in wealth creationthe chartered accounting professionals in this regard has major role to play. a...

October-D

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THE RO

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October-December 2013

Chartered AccountantsIN Wealth Creationfor National & Social Development

THE ROLE OF

Editorial 2President’s Desk 3

ARTICLESThe Role of Chartered Accountants in Wealth 5Creation for National and Social Development - M. Farhad Hussain FCA

The latest Corporate Governance 9Guidelines issued by Bangladesh Bank:Analyzing the changes made with someobservations and recommendations- Abdullah-Al-Mamun ACA

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27Interests in Other Entities: A ComprehensiveAnalysis of IFRS 10, 11, 12, IAS 27 (Revised)& 28 (Revised) and IAS 31 (Withdrawn)- 1Md.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

Revised IASB Conceptual Framework 39-laying the foundation for future IFRSs- Abu HM Kibria, ACA

Concept of Takaful and its challenges 47- Kazi Md. Mortuza Ali

Corporate Governance Vs Corruption: 61Role of MNCs- Tanzina Haque

Membership of Bangladesh in Egmont Group: 69An enduring example of success- Raihan M Chowdhury

Bridging the US GAAP and IFRS Framework: 73A Qualitative Study on Contradictory AccountingStandards Towards the way of Convergence- 1Fareen Zaman- 2Rabita Sabah

CONTENTS ISSN 1993-3649

"The opinions expressed in this publication are those of the respective authors themselves and do not necessarily reflect the views of the Editorial Board of the Institute of Chartered Accoun-tants of Bangladesh (ICAB) or the ICAB itself."

DISCLAIMER

Md. Abdus Salam FCAGopal Chandra Ghosh FCAAkhtar Sohel Kasem FCAMasih Malik Chowdhury FCANasir Uddin Ahmed FCASabbir Ahmed FCAMd. Sayeed Ahmed FCAMahmudul Hasan Khusru FCAMd. Abu Bakar FCAMd. Mahamud Hosain FCAMohammed Jashim Uddin FCASnehasish Barua FCAAjit Kumar Paul FCAMd. Abid Hossain Khan FCAMuhammmad Aminul Hoque ACAZareen Hosein ACAMd. Shahidul Islam ACADipok Kumar Roy ACAChairman DRC-ICABChairman CRC-ICAB

S M Abu Nayem Ahmed, pscSqn Ldr (Retd.)Senior Deputy Secretary-ICAB

EDITORIAL BOARD

ORIALEDIT

To the essence, the wealth creation is understood as economic growth that benefits most of the societies. It is an effective way not only to alleviate but also to solve the cause of poverty that most likely comes with training and experience.

The Chartered Accounting Professionals in this regard has major role to play. A Chartered Accountant can represent a true and fair management information with his professional expertise. Reliable and trust worthy information can help making good decision by the investors in and outside the country.

The institute of Chartered Accountants of Bangladesh is vested with the responsibility of creating highly trained and efficient world class accountants. It is recognized that our CAs have a wide range of experiences in the development of financial services, business organisation like companies, family trusts as well as partnerships, sole traders, tax returns, etc.

The Chartered Accountants are well equipped with information to ensure proper investment of capital and other assets in the best possible way. Once wealth

October - December 2013 The Bangladesh Accountant2

M. Farhad Hussain FCAChairman, Editorial Board

creation takes momentum, the function of Chartered Accountants ultimately shape up the sustainable and beneficial projects that is aimed at. The job of Chartered Accountants is to bring financial discipline. Once the discipline in terms of financial norms and practices take place, social development is then ensured through economic emancipation.

In a fragile economy of ours, the role of Chartered Accountants has been proved to be the best mechanism to control oligopoly market of mobile operators and other multinational companies. Their contributions I truly believe in yet to discover in so many aspect of our life.

Organization should operate in an effective manner in current competitive business arena by reducing the risk level of property management with a view to increase the value of the assets. However, the accountants can't solve the risk management totally unless they are rich with fair business information. So, they should always remain updated with the current business development.

As an accountant I must say, we are committed to support the development of the business. A Chartered Accountant also has indirect role to enhance consumer protection. Their action should be contributory so that the markets remain competitive, free of distortion and manipulation. This will be always a challenge to them. Every professionals irrespective of

their position has noble role to play for the people who deserves better products, better services. And I truly believe, Chartered Accountant can help realizing that aspiration.

It is at this backdrop, we chose the theme of the current issue as "The Role of Accountants in Wealth Creation for National and Social Development".

This issue of ‘Bangladesh Accountant’ will help to understand the need for our inclusive engagement in managing the limited resources to meet the growing demand and create assets needed for the development of our socio economical development.

In fine, I would appreciate any comments/suggestions regarding any relevant matter of the publication of journal which will help enriching the journal.

We mean duty of carefor the AccountancyProfession

The Bangladesh Accountant October - December 2013 3

PRESIDENT’S DESK

At the last quarter of 2013, I congratulate everyone involved with this journal for successfully cultivating and nurturing our intellect and wisdom to convey it to the readers.

Standing at the brim of the calendar year 2013, I could say my endeavor towards professional excellence will remain as it is.

As you know, I promised to enhance the image of ICAB in national and international arena vigorously. The path towards progress and advancement was not even; hindered by many unexpected happenings. We were riddled with the FRA issue, which forced us to divest our effort and energy from our routine affairs and finally, we could come to a reasonable conclusion.

As you are aware, numbers of ICAB Students and Members have been increasing sharply since 2010 after recognizing paper by paper results as guided by ICAEW with a compatible curriculum and in line with International Education Standards (IES). Currently, the total numbers of articled students are about 23,029 and members are about 1,442. ICAB’s financial strength is stronger than before even without enhancing members fees and students charges during the year 2013. Specially after implementing the new curriculum and exam system, the incomes

from Education, Training and Examination increased significantly.

Throughout 2013, ICAB upheld its network with IFAC, CAPA and SAFA in pursuit of its global professional standards. ICAB has been emphasizing on building sustainable relationship with the reputed organizations in and outside the country. ICAB has already MoU with ICAEW and CPA Ireland. ICAB is the member of IFAC, CAPA and SAFA. ICAB has MOU and MRA with ICAEW and CPA Ireland. Building mutual relationship with the professional bodies from other developed countries is also going on. ICAB has MoU with the Office of the Comptroller and Auditor General. ICAB provides training to the officials of Central Bank of Bangladesh (BB), National Board of Revenue and other regulatory bodies and commercial organizations. ICAB has implemented successfully the World Bank Projects ‘Public Private Partnership for Improved Audit Quality Assurance’.

ICAB sincerely nurtured the mutual relationship with ICAEW to ensure the standard that the English Institute wanted. Now ICAEW become closer to ICAB than before. We met ICAEW President and expressed the importance of ICAEW’s support under MoU for strengthening the capacity building of ICAB and

cooperation for ongoing World Bank financed project. Moreover, we held several meetings with ICAEW senior management team and discussed ICAB’s status, progress and standards along with other development matters. As per invitation of ICAEW, ICAB first time sent one representative to attend ICAEW Annual Tutor Conference. This Conference was an invaluable opportunity to meet with ICAEW Examiners and see how the ICAEW Advanced Stage papers are marked. It is to note that, for the first time from ICAB side, I gave a presentation “Concepts and Applications of Islamic Banking and Finance with Financial Reporting Implications” to the audiences comprising of experts and senior management team, ICAEW. I am happy to note that a team of ICAEW visited ICAB recently and expressed their satisfaction on ICAB’s performance over the years since the World Bank funded Twining Project with ICAEW.

In 2013, we continued our effort furthering the existing MoU with the Office of the Comptroller and Auditor General (OCAG) to strengthen both Public and Private sectors’ auditing capacity. A Knowledge Sharing Session was organized in presence of Representatives of National Audit Office (NAO), UK, CIPFA, OCAG’s DGs, ICAB Council Members and Past Presidents. Under the signed MoU with Local

Government Division, we tried our outmost to support the Annual External Audit, Performance Assessment and Fiduciary & Safeguard Compliance Assessment of Union Parishad for Local Governance Support Project II financed by the World Bank. We did extensive homework on formulating suitable MoU and MRA with different issues for future cooperation with ICA Australia and CPA Australia. It received special momentum, especially after signing the MRA with CPA Ireland. We look forward to have benefit of these efforts in near future.

I am confident that we are being able to make the concerned that much is needed to do before such enactment of proposed the Financial Reporting Act. It became clearer that FRA was drafted on wrong “Public Perception” which came to the notice of all the responsible assigned. Our rigorous intellectual efforts have finally paid off. Now, the minimum I can

do is that to pay profound gratitude to the Council Members, all Members of the Institute and the ICAB employees who have worked day and night to achieve our purpose. Truly, our initiates have made people aware about the professional roles/ functions of CAs serve the Nation with their true contributions. We received huge supports and responses from the electronic and print media.

However, we cannot maintain ‘wait and watch’ policy. We must be able to rise against any shortcomings we have, amongst the professionals and prove once again that we are the best of the best professionals who care social responsibility. Standing at the last month of the year 2013, I believe that I left no stone unturned to contain and uphold the image of our noble profession. However, I believe, there is always better way of doing things. It is important that we pursue our objectives with wisdom. We must be able to reflect that we truly owe duty of

care for others and for the Accountancy Profession, at large in our every work and thoughts.

Now about the theme of the current issue of journal, I can say that it is the Chartered Accountants who can provide the best services to create wealth and resources for national and social development. They are instrumental to economic development. The stakeholders should be able to utilize them properly for the greater economic emancipation.

Lastly, I urge everyone to contribute more and put quality thoughts in their professional aspects through this journal to reach thousands which will be their noble service out of love for the profession.

At the last quarter of 2013, I congratulate everyone involved with this journal for successfully cultivating and nurturing our intellect and wisdom to convey it to the readers.

Standing at the brim of the calendar year 2013, I could say my endeavor towards professional excellence will remain as it is.

As you know, I promised to enhance the image of ICAB in national and international arena vigorously. The path towards progress and advancement was not even; hindered by many unexpected happenings. We were riddled with the FRA issue, which forced us to divest our effort and energy from our routine affairs and finally, we could come to a reasonable conclusion.

As you are aware, numbers of ICAB Students and Members have been increasing sharply since 2010 after recognizing paper by paper results as guided by ICAEW with a compatible curriculum and in line with International Education Standards (IES). Currently, the total numbers of articled students are about 23,029 and members are about 1,442. ICAB’s financial strength is stronger than before even without enhancing members fees and students charges during the year 2013. Specially after implementing the new curriculum and exam system, the incomes

from Education, Training and Examination increased significantly.

Throughout 2013, ICAB upheld its network with IFAC, CAPA and SAFA in pursuit of its global professional standards. ICAB has been emphasizing on building sustainable relationship with the reputed organizations in and outside the country. ICAB has already MoU with ICAEW and CPA Ireland. ICAB is the member of IFAC, CAPA and SAFA. ICAB has MOU and MRA with ICAEW and CPA Ireland. Building mutual relationship with the professional bodies from other developed countries is also going on. ICAB has MoU with the Office of the Comptroller and Auditor General. ICAB provides training to the officials of Central Bank of Bangladesh (BB), National Board of Revenue and other regulatory bodies and commercial organizations. ICAB has implemented successfully the World Bank Projects ‘Public Private Partnership for Improved Audit Quality Assurance’.

ICAB sincerely nurtured the mutual relationship with ICAEW to ensure the standard that the English Institute wanted. Now ICAEW become closer to ICAB than before. We met ICAEW President and expressed the importance of ICAEW’s support under MoU for strengthening the capacity building of ICAB and

cooperation for ongoing World Bank financed project. Moreover, we held several meetings with ICAEW senior management team and discussed ICAB’s status, progress and standards along with other development matters. As per invitation of ICAEW, ICAB first time sent one representative to attend ICAEW Annual Tutor Conference. This Conference was an invaluable opportunity to meet with ICAEW Examiners and see how the ICAEW Advanced Stage papers are marked. It is to note that, for the first time from ICAB side, I gave a presentation “Concepts and Applications of Islamic Banking and Finance with Financial Reporting Implications” to the audiences comprising of experts and senior management team, ICAEW. I am happy to note that a team of ICAEW visited ICAB recently and expressed their satisfaction on ICAB’s performance over the years since the World Bank funded Twining Project with ICAEW.

In 2013, we continued our effort furthering the existing MoU with the Office of the Comptroller and Auditor General (OCAG) to strengthen both Public and Private sectors’ auditing capacity. A Knowledge Sharing Session was organized in presence of Representatives of National Audit Office (NAO), UK, CIPFA, OCAG’s DGs, ICAB Council Members and Past Presidents. Under the signed MoU with Local

Md Abdus Salam FCAPresident, ICAB


Government Division, we tried our outmost to support the Annual External Audit, Performance Assessment and Fiduciary & Safeguard Compliance Assessment of Union Parishad for Local Governance Support Project II financed by the World Bank. We did extensive homework on formulating suitable MoU and MRA with different issues for future cooperation with ICA Australia and CPA Australia. It received special momentum, especially after signing the MRA with CPA Ireland. We look forward to have benefit of these efforts in near future.

I am confident that we are being able to make the concerned that much is needed to do before such enactment of proposed the Financial Reporting Act. It became clearer that FRA was drafted on wrong “Public Perception” which came to the notice of all the responsible assigned. Our rigorous intellectual efforts have finally paid off. Now, the minimum I can

do is that to pay profound gratitude to the Council Members, all Members of the Institute and the ICAB employees who have worked day and night to achieve our purpose. Truly, our initiates have made people aware about the professional roles/ functions of CAs serve the Nation with their true contributions. We received huge supports and responses from the electronic and print media.

However, we cannot maintain ‘wait and watch’ policy. We must be able to rise against any shortcomings we have, amongst the professionals and prove once again that we are the best of the best professionals who care social responsibility. Standing at the last month of the year 2013, I believe that I left no stone unturned to contain and uphold the image of our noble profession. However, I believe, there is always better way of doing things. It is important that we pursue our objectives with wisdom. We must be able to reflect that we truly owe duty of

care for others and for the Accountancy Profession, at large in our every work and thoughts.

Now about the theme of the current issue of journal, I can say that it is the Chartered Accountants who can provide the best services to create wealth and resources for national and social development. They are instrumental to economic development. The stakeholders should be able to utilize them properly for the greater economic emancipation.

Lastly, I urge everyone to contribute more and put quality thoughts in their professional aspects through this journal to reach thousands which will be their noble service out of love for the profession.

Accounting is an instrumental means of determining financial stability. Accountants are responsible for determining an organization’s overall wealth, profitability, and liquidity. Accountants are practitioners of accounting or accountancy. Without accounting, organizations would have no basis or foundation upon which daily and long-term decisions could be made. The budgets for marketing activities, profit reinvestment, research and development, and company growth all stem from the work of accountants. Accounting is one of the oldest and most respected professions in the world, and accountants can be found in every industry from entertainment to medicine.

Accounting is concerned with collecting, analyzing and communicating economic information. However in order to develop a broader understanding of accounting and the central role it plays in society, we need to consider it from a social perspective.

Individuals in society coexist by establishing relationships with each other. Another way of viewing society is by segmenting it into different groups or arenas, for example the social, economic,

The Role of Chartered Accountants in WealthCreation for National and Social Development

M. Farhad Hussain FCA

organizational and political arenas. In order to function effectively, these different arenas need to communicate and it is accounting information that facilitates this communication. Accounting information serves many important purposes, for example assisting users in making informed decisions, in relation to the effective allocation of scarce resources.

Therefore, accounting information can be seen to be a potent influence in society, which affects everybody. Accounting has a long history and it is practiced by people for people and therefore it is more of an art rather than a science. Unlike other professions, which have a body of theoretical knowledge to depend on to make decisions, accounting has evolved as a craft with few rules underpinning its practice and function.

However, society and business practice have changed. The growth of global business and the emergence of new sectors such as ecommerce have led to complex transactions being undertaken. This in turn has unearthed problems of subjectivity and inconsistency in the application of traditional accounting techniques. For example, changes in the nature of business assets to include


ACCOUNTING IS

AN INSTRUMENTAL

MEANS OF

DETERMINING

FINANCIAL STABILITY.

ACCOUNTANTS ARE

RESPONSIBLE FOR

DETERMINING AN

ORGANIZATION’S

OVERALL WEALTH,

PROFITABILITY, AND

LIQUIDITY.

ACCOUNTANTS ARE

PRACTITIONERS OF

ACCOUNTING OR

ACCOUNTANCY.

WITHOUT ACCOUNTING,

ORGANIZATIONS WOULD

HAVE NO BASIS OR

FOUNDATION UPON

WHICH DAILY AND

LONG-TERM DECISIONS

COULD BE MADE. THE

BUDGETS FOR

MARKETING ACTIVITIES,

PROFIT REINVESTMENT,

RESEARCH AND

DEVELOPMENT, AND

COMPANY GROWTH ALL

STEM FROM THE WORK

OF ACCOUNTANTS.

intellectual property or the use of leasing have led to the question of how to account for these types of transactions? This fundamental change has led to loopholes in accounting and led to manipulations and scandals. The loopholes in conceptual framework can be illustrated by the collapse of Kmart where the blame was partly placed upon problems with FASB’s conceptual framework. However these manipulations and standards are reduced to a great extent by the various accounting frameworks, principles and standards.

Accounting theorists and researchers have also played a role in attempting to apply theory into accounting. The use of imagery has enabled theorists to explore the nature of accounting practices, by applying the characteristics of the image in the context of accounting.

Two contributors to the development of accounting theory, through the use


of imagery has been David Solomon and Tony Tinker, Solomon was a strong advocate of neutrality in accounting and used images of journalist, speedometer, telephone and cartography to illustrate his way of thinking. He suggests that accountants should be like journalists, reporting the news and not making it. Accountants should function like a speedometer, in capturing the real economic speed of an entity. In addition accountants should convey information impartially like a telephone. Solomon further suggests accounting should function like cartography n producing maps of economic reality. These images give us greater insight into how accounting should function in a real world.

Tony Tinker however argues against Solomon’s use of metaphors, as being unsuitable and problematic. Tinker suggests that journalists portray reality by disregarding some of the facts. Also according to Tinker, “Solomon’s

PowerManagement

Accountantsare every where!!

ACCOUNTING IS

CONCERNED WITH

COLLECTING,

ANALYZING AND

COMMUNICATING

ECONOMIC

INFORMATION.

HOWEVER IN ORDER TO

DEVELOP A BROADER

UNDERSTANDING OF

ACCOUNTING AND THE

CENTRAL ROLE IT PLAYS

IN SOCIETY, WE NEED TO

CONSIDER IT FROM A

SOCIAL PERSPECTIVE.


automotive speedometer analogy poorly reflects financial reporting” and suggests drivers are likely to tamper with the speedometer to avoid being caught out. He also argues that the telephone doesn’t convey thought on but what people say, which leads to intentional and unintentional bias, as the telephone is selective. Tinker goes on further to criticize Solomon’s cartography metaphor and argues that maps don’t represent facts as there are distortions that effect our behavior. E.g. color and size.

As demonstrated by Solomon and Tinker no one image captures fully what accounting is all about. In my opinion different images in the debate provide different perspectives of accounting practices and introduce newer images to try to overcome contradictions and influence future accounting developments. The existence of such debates also represents the problematic nature of accounting and the loopholes in its theoretical development.

Accounting plays an essential role in economic development. High-quality corporate reporting is key to improving transparency, facilitating the mobilization of domestic and international investment, creating a sound investment environment and fostering investor confidence, thus promoting financial stability. A strong and internationally comparable reporting system facilitates international flows of financial resources while at the same time helping to reduce corruption and mismanagement of resources. It also strengthens international competitiveness of enterprises in attracting external financing and taking advantage of international market opportunities. In the wake of various financial crises continued efforts are being made towards improving the quality of corporate reporting as an important part of measures towards strengthening the international financial architecture. In this regard the implementation and application of internationally


recognized standards, codes and good practices in the area of corporate reporting has been strongly encouraged as a reflection of the increasing pace of globalization and international economic integration. However, the effective adoption and implementation of such standards and codes remains a challenge for many developing countries and economies in transition as they lack some of the critical elements of corporate reporting infrastructure – from weaknesses in their legal and Regulatory frameworks, to lack of human capacity and relevant support

institutions. In the face of these challenges there is a need for a coherent approach to building capacity in this area, as well as for tools to measure and benchmark progress and identify priorities for further actions. Building an accountancy infrastructure is a complex process because it is part of an economy’s legal and regulatory system. It needs to be attuned to the interests of many stakeholders and the availability of financial, educational and human resources. Capacity building helps reinforce proper legal frameworks and

institutional arrangements. It is concerned with developing and upgrading certain skills, competencies and performance. It is also about enhancing the capacity of individuals, groups or institutions that are to carry out corporate reporting, for it is reporting and transparency that often drive improvements.

The Author is a Council Member &Past President of ICAB.

Abstract

The objective of this article is to analyze the latest corporate governance guidelines issued by Bangladesh Bank (BB) through BRPD Circular No.11 dated 27 October 2013, and BRPD Circular Letter No. 18 and 19 dated 27 October 2013 respectively (herein after referred to as latest CG Guidelines). In this article the writer has highlighted the changes made and new issues included in the latest CG Guidelines. The writer has also made a critical analysis of the latest CG Guidelines and provides his observations and recommendations upon it. The intention of the writer is not to criticize the latest CG Guidelines but to highlight some areas which may be reviewed by BB and also provide some recommendations which might be incorporated in the latest CG Guidelines.

BRPD Circular No.11 dated 27 October 2013 deals with the provisions regarding formation and responsibilities of Board of Directors (BoD) of all bank companies registered/ incorporated in Bangladesh. BRPD Circular Letter No. 18 dated 27 October 2013 incorporates the provisions relating to appointment and responsibilities of Chief Executive of all banks doing business in Bangladesh except the specialized banks. BRPD

The latest Corporate Governance Guidelines issuedby Bangladesh Bank: Analyzing the changes made

with some observations and recommendationsAbdullah-Al-Mamun ACA

Circular Letter No. 19 dated 27 October 2013 deals with the provisions regarding contractual appointment of Advisor and Consultant of all banks doing business in Bangladesh. As instructed by BB, these Circulars are issued with immediate effect and after these Circulars become effective, earlier all Circulars related to these issues (mentioned specifically at the end of each Circular) shall be treated as void.

