received Certificate of Merit. The sector wiseposition of the Companies is as follows:

RESULTSAll companies are grouped in following categories:-

Engineering

Fuel & Energy

Chemical & Fertilizer

Financial Sector - Banks


In-House

DEAD AID:Why Africa is so much poorerafter receiving billions ofdollars in aid?

Dambisa Moyo, 40, a formerinvestment banker, born in Zambiaand educated at Harvard and Oxford,author of Dead Aid has been namedone of TIME magazine's 100 MostInfluential People in theWorld in 2009.

In Dead Aid, Dambisa Moyo confrontsone of the most controversial issuesof our time: that billions of dollars inaid sent from wealthy countries todeveloping African nations hashelped to reduce poverty andaccelerate growth. In the past fiftyyears, more than $1 trillion indevelopment-related aid has beentransferred from rich countries toAfrica, but it has failed to lift millionsof recipients out of poverty, hungerand illiteracy. In fact, poverty levelscontinue to escalate and growth rateshave steadily declined.

Dead Aid describes the state ofpostwar development policy in Africaand contends that aid has madeAfrican governments unresponsive tothe real needs of their people andindifferent to the private sector. Itprops up corrupt governments and, inthe worst cases, it has abettedregimes that have destroyed someAfrican countries. In the book, Moyodraws a sharp contrast betweenAfrican countries that have rejectedthe aid route and prospered andothers that have become aid-dependent and seen povertyincrease.

Moyo has stated that her argumentsare based on those made by pro-

market economists like Peter Bauerand William Easterly. Bauer is bestremembered for his opposition to thewidely-held notion that the mosteffective manner to help developingcountries advance is through state-controlled foreign aid. Like mostmodern supply-side economists,Bauer stressed the detrimental effectsof high taxes on economic activity.Bauer also saw that government-directed investment would increase"inequality in the distribution ofpower." William Easterly is Professor ofEconomics at New York University,joint with Africa House, and Co-Director of NYU's DevelopmentResearch Institute. In The ElusiveQuest for Growth William Easterlyanalyzes the reasons why foreign aidto many third world countries hasfailed to produce sustainable growth.One main reason, according to him, isdebt relief which calls for a morescrutinizing process.

Moyo»s proposals have ignitedcriticism from economist andantipoverty crusader Jeffrey Sachswho argues that Moyo fails toestablish any scientifically provencausal link between aid and Africa'sproblems and ignores the manystudies showing development aidworking, for example her proposal tophase out all government-to-government aid in five years, as wellas her failure to acknowledge theprogress achieved by aid effortsagainst malaria and HIV/AIDS inAfrican countries. Moyo, on her part,has stated that her book does nottarget humanitarian aid to Africa.

In a new book, controversial economist Dambisa Moyo argues that aidto African countries, whether from governments or celebrities, is doingmore harm than good.


In-House

Moyo has found allies in RwandanPresident Paul Kagame and SenegaliPresident Abdoulaye Wade who haveexpressed similar views on aid, with aparticular focus on reducingprotectionism and lowering tradebarriers. Kagame also invited Moyoto Rwanda to discuss her thesis andbought copies of the book for hisentire cabinet.

Moyo also lambasts celebrities likeOscar winning actress Angelina Jolieand U2 lead singer Bono for≈perpetuating a negative stereotypeof Africa∆. In an interview she hassaid, ≈I have never, ever, seen anycelebrity stand up and say, ≈Guys,this continent has problems but youknow what, look at these positivethings that are happening. They have15 stock markets.∆

Moyo»s enthusiasm over a burgeoningmarket in Africa is not shared by theWorld Bank. In a guest article Walk,don»t run (The Economist, July 11,2009), Justin Lin, the chief economistat the World Bank argues that ≈effortsto create African stock markets havenot yet borne much fruit.∆ ExcludingSouth Africa, the annual value oftraded shares relative to GDP inAfrica is below 5 percent.

In Moyo»s defense, the FinancialTimes (May 23, 2009) noted, ≈Thereare plenty of Africans who disagree inwhole or in part with what Ms Moyosays. But even they appear to findrefreshing the presence of anarticulate young African in a debatedominated for so long by agingwestern academics and rock stars.∆

Test Your Investment-KnowledgeWWhhaatt iiss aann eeaarrnniinnggss ssuurrpprriissee??

a) When a company's earnings are significantly above or below analyst expectations.

b) When a company decides to not report earnings for a quarter.

c) When company delivers its earnings at an unexpected time.

d) When a company amends and re-releases its previously reported earnings.