Corporate governance: an overview

Corporate governance is the system of principles, policies, procedures and clearly defined responsibilities and accountabilities framed by key stakeholders to overcome the conflicts of interest inherent in the corporate form. Corporate governance in today’s business world is subject to a variety of conflicts of interest due to its inherent complexities in forms and structures. So, two major objectives of corporate governance can be:

• To eliminate or mitigate conflicts of interest particularly those between management and shareholders.

• To ensure that the assets of the company are used efficiently and productively and in the best interests of


CORPORATE

GOVERNANCE IS THE

SYSTEM OF

PRINCIPLES, POLICIES,

PROCEDURES AND

CLEARLY DEFINED

RESPONSIBILITIES AND

ACCOUNTABILITIES

FRAMED BY KEY

STAKEHOLDERS TO

OVERCOME THE

CONFLICTS OF

INTEREST INHERENT IN

THE CORPORATE FORM.

CORPORATE

GOVERNANCE IN

TODAY’S BUSINESS

WORLD IS SUBJECT TO

A VARIETY OF

CONFLICTS OF

INTEREST DUE TO ITS

INHERENT

COMPLEXITIES IN

FORMS AND

STRUCTURES.

its shareholders and other stakeholders.

Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and its stakeholders. Corporate governance is only part of the larger economic context in which firms operate that includes, for example, macroeconomic policies and the degree of competition in product and factor markets. The corporate governance framework also depends on the legal, regulatory, and institutional environment (ROSC).

The latest CG guidelines issued by BB

As mentioned earlier, BB issued three Circulars broadly covering the following:

A. Formation and responsibilities of Board of Directors (BoD).

B. Appointment and responsibilities of Chief Executive.

C. Contractual appointment of Advisor and Consultant.


Formation and responsibilities of board of directors (BoD)

In accordance with the amendments made in the Bank Company Act 1991 (amended up to 2013) in 2013 and consideration of recent financial scams and irregularities occurred in banking industry, Bangladesh Banks issued the latest CG Guidelines to protect the interest of depositors and other stakeholders.

Board of Directors of a bank should be comprised of competent and professionally skilled persons with a view to formulating policy-guidelines and supervising business activities of the bank efficiently as well as ensuring good governance in the bank management. The responsibilities of the Board of Directors of a bank company are more important than those of other companies. It is essential for bank companies to acquire and maintain confidence of the depositors as bank’s business is mainly run with the depositors' money.

As per BRPD Circular No.11 dated 27 October 2013 (herein after referred to


as latest CG Guidelines), the following directives are given for ensuring good governance regarding constitution of Board of Directors, their duties and responsibilities and other related activities:

1. Formation of BoD

The newly amended Section 15 of Bank Company Act 1991 (amended up to 2013) includes provisions for prior approval of BB before the appointment of new Directors, as well as dismissal, termination or removal of any Director from the post, qualification and competency of Directors, maximum number of Directors of the Board, appointment of independent Directors, appointment of maximum 02 (two) members from a family as Director etc.

This new clause included in the latest CG Guidelines in accordance

with amendments made in Bank Company Act 1991 (amended up to 2013).

1.1 Appointment of New Directors

As per Section 15(4) of Bank Company Act 1991 (amended up to 2013), every bank company, other than specialized banks, at the time of taking prior approval from BB for appointing of Directors should furnish the following information along with the application:

a) Personal information of the nominated person (As per Annexure A of BRPD Circular No. 11 dated 27 October 2013).

b) Declaration of nominated person (As per Annexure B of BRPD Circular No. 11 dated 27 October 2013).

c) Declaration for confidentiality by the nominated person (As per Annexure C of BRPD Circular No. 11 dated 27 October 2013).

d) In case of independent director, the approval letter from Bangladesh Securities and Exchange Commission (BSEC).

e) In case of independent director, declaration about his related interest with the company as per Annexure D (he will also have to submit declaration as per Annexure A, B and C).

f) CIB report of the nominated person.

g) Updated list of Directors.

These new clauses included in the latest CG Guidelines in accordance with amendments made in Bank Company Act 1991 (amended up to 2013).


1.2 Vacancy of office of Director

a) The office of a Director shall be vacated as per the provision of Section 108(1) of Companies Act 1994. Moreover, the office of a Director shall also be vacated if he becomes loan-defaulter and does not repay the loan within two months after getting a notice from Bangladesh Bank as per Section 17 of Bank CompanyAct 1991; provides false declaration at the time of appointment or observing his disqualification as a Director.

b) If the office of a Director is vacated as per Section 17 of Bank Company Act 1991, he will not be eligible to become Director of that bank company or any other bank company or

any financial institutions within one year from the date of repayment of the total dues to the bank. It is mentionable here that the dues can be adjusted with the shares held by the Director in that bank company. When a Director of a bank company gets notice as per Section 17 of Bank Company Act 1991, he cannot transfer his shares of that bank company until he repays his all the liabilities of that bank company or financial institutions.

c) Besides, BB can remove

Directors or Chairman of a bank company other than the state-owned banks for conducting any kind of activities that is detrimental to the interest of the banks depositors or against the public

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

These new clauses included in the latest CG Guidelines in accordance with amendments made in Bank Company Act 1991 (amended up to 2013).

1.3 Removal of Directors from office

In accordance with Section 108(2) of Companies Act1994, with the prior approval of Bangladesh Bank, any Director of a bank company other than specialized banks can be removed from his office for the reason specified in its Articles of Association. In this regard, the reason and grounds of the dismissal/ removal and the copy of such decision taken by Board and a list of Directors shall be submitted to Bangladesh Bank. It is mentionable that such removal shall be effective from the date Bangladesh Bank’s approval.

1.4 Appointment of Alternate Director

The provision regarding appointment of alternate Directors in the latest CG Guidelines has been kept same as mentioned in the BRPD Circular No. 12 dated 10 June 2003.

2. Director from Depositors

The provision mentioned in Bank Company Act 1991 regarding appointment of Director from depositors has been amended in 2013; appointment of Directors from depositors is no longer required. But, in compliance with the provision of Section 15(9) of Companies Act 1991 (amended up to 2013), bank company may consider the tenure of existing Directors from depositors or may


appoint them as the Independent Director of the company.

This new clause included in the latest CG Guidelines in accordance with amendments made in Bank Company Act 1991 (amended up to 2013).

3. Information regarding Directors

In the latest CG Guidelines, the provisions regarding the captioned clause i.e. keeping updated list of Directors, sending Directors’ list to other banks or financial institutions immediately after the appointment or release of Director and displaying of Directors’ list on the website and updating of same on regular basis have been kept same as mentioned in the BRPD Circular No. 14 dated 22 April 2010.

4. Resonsibilities of Directors

To ensure good governance in the

bank management, it is required to define the scope of responsibilities and authorities among controlling bodies over bank affairs. Under section 15B and 15C of Bank Company Act 1991 (amended up to 2013); Board of Directors has been made responsible regarding establishing and execution of policy of bank company, its risk management, internal control, internal audit and execution of the same.

4.1 Responsibilities and Authorities of Board of Directors

a) Work planning and strategic management

i. In the latest CG Guidelines, the provisions regarding chalking out of strategies, determination of goals and objectives have been kept same as mentioned in the BRPD Circular No. 06 dated 04 February 2010.

ii. In the latest CG Guidelines, the provisions regarding inclusion

of success/ failure in achieving the business and other targets of the bank in annual report and setting of Key Performance Indicators (KPIs) for the CEO and executives immediate two tiers below the CEO have been kept same as mentioned in the BRPD Circular No. 06 dated 04 February 2010.

b) Loan and Risk management

i. In the latest CG Guidelines, the provisions regarding appraisal of loan/ investment proposal, sanction, disbursement, recovery, re-scheduling and write-off of loans have been kept same as mentioned in the BRPD Circular No. 06 dated 04 February 2010.

ii. In the latest CG Guidelines, the provisions regarding framing of risk management policies and compliance and monitoring thereof have been kept same as mentioned in the BRPD Circular No. 06 dated 04


February 2010. Besides, in relation to risk management, the Board shall review the report made by Risk Management Committee and monitor the compliance of core risk management guidelines issued by Bangladesh Bank and these issues are newly inserted in this clause through the latest CG Guidelines.

c) Internal Control Management

In the latest CG guidelines, the provisions regarding the captioned subject have been kept same as mentioned in the BRPD Circular No. 06 dated 04 February 2010 except the following:

The Board of Directors will establish such an internal control system so that internal audit activities could be conducted independently from the management.

d) Human Resources Management and Development

i. In the latest CG Guidelines, the policies relating to recruitment,

promotion, transfer, disciplinary and punitive measures, human resources development with motivation and service rules framing and approval have been kept under the authority of Board of Directors. Also, the Chairman or Directors shall in no way involve themselves and interfere into or influence over any administrative affairs including recruitment, promotion, transfer and disciplinary measures except recruitment, promotion transfer and punitive measures to the immediate two tiers below the CEO. All provisions under this clause have been kept same as mentioned in the BRPD Circular No. 06 dated 04 February 2010.

ii. In the latest CG Guidelines, the provisions regarding development of skills of bank’s staff in the different fields of its business activities including

prudent appraisal of loan/ investment proposals, adoption of modern electronic and information technologies and the introduction of effective Management Information System (MIS) have been kept same as mentioned in the BRPD Circular No. 06 dated 04 February 2010.

iii. The Board of Directors shall formulate Code of Ethics for all executives and officers of the bank and they will follow it properly. For development of compliance culture in the bank, the Board shall set better ethical standards. This clause is newly inserted in the latest CG Guidelines.

e) Financial Management

i. As per the latest CG Guidelines,


the annual budget and the statutory financial statements shall be prepared with the approval of the Board. At quarterly rests the Board shall review/ monitor the positions in respect of bank’s income, expenditure, liquidity, non-performing assets, capital base and adequacy, maintenance of loan loss provision and steps taken for recovery of defaulted loans including legal measures. All provisions under this clause have been kept same as mentioned in the BRPD Circular No. 06 dated 04 February 2010.

ii. As per the latest CG Guidelines, the Board shall frame the policies and procedures for bank’s purchase and procurement activities and shall accordingly approve the delegation of power for making such expenditures. The maximum possible delegation of such power shall rest on the CEO and his subordinates. The decision on matters relating to infrastructure development and purchase of land, building, vehicles etc. for the purchase of bank’s business shall, however, be adopted with the approval of the Board. All provisions under this clause have been kept same as mentioned in the BRPD Circular No. 06 dated 04 February 2010.

iii. The Board shall review whether the Asset Liability Committee (ALCO) has been formed and the said Committee is executing its activities properly as per the

guidelines issued by Bangladesh Bank. This clause is newly inserted in the latest CG Guidelines.

f) Appointment of Chief Executive Officer (CEO)

As per the latest CG Guidelines, it is the responsibility of the Board to make appointment of an honest, competent, experienced and suitable CEO/ MD (Managing Director) for ensuring strong financial base of

the bank and obtaining confidence of depositors. The provision regarding appointment of such competent CEO of the bank shall be made with the approval of the Bangladesh Bank which is same as mentioned in the BRPD Circular No. 06 dated 04 February 2010.

g) Additional Responsibilities of the Board

As per the latest CG guidelines, the Board shall ensure fulfilling any

other responsibilities appropriately assigned by Bangladesh Bank which is same as mentioned in the BRPD Circular No. 06 dated 04 February 2010.

4.2 Meetings of the Board of Directors

As per the latest CG Guidelines, the Board of Directors may meet once or more than once in a month upon necessity and not less than one meeting of the Board in three months to be held which are same as mentioned in the BRPD

Circular No. 06 dated 04 February 2010. Besides, in

the latest CG Guidelines, holding of

additional Board meeting has been discouraged.

4.3 Responsibilities of the Chairman of Board of Directors

i. As the Chairman of

the Board of Directors or

Chairman of any Committee formed by

the Board or any Director does not personally

possess the jurisdiction to apply policy making or executive authority, he/ she shall not participate in or interfere into the administrative or operational and routine affairs of the bank. The said provisions mentioned in the latest CG Guidelines are same as those mentioned in the BRPD Circular No. 06 dated 04 February 2010.

ii. The Chairman may conduct on-site inspection of any bank branch or financing activities


under the purview of the oversight responsibilities of the Board. He may call for any information relating to bank’s operation or ask for investigation into any such affairs; he may submit such information or investigation report to the meeting of the Board or the executive committee and if deemed necessary, with the approval of the Board, he shall effect necessary action thereon in accordance with the set rules through the CEO. However, any complaint against the CEO shall have to be apprised to Bangladesh Bank through the Board along with the statement of the CEO. The said provisions mentioned in the latest CG Guidelines are same as those mentioned in the BRPD Circular No. 06 dated 04 February 2010.

iii. As per the latest CG guidelines, the Chairman may be offered an

office room, a personal secretary/ assistant, a peon/MLSS, a telephone at the office, a mobile phone usable inside the country and a vehicle in the business interest of the bank subject to the approval of the Board. The said provisions are almost same as mentioned in the BRPD Circular No. 06 dated 04 February 2010.

5. Formation of Supportive Committees of the Board

In the earlier CG Guidelines, bank companies were allowed to form only two supporting Committees of the Board i.e. Executive Committee and Audit Committee. In the latest CG Guidelines, Bangladesh Bank instructed to form a Risk Management Committee in addition to the said two Committees.

As per the latest CG Guidelines, the Board of Directors of every bank company shall have to form

an Executive Committee, an Audit Committee and a Risk Management Committee with the members of the Board. There shall be no other permanent or temporary Committee or subcommittee of the Board can be formed except the said three Committees.

The issues regarding organizational structure of the supportive Committees, qualification of members, roles and responsibilities of the Committee and conducting of Committee meetings have been described elaborately in the latest CG Guidelines.

5.1 Executive Committee

In the earlier CG Guidelines the provisions regarding Executive Committee was not mentioned in an organized way and in detail frame. But in the latest CG Guidelines, the provisions regarding Executive Committee have been described thoroughly in


an organized way. As per the latest CG guidelines, an Executive Committee is to be formed for taking decision on urgent and day-to-day or routine activities between the intervals of two Board meetings. The Executive Committee shall perform according to the terms of reference determined by the Board.

As per the latest CG Guidelines, the Executive Committee shall be formed with maximum of 07 (seven) members which is same as mentioned in the BRPD Circular Letter No. 02 dated 15 February 2010. The members of the Committee shall be elected for 03 (three) years. The Chairman of the Board can also become the member of the Executive Committee. Each member should be capable of making valuable and effective contributions in the functioning of the Committee. The company secretary of the bank shall act as the secretary of the Committee.

The Executive Committee shall discharge responsibilities and take decision on the matters as instructed by the Board except discharging of those responsibilities and taking decisions that are specifically assigned on full Board through Bank Company Act 1991 or other related laws and regulations. The decisions taken by the Committee shall be ratified in the next Board meeting.

Upon necessity the Committee can call meeting at any time. The Committee may invite CEO, Chief Risk Officer or any executive to attend the committee meeting. To ensure active participation and contribution by the members, a detailed memorandum should be circulated to Committee members well in advance before each meeting. All recommendations/ observations of the Committee

should be noted in minutes. C.2 Audit Committee

In most of the cases the provisions of Audit Committee mentioned in the latest CG Guidelines are same as those mentioned in BRPD Circular No. 12 dated 23 December 2002. The Audit Committee shall be formed to assist the Board in fulfilling its oversight responsibilities including implementation of the objectives, strategies and overall business plans set by the Board for effective functioning of the bank. The Audit Committee will review the financial reporting process, the system of internal control, the audit process and the bank’s processes for monitoring compliance with laws and regulations and its own code of business conduct.

As per the latest CG Guidelines, the Audit Committee shall be formed with maximum of five members and two of them shall be Independent Directors. The Audit Committee shall be constituted of such members apart from the members of the Executive Committee of the Board. This clause is also mentioned in Section 15B (2) of Bank Company Act 1991 (amended up to 2013). The members of the Committee may be nominated for three years and the company secretary of the bank shall act as the secretary of the Committee.

The roles and responsibilities of the Audit Committee mentioned in the latest CG Guidelines are almost same as mentioned in BRPD Circular No. 12 dated 23 December 2002. The roles and responsibilities of Audit Committee are as follows:

Internal Control

• Evaluate whether management is adhering to the appropriate

compliance culture by communicating the importance of internal control and risk management to ensure that all employees have clear understanding of their respective roles and responsibilities.

• Review the arrangements made by the management for developing and maintaining a suitable Management Information System (MIS).

• Consider whether internal control strategies recommended by internal and external auditors have been implemented timely by the management.

• Review the corrective measures taken by the management as regards to the reports relating to fraud forgery, deficiency in internal control or other similar issues detected by internal and external auditors and inspectors of the regulators and inform the Board on a regular basis.

Financial Reporting

• Review the Annual Financial Statements and determine whether they are complete and consistent with applicable accounting and reporting standards set by respective governing bodies and regulatory authorities.

• Discuss with Management and External/ Statutory Auditors to review annual financial statements before their finalization.

Internal Audit

• Evaluate whether the Internal Audit functions are conducted independently from the Management of bank.


• Review the activities and organizational structure of the internal audit function and ensure that no unjustified restrictions or limitations are made.

• Review the efficiency and effectiveness of internal audit function.

• Review that findings and recommendations made by the Internal Auditors for removing the irregularities, if any, detected are duly acted upon by the management in running the affairs of the bank.

External Audit

• Review the performance of external auditors and their audit and management reports.

• Review the findings and recommendations made by the external auditors for removing the irregularities, if any, detected are duly acted upon by the management in running the affairs of the bank.

• Make recommendations to the Board regarding the appointment of the external auditors.

Compliance with existing laws and regulations

The Audit Committee shall review whether the laws and regulations framed by the regulatory authorities (Central Bank and other bodies) and internal policy/ regulations approved by the Board and Management have been complied with.

Other Responsibilities

• The Audit Committee will submit a ‘Compliance Report’

on quarterly rest to the Board mentioning any errors and irregularities, fraud and forgery and other anomalies pointed by Internal and External Auditor and Inspection Team from Bangladesh Bank.

• The Audit Committee will submit the evaluation report relating to Internal and External Auditor of the Bank to the Board.

• This Committee will supervise other assignments delegated by the Board and evaluate its own performance regularly.

Meetings of the Audit Committee

As per the latest CG Guidelines, the Audit Committee shall have to hold at least 4 meetings in a year and upon necessity, the Committee can call meeting at any time. The Committee may invite CEO, Head of Internal Audit or any executive to attend the Committee meeting. All recommendations/ observations of the Committee should be noted in minutes.

Risk Management Committee (RMC)

The provision of Risk Management Committee has been newly inserted in the latest CG Guidelines. This clause will ensure more accountability of Directors regarding risk management of bank companies. The Risk Management Committee shall have to be formed to mitigate impending risks which could be arisen during implementation of Board approved policies, procedures and strategies. The Risk Management Committee is entrusted to examine and review whether management is properly working on identifying and mitigation of credit risk, foreign

exchange risk, internal control and compliance risk, money laundering risk, information and communication technology risk, operation risk, interest rate risk and liquidity risk and keeping adequate capital and provision against the risks identified.

As per the latest CG guidelines, the RMC is to be formed with maximum of five members and they will be appointed for 03 (three) years. Each member should be capable of making valuable and effective contributions in the functioning of the Committee. The company secretary of the bank shall act as the secretary of the Committee.

As per the latest CG guidelines, the RMC shall discharge the following roles and responsibilities:

Risk identification and control policy

It is the responsibility of RMC to identify and assess risk of the bank and guide management to formulate strategies for minimizing/ controlling of risk. The Committee will review the risk management policy of the bank and modify the same as per requirement.

Formation of administrative structure

For controlling of risk, it is the responsibility of RMC to ensure suitable administrative structure at the bank. To ensure the compliance of risk management guidelines relating to credit risk, foreign exchange risk, internal control and compliance risk, money laundering risk and information and communication technology risk, the RMC will form separate Committees at the management level and also monitor their activities.


Review and approval of risk management policy

RMC shall review the risk management policy and guidelines of the bank at least once in a year, make necessary modifications as per requirement and submit the same to the Board for approval. Besides, lending limits and other limits should be reviewed at least once in a year and should be amended, if necessary.

Storage of data and reporting system

Adequate record keeping and reporting system developed by the bank management will be approved by the Committee after examination and review of the same. The Committee will monitor the overall implementation of risk management policy of the bank and also examine whether remedial measures have been taken for minimization of credit risk, market risk and operation risk of the bank.

Meeting of the RMC

The Committee is entitled to conduct at least four meetings in a year and call meeting at any time as per requirement. The Committee may invite the Chief Executive, Chief Risk Officer or any executive to attend the committee meeting. To ensure active participation and contribution by the members, a detailed memorandum should be circulated to Committee members well in advance before each meeting. All recommendations/ observations of the Committee should be noted in minutes.

Training of DirectorsAs per the latest CG Guidelines, the Directors of the Board will acquire appropriate knowledge of the Banking laws and other relevant laws, rules and regulations to effectively discharge the responsibilities as a Director of the bank which is same as mentioned in the BRPD Circular no. 06 dated 04 February 2010.

Appointment and Responsibilities of Chief Executive

In order to strengthen the financial base of the bank and obtain confidence of the depositors, appointing honest, efficient, experienced and suitable Chief Executive is one of the key responsibilities of the Board of Directors. Through BRPD Circular Letter No. 18 dated 27 October 2013 (herein after referred to as latest CG Guidelines), BB aggregated the provisions of earlier 07 (seven) Circulars and Circular Letters and also included some new conditions/ provisions (by considering the amendments made in Bank Company Act 1991 in 2013 and recent irregularities occurred in the banking industry) for appointment of CEO and his responsibilities.

As per the latest CG Guidelines, the following guidelines are given for appointing the CEO and devising the roles and responsibilities and authorities of the CEO:

A. Provisions relating to appointment of CEO

1. Moral Integrity

In the BRPD Circular Letter No. 15 dated 03 September 2002, four conditions were mentioned. In the latest CG Guidelines, BB kept two conditions unchanged, modified one condition a little bit and repealed one condition totally. That is, for appointment of CEO, satisfaction in respect of the concerned person should be ensured to the effects that:

a. He has not been convicted by any Criminal Court of Law.


b. He has not been punished for violating any rules, regulations or procedures/ norms set by any regulatory authority.

c. He was not associated with any such company/ organization, registration or license of which has been cancelled.

2. Experience and Suitability

In the latest CG Guidelines, BB kept all five conditions unchanged which was mentioned in the BRPD Circular Letter No. 15dated 03 September 2002 and subsequently modified through BRPD Circular Letter No. 06 dated 16 March 2013. The latest CG Guidelines only added a new clause with the second condition which is as follows:

“At least he has been obtained post-graduation degree from a recognized university.”

3. Transparency and financial integrity

Three conditions mentioned in the BRPD Circular Letter No. 15 dated

03 September 2002 have been kept intact in the latest CG Guidelines with adding a new clause in the second condition. Also, a new condition included in the captioned section. Details are as follows:

i. Or he is not a loan-defaulter added with the second condition of the Circular Letter dated 03 September 2002.

ii. He is not a tax-defaulter; this new condition is included in the captioned section.

4. Age Limit

The age limit i.e. no person crossing the age of 65 years shall hold the post of Chief Executive of a bank mentioned in BRPD Circular Letter No. 03 dated 01 February 2006 has been kept unchanged in the latest CG Guidelines.

5. Appointment Tenure

The appointment tenure of Chief Executive has been kept unchanged in latest CG Guidelines

i.e. for 3 years (reappointment can be made) mentioned in the BRPD Circular Letter No. 06 dated 16 March 2003. A new provision also has been included in the latest CL which is as follows:

If the age of the candidate has less than 3 years left to attain 65 years, in that case, he/ she can be appointed for that shorter period.

6. Guidelines in fixing the salary and allowances

The five guidelines stated in the BRPD Circular Letter No. 03 dated 01 February 2006 for determining the salary and allowances of the Chief Executive has been kept intact in the latest CG Guidelines. A new provision also has been included in the latest CG Guidelines which is as follows:

The annual increment of salary will not be payable unless the related key financial indicators of the bank e.g. CAMELS has been improved.

7. Incentive Bonus

The provision regarding payment of


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

8. Honorarium for attending the Board Meeting

The provision for getting honorarium for attending the Board meeting mentioned in the BRPD Circular Letter No. 03 dated 02 March 2008 has been kept unchanged in the latest CG Guidelines i.e. as the Chief Executive is a salaried executive, he will not get any honorarium for attending the Board meeting or Board formed Committee meeting.

9. Evaluation Report

The captioned provision is newly inserted in the latest CG Guidelines i.e. for reappointment of Chief Executive; the Chairman of the bank shall have to submit a Board approved evaluation report to the Bangladesh Bank.

10. Prior Approval from Bangladesh Bank

The captioned provision which was included in the BRPD Circular Letter No. 15 dated 03 September 2002 and BRPD Circular Letter No. 17 dated 14 October 2002 remained unchanged with inclusion of the following new conditions:

i. The proposal shall be signed by the Chairman of the Board and the Board approved copy of the proposal is to be submitted to the Bangladesh Bank. The attachments with the proposal

i.e. the resume of the selected person, and appointment condition (direct and indirect salary-allowances and other benefits) remain unchanged.

ii. The selected person shall also have to submit declarations i.e. Declaration as per Attachment A and Confidentiality Declaration as per Attachment B of the latest CG Guidelines. In the Attachment A some new conditions have been added with the earlier ones. The Confidentiality Declaration as per Attachment B has been newly inserted in the latest CG Guidelines.

11. Decision of Bangladesh Bank is final

The captioned provision mentioned in the BRPD Circular Letter No. 15 dated 03 September 2002 has been kept unchanged in the latest CG Guidelines i.e. the decision of BB for appointment of the Chief Executive will be treated as final and such appointed Chief Executive cannot be terminated, released or removed from his/ her office without prior approval from Bangladesh Bank.

B. Responsibilities and Authorities of Chief Executive

The Chief Executive of the bank, whatever name called, shall discharge the responsibilities and exercise the authorities as follows:

a. In terms of the financial, business and administrative authorities vested upon him by the Board, the CEO shall discharge his own responsibilities. He shall remain accountable for achievement of financial and other business targets by means of business plan, efficient implementation thereof and prudent administrative and financial management. The said provisions mentioned in the latest CG Guidelines are same as those mentioned in the BRPD Circular No. 06 dated 04 February 2010.

b. The CEO shall ensure compliance of the Bank Company Act 1991 and other relevant laws and regulations in discharging of routine functions of the bank. The said provisions mentioned in the latest CG Guidelines are same as those mentioned in the BRPD Circular No. 06 dated 04 February 2010.

c. The CEO shall include clearly any violation from Bank Company Act 1991 and/ or other relevant laws and regulations in the “Memo” presented to the meeting of the Board or any other Committee (s) engaged by the Board. The said provisions mentioned in the latest CG Guidelines are same as those mentioned in the


BRPD Circular No. 06 dated 04 February 2010.

d. The CEO shall report to Bangladesh Bank of issues in violation of the Bank Company Act 1991 or of other laws/ regulations. The said provision mentioned in the latest CG Guidelines are almost same as that mentioned in the BRPD Circular No. 06 dated 04 February 2010.

e. The recruitment and promotion of all staff of the bank except those in the two tiers below him/ her shall rest on the CEO. He/ she shall act in such cases in accordance with the approved service rules on the basis of the human resources policy and approved delegation of employees as approved by the Board. The said provisions mentioned in the latest CG Guidelines are same as those mentioned in the BRPD Circular No. 06 dated 04 February 2010.

f. The authority relating to transfer of and disciplinary measures against the staff, except those at

two tiers below the CEO, shall rest on him/ her, which he/ she shall apply in accordance with the approved service rules. Besides, under the purview of the human resources policy as approved by the Board, he/ she shall nominate officers for training etc. The said provisions mentioned in the latest CG Guidelines are same as those mentioned in the BRPD Circular No. 06 dated 04 February 2010.

Contractual Appointment of Advisor and Consultant

Sometimes bank companies need to appoint contractual Advisor and Consultant in addition to the permanent posts in the organization structure for performing any special or specific task. Bangladesh Bank issued BRPD Circular Letter No. 19 dated 27 October 2013 (herein after referred to as latest CG Guidelines), regarding appointment rules and guidelines of contractual Advisor and Consultant in bank companies which repealed earlier two guidelines i.e. Circular Letter

No.16 dated 09 August 2003 and Circular Letter No. 07 dated18 September 2007. However, in most of the cases, the provisions mentioned in the latest CG guidelines are same as mentioned in the earlier guidelines.

Provisions regarding appointment of Advisor

As per the latest CG guidelines, bank companies are instructed to follow the guidelines stated below while appointing Advisor:

Experience and Suitability: For appointment as advisor, the concerned person will have to fulfill the following requirements with regard to experience and qualifications:

a. Experience in Banking or Administration for at least15 (fifteen) years or have a long experience in social activities.

b. Higher academic education in the field of Economics, Banking and Finance or Business Administration will be treated as additional qualification for the concerned person.


c. Satisfaction should be ensured that the concerned person was not dismissed from his service when he was Chairman/ Director/ Executive of any company.

d. The person who is working in any bank or financial institution or who has business interest in that bank will not be eligible for appointment to the post of Advisor.

e. Satisfaction should be ensured that the concerned person is not a loan defaulter or tax defaulter and has never been adjudicated an insolvent by the Court.

In the above conditions, only tax defaulter clause has been newly inserted in the latest CG Guidelines.

Responsibility of the Advisor

The roles and responsibilities of the Advisor should be defined specifically. The Advisor can advise the Board of Directors or Chief Executive only on those matters specified in the appointment letter. The general and normal activities of the bank will not be included in his terms of reference. He will not be entitled to exercise any power or involve himself in the decision making process of financial, administrative, operations or other activities of the bank. All these provisions mentioned in the latest CG Guidelines are same as those mentioned in the earlier guidelines.

Prior approval from Bangladesh Bank

Prior approval from Bangladesh Bank is mandatory before appointing an Advisor. For such appointment, the justifications of the post of advisor, responsibilities

or terms of reference, complete resume of the concerned person, terms of appointment (mentioning remuneration and facilities) and copy of board's approval shall be submitted to Bangladesh Bank. The nominated person has to make a declaration as per Annexure A of the latest CG Guidelines. This declaration shall also be submitted to Bangladesh Bank.

Remuneration and other facilities of Advisor

The post of Advisor is not a fixed or substantive post in the bank's organization structure. Advisor will not be entitled to salaries and allowances as regular employee except gross amount of remuneration, transport and telephone facilities. Remunerations inconsistent with the terms of reference of the advisor will not be considered as acceptable to Bangladesh Bank.

Tenure of Advisor

The tenure of the advisor shall be maximum 01(one) year, which is renewable. An evaluation report (by the Chairman that is approved by the Board of Directors) of previous tenure should be submitted to Bangladesh Bank along with the re-appointment proposal.

Appointment of Ex-executive

For ensuring good governance, any former Director, Chief Executive or any other Executive of the bank will not be eligible to become an Advisor in the same bank immediately after their retirement or resignation. However, after one year from such retirement or resignation, he/ she will be eligible for appointment as Advisor.

Provisions regarding appointment of Consultant

In most of the cases the provisions mentioned in the latest CG guidelines regarding appointment of Consultant are almost same as mentioned in the BRPD Circular Letter No. 07 dated 18 September 2013. The provisions regarding appointment of consultant are as follows:

Terms of reference of Consultant

Consultant can be appointed for specialized tasks like tax, law and legal procedures, engineering and technical works, information technology, etc. Consultants' appointment should be avoided as much as possible for those works that could be done by regular employees of the bank.

Responsibilities of Consultant

The responsibilities or term of reference of Consultant should be specified. He/she should not be involved in any activities beyond his/her terms of references and he/she cannot exercise any kind of power in bank operation or cannot participate in the decision making process.

Appointment of Consultant

The Consultant can be appointed with the approval of Board of Directors. After such appointment the bank shall send the Consultant's complete resume, terms of reference and details of remuneration to Bangladesh Bank immediately.

Tenure of Consultant

The tenure of Consultant should be consistent with the terms of reference, but would not exceed 02 (two) years. Normally the consultant will not be eligible for re-appointment. But to complete the unfinished tasks, his contract


may be extended for maximum period of 01 (one) year with the approval of Bangladesh Bank. The Chairman of the bank upon approval of the Board shall have to submit the extension proposal to Bangladesh Bank with the evaluation report of his last tenure. The captioned condition is newly inserted in the latest CG Guidelines.

Remuneration / honorarium of Consultant

The Consultant's remuneration should be in the form of monthly or single lump-sum payment, and he is not entitled to any other facilities.

Appointment of Ex-executive

For ensuring good governance, any former Director, Chief Executive or any other Executive of the bank will not be eligible for

appointment as a Consultant in the same bank immediately after their retirement or resignation. However, after one year from such retirement or resignation, he/ she will be eligible for appointment as Consultant.

Observations and Recommendations

• Performance Evaluation of BoD

No provision regarding disclosure of performance evaluation of Board of Directors (BoD) and Chairman was included in the latest CG Guidelines issued by BB on 27 October 2013. BB may include the said issue in its CG Guidelines, which may enhance the accountability of the BoD of the bank companies.

• Qualification of Directors

No clause regarding qualification required to become Directors of a bank company have been included in the latest CG Guidelines issued by BB on 27 October 2013. BB may include a clause mentioning that a person who has sufficient knowledge about banking business and its risk management, expertise and having professional degree in financial accounting and financial management can be able to become a Director of a bank company. This clause can play an instrumental role for managing a bank company effectively and efficiently. However, the qualification issues have been described a littlie bit to become the member of supporting Committees of the Board e.g. Audit Committee.

• Chairman of the Audit Committee

In the latest CG Guidelines issued by BB on 27 October 2013, it has


not been specifically mentioned who will be the Chairman of Audit Committee. BB may include a provision under administrative structure of Audit Committee that an Independent Director of the bank will be the Chairman of the Audit Committee. This will make Audit Committee more strong and independent to execute its functions and also help to strengthen the overall internal control mechanisms of the bank. However, the CG Guidelines issued by Bangladesh Securities and Exchange Commission (BSEC) specifically stated that the Chairman of the Audit Committee shall be an Independent Director and he shall remain present in the Annual General Meeting (AGM).

• Services provided by External/ Statutory Auditors

No clause regarding restriction of other services which cannot be provided by the external auditors of a bank company mentioned in the latest CG Guidelines issued by BB on 27 October 2013. BB may include a clause mentioning a list of services, which would not be performed by External/ Statutory Auditors. The CG Guidelines issued by BSEC covered the said issue and mentioned a list of services which could not be provided by External/ Statutory Auditors.

• Directors’ Report

The latest CG guidelines issued by BB on 27 October 2013 did not mention any clause in detail about the issues to be included in the Director’s Report of a bank company. BB may insert a clause in this regard mentioning a list, which must be disclosed in the Directors’ Report of a bank company in its annual report. The CG Guidelines issued by BSEC covered the said issue in detail.

• Certification of Financial Statements by CEO and CFO

The latest CG guidelines issued by BB on 27 October 2013 did not mention any clause regarding authentication of financial statements of a bank company by its CEO and CFO and submitting the same to the Board. BB may include such clause in its CG guidelines, which will enhance the credibility of financial statements of a bank company and ensure the transparency and accountability from the viewpoint of management. The CG Guidelines issued by BESC mentioned the captioned issue and the said issue also covered in the corporate governance guidelines of developed countries.

• Subsidiary Company of the Bank

The latest CG Guidelines issued by BB on 27 October 2013 did not mention any clause regarding monitoring of activities of subsidiary companies established by a bank company. BB may insert a clause in its latest CG guidelines mentioning that at least one Independent Director of the bank shall be a Director on the Board of Directors of the subsidiary company and the minutes of the Board meeting of the subsidiary company shall be placed for review at the following Board meeting of the bank company. The CG guidelines issued by BSEC covered the said issue in detail.

• Certification on compliance of CG Guidelines

The latest CG guidelines issued by BB on 27 October 2013 did not mention any clause for obtaining of certificate from professional accountant/ secretary regarding compliance of conditions of CG Guidelines of the BB and send the same to the shareholders along

with the Annual Report on a yearly basis. BB may insert a clause in this regard like the clause mentioned in the CG guidelines issued by BESC.

• No age limit for Advisor and Consultant

The latest CG guidelines issued by BB on 27 October 2013 did not mention any clause regarding the age limit for Advisor and Consultant. BB may insert a clause similar to the age limit of CEO that a person crossing a certain age cannot become an Advisor or Consultant of a bank company.

• No Harmonization was made with BSEC Guidelines

No harmonization was made with the corporate governance guidelines issued by BSEC for listed companies in Bangladesh. If there is any conflict between two guidelines, there should be a clear specification regarding which guideline or directive to be followed. Therefore, BB should make harmonization of its latest CG Guidelines with those of BSEC by sitting with BSEC Officials.

Concluding Remarks

The writer has observed that some leading bank companies in Bangladesh followed old CG Guidelines issued by BB on 24 July 2003 for disclosing their compliance status in the Annual Report (up to annual report 2012) although that was subsequently repealed by the CG guidelines issued by BB on 04 February 2010. The latest CG Guidelines issued by BB on 27 October 2013 also repealed earlier all guidelines of CG issued by it which specifically mentioned at the end of the latest CG Guidelines. BB may develop a checklist summarizing all conditions mentioned in the latest

The Author is a Faculty & AssociateMember of ICAB and Senior Manager,Finance Division, Eastern Bank Limited


CG Guidelines and instruct all bank companies to mention their compliance status in the checklist and disclose the same in the Annual Report. The concerned department of BB may review and examine the said disclosed checklist in the Annual Report of bank companies and may take necessary actions based on the non-compliance of conditions of latest CG Guidelines by bank companies, if any. As recommended by the writer in his observation and recommendation section of the article, BB may include a section in the latest CG Guidelines about obtaining of certificate from professional accountant/ secretary regarding compliance of conditions of CG Guidelines of the BB and send the same to the shareholders along with the Annual Report on a yearly basis.

BB may consider the observations and recommendations, which the writer mentioned in the observation and recommendation section to enrich and strengthen its latest CG guidelines. BB is needed to observe the CG guidelines issued by BSEC and should make a harmonization with the guidelines issued by BSEC, as most of banks in Bangladesh are listed in the stock exchange.

However, the latest CG guidelines issued by BB is far better than those of earlier ones. The latest CG guidelines have been developed in accordance with the amendments made in the Bank Company Act 1991 (amended up to 2013) in 2013 and consideration of recent financial scams and irregularities occurred in banking industry with a view to protecting the interest of depositors and other stakeholders at a greater extent. If followed strictly, the last CG Guidelines will ensure good health of the banking sector and bring all banks under strict monitoring and control mechanism and finally improve the overall corporate governance culture in the banking industry.

References

• Bank Company Act 1991 (amended up to 2013)

• BRPD Circular No. 11 dated 27 October 2013.

• BRPD Circular Letter No. 18 dated 27 October 2013.


• BRPD Circular Letter No. 08 dated 19 June 2011.

• BRPD Circular No. 14 dated 22 April 2010.

• BRPD Circular Letter No. 06 dated 20 April 2010.

• BRPD Circular Letter No. 02 dated 15 February 2010.

• BRPD Circular No. 06 dated 04 February 2010.

• BRPD Circular No. 05 dated 28 January 2010.

• BRPD Circular Letter No. 12 dated 18 August 2008.

• BRPD Circular Letter No. 10 dated 23 July 2008.

• BRPD Circular Letter No. 03 dated 02 March 2008.

• BRPD Circular No. 11 dated 05 November 2007.

• BRPD Circular Letter No. 07 dated 18 September 2007.

• BRPD Circular Letter No. 03 dated 01 February 2006.

• BRPD Circular Letter No. 16 dated 09 August 2003.

• BRPD Circular Letter No. 12 dated 10 June 2003.

• BRPD Circular Letter No. 06 dated 16 March 2003.

• BRPD Circular No. 12 dated 23 December 2002.


• BRPD Circular Letter No. 15 dated 03 September 2002.

• Companies Act 1994.• Mamun. A. Abdullah, (2013),

Corporate Governance Mechanisms in Bangladesh: A Critical Analysis of BSEC’s latest Corporate Governance Guidelines, The Bangladesh Accountant, April - June 2013, 43-50.

• SEC Notification No. SEC/CMRRCD/2006-158/134/Admin/44 dated 07 August 2012.

• www.worldbank.org/ifa/ rosc_cg.html.

Abstract:

IFRS 10 ‘Consolidated Financial Statements’, IFRS 11 ‘Joint Arrangements’ and IFRS 12 ‘Disclosure of Interests in Other Entities’, had been published together along with IAS 27 (Revised) ‘Separate Financial Statements’ and IAS 28 (Revised)‘Investments in Associates and Joint Ventures’ in May 2011 along . Together these Standards form a comprehensive package of material dealing with group issues and off-balance sheet activity. Objectives of our study are to make the readers, especially persons working in the in the industry, accounting & auditing practitioners practicing in the professional capacity, academicians in the relevant areas and other interested persons as a whole, about the recent changes to IFRSs that will affect companies’ financial reporting in the near future since these standards are effective for annual periods beginning on or after 1 January 2013. This effort covers both new IFRS and IFRIC that have been issued recently and amendments taken place to the existing Standards.

Introduction:

IFRS 10 ‘Consolidated Financial Statements’ is in part a response to the global financial crisis of 2008. Prior to its

New Issue and Amendments of IFRSs to Interests inOther Entities: A Comprehensive Analysis of IFRS 10, 11, 12,

IAS 27 (Revised) & 28 (Revised) and IAS 31 (Withdrawn)1 Md. Kishlur Rahman ACA, ACMA | 2 Shah Md. Jubaer ACA

publication, consolidation has been addressed by IAS 27 ‘Consolidated and Separate Financial Statements’ (2008) and SIC-12 ‘Consolidation – Special Purpose Entities’. There were some tensions between these pronouncements, with IAS 27 (2008) focusing mainly on control through powers such as voting rights, and SIC-12 focusing more on exposure to risks and rewards of the investee. IFRS 10 aims to address these concerns with a new principle-based, definition of control that will be applied to all types of investee to determine which are consolidated.

Entities with interests in joint arrangements will need to consider the new terminology and classification requirements of IFRS 11 ‘Joint Arrangements’ .Where proportionate consolidation has been used in the past under IAS 31, entities will often need to switch to equity accounting under IFRS 11.

IFRS 11 has been issued with the intention of addressing two perceived deficiencies in IAS 31 ‘Interests in Joint Ventures’:

• that the legal form of the arrangement was the critical determinant of the accounting

• that an entity had a choice of accounting treatment for interests in


IN THE RECENT

ISSUES OF IFRSS

RELATING TO INTEREST

IN OTHER ENTITIES

(NAMELY SUBSIDIARY,

ASSOCIATES, JOINT

ARRANGEMENTS AND

OTHERS), IASB TRIED TO

STREAMLINE SOME

CONFLICTING AREAS

AND REDUCE THE

UNWANTED

ALTERNATIVE

TREATMENT WHICH

MAY LEAD TO MORE

RELIABLE AND

RELEVANT FINANCIAL

INFORMATION. WE

MUST BE AWARE OF

THESE LAND-SLIDE

CHANGES FOR

APPROPRIATE

ACCOUNTING AND

REPORTING

TREATMENTS OF THE

TRANSACTIONS AND

EVENTS RELATING TO

INTEREST IN OTHER

ENTITIES.

jointly controlled entities (proportionate consolidation or equity accounting).