The correct Answer is:

a) When a company's earnings are significantly above or below analyst expectations

An earnings surprise occurs when a company's quarterly or annual report is above or below analysts' earnings estimates. Company earnings are watched closely by many analysts and investors. When a positive earnings surprise occurs, the company's share price will usually increase. When a negative earnings surprise occurs, the share price will often decline.

The Pakistan Accountant

In-House

Recovery is Coming

The International Monetary Fund has said that the world economy is starting to pull out of recession though Olivier Blanchard,IMF chief economist, has cautioned that ≈it is likely to be a weak recovery∆.

IMF is marking up its growth forecasts for next year and hinting that it might reduce its estimates for bank losses. However,investors signaled their doubts about the strength of any economic recovery by selling off commodities, notably oil and gold,and stocks.

The IMF now forecasts global growth of 2.5 per cent next year, up from 1.9 per cent in April, led by strong growth in China andIndia, a rebound in Japan and positive but sub-trend growth in the US. It upgraded its forecasts for Europe too, but still expectsthe eurozone to contract 0.3 per cent next year, with Germany declining 0.6 per cent.

The IMF did not update its estimates for losses facing banks. It urged further efforts to clean up the banking system, noting that≈bank capitalization remains a concern, notably in Europe∆.

Mr. Blanchard said governments should prepare for the possibility that further stimulus could be needed. ≈It may be that privatedemand is going to be very weak for longer than we anticipated. In that case the fiscal stimulus in some form will have to becontinued.∆

China’s Economic Growth Accelerates

Analysts expect China to be the first major country to emerge from the globalslump. That could help pull the rest of the world out of recession as China buysmore raw materials, industrial components and consumer goods from strugglingeconomies of United States and Europe. Earlier this month, the IMF raised itsforecast of China's growth in 2009 by one percentage point to 7.5 percent. TheWorld Bank boosted its forecast last month from 6.5 percent to 7.2 percent.According to Goldman Sachs, compared with the previous quarter, China's secondquarter growth accelerated to 16.5 percent on an annualized basis.

The Chinese government is trying to reduce reliance on exports by boostingdomestic consumption by pumping money into the economy through a massivescheme to construct new airports and other public works.

World Bank Says Remittances are CrucialLink in Global Economy

While foreign investment to developing countries is drying up, remittances areexpected to remain relatively stable. The World Bank predicts a 7 per cent fall in2009, followed by a modest 3 per cent rise the year after. By 2010 remittances willbroadly equal net private capital flows to developing countries.

While the biggest aggregate recipients of remittances are India, China and Mexico,countries like Honduras, Lebanon and Tajikistan which are most reliant onremittances tend to be poorer and more unstable. In contrast to previous G-8gatherings which underlined the risk of remittances being used as cover for terroristfinancing, this year's L'Aquila G-8 summit reiterated the aim of making them easierand cheaper by aiming to cut down administrative costs from 10 to 5 per cent infive years.

China OvertakesJapan to BecomeWorld’s No.2 StockMarket

China overtook Japan as the world'ssecond largest stock market by valuefor the first time in 18 months after a$585 billion government stimuluspackage and record bank lendingboosted share prices this year. TheShanghai Composite Index has gained75 percent this year, the bestperforming major market against a 5.5percent advance in the Nikkei 225Stock Average. The United States hasthe biggest equities market worth$10.8 trillion.

According to data from Bloomberg,Chinese companies account for four ofthe ten largest companies by marketvalue. Toyota Motor Corp., the topranked Japanese company at No. 25is worth about one-third thecapitalization of PetroChina Co., theworld's No.1. Japan's naggingdeflation, an ageing population andenormous public debt have sappedstrength from what was once theworld's largest market bycapitalization.

World In Focus

April - June, 2009 46


In-House

Strengths - Based Leadership

Tom Rath and BarryConchie

Nearly a decade ago,Gallup unveiled the resultsof a landmark 30-yearresearch project thatignited a globalconversation on the topicof strengths. More than 3

million people have since taken Gallup'sStrengthsFinder assessment, which forms thecore of several books on this topic, includingthe #1 international bestsellerStrengthsFinder 2.0.

In recent years, while continuing to learnmore about strengths, Gallup scientists havealso been examining decades of data on thetopic of leadership. They studied more than 1million work teams, conducted more than20,000 in-depth interviews with leaders, andeven interviewed more than 10,000 followersaround the world to ask exactly why theyfollowed the most important leader in theirlife.

In Strengths Based Leadership, Tom Rathand Barry Conchie reveal the results of thisresearch. Based on their discoveries, thebook identifies three keys to being a moreeffective leader: Knowing your strengthsand investing in others’ strengths, gettingpeople with the right strengths on yourteam, and understanding and meeting thefour basic needs of those who look to youfor leadership.