IFRS 11 aims to improve on IAS 31 by establishing principles that are applicable to the accounting for all joint arrangements (a joint arrangement being an arrangement over which two or more parties have joint control).

IFRS 11 replaces IAS 31’s three categories of ‘jointly controlled entities’, ‘jointly controlled operations’ and ‘jointly controlled assets’ with two new categories – ‘joint operations’ and ‘joint ventures’.

• a joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (ie joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement.

• a joint venture is a joint


arrangement whereby the parties that have joint control of the arrangement (ie joint ventures) have rights to the net assets of the arrangement.

Unlike the other Standards, entities are encouraged by the IASB to provide some or all of IFRS 12’s disclosure requirements early even if they choose not to early adopt the entire package.

The Standard establishes disclosure objectives according to which an entity discloses:

• Significant judgments and assumptions (and changes) made by the reporting entity in determining whether it controls another entity

• The interest that the non-controlling interests have in the group’s activities


• The effect of restrictions on the reporting entity’s ability to access and use assets or settle liabilities of consolidated entities

• The nature of, and changes in, the risks associated with the reporting entity’s interests in consolidated structured entities, joint arrangements, associates and unconsolidated structured entities.

Analysis of IFRS 10, 11, 12, IAS 27 (Revised) & 28 (Revised) and IAS 31 (Withdrawn)

IFRS 10 ‘Consolidated Financial Statements’ in Comparison with IAS 27 ‘Consolidated and Separate Financial Statements’ and SIC-12 ‘Consolidation – Special Purpose Entities’ Consolidated Financial Statements

Objective:

The objective of IFRS 10 is to establish principles for the

presentation and preparation of consolidated financial statements when an entity controls one or more other entities.

Key Consideration:

The new definition of control

IFRS 10 introduces the following revised definition of control together with accompanying guidance on how to apply it.

“An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.” (IFRS 10.6)

The new standard introduces a new single control model for all entities. Under the new guidance control is the sole basis for consolidation. The structure of the investee is not relevant. An investor will be required to consolidate an investee if it has all

of the followings:

• Power over the investee;

• Exposure, or rights, to variable returns from its involvement with the investee;

• The ability to use its power to affect the amount of the investor’s returns.

Specific thresholds (or ‘bright lines’) have deliberately been excluded from IFRS 10, with key aspects being principles based. This is likely to prevent a particular accounting outcome being achieved through structuring which, to a limited extent, was possible under previous guidance. However, this does mean that judgment may be required in determining whether an investor should consolidate a particular investee.


Highlights of difference between requirements of IFRS 10 and IAS 27 (2008)

Sl Basis for Differences

IAS 27 (2008) IFRS 10

1. Basis for Consolidation

IAS 27(2008) identifies control as the basis for consolidation and focuses on the power to govern the financial and operating policies for assessing control of typical operating entities.

In contrast, SIC-12 focuses on risks and rewards for assessing control of special purpose entities.

IFRS 10 identifies control as the single basis for consolidation for all types of entities.

There is no separate guidance with a different consolidation model for special purposes entities; rather, this guidance is incorporated into the single consolidation model in IFRS 10. The new control definition reflects that an investor can achieve power over an investee in many ways, not just through governing financial and operating policies. The investor must assess whether it has rights to direct the relevant activities. Although exposure to risks and rewards is an indicator of control, it is not the sole focus for consolidation for any type of entity.

2. Control without a majority of Voting Rights

Although the idea that an investor could control an investee while holding less than 50% of the voting rights was implicit in IAS 27 (2008), it was not explicitly stated.

IFRS 10 states that an investor can control and investee with less than 50% of the voting rights of the investee IFRS 10 provides specific application guidance for assessing control (i.e. de-facto control) in such cases.

3. Potential Voting Rights

Only currently exercisable potential voting rights are considered when assessing control.

Potential voting rights need to be considered in assessing control, but only if they are substantive. Potential voting rights are substantive when the holder has the practical ability to exercise its rights and those rights are exercisable when decisions about the direction of the relevant activities need to be made. Deciding whether potential voting rights are substantive requires judgment. Potential voting rights may need to be considered even if they are not currently exercisable.

4. Delegation creating Agency Relationships

IAS 27(2008) has no specific guidance regarding situations when power is delegated by a principal to an agent.

IFRS 10 contains specific application guidance for agency relationships. When decision making authority has been delegated by a principal to an agent, an agent in such a relationship does not control the entity. The principal that has delegated the decision-making authority would consolidate the entity. The application guidance offers a range of factors to consider and contains examples.

5. Reassessment of Relationship on Continuous Basis

There was no requirement in IAS 27(2008) or SIC-12 to reassess investor/investee relationships on a continuous basis, in practice the existence of control was reassessed when there was a change in facts and circumstances.

IFRS 10 contains an explicit requirement for investor/ investee relationships to be reassessed on a continuous basis.


The accounting requirements for consolidated financial statements in IFRS 10 have been carried forward unchanged from IAS 27 (2008) Consolidated and Separate Financial Statements. This means that:

• Intra-group transactions are eliminated in full.

• Uniform accounting policies are applied throughout the consolidated group.

• The financial statements of the parent and subsidiaries are required to be prepared to the same reporting date.

Examples with regard to Status of control of a company in the context of IFRS 10

We would like draw some examples wherein the Group [JK International Limited (Bangladesh)] has full control over its all investees, the single basis for consolidation through various modes of control. The Group has been consolidating all the investees. Details are given below:

Impact of IFRS 10 in respect of consolidation of JK International Limited

All entities that were consolidated in the financial statements as the relationship fulfills all three requirements of consolidation and will be consolidated in reported year.

Hope Cooperative Services, Brazil (Hope) was incorporated in the

beginning of reported year. Despite JK has no investment in Hope, it has power of control on its operational affairs. Moreover, all members of Hope must undergo an approval from JK before getting a loan and investment transaction. Even JK gets commission from Hope for providing management services.

Thus Hope fulfills the condition of power over the investee and the

ability to use its power to affect the amount of the investor’s returns, so it will be considered at the time of consolidation.

IFRS 11 ‘Joint Arrangements’ in Replacement with IAS 31 ‘Interests in Joint Ventures’

Objective:

The objective of IFRS 11 is to establish principles for financial

Entity Type ofentity

Parent Power over investee

Parent’s share-

holding

Linkage between power & return

Consolidation Status

BD Microfinance Ltd.

Incorporated JK International Limited

(Bangladesh)

Yes 85.44% Yes Yes

Fundamentals forRural People

NGO JK International Limited

(Bangladesh)

Yes - Yes Yes

H&E Australia Pvt. Ltd. (Australia)


(Bangladesh)

Yes 100% Yes Yes

Peoples Financial Services Ltd. (Canada)


(Bangladesh)

Yes 72% Yes Yes

Hope Cooperative Services (Brazil)

Association - Yes Nil Yes Yes

H&E Financial Services Ltd. (USA)


(Bangladesh)

Yes 27% Yes Yes

H&E Argentina (Argentina)

NGO JK International Limited

(Bangladesh)

Yes - Yes Yes

KYSOMAT Incorporated JK International Limited

(Bangladesh)

Yes 76% Yes Yes


reporting by entities that have an interest in arrangements that are controlled jointly (ie joint arrangements).

Key consideration:

The accounting requirements in IAS 31 were driven only by whether the arrangements were structured through an entity. For example: ‘jointly controlled

operations’ and ‘jointly controlled assets’ were arrangements in IAS 31 that did not require the existence of an entity. Parties were simply required to recognize assets, liabilities, revenues and expenses arising from the arrangements. However, when the same arrangements were structured through an entity, IAS 31 classified them as ‘jointly controlled entities’ and offered parties an accounting

choice between proportionate consolidation and the equity method.

Under the new requirements the accounting for joint arrangements will be driven by a principle, namely that parties should recognize their rights and obligations arising from the arrangements. The parties’ rights and obligations will result in either the recognition of assets and liabilities and corresponding revenues and expenses or in the recognition of an investment. IFRS 11 provides application guidance to assist entities in determining precisely whether they have rights to assets and obligations for liabilities (in which case, the parties have an interest in a joint operation) or whether they have rights to the net assets of an arrangement (in which case, the parties have an interest in a joint venture). An entity will be required to apply judgment when assessing its rights and obligations arising from the arrangements, because this will determine the classification of the arrangements.

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

ElaborationJCO/ JCA: Jointly controlled operation/ jointly controlled asset; JO: Joint operationJCE: Jointly controlled entity; JV: Joint Venture

IAS 31 IFRS 11

Line by line accounting of the underlying assets

& liabilities

Choice: Equity method of accounting or

proportionate consolidation

Line-by-line accounting of the underlying assets

& liabilities

No separate vehicle

A separate vehicle with separation maintained

A separate vehicle, but separation overcome by legal form, contract or

other facts & circumstances

Equity method of accounting

JCO/JCA JO

JO

JV

JCE

JCE


IFRS 12: Disclosure of Interests in Other Entities-Emergence of one-stop Disclosure Requirements

Objective:

The objective of IFRS 12 is to require the disclosure of information that enables users of financial statements to evaluate:

• the nature of, and risks associated with, its interests in other entities;

• the effects of those interests on its financial position, financial performance and cash flows.

Key consideration:

Where the disclosures required by IFRS 12, together with the disclosures required by other IFRSs, do not meet the above objective, an entity is required to disclose whatever additional

information is necessary to meet the objective.

IFRS 12 is required to be applied by an entity that has an interest in any of the followings:

• subsidiaries;

• joint arrangements (joint operations or joint ventures);

• associates;

• unconsolidated structured entities.

An entity discloses information about significant judgments and assumptions it has made (and changes in those judgments and assumptions) in determining:

• that it controls another entity;

• that it has joint control of an arrangement or significant influence over another entity;

• the type of joint arrangement (i.e. joint operation or joint venture) when the arrangement has been structured through a separate vehicle.

Interests in subsidiaries

An entity shall disclose information that enables users of its consolidated financial statements to:

• understand the composition of the group;

• understand the interest that non-controlling interests have in the group's activities and cash flows;

• evaluate the nature and extent of significant restrictions on its ability to access or use assets, and settle liabilities, of the group;


• evaluate the nature of, and changes in, the risks associated with its interests in consolidated structured entities;

• evaluate the consequences of changes in its ownership interest in a subsidiary that do not result in a loss of control;

• evaluate the consequences of losing control of a subsidiary during the reporting period.

Interests in unconsolidated subsidiaries

In accordance with IFRS 10 Consolidated Financial Statements, an investment entity is required to apply the exception to consolidation and instead account for its investment in a subsidiary at fair value through profit or loss.

Where an entity is an investment entity, IFRS 12 requires additional disclosure, including the fact the entity is an investment entity:

• information about significant judgments and assumptions it

has made in determining that it is an investment entity, and specifically where the entity does not have one or more of the 'typical characteristics' of an investment entity;

• details of subsidiaries that have not been consolidated (name, place of business, ownership interests held);

• details of the relationship and certain transactions between the investment entity and the subsidiary (e.g. restrictions on transfer of funds, commitments, support arrangements, contractual arrangements);

• information where an entity becomes, or ceases to be, an investment entity.

Interests in joint arrangements and associates

An entity shall disclose information that enables users of its financial statements to evaluate:

• the nature, extent and financial

effects of its interests in joint arrangements and associates, including the nature and effects of its contractual relationship with the other investors with joint control of, or significant influence over, joint arrangements and associates;

• the nature of, and changes in, the risks associated with its interests in joint ventures and associates.

Interests in unconsolidated structured entities

An entity shall disclose information that enables users of its financial statements to:

• understand the nature and extent of its interests in unconsolidated structured entities;

• evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities.


Disclosure Checklist as per IFRS 12

Sl# IFRS 12 Disclosure requirements

1 Significant judgments & assumptions made in determining control (if control varies than shareholding)

2 Disclosure of interests of non-controlling interests (NCI)

i. Name of the subsidiary;

ii. Proportion of ownership interest held by NCI;

iii. Principal place of business

iv. Profit/loss allocated to NCI during reporting period;

v. Accumulated NCI of subsidiary at the end of reporting period;

vi. Dividend paid to NCI;

vii. Summarized financial information (current assets, non-current assets, current liabilities, non-current liabilities, revenue, profit or loss).

3 Disclosure of the nature & extent of significant restrictions

i. Restriction on the ability of a parent or its subsidiaries to transfer cash or other assets to (or from) other entities within the group;

ii. Guarantees or other requirements that may restrict dividends and other capital distribution being paid, or loans and advances being made or repaid, to (or from) other entities within group;

iii. The nature and extent to which protective rights of NCI can significantly restricts the entity’s ability to access or use the assets and settle the liabilities of the group;

iv. The carrying amounts in the consolidated financial statements of the assets and liabilities to which the restrictions apply.

4 Financial support to consolidated structured entities

5 Disclosure of changes in ownership interest

6 Details of material joint agreement & associates

7 Disclosure of financial information individually immaterial to joint ventures & associates

8 Disclosure of contingent liabilities relating to joint ventures & associates

9 Disclosure of interest in unconsolidated structured entities (SPE)


Points to Remember and Impact on Financial Statements:

Area Summary Frequency of Entities Affected

Impact on Affected Entities

IFRS 10 supersedes IAS 27 ‘Consolidated andSeparate Financial Statements’ and SIC-12 ‘Consolidation – Special Purpose Entities’

changes the definition of control and applies it to all investees to determine the scope of consolidation

has the potential to affect the outcome of many borderline and judgmental control assessments

expected to lead to few changes for conventional group structures based on majority share ownership

where such a change does arise, however, the impact could be

very significant.

All companies with significant involvement & investment in other entities will need to consider the requirements of the new Standard.

We expect that in most cases, conclusions as to what should be consolidated will be unchanged. In some circumstances, it will however change the composition of a group as a consequence of reassessment of which entities a parent company controls. In these cases the impact could be substantial.

IFRS 11 supersedes IAS 31 ‘Interests in Joint Ventures’

introduces two accounting categories whose applicability is determined based on the substance of the joint arrangement

eliminates the option of using proportionate consolidation for joint ventures

eliminates IAS 31’s ‘jointly controlled operations’ and ‘jointly controlled assets’ categories

many of the arrangements that would have been classified under those categories will fall into the newly defined category ‘joint operation’.

IFRS 11 can be expected to affect many entities operating in the extractive industries, property and construction sectors where joint ventures and other joint arrangements are common. It may of course have a significant effect on individual companies in other industries.

IFRS 11 eliminates the use of proportionate consolidation for joint ventures. This will be a significant presentational change for the many venturesthat chose this accounting policy under IAS 31. Although net assets will not be affected, the removal of that method of accounting will affect individual balance sheet and performance ratios.

IFRS 12 combines the disclosure requirements for subsidiaries, joint arrangements, associates and unconsolidated structured entities within a comprehensive disclosure standard

provides more transparency on ‘borderline’ consolidation decisions

enhances disclosures about unconsolidated structured entities in which an investor or sponsor has involvement

will help investors to assess the extent to which a reporting entity has been involved in setting up special structures and the risks to which it is exposed as a result.

Most entities can expect to be affectedby the new disclosure requirements of IFRS 12. Parent companies whose subsidiaries have non controlling interests and businesses that operate through so-called structured entities are likely to be especially affected.

IFRS 12 specifies minimum disclosuresthat an entity must provide. Some of this information will be new and its preparation will require planning. System modifications and enhancements may be required to address the change in guidance and to provide the necessary information for the new disclosure requirements.


Concluding Remarks:

In the recent issues of IFRSs relating to interest in other entities (namely subsidiary, associates, joint arrangements and others), IASB tried to streamline some conflicting areas and reduce the unwanted alternative treatment which may lead to more reliable and relevant financial information. We must be aware of these land-slide changes for appropriate accounting and reporting treatments of the transactions and events relating to interest in other entities. Having awareness and knowledge on the changes through new issue of standards and amend-ments in the existing ones would create a focus on the transition of the new standards effectively.

References

IFRSs-Unaccompanied Standards and their Technical Summaries (December 2013). Standards (IFRSs), the IFRS Foundation and the IASB. Retrieved from http://www.ifrs.org/IFRSs/Pages/IFRS.aspx

Baltazar, E., Beyersdorff, M., Bonham, M., Covic, A., Curtis, M., Danmola, T.,. . . Vaidison, S. (2012). Interna-tional GAAP 2012-Generally Accepted Accounting Practice under Interna-tional Financial Reporting Standards (IFRSs), Ernst & Young and Wiley.

Navigating the Changes to IFRS: A Briefing for Chief Financial Officers (December 2012). IFRS Publications, Grant Thornton International.

Retrieved from http://www.gti.org/Publications/ifrs-publications/index.asp#ifrsnews.

Time for Transition: IFRS 10 Consoli-dation (1 January 2013). IFRS Newslet-ters, KPMG IFRG Limited. Retrieved from http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/ifrs-newsletters/

Pages/TFT-IFRS10.aspx.

Time for Transition: IFRS 11 Joint Arrangements (1 January 2013). IFRS Newsletters, KPMG IFRG Limited. Retrieved from http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/ifrs-newsletters/Pages/TFT-IFRS11.aspx.

The Authors are1 FAVP & Head, Finance & Planning and Basel Implementation, IFIC Bank Limited2 Deputy Director (Accounts), ASA International N.V.


Time for Transition: IFRS 10 Amend-ments (6 December 2013). IFRS Newsletters, KPMG IFRG Limited. Retrieved from http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/ifrs-newsletters/

Pages/TFT-investment-entities.aspx.Adopting the Consolidation Suite of Standards- Transition to IFRSs 10, 11 and 12 (1 November 2013). IFRS Practice Issues, KPMG IFRG Limited. Retrieved from

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/IFRS-Practice-Issues/Pages/IFRS practice-issues-IFRS10-transition.aspx.

What is Conceptual Framework and why is the revision?

The Conceptual Framework provides the foundation upon which accounting standards are set by the International Accounting Standards Board (the IASB). This also assists the preparers of financial statements when accounting treatment of a particular topic is not dealt with by an existing standard or other authoritative guidance.

The IASB acknowledges that while the existing Conceptual Framework has enabled it to develop high quality IFRSs resulting in improved financial reporting, it is not comprehensive enough.

In 2010, the IASB revised the chapters of the Conceptual Framework that describe the objective of financial reporting and the characteristics of useful financial information. It also published an Exposure Draft on the reporting entity and performed substantial work on other areas.

However, the IASB had to suspend the work on the Conceptual Framework in the same year so that it could focus on more urgent projects that arose from the financial crisis. In 2011, the IASB carried

Revised IASB Conceptual Framework-laying the foundation for future IFRSs

Abu HM Kibria, ACA

out a public consultation on its future agenda. Many respondents to that consultation identified the Conceptual Framework as a priority project for the IASB. Consequently, the IASB resumed the project.

This Discussion Paper (DP) is designed to obtain initial views and comments on important issues that IASB will consider as it develops an Exposure Draft of a revised Conceptual Framework. The issues include:

• definitions of assets and liabilities;• recognition and derecognition;• the distinction between equity and

liabilities;• measurement;• presentation and disclosure; and• other comprehensive income (OCI).

Commenting on the publication of the DP, IASB Chairman Hans Hoogervorst said:

“The Conceptual Framework underpins the work of the IASB and affects all IFRSs that we develop. This Discussion Paper gives people the opportunity to help us to shape the future of financial reporting by discussing the concepts that drive our work.”


IN KEEPING

WITH IASB’S STANCE

ON RECOGNISING ALL

ASSETS AND

LIABILITIES, IASB

BELIEVES THE FAILURE

TO RECOGNISE AN

ASSET OR A LIABILITY

IS NOT RECTIFIED BY

DISCLOSURE OF THE

ACCOUNTING POLICIES

USED NOR BY THE

NOTES OR

EXPLANATORY

MATERIAL. IN IASB’S

VIEW, IF SOME ASSETS

OR LIABILITIES ARE

NOT RECOGNISED, THE

RESULTING DEPICTION

OF THE ENTITY’S

RESOURCES AND

OBLIGATIONS WOULD

BE INCOMPLETE AND

WOULD THUS PROVIDE

A LESS FAITHFUL

REPRESENTATION OF

THE ENTITY’S

FINANCIAL POSITION.

What is changing?

The proposed changes will have significant impact on the following key areas of financial statements:

i) balance sheet ii) income statement including OCIiii) disclosures

The most significant impact is likely to be on balance sheet items. Accordingly this article will keep its focus on proposed changes impacting balance sheet items.

The contents of the DP, however, do not talk about impact and implications of growing prominence of Integrated Reporting (IR) on IFRSs. Aligning IFRSs with IR or vice-versa will perhaps be another project in its own right.


Assets and liabilities – revised definitions

According to IASB, assets and liabilities are the basic building blocks from which the statement of financial position is constructed.

With the proposals incorporated in the DP, the fundamentals of assets and liabilities are being rejigged. The change starts with a change in definition, cascading down to recognition and derecognition principles, and to measurement bases.

The following table presents the “key changes” in definitions of assets and liabilities plus a snapshot of couple of important definitions being introduced:


Definition Current requirements ‘Future’ requirements Key changesAssets A resource controlled by

the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

An asset of an entityis a present economicresource controlled by the entity as a result of past events.

Introduction of the concept of “economic resource”.

Deletion of “…economic benefits are ‘expected’ to flow to the entity”.

Liabilities A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

A liability of an entityis a present obligation of the entity to transfer an economic resource as a result of past events.

Introduction of the concept of “transfer of an economic resource”.

Deletion of “… is ‘expected’ to result in an outflow...”

Economic resource

N/A A right, or other source ofvalue, that is capable ofproducing economicbenefits.

Refer to ‘future requirements’ column

Control N/A An entity controls an economic resource if it has the present ability to direct the use of the economic resource so as to obtain the economic benefits that flow from it.

Refer to ‘future requirements’ column


In IASB’s view, the revised definitions of assets and liabilities make them more consistent in that both now include the term “present”, i.e. ‘present economic resource’ or ‘present obligation’. Revised definitions retain the term “as a result of past events”. This reinforces the fundamental principle of accounting – you only account for a transaction if it arises as a result of a past event taking into consideration the nuances of recognition principle.

Proposed omission of the term ‘expected’ from definition of assets and liabilities is designed to take out some uncertainty around recognition of assets and liabilities. Uncertainty plays a role in definition as well as recognition of assets and liabilities as the existing definitions include the notion that future economic benefits (or a future outflow of resources) must be expected, and the existing recognition criteria specify that an asset or a liability is recognised if it is probable that any future economic benefit associated with the item will flow to or from the entity. Some users had interpreted that the use of the term ‘expected’ was intended to convey a requirement that the probability of an inflow or outflow of economic benefits must meet some minimum threshold or used in the mathematical sense of an ‘expected value’, i.e. a probability-weighted average of the possible outcomes. IASB has considered the uncertainty – both existence uncertainty and outcome uncertainty, and is of the view that the notion that an inflow or outflow is ‘expected’ should not be retained as this might exclude many items that are clearly assets or liabilities, for example many purchased options or written options.

The introduction of the concept – ‘economic resource’ challenges the

traditional view around an asset. For a physical asset, the DP proposes, the economic resource is not the underlying object (e.g. a piece of property) but a right (or set of rights) to obtain the economic benefits generated by the physical object.

The term “set of rights” is also interesting and could be far-reaching. An entity may treat all of the rights it holds in connection with an asset as a single asset. However it may also treat some of the rights as one or more separate assets if it is considered relevant to users of financial statements and provides a faithful representation of the entity’s resources. Potentially this could lead to changes in the way lease assets are currently recognised. Lessees might start booking just the right to use a lease asset – a slice of the asset representing the lease, rather than the whole lease asset in entirety.

Setting the tone for “control” at the framework will streamline the use and application of this concept in future standards, the IASB believes. Currently control is defined differently in different standards. In line with the example above under ‘economic resource’, in determining whether an entity controls an economic resource, it is important to identify the economic resource correctly. For example, entities A, B and C may jointly own a real estate on terms that provide them with 25 per cent, 40 per cent and 35 per cent respectively of the economic benefits flowing from that real estate. In the absence of any other agreements that modify control, each party controls its proportionate interest in the underlying economic resource. No single party controls the underlying real estate in its entirety.

IASB proposes to define a liability

as a present obligation ‘to transfer an economic resource’ as a result of past events. The phrase “to transfer an economic resource” is a change to the existing definition. An obligation to transfer an economic resource may result in an entity paying cash, transferring assets other than cash, granting a right to use an asset, rendering services or standing ready to make a payment on the occurrence of a future event that is outside the entity’s control. IASB also attempts to clarify the concept of ‘present’ obligation. A present obligation is one that exists at the reporting date. To meet the definition of present obligation, the economic resource to be transferred need not exist at that date, nor does the entity need to control it already at that date. In many cases, an entity has a present obligation that it will fulfil with economic resources that it will acquire in the future. In this context, IASB emphasises and clarifies two important concepts – present obligations and possible future obligations.

A present obligation must arise ‘as a result of past events’. An entity typically incurs an obligation to transfer an economic resource in exchange for receiving a different economic resource (e.g. an entity incurs an obligation to transfer goods and services to a customer in exchange for consideration received from that customer) or as a result of conducting an activity for which another party seeks payment from the entity (e.g an entity may incur an obligation to pay a tax or a levy as a result of earning revenue or profits). However it is not always clear whether a past event is sufficient to create present obligation to transfer an economic resource, i.e. at the reporting date, if it remains conditional on future events which are yet to take place.


Possible future obligations are future events on which an obligation remains conditional, and are classified as:

(a) those whose occurrence is outside the control of the entity (also known as ‘stand-ready obligations’); and

(b) those whose occurrence depends on the entity’s future actions.

Stand-ready obligations are those obligations for which the entity has an unconditional obligation to stand ready to transfer the resources if the specified future event occurs, e.g. a guarantor’s obligation to compensate a lender if a borrower defaults. In IASB’s view such unconditional obligations are present obligations which meet the definition of a liability.

For obligations whose occurrence depends on the entity’s future actions, IASB proposes this view – ‘a present obligation must have arisen from past events and be practically unconditional’. Under this, an entity might not have the practical ability to avoid a future transfer of economic resource. For example in an industry where “a levy on revenues above a threshold” is required, an entity may not be able to practically avoid paying the levy without significantly curtailing its operations or leaving the market. In such situation a levy is a present obligation on ‘practicality’ ground. IASB expects more guidance in this area in future.

Assets and liabilities – revised recognition and derecognition criteria

Recognition of an asset or a liability is the process of including,

in the financial statements, an item that meets the definition of an asset or a liability and/or income or expenses.

IASB proposes that an entity should recognise all its assets and liabilities, unless:

(a) recognising an asset or a liability would provide users of financial statements with information that is not relevant, or is not sufficiently relevant to justify the cost; or

(b) no measure of an asset or a liability would result in a sufficiently faithful representation of both that asset or liability and the resulting income or expense.

In line with the omission of the term ‘expected’, IASB also proposes to delete the term ‘probable’ from the recognition


criteria to address the uncertainty notion discussed earlier.

In keeping with IASB’s stance on recognising all assets and liabilities, IASB believes the failure to recognise an asset or a liability is not rectified by disclosure of the accounting policies used nor by the notes or explanatory material. In IASB’s view, if some assets or liabilities are not recognised, the resulting depiction of the entity’s resources and obligations would be incomplete and would thus provide a less faithful representation of the entity’s financial position. IASB may provide more guidance on recognition in particular standards when relevant.

Derecognition of an asset or a liability is the process of removing, from the financial statements, an asset or a liability that has previously been recognised.

The existing Conceptual Framework does not define derecognition and does not describe when derecognition should occur. Because there is no agreed conceptual approach to derecognition, different Standards have adopted different approaches posing the risk of inconsistencies. IASB proposes guidance here in terms of derecognition and discusses full or partial derecognition using “control” and “risk and reward” approach. In

IASB’s view an entity should derecognise an asset or a liability when it no longer meets the recognition criteria (control approach). IASB prefers full derecognition. However it seeks user’s views as to the appropriate treatment if an entity retains a component of an asset or a liability in case of partial derecognition.

Assets and liabilities – revised measurement principle

Measurement is the process of determining the amount to be included in the financial statements for an asset or a liability and/or income or expenses.

The existing Conceptual Framework does not provide detailed guidance on measurement, nor does it discuss when a particular measurement basis should be used. The DP attempts to describe detailed guidance on measurement that could be included in a revised Conceptual Framework.

In order to enhance understandability and comparability of financial statements it is suggested in the DP that IASB should limit the number of measurement bases used. Importantly, the DP also suggests that a single measurement basis for all assets and liabilities may not provide the most relevant information.

The DP discusses three measurement bases:

(i) cost-based measurements;

(ii) current market prices including fair value; and

(iii)other cash-flow-based measurements.

There are some arguments that all assets and liabilities should be recorded using the same measurement basis. However this is not going to be relevant for all users of financial statements, and in a number cases may not faithfully represent the accounting transactions for the users. For example, while cost basis can be highly relevant for measuring PPE, it is less relevant for sophisticated financial instruments like derivative for which fair value is likely to be more relevant. Accordingly, IASB’s preliminary view is that a single measurement basis for all assets and liabilities may not provide the most relevant information for users of financial statements, and has kept all of the above three options on the table for measuring assets and liabilities. Preparers of the financial statements would need to choose the measurement basis that represents the transactions faithfully and is relevant for users.


Impact assessment quick summary for assets and liabilities:

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

Assets LiabilitiesDefinition and/or recognition

An asset can be a single asset or one or more separate assets in a set of rights/bundle of rights. This could allow treatment of many non-financial assets to be similar to the treatment of financial instruments, i.e. being sliced and diced from an accounting perspective.

The proposed changes might require an entity to recognise all liabilities in the balance sheet regardless of whether it can avoid fulfilling it with any uncertainty about the outcome being recognised in measurement.

Derecognition An asset potentially can be taken off the balance sheet more easily if the entity loses control of legal rights (e.g. repo securities).

All liabilities are likely to remain on the balance sheet as long as it is considered not practical for the entity to avoid fulfilling it.

Measurement Different measurement bases for assets and liabilities are to be continued. However the number of bases are likely to be limited and streamlined including guidance on how an asset contributes to future cash flows orhow a liability will be fulfilled or settled.

The Author is Manager, KPMG10 Shelly St, Sydney, NSW 2000,Australia


Summary of other proposed changes

Equity

The DP suggests entities should use an enhanced statement of changes in equity. An enhanced statement of changes in equity would provide more information about different classes of equity and show how wealth is transferred between those classes.

Profit or loss and OCI

The DP suggests that the IASB should introduce principles to decide which items of income and expense should be recognised in profit or loss, and which should be recognised in OCI, and whether, and when, items previously recognised in OCI should be recycled.

Disclosures

IASB has received comments from many respondents in recent past that a framework for disclosure is needed to ensure information disclosed remain highly relevant to investors, and to reduce somewhat unnecessary burden on preparers. One aspect of the IASB’s response is the development of disclosure concepts for the Conceptual Framework. Materiality in disclosure tops the change agenda.

The IASB also plans other work on disclosure including possible amendments to existing IFRSs.

Comment period:

IASB is inviting comments on the Discussion Paper and will accept them until 14 January 2014.

Note: Detailed proposals on possible changes can be viewed from the Discussion Paper itself which is comprehensive and discusses a number items in great length.

Source and useful links:

• www.ifrs.org

• Discussion Paper: A Review of the Conceptual Framework for Financial Reporting

• Snapshot: Review of the Conceptual Framework

Takaful means joint guarantee, whereby participants in a scheme agree to mutually guarantee each other against defined losses. Takaful Act 1984 of Malaysia defined takaful as, “a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need”. However, in order to get any assistance and aid under the scheme, the participants mutually should agree to contribute for that purpose. Under takaful scheme, the participants agree to donate a portion or the whole of takaful contribution to a specific fund, which enables him to fulfill his obligation of mutual help. The fund, thus created is used to meet the commitment of joint guarantee should any of the participants suffers from a defined loss. Thus, a takaful contract is basically a contract of cooperation and mutual help. The fund belongs to participants and takaful operators manage this fund as trustee to provide assistance or compensation to the participants in the event of a loss suffered by any of the participants.

Islamic Financial Services Board (I.F.S.B.) has defined takaful as an arrangement, “whereby a group of participants agree among themselves to support one another jointly for the losses arising from specified

Concept of Takaful and its challengesKazi Md. Mortuza Ali

risks. In a takaful arrangement the participants contribute a sum of money as tabarru commitment into a common fund that will be used mutually to assist the members against specified loss or damage”. The Accounting & Auditing Organization of Islamic Financial Institution (AAOIFI) defined “Islamic insurance as a system through which the participants donate part or all of their contribution which are used to pay claims for damages or losses suffered by some of the participants”. In Bangladesh, Insurance Act 2010, defines “Islami insurance business” as “insurance business” carried on according to the “Islami Sariah”. Details of Islami insurance are supposed to be guided by Takaful Rules. Takaful has also been defined as a “contractual arrangement between a participant (insured) seeking protection against a defined risk, from a takaful operator(insurer)” (Tobias Frenz 2010).

Takaful is a unique system of mutual risk sharing, and concentrates on providing maximum assistance to the unfortunate. Takaful provides that profits should be clean and non exploitative. The ethical principle on which takaful is based bring the takaful operators close to their customers and to the true spirit of mutual cooperation, brotherhood and solidarity. The ethics of cooperation among people within the spirit of brotherhood, solidarity


IN

CONVENTIONAL

INSURANCE, FOR A

CERTAIN PREMIUM, THE

INSURED IS COVERED

FOR FINANCIAL LOSS ON

THE OCCURRENCE OF A

CONTINGENT EVENT. IN

THIS CONTRACT, BOTH

THE AMOUNT OF

FINANCIAL LOSS AND

WHETHER THE INSURED

EVENT WILL OCCUR ARE

UNCERTAIN. TO

ADDRESS THIS ISSUE,

CONCEPT OF TABARRU

HAS BEEN

INCORPORATED IN THE

TAKAFUL SYSTEM.

and cooperation is very clearly said in the Quran. “Help you one another in goodness and piety but do not help one another in sin and transgression ……………….” (Sura Maidah 5:2) Cooperation among a group of people, for the sake of taking care of


any one of them is the essence of takaful. Takaful resembles to solidarity of a group of people. Three basic ingredients of takaful are, brotherhood, solidarity and mutual help. This is illustrated below:

CONCEPT

TAKAFUL

BROTHERHOOD SOLIDARITY MUTUALITY

TAKAFUL AS ALTERNATE SYSTEM OF CONVENTIONAL INSURANCE IS BASED ON THE CONCEPT OF BROTHERHOOD SOLIDARITY & MUTUALITY.


Under takaful contract, the policyholders pay a donation as “tabarru” to a cooperative fund with the intention that all the participants of the scheme will be entitled to receive financial help or compensation from the fund. The amount of contribution differs from one participant to another based on the degree of risk in general takaful and actuarial calculation in family takaful. Policyholders (participants) are entitled to receive any surplus resulting from the operation of this common fund. There is no unified system to operate the treatment of surplus/deficit. Takaful fund is a separate fund that does not belong to the Takaful operator ( the takaful company) or its shareholders. Generally speaking, the fund is owned by all the participants who have donated financial contribution to the fund. Thus, takaful is similar to mutual insurance.

The concept of “tabarru” (takaful donation) is the pillar under the takaful system. The word tabarru literally means donation. It is a “shared responsibility and guarantee” principle of takaful. This is the most important factor which distinguished takaful from conventional insurance. It is “Amalus Saleh” (good deed) of the participant, through helping each other. The underlying concept of tabarru in takaful contract is different from the literal understanding of hibah (gift) or sadaquah (charity). Tabarru is actually a donation which is conditional to provide assistance and compensation to participants of the takaful scheme. It is an obligation and commitment to pay the defined amount. Shariah allows that a donation may be restricted by or subjected to certain terms and conditions, and may be allocated for specific purposes.

From an actuary’s perspective, the tabarru is the participant’s contribution to a risk pool that ultimately will be used to pay specified claims of participants who contribute in the pool. The risk pool can pay for claim to participants who has duly paid his tabarru. The risk pool is not accessible to others. The amount of tabarru need to be determined by an actuary, who will determine it by using a cash flow model from observance of past experience and mortality table. The amount of tabarru is fixed by estimating the risk that the participant brings to the takaful risk pool. The actuary should try to ensure that all participants contribute fairly to the risk pool. The tabarru is calculated mathematically as sufficient to cover the risk in commensuration with the probability of claim.

In “general takaful” and “family takaful” business, tabarru is a contract where a participant agrees to donate a predetermined percentage of his contribution to a Takaful fund. This concept eliminates the element of gharar (uncertainly) from the takaful contract. One reason, conventional insurance is considered not

permissible in Sharia is that there are elements of uncertainty (gharar) in the insurance exchange contract. In conventional insurance, for a certain premium, the insured is covered for financial loss on the occurrence of a contingent event. In this contract, both the amount of financial loss and whether the insured event will occur are uncertain. To address this issue, concept of tabarru has been incorporated in the takaful system, whereby a donation is being paid into the takaful fund for the purpose.

Tabarru, under takaful system, is not a premium for meeting loss, but a donation i.e. gratuitous contribution for a noble purpose to help each other. The money collected from each member or participant is to be used for the purpose of assisting fellow participants who require assistance according to the terms agreed and as long as these terms are not in conflict with Shariah. It is the principle of shared responsibility and shared guarantee of the participants for a common cause. Wherever, one of the members suffers a defined loss and makes a legitimate claim, takaful operators


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

The objective of takaful is to pay defined loss from a defined fund. Each participant who needs protection must have an intention to donate to other participants faced with difficulties. Therefore, takaful system provides that each participant contributes into a fund that is used to support one another where each participant contributing sufficient amount to cover expected claims. Tabarru is basically discretionary. However, commitment to donate in takaful pool is necessary in order to promote cooperation which takaful aims to achieve. Commitment to pay tabarru is fundamental to Islamic insurance or takaful.

Concept of cooperation

Takaful is based on the concept of “Tawoon” or cooperation. Participants mutually agree to assist each other financially in case of certain defined needs of takaful contract by contributing to a common fund. By jointly guaranteeing each other, the participants are in fact both the insurer as well as insured at the same time. The takaful system stresses the spirit of cooperation and joint responsibility among participants. The basic notion of takaful is to provide an avenue to share responsibility, solidarity and mutual cooperation. Takaful is founded on the basis of cooperation and mutual help. The emphasis is on togetherness in striving for common good. Both

the operator and the participant mutually agree to a lawful cooperation.

In principle, takaful system is based on mutual cooperation and assistance between groups of participants who agree to mutually guarantee among themselves. This concept per-dates the Islamic era when the tribes used to help the needy on a voluntary and gratuitous basis. The merchants of Makka used to pool funds for victims of natural disaster, piracy etc. In any society, an individual feels the necessity of cooperation in realizing peoples social and economic well being. Cooperation among a group of people, for the sake of taking care of any one of them who may be subject to any mishap is expected and much desired.

Takaful is a form of cooperative risk sharing using charitable donations. The policyholder or insured called participant, pay a premium (contribution) to a fund as donation for those who suffer losses. The policy holders are then entitled to receive a surplus/profit from the cooperative insurance fund. They will also make up for any deficits. The premium or contribution will differ, based on

the degree of risk. It is based on Shariah tenets which state that if gain is desirable; loss should be acceptable. There should be no ambiguity and there should be no deception due to ignorance or absence of information.

Mutuality or cooperative risk sharing is the core of Islamic insurance (takaful). The first relationship is established through a mutual insurance contract between policyholders (participants) considering the concept of donation (tabarru). The second relationship is established between the participants and the takaful operators through a concept of trustee and agency contract wherein, takaful operators are to manage the investment fund and tabarru fund. To ensure compliance with Shariah, any takaful company (operator) need to have a formal mechanism in the form of an independent Shariah Supervisory Board (S.S.B) which will provide Shariah guidelines to the operators. The S.S.B. is not involved in any day to day operations. It delegates and supervise the tasks to executive called Murakib (Shariah compliance and audit team). This can be shown from the following diagram:-


The main role of the Shariah Board is to ensure that all takaful operations are in accordance with Shariah principles. The Shariah Board trusts that the takaful operator (the Board of Directors and the Management) would abide by the Shariah rulings and principles in conducting its operations.

The whole objective of takaful is to establish “tawoon” (cooperation) which protects the participants against the perils of losses. While managing the risk fund, the takaful operator is supposed to act as a cooperative rather than a profit maker. However, the operator can generate income by investing the funds as per Shariah guidelines. In takaful system, shareholder’s fund and policyholder’s fund are kept separate. The operators relationship with the shareholders is equity based. The operator acts as agents or managers while managing the tabarru fund and as mudarib or wakil while investing the funds. Takaful operator acts as Mudarib/Wakil or both for underwriting, investment and administration.

Types of Takaful

Takaful can be divided into general takaful (non-life insurance) and family takaful (life insurance). Family takaful deals with the provision of financial help to the participants and/or their family in the event of misfortunes that relate to the old age, death or disability of the participants. In this case, T.O. is engaged in a long-term relationship over a defined number of years with the takaful participants. In family takaful, the paid contribution is segregated into two accounts. The first is the participants’ investment fund (PIF) and the second is the Participants’ Risk Fund (PRF). The term P.R.F. is also referred to as Participants’ Special Account (P.S.A.). The purpose of PIF is capital formation through regular savings. There are several short-term family takaful products without savings element (group, term etc), wherein all takaful contributions are considered as tabarru and credited direct to P.R.F.

General Takaful Schemes are basically contracts of joint guarantee on a short term basis

(normally one year) providing mutual compensation in the event of specified type of loss. The schemes are designed to meet the needs for protection of individuals and corporate bodies in relation to material loss or damage resulting from different man made and natural disasters inflicted upon real estates, assets and belonging of participants. The entire takaful contribution of participants in these cases are pooled into the PRF under the principle of tabarru. A takaful operator is supposed to be the Mudarib/Wakil or both depending on which model of takaful is adopted. T.O. administers the PIF and or PRF on behalf of the participants, and in return will be remunerated via fees and or profit share arising under a partnership contract (Mudarabah).

A family (life) takaful operator manages three funds i.e. shareholders’ fund, participants’ investment fund and participants’ risk fund. While a general takaful operator manages two funds viz shareholders fund and participants’ risk fund. Shareholders’ fund consists of paidup capital, subsequent capital injections, management fees and share of profit from investment fund. All management expenses and shareholders dividends would normally have to be borne by this fund. Participants’ investment fund constitutes a part of participants’ contribution after deducting the tabarru amount. This fund is managed by the operator and they are remunerated for this purpose by way of fees and or share of profit. Participants’ risk fund is the takaful donation of all the participants to mutually assist all in the scheme (when one suffers a misfortune). In a family takaful operation both participants’ fund and shareholders’ fund are managed separately as follows:

HOW TAKAFUL SCHEME OPERATES?

REGULATOR

OPERATOR

SOLIDARITY FUNDCOOPERATION

BOARD S.S.B

TRUSTEESHIP

PARTICIPANTS


surplus distribution to participants. First one is the pro-rata mode, wherein it is distributed to the participants in proportion to the contribution made by them, irrespective whether one has received any claim or not. Another mode suggests to distribute the surplus amongst those participants only who did not make any claim from the risk fund.

In Malaysia, Mudarabah was the first operational model. The provision or condition for profit distribution between Mudarib and participants in takaful is one pillar of Mudarabah contract. It is necessary for the validity of the contract that the parties agree on a definite portion of the profit to be shared. When Mudarabah is applied in a takaful contract, a profit sharing has to be embedded, otherwise the contract will be invalid. However, some controversy had arisen regarding distribution of profit from tabarru fund as the very purpose of tabarru is not to make profit.