As you read Strengths Based Leadership,you'll hear firsthand accounts from some ofthe most successful organizational leaders inrecent history, from the founder of Teach ForAmerica to the president of The Ritz-Carlton,as they discuss how their unique strengthshave driven their success. Filled with novelresearch and actionable ideas, StrengthsBased Leadership will give you a new roadmap for leading people toward a betterfuture.

Available@ amazon.comPrice $15.89

The Return of Depression Economicsand the Crisis of 2008

Paul Krugman

In 1999, in The Return of Depression Economics, PaulKrugman surveyed the economic crisis that had swept acrossAsia and Latin America, and pointed out that those criseswere a warning for all of us. In the years that followed, as WallStreet boomed and financial wheeler-dealers made vastprofits, the international crisis of the 1990s faded frommemory. But now depression economics have made acomeback to America with the bursting of the great housingbubble of the mid-2000s. The US financial system has proved

as vulnerable as those of developing countries, caught up in earlier crises.

In this updated edition of The Return of Depression Economics, Krugmanshows how the failure of regulation to keep pace with an increasingly out-of-control financial system set the United States, and the world as a whole, up forthe greatest financial crisis since the Great Depression of the1930s. He alsolays out the steps that must be taken to contain the crisis, and turn around aworld economy sliding into deep recession.


Grown Up Digital:How the Net Generation is Changing YourWorldDon Tapscott

The Net Generation Has Arrived. Are you ready for it?Chances are you know a person between the ages of 11 and 30. You've seenthem doing five things at once: texting friends, downloading music, uploadingvideos, watching a movie on a two-inch screen, and doing who-knows-what onFacebook or MySpace. They're the first generation to have literally grown updigital - and they're part of a global cultural phenomenon that's here to stay.

The bottom line is this: If you understand the Net Generation, you willunderstand the future. If you're a Baby Boomer or Gen-Xer: this is your fieldguide.

A fascinating inside look at the Net Generation, Grown Up Digital is inspired bya $4 million private research study. Don Tapscott surveyed more than 11,000young people and instead of a bunch of spoiled "screenagers" with shortattention spans and zero social skills, he discovered a remarkably brightcommunity which has developed revolutionary new ways of thinking,interacting, working, and socializing.


Books


Last Page

ReKindlingthe Future ofPublishingAmazon.com will now sell continuing educationlegal books from the Practising Law Institute(PLI) on its six inch portable electronic readerKindle which features a built-in wirelessnetwork over the Sprint network in US.

Practising Law Institute (PLI), a nonprofit groupin the US, that provides continuing educationfor lawyers is making its books available forsale on Amazon.com Inc.’s Kindle,underscoring the widening appeal of the digitalreader.

The Kindle edition of Copyright Law: A Practitioner's Guide, byBruce P. Keller and Jeffrey P. Cunard, is priced at $236, a 20%discount from the $295 print price. Amazon says its goal is to pricebooks as low as possible for customers.

Traditionally, lawyers buy PLI books whose binders allow them toinsert new material and discard the old. PLI customers typicallyreceive annual supplements priced at $125. With the Kindle, userswill be able to delete old versions of their texts and substitute newbooks. The digital editions are also searchable.

Many PLI titles are extensively footnoted, with the information oftenprovided at the end of each chapter. The Kindle e-books treat thefootnote numbers as 'links', enabling a reader to toggle* betweentext and footnote.

An average law textbook is easily over 1,000 pages and many aremultivolume sets, so that's a lot of information, With Kindle it will bepossible to carry an entire law library. According to PLI, 67 of its 90titles are now available in the Kindle format.

"There are a lot of practical reasons to believe that the digitalmarket may well be more profitable for publishers of legal, medicaland educational texts," said Andrew Frank, a vice president atmarket-research firm Gartner Inc. "Since these texts are referencematerial, the ability to index them and set up bookmarks, which youcan do easily with the Kindle, will save time and money for users."

* Switch between computer operations using the same key or command

Amazon'sKindle 2vsSony PRS-505The 2 main players of the e-readermarket are Amazon's Kindle 2 andSony Corp.'s Portable Reader System(PRS-505).

Originally released at a cost of$399.00, Kindle 2 has since droppedin price to around $359.00. ThoughKindle works outside the US, you willneed a US credit card and shippingaddress to buy e-books. If you arelooking for a similar internationalreader, you might try the Sony PRS.

While Kindle is wireless, Sony relieson broadband connections topurchase and download content. Butunlike Sony, Kindle 2 does notsupport PDF. Instead, Amazon offersits users to send their PDFdocuments to Amazon's automaticdocument conversion service whichconverts the file for free, but chargesto send the converted documentsback to your Kindle 2.

However, neither the Kindle 2 nor theSony are cheap, and there's theadded cost of content.