Therefore, practitioners have been using the word surplus instead of profit for distribution from takaful fund (risk fund). When Wakalah model came into practice, the issue of surplus distribution was discussed again as under Wakalah contract the operator is not supposed to participate in surplus or profit from risk fund (tabarru). However, in practice, takaful operators distribute surplus to participants and in many cases to shareholders also. This is done as incentive to operator. It is argued that surplus be treated as performance fees as it is the result of excellent management of risk portfolio.

So far the family takaful is concerned, profit sharing of Mudarabah fund (participants own fund) is perfectly all right. But, in

In general takaful also the operator manages two funds (shareholders’ and participants’) separately. In this case entire contribution is treated as tabarru and constitutes the participants’ risk fund (PRF) or takaful fund (TF). The takaful fund is owned by the participants jointly as opposed to the shareholders in a conventional non-life insurance company. The profit of participants investment fund (PIF) in case of family takaful operation will usually be distributed to participants’ and also may be shared with operator under Mudarabah contract. The surplus of participants’ risk fund is generally used to build up a claim contingency reserve (CCR) within the risk fund to smooth claim experience over a time. The claims contingency reserve (CCR) acts as a buffer against an adverse claim experience in future. This is necessary to provide protection for participants. Any possible deficit in the PRF will be met first from the CCR before “karje hasana” (interest free loan) is sought from SHF. When profit/surplus form PIF is shared between shareholders and participants the rate is usually 10% for shareholders and 90% for participants as per relevant Insurance law. If and when surplus of takaful fund (general takaful) or PRF (family takaful) is shared, it varies as per contractual terms of the scheme.

Distribution of Surplus

Surplus arises form takaful fund/participants risk fund after paying incurred claims, reinsurance contribution and setting aside contingency reserve. The question arises how should the surplus be distributed and to whom. Surplus distribution is a contentious issue in takaful. Two juristic views have surfaced and dominated the takaful world in the Middle East and South Asia. One view is that the underwriting surplus should not be shared between the takaful operator and the participants. The other view validates the sharing. It is argued that there is nothing wrong in sharing the underwriting surplus in the absence of any textual Shariah principle disapproving such a practice.

Those who agree for prohibition of sharing underwriting surplus with the TO, states that shariah allows sharing of profit (return of investment) of participants’ investment fund as well as participants’ risk fund under Mudarabah contract. The underwriting surplus should go back to the participants or be used to establish new reserves or to lower the tabarru (takaful donation). Presently, takaful operators use several modes of

FAMILY TAKAFULOPERATOR

SHAREHOLDERS PARTICIPANTS

SHAREHOLDERS

PARTICIPANTS’INVESTMENT

FUNDS

PARTICIPANTS’RISK FUND

CONTRIBUTIONPARTICIPANT

FUND


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

Many experts feel that there is nothing wrong with surplus distribution as far as Shariah compliance and regulation is concerned. There is no specific Shariah ruling that prohibits surplus distribution under takaful, as long as it is distributed among the parties entitled to and without exploitation by one party over the other.

Mudarabah (partnership) Model

The Mudarabah principle of trade as per Shariah is a partnership between two parties where one party provides capital (rab-ul-mal) and the other party extends necessary management to operate the business venture in the capacity of trustee or manager of the fund to earn profit for the venture by investing the capital. Second party is the Mudarib ( managing the capital under contract) i.e. partner to share profit without providing capital for the venture. The Mudarib can claim share of profit only and not salary, commission or any other remuneration. Mudarib bears share

of loss, if and when loss arises, he is not remunerated in any way.

Mudarib is free to take any decision to manage the business for the betterment of the Mudarabah contract, wherin provider of capital is in real sense a sleeping partner only. However, the Mudarib must exercise prudence, due diligence, business norms, customs, rules and lows relating to the Mudarabah contract. There can be of course restricted Mudrabah contract wherein the provider of capital restricts the operation under contractual terms relating to product, type of investment, market etc. In this case the provider of capital should not interfere in day-to-day operation of the business.

The Mudarib, as trustee needs free hand in decision making and manage the operation to bring best output and ensure reasonable profit. Restricted Mudarabah is permissible in Mudarabah as it helps the provider of capital to protect his/her fund from engaging into high risk venture. The capital owner may target moderate or low

profit with less risk involved in investment. Observers suggest that restricted Mudarabah is more suitable for takaful or Islamic insurance, as this would ensure cautions investment of the takaful assets. Moderate and stable profit is more desirable in takaful business than adopting policies which aisus at maximum profit at high risk.

Although loss under Mudarabah contract is borne by the capital provider, the Mudrib can be held responsible for such loss, if he fails to abide by the terms of the contract, or do not exercise due diligence mouse fund, or act negligently. The profit sharing ratio between the takaful operator (Mudrib) and the participants as provider of capital need to be set clearly in advance in the contract. Duration of Mudarabah investment, mode of fund utilization (restricted/unrestricted), the mode of operation of the fund under Shariah principles should be clearly spelled out in the Mudarabah contract to ensure accountability and transparency of the system.


Wakalah (Agency) Model

As an alternate to Mudarabah , Wakalah contract can be used to operate takaful system. Wakalah means agency. In the Wakalah contract the takaful operator acts as wakeel on behalf of the Muwakkil (participants). The Wakil is supposed to protect the interests of the principlal ( Muwakkil) under Shariah guidelines. The wakeel can act to transact business on behalf of participants as per permissible modes and process of investment. He does not take share of profit but receives commission upon performance of the contractual terms. The terms of the contract and operational guidelines should be clearly spelled out with full transparency. Agent act, as representative of the principal and is supposed to act as per authority given to him. The principal is liable for the consequences of the acts of the agent, so far the authority has been entrusted to the agent. If the agent acts beyond his authority, the principal is not liable. An agent cannot delegate his/her authority, unless he/she is permitted by the principal.

An agent under Wakalah contract acts as trustee and not a guarantor. Therefore, the agent is not liable for loss or damage of takaful assets unless he is found negligent and or acts irresponsibly. The agent is supposed to use reasonable care to serve and protect the interest of the principal and as such should ensure best investment at the least risk. If the agent fails to perform his duties and discharge his responsibilities properly, he will be liable to the principal for any losses incurred thereupon.

The main distinction between Wakalah and Mudarabah is the extent of control of operation by the Rab-ul-mal (capital owner). In wakalah concept, the agent agrees

to act as per the directions of the principal. This distinguishes the role of the Mudarib who acts independently and the capital owner has no right to control or supervise the Mudarib. Another important distinction is risk and profit sharing. Mudarib has right to share profit whereas Wakil is entitled to wakalah fee only on commission basis or on lump-sum basis, irrespective of profit or loss in investment. This means a pre-determined cost is involved in Wakalah model. The Mudarib shares in the risk of investment as he/she is not remunerated when there is a loss. The agent does not take any risk, in case of loss. However, the agent should be held responsible for loss or damage of assets or money because agent acts as trustee, but the agent cannot be held liable to compensate.

Hybrid Model

Considering pros and cons of Wakalah and Mudarabah, hybrid system (model) has evolved in takaful market, although some experts feel that restricted Mudarabah is more suitable for takaful operation, in comparison to pure Wakalah. On the other hand, it is argued that a key advantage of wakalah over a Mudaraba is that the wakala fee can be collected upfront and support acquisition cost of new business. This also does not help to increase business, because high wakalah fee will be unattractive to participants and it may hinder sales ultimately. Mudarabah model, on the other-hand, might be more attractive as the profit is shared, but it becomes very difficult for the takaful operator to bear the cost of acquisition. If significant new business is written or if the company is in its early years with no income from existing inforce business to subsidies the shortfall. This is why there has been a trend

towards a Wakalah model for underwriting and the Mudarabah model for the investment part. This hybrid model is accepted by the vast majority of Shariah scholars.

In Bangladesh, in the proposed Takaful Rules, it has been stated that unless otherwise stated, the model to be followed by the takaful operator shall be based on the combination of Wakalah and Mudarabah. It is perhaps a sensible choice specially for family takaful savings products. When Sudan launched its takaful operation based on the “tawoon” principle, it adopted the wakala model. However presently, in most of the Middle-east, the hybrid model is being used. This is also the case for South Asian countries like Malaysia, Indonesia, Brunei etc, although when takaful was launched in those countries, they used to follow pure Mudarabah model. From the operation point of view, hybrid model is more attractive to takaful operator, as it ensures three sources of income, comprising, wakalah fee, profit from Mudarabah investment and


profit from shareholders fund. The participants will get share of underwriting surplus as well as profit from the investment of Takaful fund/Mudarabah fund.

Operational flow charts of family takaful and general takaful under hybrid model can be seen in the following two diagrams:-

Challenges of Takaful

There are a number of practical challenges that need to be addressed in order to ensure the success of takaful industry. The practical challenges relate to the managerial efficiency of the operator who need to be more competitive in order to offer a commercially viable alternative to conventional insurance. In order to compete with conventional market, a takaful operator would need to have a range of products to attract a wide range of consumers. There is still the great need to educate the general public about takaful. Identification of halal investment sources both within Islamic countries and in non-Islamic countries can help takaful operators to improve their competitiveness and investment results, which can help them effectively, spread their investment risks. Takaful industry must reach to a consensus on adopting a standard business model globally. The Islamic Financial Services Board (IFSB), the ASEAN Takaful Group (ATG), the International Takaful Association (ITA), and the Accounting & Auditing Organization of Islamic Financial Institution (AAOIFI) need to work together to promote standard practices within the industry.

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

TakafulOperator

DIAGRAM - A (Hybrid Model)General Takaful

Flow Chart

ReserveManagement

ExpensesRetakaful

CostClaims

Investment

Profit Participants Contribution Wakala Fee Shareholders

Surplus Shareholders Fund

Takaful Fund Investment Profit

TakafulOperator

DIAGRAM - B (Hybrid Model)Family Takaful

Flow Chart

Participants Contribution

Investment

Share Holders

Profit

Share Holders Fund

Management Exp

Claims Surplus

InvestmentTabarru (PRF)

RetakafulCost

WakalahFee

Mudarabah(PIF)

MaturityBenefit Profit


potentially high return and high-risk situations. Takaful operators would desire to maximize higher investment income because their compensation is directly related to their own investment performance. There must be also a formal supervisory system that monitors takaful operations efficiently. The mere existence of a Shariah supervisory board within a takaful operation may not be all effective in this regard. The operators must strengthen their financial capabilities and improve other essential skills in providing insurance services. Focusing on quality of coverage as well as competitive price are required for efficiency in operation and enhancing competitiveness with conventional insurers.

Challenges of takaful need primarily be met by the professionals involved in the operation of takaful. It is an accepted fact that takaful differs from traditional insurance models and fostering takaful business for the betterment of the society is a worthwhile endeavour. The joint stock model and the mutual or cooperative model have been the traditional ways of delivering insurance. Takaful model has now emerged as the new unique model wherein both the shareholders and policyholders interests need to be protected more equitably. In joint stock model, the shareholders are supposed to look after their own interests. Mutual companies look after the interests of the policyholders only. In takaful, the management is supposed to pay reasonable dividend to shareholders as well to pay high rate of bonus or profit to policyholders. Therefore, to maintain equity and justice, takaful operators need to have separate set of accounts and assets; one for its shareholders and the other for its

policyholders. Apart from that, Family Takaful Operators should maintain a risk sharing pool for its members to meet the death claims during the term of the policy.

Management of a takaful operator is to play crucial role in this regard. Providing policy or risk cover at a lower rate of premium (contribution) than conventional insurers ought to be a prime goal of takaful operator. This can be done by increasing overall managerial efficiency through proper motivation of the human resource. Reducing cost and increasing productivity are the main two principal processes of reaching the goal. Increasing underwriting surpluses is another way to increase financial surplus. In takaful, in the event of underwriting losses, shareholders provide Karje-hasana (interest free loan) to takaful fund/Participants Risk Fund to meet emergency. A part of the underwriting surpluses can also be kept as emergency “Reserve” for future unusual deficit, if any. The future of takaful industry depends much on how the takaful operators are able to make a happy marriage between higher rate of profit to policyholders and cheaper rate of products without any compromise with quality in products and services. This means takaful operators must ensure good governance and transparency to the highest degree.

Maintaining Highest Degree of Transparency

Different takakul models have evolved during last three decades. All the models emphasize that transparency has to be maintained to ensure equity and justice. While shareholders are represented in the Board of directors; the policyholders are not represented in the Board. Therefore,

independent directors be appointed in the Board to ensure corporate good governance and to protect all stakeholder’s interest, specially that of policy holders(participants).

Takaful operators are not charitable institutions; neither they are purely commercial. While the principles of mutuality and cooperation are the essence of takaful operation, it has to be also commercially viable, and transparency should be the core feature. Operators are trustees of people’s fund and they need to clarify at the outset, how the profit and surplus be distributed from investment and underwriting surplus. Different models have different guidelines of sharing surplus. In Mudaraba (partnership) model, the shareholders are entitled to participate in both investment and underwriting surplus. Management expenses be borne by the operator out of these surpluses. In the Wakala (agency) model, investment return and underwriting surplus are not shared by the shareholders; instead the operator takes only wakala fees.

In the hybrid model of Wakala and Mudaraba the takaful operator (shareholders) apart from fixed wakala fees is entitled to have share from investment profit. In some cases underwriting surplus is also shared by the shareholders. In the pure cooperative model all profits and or surpluses belong to policyholders only. These aspects of surplus distribution methods and policies need to spelled out clearly in the policy documents. Policyholders (participants) need to be educated about the Shariah guidelines regarding distribution of surplus under Mudaraba model, Wakala model and different hybrid models.

Unfortunately, in most of the countries there is no regulatory


framework or guidelines as to which model to be followed and what are the basic requirements from Shariah view point and regulatory aspects. Bahrain’s regulatory framework sets out explicitly the need to use the Wakala model for underwriting and the Mudarabah model for investment returns. Malaysia allows all the different models, but have separate law and regulations for takaful. In Bangladesh, Insurance Act 2010 and the proposed takaful Rules provide that takaful operators should maintain two separate funds viz participants takaful fund and shareholders fund. It is, therefore, necessary that the Board of Directors and the management ensures that all employees of takaful companies embrace and follow takaful principles in all aspects of operation, be it underwriting, claims, accounts, and so on. Corporate governance and regulations are very important for maintaining transparency. Regulators need to take a strong position to protect the policyholders.

Takaful contracts need to be simple, transparent and standard. In most countries there is no standardized policy document for Takaful. The relationship between policyholder and the takaful operator should be made clear. Regulation should ensure that the basis of operators fee, sharing of profits/surpluses are properly disclosed. All operators of takaful must also treat the policyholders fairly. It is, therefore, necessary to disclose, how the operator distribute underwriting surplus and to whom it should be distributed.

Ensuring Good Governance

The unique characteristics of takaful make its success somewhat dependent on a supportive

regulatory framework. Malaysia is a glaring example. From the outset, Malaysia has had a separate law regulating takaful. In Malaysia, there is no restriction on the takaful models to be followed. However no takaful windows are allowed. Some of the important features of takaful regulations in Malaysia are as follows:

a) An actuary is to certify pricing of takaful products.

b) Shariah certification is required on the operation of takaful companies.

c) A supreme Sharia Rules making body for takaful has been formed by the regulator.

d) There are limitations on the commission to be paid to intermediaries.

e) There are specific regulations for the investment of takaful assets.

The most important ingredients for takaful to succeed are regulations in the relevant Jurisdiction. However, it is not appropriate simply to copy the regulation of one country. The regulators and the operators need to understand the implication of Shariah interpretation of the Islamic laws as

applicable to business contract (Fiqh Muamalat). Unfortunately, many of the professionals have little or no knowledge about business laws of Shariah. Therefore, there is a feeling amongst several regulators that takaful can be regulated by the conventional rules and regulations applicable for insurance business. This concept seems not correct. It is evident that takaful is inherently more transparent than conventional insurance as the operator has to disclose to all participants how much tabarru is being deducted and why, how munch fee is to be charged and its basis, in what proportions the surpluses are to be distributed. Regulations need to specify these aspects and obligations of the operator to maintain fairness and equity for all the stakeholders.

Risks should be clearly elucidated and risk should be allocated to the appropriate stakeholder. Regulators need to ensure the long-term sustainability of the takaful operation. Therefore, they need to provide instructions and guidelines to the Board, Shariah Board and the Actuary as to how they perform


their responsibilities to shareholders, policyholders, management team and the public in general. The Board must ensure corporate good governance and advise the management team to comply with rules, regulations and the Shariah law as applicable to takaful operation. For this purpose a supreme Sharia Council or Board need to be established by the regulator to ensure uniformity in Shariah interpretation of takaful operation. Further it is necessary to oversee that management ensure fair and sound pricing of products. It is also necessary to ensure that solvency rules are being followed. The shareholders expects to earn reasonable dividend and the participants or policyholders expect cheaper price and more benefits from the savings and protection schemes of takaful.

While management is supposed to meet all these expectations, they need to meet long-term liability and ensure financial soundness of the company, without any

discrimination to any of the stakeholders and ensuring complete compliance of Shariah guide lines.

Mitigating Inherent Risks in TakafulTakaful operators ought to be very careful to ensure that enterprise risks are managed prudently. This can be ensured by setting and maintaining.a) Capital adequacy,b) Adequacy of Loss Reserves,c) Quality of Assets,d) Pragmatic underwriting Policy

and e) Monitoring & Managing

Enterprise Risks.

Furthermore, the operators need to maintain appropriate levels of risk based capital. There is also a need to expand the variety of Shariah compliant assets to mitigate the investment risks inherent in Family Takaful (long-term savings and protection products). The success of takaful is likely to be materially dependent on having access to wide range of Islamic Bonds (Sukuk). In Bangladesh, the takaful

operators are facing extreme difficulties for not having access to appropriate Islami Bonds.

Operational risks and expense risks of takaful operator are borne by shareholders as the management is responsible for business on behalf of the shareholders. But underwriting risk and investment risks under takaful operation are borne by the policyholders, although they have no say in the decision making process. Tabarru rate or the risk premium is determined on the basis of estimated likelihood of a loss of property or as determined by the Actuary on the basis of Mortality Table. In the real world, there will be fluctuations and volatility in the amount of claim. It become, therefore, necessary that a reasonable amount is kept reserved for the unusual years. A complication arises if the shareholders share in underwriting surplus, but not in underwriting losses.


In family takaful, an Actuary takes care of product pricing and tabarru rate can be periodically reviewed. However in non-life (general takaful) business it has been recommended that underwriting surplus should be paid out only after keeping a reasonable amount into a reserve fund. Therefore, deficits if any can be made good first from the reserve fund and, if that is not sufficient by “karj-e-hasana” from the shareholders fund. The basis of underwriting surplus should be regulated or reviewed by the Regulator to reduce the possibility of over payment or wrong payment.

Ensuring Shariah Compliance Compliance of Shariah rules is the essence of takaful. Structurally, takaful company is a combination of stock company and mutual organization. However, there are significant variations in takaful operation in comparison to stock companies and mutuals/cooperatives engaged in insurance business. Mutuals, cooperatives and the conventional companies are not supposed to comply Shariah guidance, which a takaful operator must abide by. On the surface, takaful appears to be similar to mutual insurance however, the vast majority of takaful companies operate as stock companies. The key difference is that takaful operators must have a Shariah Board to supervise and monitor the operations of takaful regarding Sharia compliance.

Takaful is guided by the Shairah law of “Muamalat” (commercial law). Therefore, belief in religion of Islam is not a precondition for participants, executives, share holders and so on. But this does not mean that the stakeholders can remain ignorant or indifferent

about the applicable Shariah laws and their implications in the takaful operations. One cannot be Shariah compliant, unless he/she is conversant with Shariah knowledge. Furthermore, all the stakeholders must be willing to be Shariah compliant. Operation of takaful business purely on business motive cannot fulfill the desires of vast majority of Muslims throughout the world. A Shariah compliant takaful operator cannot charge or earn interest and they must not invest in non Shariah compliant assets. To avoid confusion among the Muslim population, there should be a consensus among Shariah scholars as to how takaful is to be structured and implemented under Shariah guidelines. In this respect, local Shariah scholars must try to agree among themselves and then to come to consensus regarding structure and operational guidelines.

In Malaysia, there is no restriction on the takaful models to be applied. However, the operation framework sets the maximum fees to be charged to the participants and the maximum share of surplus an operator can take for itself. In Bahrain, all takaful operators must organize and operate their business according to the wakala model. However, the takaful operator can use the Mudaraba model from the investment portfolio. It is observed that Takaful industry practice is gradually converging toward a hybrid business model, which combines a fixed fee model for underwriting (wakala) with profit sharing for investment activities (Mudaraba).

In Bangladesh, takaful (Islamic Insurance) has been defined in the Insurance Act, but no rules/regulations have been made so far. Sharia scholars have to come forward with their

suggestions so that it is decided finally as to what is Shariah compliant and what is not. Regulating takaful is different from regulating insurance. This stems from the hybrid nature of its set up. A risk-based approach along-with a well-thought-out rules-based regulations may be appropriate. An important decision for the Shariah people and the regulators is whether to allow Takaful windows. There are several other issues where consensus is required and need regulatory support.

Ensuring Regulatory Support

Regulatory support is one of the key factors for the continued development and growth of takaful. A good example is Malaysia which has become the biggest takaful market worldwide. This is due to the comprehensive takaful regulations and continuous support by the Regulator, “Bank Negara Malaysia”. Bank Negara’s goal is to put takaful operators on an equal footing with conventional insurers. New regulation in Malaysia is the introduction of the Islamic Financial Services Act. This will accelerate the consolidation process further as it will require takaful operators to have separate licenses for general and family takaful instead of composite operation. In Indonesia, the regulator allows conventional insurers to set up takaful windows. However, a new regulation is expected to come into effect requiring takaful windows to convert to a full-fledged takaful operator.

Recently, the regulator in Pakistan, issued new takaful rules allowing conventional insurers to set up takaful windows. However, existing takaful companies have opposed to this venture as they felt that it puts them at a disadvantage position compared to their


competitors in the conventional market. In Bangladesh, Insurance Act 2010 allows Conventional life insurance companies to open takaful windows but non-life conventional companies are barred to open takaful windows. Thus, it appears that the issue of window operation of takaful is now being debated and also controversial. Regulators need to have strong logic for allowing or not allowing takaful windows.

In takaful, the shareholders are expected to provide the initial capital, but ultimately the participants (policyholders) are expected to build up the necessary solvency capital. The challenge of setting solvency standard for takaful operator need to be handled very carefully by the Regulator. The International Financial Services Board (IFSB) has set a standard with regard to solvency requirements for takaful. The standard envisages separate ring-fenced shareholder’s and policyholder’s, funds, where each fund would need to have sufficient assets to meet the solvency obligations. It has been assumed that the shareholders would be obliged to extend interest free loan to the policyholders fund when it is needed. The standard is silent on how takaful products will be priced and what happens to the contributing policyholders, if the fund created by them is used to finance future policyholders. The regulator needs to introduce creative and positive solutions to these issues.

Besides the legal and regulatory issues, there are a number of practical challenges those also need to be addressed in order to ensure the success of this nascent industry. For example, there is a great need to educate the general public about insurance and takaful. Further it appears that the so called social elites and the modernists are allergic to Islam and they are not in favor of allowing a separate insurance system based on Shariah principles. Amidst all these unfavorable environment, it is necessary to adopt a standard takaful model nationally, if not globally. Regulator needs to play the key role in this regard.

Concluding Remarks:

Takaful operators follow different models of takaful operations. Shariah scholars feel that more perfection in the operating process is required to make it best in comparison to conventional insurance system. Current models of takaful are acceptable to Shariah scholars because it is better than conventional insurance and it is being developed towards more perfection. Scholars and professionals throughout the world are now trying to develop takaful and make it more Shariah compliant. The great obstacle in the way of perfection is the environment where we live and operate. Takaful companies operate in an environment which is not 100% Shariah compliant. Furthermore, there are several issues which have

not been resolved finally. There are debates about surplus distribution, management expense, karje hasana, wakala fee, tabarru and so on. At the same time, takaful operators can not play on a level playing field because of shortage of Shariah compliant assets for investment, shortage of Shariah experts on takaful, shortage of takaful professionals, shortage of retakaful operators, absence of Shariah compliant capital market etc.

The global takaful industry is still in its early stages of development. While the number of takaful operators have risen and expanding into new territories, the industry is still small when compared to the nearly US$ four trillion of premium seen in conventional insurance. Majority of conventional insurance consumers are from Europe, America and Oceania. This is simply because insurance consciousness and people’s ability to buy insurance is more in western countries in comparison to third world Muslim countries. Despite this lopsided high position of conventional insurance, it is heartening to note that Islamic insurance (takaful) is one of the fastest growing areas of international Islamic finance today.

The Author is Managing Director,Prime Islami Life Insurance Ltd.

Abstract

Changes in the global marketplace over the past several years have made bribery and corruption one of the central issues in international business today. Though the Corporations are expected to conduct their operations responsibly with accountability to wider society, the real world picture is quite different. The objective of this paper is to highlight these issues by reviewing the academic literature in relation to Multinational Corporation’s responsibility to fight against corruption through the tool of corporate governance. Here corruption is considered under one dimension i.e. bribery or questionable payments. The study seeks to shed light on different initiatives taken at business, government and multilateral level to deal with this problem. And individual firm action is a vital component of the ultimate mix of policies and strategies that is likely to make a significant difference in the practice of making corrupt payments.

Introduction

Corporate governance and corruption, two interrelated concepts which are very much controversial in modern economy, get the

Corporate Governance VsCorruption: Role of MNCs

Tanzina Haque

highest priority by the corporate sector as well as by the government, particularly in the emerging economy. Good governance and controlling corruption is really a fundamental basis for growth and development of any country. This paper mainly seeks to contribute to the debates about the questionable relationship between corporate governance and corruption and what role the business firms particularly MNCs play to address both issues. The paper also draws attention to a variety of strategies and processes used by MNCs to deal with those subject matters. The paper is the extensive review of the existing literature on the field of MNC’s responsibilities towards good corporate governance and corrupt practices.

Before going to detail analysis, brief overviews of the two terms are given below for clarification.

Corporate governance

Corporate governance is an emerging issue in today’s world. According to literature, corporate governance is a set of mechanisms which act to enhance the performance of corporations. In other words we can say ‘corporate governance is the system by which companies are


CORPORATE

GOVERNANCE AND

CORRUPTION, TWO

INTERRELATED

CONCEPTS WHICH ARE

VERY MUCH

CONTROVERSIAL IN

MODERN ECONOMY,

GET THE HIGHEST

PRIORITY BY THE

CORPORATE SECTOR

AS WELL AS BY THE

GOVERNMENT,

PARTICULARLY IN THE

EMERGING ECONOMY.

GOOD GOVERNANCE

AND CONTROLLING

CORRUPTION IS REALLY

A FUNDAMENTAL

BASIS FOR GROWTH

AND DEVELOPMENT OF

ANY COUNTRY.

directed and managed (ASX principles)’. It is evident that the development of corporate governance concept is a global occurrence therefore it is a complex


area including legal, cultural, ownership and other structural differences. According to John Farrar the structure of corporate governance is as follows:

Fig: The structure of corporate governance

Legal regulation

Stock exchange listing requirements & statements of accounting practice

Codes of conductGuidelines Statementof best practice

Business ethics

Corporate governance is a broad theory concerned with the alignment of management and shareholder interests (Grant, 2003). Arthur Levitt defines corporate governance as “the relationship between the investor, the management team and the board of directors of a company” (Levitt, 2002: 209). So Corporate governance is the control rights to influence the activities of managers to ensure efficient use of resources entrusted at their disposal. It specifies the distribution of rights and responsibilities among the different actors inside the corporation – CEO (Chief Executive Officer), board members, managers, shareholders and stakeholders (Goyer, 2001).

Why the concept of corporate governance exists? Or why it is so important? In this regard, Sir Adrian Cadbury perfectly said, “corporate governance is considered withholding balance between economic and social goals and between individual and community goals.” (Cadbury, 2003).

Corporate governance has become a top priority for the regulatory bodies with the objective of providing better and effective protection to all stakeholders and also to make the market confident as research reveals a positive correlation between corporate governance and share prices (Ahmad, 2004). Another important reason is that poor governance leads corruption. James Wolfensohn, the president of World Bank says "The governance of the corporation is now as important in the world economy as the government of countries." There are two guiding principles for corporate governance

- Transparency- related to the disclosure issue of corporation regarding the event made by the corporate people

- Accountability- says that the corporate people (directors and other officers) should be accountable for their actions


Corruption

There are plethoras of definition in literature regarding corruption. According to Macrae (1982) corruption is ‘an arrangement that involves an exchange between two parties (demand and supply) which has an influence on the allocation of resources either immediately or in the future and involves the use or abuse of public or collective responsibility for private ends.’Corruption may be in different forms and occurred at different levels. According to Waller Verdier & Gardner, 2000, we can think of two structures of corruption: top-down and bottom-up (Gardner and von Hagen [1996], Cheung [1998]). Top-down corruption refers to a setting where corruption decisions are centralized in the chief of state, who then monitors lower level officials in an attempt to collect corruption rents. Bottom-up corruption refers to a setting where corruption decisions

are decentralized at the level of lower officials. In this form of corruption, the chief of state is simply one among many collectors of corruption rents. In the era of globalization, as business firms expanded their operations across the national boundaries, governments, managers and scholars all grew more aware of the magnitude of corruption and the need to understand and address it. For analysis purposes this paper considers corruption under the scope of bribe or questionable payments.

Bribe/questionable payments

Bribery can take place in a wide scale of business activities. And it can be active or passive in that sense after doing something wrong when the business pay bribe to avoid future unfavourable events then it is passive but when business initiate bribe to make

some undue influence then it is active. Unfortunately bribery practices have several hidden costs that may dwarf any immediate gains from such practices (Xun Wu, 2005 p.154). Bribery should be distinguished from common practices involving social gifts and entertainment and cases where payment may constitute an authentic and accepted method of compensation.

Cost of corruption

The effects of corruption on firms are similar regardless of any national nature. But some researchers, suggest that the nature of corruption varies appreciably across countries (Schleifer and Vishny,1993), In some countries, corruption is hierarchical, organized and predictable e.g developing countries In other countries, corruption is disorganized, independent and


unpredictable like developed countries (Herrera & Rodriguez, 2003, p.2). Whatever the nature, corruption involves costs both explicit and implicit (hidden). As a result the operational cost of the business increases. Have an impact on the profitability or the overall creditworthiness of the firm. Not only has the business organization, corruption imposed cost on the society indirectly by limiting the ability of the government to perform effectively and efficiently, Which ultimately has a negative impact on the standard of living of that nation. That's why it is important to apply good corporate governance practice to reduce corruption.

Relationship between Corporate governance and Corruption

It is hard to say whether the corporations are corrupt because they have the poor corporate governance, or they are unfortunate to establish good corporate governance because they are corrupt, but it is clear that something need to be done about the high levels of corruption to enjoy any kind of growth and prosperity by the corporation as well as nations.

To establish the relationship, here it is assumed that:

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

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

HP 1: Corruption Will Be Lower in Countries Where Corporate Boards

Are More Accountable to Shareholders (accountability)

HP 2: Corruption Will Be Lower in Countries that Have Higher

Standards for Accounting Information Reporting (transparency)

Corresponding to the two hypotheses regarding corporate governance and corruption, two measures of corporate governance that are taken a) efficacy of corporate boards in representing outside shareholders (SHAREHOLDER), and b) the quality of accounting practices (ACCOUNT) among 75 major economies around the world (sample size). And corruption perception index from TI is taken as measure of corruption as dependent variable plus some other control variables. Regression analysis is used to prove the above


hypothesis. The results provide convincing evidence in favour of the two hypotheses. ‘The coefficients on two measures of CG have the expected effects on corruption and they are statistically significant. There will be less corruption in a country where corporate boards truly represent the interests of shareholders; the prevention of accounting irregularity such as keeping profits and wages off the books can also play a positive role in the battle against corruption.’ The research study also conducted using Bribe Payer Index (BPI) as dependent variable and that result also indicate ‘the two corporate governance measures have the expected effects on the perceived

level of corrupt practices of firms from nations ranked in the Bribe Payers Index. Firms from countries with lower corporate governance are more likely involve with corrupt practice like giving bribe (Wo, 2005).

According to the World bank, governance indicator measure six dimension of governance: a)voice and accountability b)political stability and absence of violence, c)government effectiveness, d) regulatory quality, e) rule of law, and f) control of corruption, covering 213 countries. If consider only one dimension that is control of corruption and taking top 5 and bottom 5 countries from Corruption perception index (CPI)

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

Countries having higher scores are cleaner in terms of applying good corporate governance and countries having lower scores are more corrupt. In a modern globalized economy, the top ranking countries in CPI are doing business to the lower ranking countries and those multinational are somehow involves in the bribery payments to those nations. The interesting fact is that clean countries according to CPI of Transparency International are responsible for the bottom side corrupt countries for exporting corruption. But it’s really difficult to determine which countries are producing the greatest supply and demand of corruption. Transparency International's "The Global Corruption Barometer 2013" which is a survey of 114,000 people in 107 countries, shows corruption is widespread. The survey said that 27 per cent of respondents had paid a bribe. According to the survey, many people regard corruption as a very serious problem for their societies. On a scale of one to five, where one means "corruption is not a problem at all" and five means "corruption is a very serious

Countries Rank CPI scores

Denmark Finland New ZealandSweden Norway

11335

9191898986

South SudanSudanAfganistanNorth KoreaSomalia

7374757575

1411888


problem", the average score across the countries surveyed was 4.1.

MNC’s role in CG and corruption

Do the business organizations contribute to the reduction of the corruption in a particular country by exporting good corporate governance? It is evident that presence of foreign owned subsidiaries, on average, reduce the level of corruption of the host country (Chuck & Solomon, 2006). That is MNCs play a major role in combating corruption and boost up good corporate governance, because they have the opportunity to exchange good corporate practice across the country. But is it the whole story? Sorry to say- No. Though they can do something better, they are actually taking advantage from corrupt economy. The Head of Nigeria’s Economic and Financial Crime Commission, Nuhu Ribadu said, ‘I have seen multinationals and big oil companies play by the rules elsewhere, but behaving badly in

Nigeria and Africa because of our collapsed systems.’ And this is the picture of most developing countries.

It has been argued that companies, especially multinationals, are the biggest perpetrators using a sophisticated network of notional companies and corporate structure to facilitate corrupt practices in developing countries (Kapoor, 2005, Martens, 2007). Firms from countries where domestic corruption is minimal play a major role as bribe payers into corrupt environments (Dunfee 2000). Some factors can be identified as responsible for explaining this type of inconsistent behavior of MNCs.

Firms may involve in corrupt practices due to competitive necessity. They may find themselves at a serious disadvantageous position if they refuse to pay bribes while others continue to do so.

MNC’s need to show respect for local cultural norms. As a result sometimes they are bound to

cope with this questionable practices

Some instances of bribery are the result of extortion. The morality of extorted payments depends on the nature and circumstances surrounding the payments.

In extreme cases MNC’s inability or unwillingness to control rogue employees also contribute to corrupt practices.

But the use of bribery and inducement to secure competitive advantages is primarily a matter of executive discretion rather than any legal or moral compulsion (Otusanya 2012). So it is possible by the firms to control themselves from this type of dishonest activities.

Combat corruption through CG

Remember that one corruption gives birth to another one. The second transaction may lead to

`~bx©wZ

`gb K

¬ve


another corrupt action. Then what is the ultimate end? It is endless. What should be the policy to deal with the corruption in the corporate sector? Xun Wu used a simple coordination game to illustrate firms’ choices in the situation of giving bribe or not to give bribe. Assume that two firms compete for a public contract, and the firm involved in bribery may have an undue advantage over the other firm if other firm does not pay bribe but such gain should be offset by the potential loss. The scale is taken from 0 to 4 and the payoff matrix is shown in the figure below:

When both firms offer bribe then this create an equilibrium position that no firm gains competitive advantage (4th scenario). In other extreme point when no one give bribe, the firms are in another equilibrium position (1st scenario), So the best strategy for the firm is to follow either bribe-bribe or no bribe-no bribe condition.

According to Jon Quah the ultimate consequences of corruption can be minimized by taking appropriate strategy by the government, business people, social groups or multilateral organization. He provides a matrix of anti-corruption strategy taken by the government to reduce corruption.

Government should take the initiative to apply effective strategy, with strong political commitment implement adequate rule and regulation to ensure less corruption. In modern days some of the measures are taken to deal with this situation e.g. Foreign Corrupt Practice Act (The FCPA has had an enormous impact on the way American firms do business), International Code of Conduct or Corporate Governance Principles (OECD, AIMA, World

bank, ASX etc.), donor forces for economic and political stability and ensure ethical behaviour.

In response to the lack of government initiatives, the private sector’s role in the anti-corruption movement increased considerably. As a driver of economic growth and development, the private sector plays an invaluable and evolving role in rooting out corruption, especially when working in countries with weak institutions.

Hess and Dunfee offer an effective instrument for the business to combat corruption through corporate governance by C2 Principles which is a voluntary approach to prevent payment of bribes and to publicly disclose their progress and efforts towards these ends. It has been argued that such codes of conduct and statement of responsible and ethical conduct are used as strategic resources to mould public

opinion and shield the business from a hostile external environment (Baken 2004, Sikka 2010).

Perhaps the most significant fact of all anti-corruption efforts and trends is that the general public appears to have lost its tolerance of corruption and bribery. Research study reveals that though in the short run bribery gives a positive return for streamlining business operation, in the long run it ultimately has a negative effect. Spending money or time on bribery, facilitation payments, or extortion represents a blatant misuse of corporate assets and increases the risk on the rate of return on invested money.

Conclusion

In conclusion it can be said that the relationship between corporate governance and corruption is really a controversial issue. It is very difficult to identify the perfect

Company A

Company B

Fig: Pay-off matrix of two firms competing for contract

No bribe bribeNo bribe 4,4

1st scenario0,32nd scenario

bribe 3,03rd scenario

1,14th scenario

Anti corruption strategy

Commitment Of political leadership

Adequate InadequateStrong Effective

strategyIneffective strategy 2

Weak Ineffective strategy 1

Hopeless strategy

The Author is Assistant Professor Department of Accounting &Information Systems,Dhaka University


cause-effect relationship between them. Sometimes we can say that corporate governance is the cause for ultimate effect of corruption i.e. good corporate governance reduces the level of corruption or bad one increases corruption. But we can also say that due to the cause of corruption, the level of corporate governance is affected. In a highly corrupt environment, it is very tough to ensure good corporate governance. The truth is that interdependent relationship exists so initiative should be taken simultaneously to reduce corruption and improve corporate governance practice.

And in this respect Multinational Corporations can play a significant role because MNCs have the capacity to shape up the regulatory framework through private payments to public officials which in turn skews the policy making process in favor of particular firms. So MNCs have the major responsibility to deal with the corruption by exporting/ importing good corporate governance wherever it is required.

References:

Farrar, John 2005, ‘Corporate Governance: Theories, Principles & Practices’, 2nd Edition, Oxford University Press.

Chuck, CY Kwok & Solomon, Tadesse 2006, ‘The MNC as an agent of change for host country institutions:FDI and corruption’, Journal of International Business Studies, 37, 767-785

Goyer, M. 2001, ‘Corporate governance and the innovation system in France: 1985-2000,’ Industry and Innovation, 8(2): 135-159

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Ahmad, J. U. 2004, ‘Draft Code of Corporate Governance-Bangladesh’, The Bangladesh Accountant, October-December, Quarterly journal of the Institute of Chartered Accountants of Bangladesh.

Cadbury, A. 2003, ‘Corporate Governance – An Indian Perspective: Diverse Demands; Disciplined Approach,’ The Institute of Chartered Accountants of India (Publication of the 125th All India Conference of Chartered Accountants, January, Delhi).

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Otusanya, O. J. (2011b) ‘Corruption as a Obstacle for Development in Developing Countries: A Review of Literature’, Journal of Money Laundering Control, 14 (4):387-422.

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Obtaining the membership of Bangladesh in Egmont Group, a global network of financial intelligence units, is another achievement in our growing financial sector. It will certainly help the country combat cross-border money laundering and potential terror financing. With this inclusion, Bangladesh will have access to sensitive information on the Egmont Group website.

Thanks to the membership, Bangladesh will be able to detect money laundering only through the banking channel. Another major benefit that Bangladesh will get from the membership is training from international experts and sharing of expertise among members.

Bangladesh first sought membership in 2008 and received it at Egmont’s meeting held recently in Toronto, Canada. Malaysia and Thailand sponsored Bangladesh for the membership.

The Financial Intelligence Unit of Bangladesh Bank will act as the national centre for all work.

Established in 1995 at the Egmont Arenberg Palace in Brussels, Egmont Group is an informal organisation of financial intelligence units of 139 member countries in the Group.

Membership of Bangladesh in Egmont Group:An enduring example of success

Raihan M Chowdhury

The Group operates a global dragnet against money laundering and other financial frauds as part of the campaign against illegal narcotics, activities of organised crime and terror financing.

Increasingly, corruption related crimes appear in the statistics of FIUs and of law enforcement agencies, as a major category of predicate offences.

The US Department of State 2011 Money Laundering and Financial Crime Report names corruption as a ‘major predicate offence’ or as a serious obstacle to fighting money laundering, a document on the Egmont Group website shows.

“We’ll now exchange information among the member countries to detect money laundering and terror financing,” Mr Atiur Rahman, Governor of Bangladesh Bank said in a press briefing.

In fact, Bangladesh Bank’s years of hard work culminated in success through obtaining the Egmont membership. The Relevant Departments of Anti Money Laundering and Combating Financing of Terrorism of Bangladesh Bank- Bangladesh Financial Intelligence Unit and Central Bank Strengthening Project Cell-performed a series of jobs during the last few years.


IT IS GRATIFYING

THAT BANGLADESH’S

ASSET RECOVERY

INITIATIVES ARE IN

GOOD SHAPE WITH

GLOBAL EFFORTS, AS

PART OF OUR

OVERARCHING AML CFT

INITIATIVES GUIDED BY

THE NATIONAL

COORDINATION

COMMITTEE CHAIRED BY

THE HONORABLE

FINANCE MINISTER.

ASSET RECOVERY

INITIATIVES IN

BANGLADESH ARE

BEING OVERSEEN BY AN

INTER-AGENCY

COMMITTEE HEADED BY

THE ATTORNEY GENERAL

AND ASSISTED BY THE

BFIU.

Money Laundering Prevention Act (MLPA), 2012 was promulgated repealing the Money Laundering Prevention Act, 2009 and the Anti Terrorism (Amendment) Act, 2012 was declared amending the Anti Terrorism Act, 2009 to meet the international standards and to make an effective anti-money laundering (AML)/ CFT (combating the financing of terrorism) regime in Bangladesh.

The Bangladesh Financial Intelligence Unit (BFIU) has performed a major role in drafting both of the Acts. BFIU performed key role in drafting Mutual Legal Assistance Act on Criminal Matters (MLA Act), 2012 aiming to gain better international cooperation.

BFIU developed 'National Strategy for Anti Money Laundering and Combating Financing of Terrorism 2011-2013'. The strategy paper contains 12 (twelve) strategies against 12 (twelve) strategic objectives. The National Coordination Committee, headed by honorable Finance


Minister, approved the strategy paper on 30 April, 2011.

BFIU has performed vital role with Anti Corruption Commission to conduct AML/CFT risk and vulnerabilities assessment on Bangladesh to identify the AML/CFT risks and vulnerabilities in Bangladesh and drafted a report on it.

A National Coordination Committee (NCC) was formed headed by honorable Finance Minister, comprising Attorney General, Chairman of Anti Corruption Commission, Principal Secretary and secretaries of all relevant ministries to formulate top level policy on AML/CFT issues and to determine the work procedure to implement the policies. Governor of Bangladesh Bank is one of the members and Deputy Governor (Head of BFIU) is the member secretary of the committee.

A Working Committee was formed comprising 21 (twenty one) members


to support the NCC and to implement the decisions of NCC. The convener of the committee is the Secretary of Bank and Financial Institution Division, Ministry of Finance.

‘Primary Contact Point’ has been established in the relevant 21 (twenty one) ministries/Division/Organization to ensure seamless flow of information on ML/TF issues.

BFIU has drafted a notification to share related/required information with it and accordingly the notification has been issued by the Bank and Financial Institutions Division, Ministry of Finance instructing all the related agencies.

Bangladesh Financial Intelligence Unit already inked MoU with FIU

of 11 countries among which 7 MoUs were signed during May 2009- May 2012 for sharing information and intelligence on ML/TF issues.

BFIU later successfully arranged the APG (Asia Pacific Group on Money Laundering) Typology Workshop, 2010 on AML/CFT attended by about 160 representatives from 40 member countries and other donor agencies. Honorable Prime Minister of the country, Sheikh Hasina inaugurated the workshop and declared ‘zero tolerance’ against ML/TF issues. The successful completion of the event has been applauded by APG and other international organizations.

According to the rating of the 2nd Mutual Evaluation Report prepared

by APG, Bangladesh was under International Cooperation and Review Group (ICRG) process since October 2010. As part of the ICRG process Bangladesh has developed a time bound action plan to upgrade its AML/CFT regime at par with the international standard and the honorable Finance Minister extended high level political commitment to the FATF. Bangladesh with the dynamic leadership of BFIU of BB has completed almost all the actions properly

Participants from all the financial sectors have been brought under AML/CFT regime including Insurance Companies, Money Changers, Money Remitters, Securities market intermediaries, NGOs/NPOs etc.


BFIU has issued separate Guidance Notes on Prevention of Money Laundering for the insurance companies and money changers.

BFIU issued a comprehensive circular for NGO/NPOs on 15 June, 2011.

BFIU has already taken initiatives against the Multi Level Marketing

(MLM) companies suspected to be involved in defrauding their customers.

BFIU has been maintaining a rich database of financial information relating to Suspicious Transaction Reports (STRs) and Cash Transaction Reports (CTRs) and data received from other sources. Necessary security and confidentiality have been ensured in this regard.

BFIU has already finalized the procurement process of ‘goAML’ software for online reporting of CTR and STR. BFIU has established MIS to preserve and update all the information and to generate necessary reports using the MIS.

BFIU has continued its effort to create awareness among the bank officials; furthermore it has included officials of other reporting organizations under this awareness programme. It has encouraged the banks to conduct massive training programs for the officials on AML/CFT throughout the country each year and provided support in 56 districts to make the program successful. BB also arranged workshops for other law enforcing agencies.

BFIU also arranged a 13 (thirteen) days-long country wide road-show from 26 March 2010 to 2 April 2010 to build massive public awareness focusing four issues: Prevention of Money Laundering,

Prevention of Hundi and public motivation thereon to boost foreign remittance through legitimate channel, Agricultural Credit Loan and SME Financing. It was a unique countrywide event which helped to raise awareness on AML/CFT among the common people. The Government of the People’s Republic of Bangladesh recognized the road show as a success story for attaining financial inclusion.

The processes involved in asset recovery are necessarily complex, since the assets to be recovered are located in different jurisdictions under different legal systems with varying degrees of access to appropriate legal services. Successfully tracking down the stolen assets through the trails of transfer require close interactive cooperation within the source countries, effective cross border cooperation between FIUs of different jurisdictions on the transfer trails of the funds, and help from international agencies like the Interpol. After ascertaining the locations of the assets to be recovered, different legal methods like criminal confiscation, civil forfeiture, non-conviction based

recovery etc., may be needed under various situations in different jurisdictions. Regulators, investigating law enforcement agencies, and adjudicators need a holistic understanding of the entire sequence of the processes involved.

It is gratifying that Bangladesh’s asset recovery initiatives are in good shape with global efforts, as part of our overarching AML CFT initiatives guided by the National Coordination Committee chaired by the honorable Finance Minister. Asset recovery initiatives in Bangladesh are being overseen by an inter-agency committee headed by the Attorney General and assisted by the BFIU. Besides enacting amendments updating the AML CFT statutes in line with UN conventions and other global best practices, our Government has also enacted in 2011 a statute indemnifying disclosure of information in the public interest, protecting interalia the whistle blowers about corrupt practices in public institutions. At the Bangladesh Bank, BFIU’s manpower skills and physical facilities have undergone major upgrading, and the Mutual Legal Assistance in Criminal Matters Act 2012 has facilitated BFIU’s signing of mutual assistance MOUs with FIUs in other jurisdictions. The interagency Asset Recovery Committee headed by the Attorney General of Bangladesh already has one success story in its bag, a milestone event.

The Author is Business Editor ofThe Financial Express

BENEFITSBangladesh will have access to

information from financialintelligence units of 131

member nations

Help recover laundered assets

Detect cross-border moneylaundering, corruption and

terror financing

Local officials will get trainingfrom international experts

Abstract

The main objective of this work is to highlight the FASB-IASB Convergence, as the authors are highly interested in a qualitative presentation of the rule-based & principle-based natures of US GAAP & IFRS respectively. The body of the paper describes the elaborations of the standards & convergence issues, the remarkable differences between the subject matters throughout a comparative analysis and some suggestions regarding convergence based on the authors’ analysis. The total study is aimed at a theoretical & analytical presentation of convergence of the worldwide prescribed accounting standards in practice.

Introduction

The International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) as the main world’s accounting standards-setters have been working on convergence of U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS) since 2002. In September 2002, the IASB and the FASB agreed to work together to remove the divergences between IFRS and US GAAP. This decision was embodied in

Bridging the US GAAP and IFRS Framework:A Qualitative Study on Contradictory Accounting

Standards Towards the way of Convergence1 Fareen Zaman | 2 Rabita Sabah

Memorandum of Understanding (MoU) between the boards known as the Norwalk Agreement. The base of the conceptual framework has been formed by the objective of general purpose financial reporting. Convergence continued to be a high precedence on the agendas of both the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (jointly, the Boards) in 2012. However, the convergence process is planned to deal with only the most significant differences and/or areas that the Boards have recognized as having the greatest need for up-gradation. While the converged standards will be more similar, differences will continue to exist between US GAAP as promulgated by the FASB and International Financial Reporting Standards (IFRS) as promulgated by the IASB.

The FASB framework holds two kinds of objectives relating to business entities & non-business entities. The IASB framework contains only objectives in the context of business entity. Both frameworks bring into play the qualitative characteristics of financial information in terms of attributes that ensure the information usefulness for the users in making economic decision. There are parallel characteristics used in both frameworks. Both use similar


THE EUROPEAN

UNION HAS ALREADY

SWITCHED TO IFRS,

STARTING FROM 2002,

ENDING ON 2005.

COUNTRIES LIKE

JAPAN, INDIA, CHINA,

AND CANADA ARE

ALSO IN ALTERATION.

THESE COUNTRIES

HAVE ALREADY

UNDERSTOOD THE

ADVANTAGE AND

SIGNIFICANCE OF IFRS.

THE CONVERGENCE OF

IFRS AND US GAAP IS

IMPORTANT FOR A

NUMBER OF REASONS;

LIKE: RELEVANCE,

UNDERSTANDABILITY

AND COMPARABILITY,

WHICH ARE FEW OF

THE QUALITATIVE

CHARACTERISTICS OF

FAIR FINANCIAL

REPORTING.

constraints of accounting information. The divergences are in the form of setting out the characteristics.

Understanding the importance of one set of accounting standard, SEC has announced its plan to switch from US GAAP to IFRS, as the world mostly is following the IFRS, making it gradually difficult for uniformity in financial reporting. So, convergence of IFRS and US GAAP is inevitable.

Literature Review

Previous studies came across to the fact that adoption of International Financial Reporting Standards (IFRS) has led to an increase in comparability among European firms (Yip and Young, 2012). Again in 2012, a study by Barth, Landsman, Lang, and Williams ended in the same result like the prior one between non-U.S. and U.S. firms (, 2012). Most of the studies mainly focus on the impact of a switch from non-U.S. domestic standards to IFRS. To the best of our knowledge, no studies have investigated whether a mandatory switch from U.S. GAAP to IFRS increases comparability and, if so, whether adoption of IFRS provides an incremental effect on the increased comparability beyond continued convergence between U.S. GAAP and IFRS. Henry, Lin, and Yang (2009) find that the accounting differences between IFRS and U.S. GAAP significantly trim down after the convergence projects between IASB and FASB. Similarly, Barth et al. (2012) find that the junction between U.S. GAAP and IFRS has played a vital role in the augmented financial information comparability between non-U.S. firms reporting under IFRS and U.S. firms.

These remain significant questions since U.S. regulators and standard setters persist to think about a compulsory change from U.S. GAAP to IFRS for publicly listed firms (SEC Roadmap 2008; SEC’s Work Plan


2010; 2011; 2012). All at once, the combined efforts by FASB and IASB together (henceforth, ‘the Boards’) to unite these two sets of accounting standards keep on trimming down the accounting differences and getting better their overall quality. The option between adoption of IFRS and convergence with IFRS, as well as their relative benefits and costs, has fascinated a great deal of concentration and produced debates among accounting regulators, standard setters, practitioners, and academics.A number of studies (e.g., Barth et al., 2012; Yip and Young, 2012; Cascino and Gassen, 2012) build upon DeFranco, Kothari, and Verdi (2011)’s comparability measure. DeFranco, et al. (2011) argue that accounting is fundamentally the mapping of economic transactions to financial statements and therefore label comparability as the similarity of firms’ accounting functions in translating economic transactions into accounting data.

The FASB framework sets them out in a hierarchy, treating the understandability come apart from the others, relevance and reliability as the primary qualities and comparability as a secondary quality while the IASB framework consider all these characteristics as primary characteristics (H. Bohusova, 2011).

IFRS could come at the cost of lower accounting quality for certain German firms. In addition, a transition to IFRS would impose a significant and immediate financial burden on adopting U.S. firms (Roadmap, 2008). However, it could be less costly to converge between IFRS and US GAAP because convergence may not essentially lead to striking changes in U.S. GAAP. Additionally, convergence spreads all costs linked with changes to the accounting system over a certain time period. Therefore, the financial impact may be more convenient.


Moreover, compared to ongoing convergence between U.S. GAAP and IFRS, it would likely be more costly for U.S. firms to return to reporting in accordance with U.S. GAAP after adopting IFRS if the Securities and Exchange Commission (SEC) determines not to allow or necessitate U.S. issuers to utilize IFRS (Roadmap 2008).

Having a worldwide language for financial reporting and disclosure is becoming more and more important with the passage of each day. Since the market place is not domestic anymore, understanding accounting in a global level is mandatory, especially for companies operating worldwide. In a situation like this, one major player in the world economy, USA, using separate accounting

standards in financial reporting, unlike the rest of the world, is creating problems in terms of comparing the performance and financial statements throughout the world.

The European Union has already switched to IFRS, starting from 2002, ending on 2005. Countries like Japan, India, China, and Canada are also in alteration. These countries have already understood the advantage and significance of IFRS. The convergence of IFRS and US GAAP is important for a number of reasons; like: relevance, understandability and comparability, which are few of the qualitative characteristics of fair financial reporting.

Methodology

This paper is just concerned with the most momentous divergences between the IFRS and the US GAAP from the context of qualitative characteristics of accounting information & other financial reporting standards regarding to the diversified choices.

The configuration of the paper is alienated to two significant parts. Towards the way to convergence shows the IAS/IFRS and US GAAP convergence in general as well as the comparison focusing on the qualitative characteristics with pros & cons. At the end, based on the results of the total analysis, the fundamental doctrine for a common conceptual framework in


the area of purpose of financial reporting, and qualitative characteristics, which could be pertinent, are described.

The paper uses the standard methods of scientific analysis, like the method of description was used to explain the progress in the area of IAS/IFRS and US GAAP convergence. Then, a comparative analysis was used to discuss the divergences between conceptual frameworks the IAS/IFRS and US GAAP.

Towards the Way to Convergence

The convergence will make the financial reports of multinational/national companies easily comparable. Having one set of accounting standard will make it easy to understand the accounting practices and performance of the company. Lastly, applying a global accounting standard will make the financial statements up to date and relevant with the rest of the competitors in the global market.

According to GAAP, financial reports are said to be fair if there are relevance, reliability, consistency and comparability. On the contrary, IFRS requires understandability, relevance, reliability, materiality and comparability. A convergence will create a better judgmental basis for fair financial reporting as being discussed below:

• Understanding financial statement for users with little or no accounting knowledge may prove to be challenging while decision making. Like Deegan said: ‘Understandability will make the financial statements easily understandable for users with reasonable business and accounting knowledge.’ But it does not necessarily mean the omission of complex but relevant information. Rather it develops a reasonable procedure for understanding the complexity of underlying transactions or events.

By including this factor as a condition for fair financial reporting by IFRS, managers will provide an extra care while preparing the statements as t has to be understandable.

• Relevance gives financial information predictive value and feedback, where the first one helps users to forecast future events based on present information and the latter one gives confirmation to the prior expectation.

By applying relevance the company can provide information in due time to the users, when the information is actually required in decision making. Because information is only relevant at the right time, it loses the relevance if the time is expired that required the information for timely decision making.

• Reliability provides error free and unbiased information. To be reliable accounting information must be verifiable i.e. provable that the


information is free from error and bias. It also requires faithful representation, i.e. the actual purpose and facts of that information and lastly the information must be neutral i.e. the information is not prepared or presented to favor one over another individual or group of people.

Reliability is essential because users must have the faith to rely over the information provided by the company because present and future decision of the user is dependent on that information. So it must be reliable.

• Comparability gives more preference to accounting information by making it comparable with that of the other competitor company. Investors and users can make a better use of accounting information if it can be

compared with the information of other companies and also prior and prospective information.

The present market place is very much competitive with number of players in it and all of them provide financial information through the financial statements to get the potential investors in their favors. So while decision making the investor will always analyze the performance of these competing companies, as a result the preparation and presentation of financial information and statements should be comparable, so that the investor can compare performance and decide.

• The materiality concept is a time-honored, accepted accounting convention. Materiality defines the threshold or cut-off point following which financial

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

Materiality is relative to the size and particular state of affairs of individual companies. Irrelevant amounts need not be recorded and reported according to the GAAP rules. But this does not indicate that insignificant items cannot or should not be recorded and reported according to the rules of GAAP, here is a choice for the users. But, in reality, only the material information remains applicable while being reported or used.

Again, lapse or misstatement of an important piece of information impairs users' capability to make accurate decisions taken on the basis of financial statements in that way upsetting the reliability of information.

Information enclosed in the financial statements must be complete in all material respects in order to present a true and fair view of the dealings of the company.

The discrepancy about the convergence is mostly based on the controversy between the principle based and rule based decision making followed by


financial reporting. IFRS is said to be principle based, where US GAAP is more rule based. As a result there are more scopes for condemnatory decision making in financial reporting, using IFRS than US GAAP. US GAAP also creates scopes to hide out and misinterpret diverse argumentative and unwanted events and outcomes under the rules.

The example of Enron can be taken into account in order to explain the situation. The aftermath of Enron shows that the huge amounts of difference in the balance sheet was hidden by treating liabilities as off balance sheet items using GAAP rules. But if they had followed IFRS, this hide out of liabilities would have been judged based on principle and the vast difference in the balance sheet would have been cleared.

In this same way, different accounting rules can create different results from identical information. This raises problem in making decisions by the investors

especially when they have invested in companies operating in diverse countries. Financial statements are source of information to the investors and these sources can be proved useless if it creates discrepancies just because of two separate sets of accounting standards. There should be standardization and harmonization.

Standardization is a term appears to imply the imposition of a more rigid and narrow set of rules than harmonization. (Nobes & Parker). Standardization is the course of mounting and approving upon procedural standards. The standard is a deed that establishes homogeneous engineering or technical provisions, criteria, methods, processes, or practices. Some standards are compulsory while others are deliberate. Voluntary standards are accessible if one chooses to use them. Some are de facto standards meaning a custom or necessity which has a casual but foremost status. Some standards are de jure meaning

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

In social sciences, including economics & accounting too, the thought of standardization is close to the way out for a coordination problem, a situation in which all parties can comprehend mutual gains, but only by making reciprocally dependable decisions. Standardization implies the elimination of alternatives in accounting for economic transactions and other events. Globalization also carries the connotation that things were once considered the authority and responsibility of each country is no longer possible are not affected by the international community; similarly, financial reporting and accounting standards. One of the qualitative characteristics of accounting information is comparability including international accounting information must be compared as it is essential in the world of global trade and venture. In the event wanted to obtain full comparability is mostly applicable worldwide, required standardization of international accounting standards.Concept is more popular than standardization to link the wide variety of accounting standards in different countries is the concept of harmonization. Harmonization of accounting standards is defined as minimizing the differences in accounting standards in various countries (Iqbal, 1997:35). There are many prospective returns associated with harmonization of accounting standards. The world economy could gain through progressively sophisticated investment decisions which would


direct to overall global economic growth. Accounting information can be interpreted by experts to reduce the risk of investment.

One of the main tools used in financial analysis is the comparability of financial information for similar businesses in competition. Internationally adopted accounting standards would increase this ability to contrast similar industries and make investment decisions less risky through greater aptitude.

Another impending benefit from the harmonization of international accounting standards would be the reduced costs associated with multi-national corporations who must reconcile their accounting information for multiple accounting standards. (Diaconu 2007) Countries with scarce resources could also take advantage of international

accounting standards, because they would not have to invest resources creating and regulating national accounting standard-setting agencies.

In order to be listed on credible stock exchanges, businesses must abide by the financial reporting requirements of the stock exchange it wishes to sell securities through. Stock exchanges around the world could profit from a harmonization of accounting standards, as more companies begin to adopt the international standard, they will become eligible for listing.

Although there are many promising advantages of harmonization, there are also many potential disadvantages. One possible disadvantage of harmonization can be seen through the role culture plays in developing national accounting standards. Countries may view compliance with international accounting standards

as a hazard to their nationalism and view conformity as surrender to the force of other countries. A major censure of harmonization comes from underdeveloped countries who view harmonization as an obligation placed on them by countries with superior economies. Another drawback of harmonization is the enormous amount of inequality that exists between different countries accounting practices. The abundant differences in accounting practices world-wide would definitely show the way to significant changes for any country who adopted the international standard. These substantial changes would lead to many expenses for businesses in countries meeting the requirements of a new international standard.

Another common criticism of harmonization is the argument that an international accounting standard will not be elastic enough


to deal with all the dilemmas faced by nations with conflicting troubles and circumstances. National accounting standards can be customized as situations change, and policies can be implemented without sanction of all the nations involved in a global accounting system. (Diaconu 2007).

After having done with the discussion about the budding pros and cons of international harmonization of accounting standards, there are various obstacles too restricting the implementation of this. Many companies in the European Union submit to International Accounting Standards, and many other corporations reconcile financial information to provide IFRS financial statements as well as US GAAP. Since the US is the largest economy in the world many

international companies adopt US GAAP financial statement to boost the ability to trade with the US Companies in the US must always do the accepted thing to US GAAP and settle any other financial statements to meet the GAAP requirements.

One possible solution to the problem of setting international accounting standards would be to provide a choice between the two most popular systems: the US GAAP or the European IAS/IFRS. As more companies favor one method over the other that method will eventually become the international standard. (Diaconu 2007) There are many probable solutions to execute harmonization, but in the end, intact harmonization of accounting principles will possibly never be realized. There are too many

variables to account for and too many groups of people in political power with too much to mislay. (Weber 1992).

Findings and Suggestions

After having detailed empirical study on the convergence issues between U.S. GAAP and IFRS framework, we can move towards a solution regarding a uniformed set of standards to be followed in worldwide accounting practices.

Converging to the U.S. GAAP and IFRS framework may assist in solving some of the controversial issues like: lease, financial statement presentation, revenue recognition etc. which are usually are not solved using any of these frameworks individually. Following a single set of accounting standards, will allow maintaining

the essential qualitative characteristics of accounting information internationally, which may lead to a harmonized practice for all stakeholders.

Having on set of standard also provides a great deal of comparability and continuity especially to the multinational organizations, with business spread over different countries. For example, the preparation of multinational organizations listed in different stock exchanges throughout the world would become more synchronized. Moreover, exchanging staffs and employees between branches of the same company but in different countries would be more flexible and efficient.

On the other hand, by solving the rule based and principle based debate, a uniformed set of accounting standards may lead to objective and accurate decision

making by different parties like investor, creditors, suppliers, auditors, govt. and even the general people.

Comparability not only in case of accounting events, but also in context of the economic events, may be ensured, whether we want to know about the economy of different countries of the world from the same aspect.

In the light of above findings, it is evident that no standard of these two would exist alone in the long run without making any convergence. That’s why the combined effort by the standard setters, accounting regulators, practitioners, academics as well as the other stakeholders regarding this issue may provide an effective result in near future, provided that, the issue is concentrated accordingly.

Conclusion

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

References

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Bohusova H. (2011) “General Approach to the IFRS & US GAAP Convergence” Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis: 59: 27-36

Cascino, S. and J. Gassen. (2012). “Comparability effects of mandatory IFRS adoption.” Working Paper, London School of Economics.

DeFranco, G., S.P. Kothari, and R.S. Verdi. (2011). “The Benefits of Financial Statement Comparability.” Journal of Accounting Research: 49: 895-931

Deloitte, 2008, “IFRS and US GAAP – A Pocket Comparison”, Deloitte Development LLC

Diaconu, P. (2007) “Impact of Globalization on International Accounting Harmonization.” http://dx.doi.org/10.2139/ssrn.958478

Financial Accounting Standards Board (1999), “Summaries and Status of all FASB Statements”, www.rutgers.edu / Accounting / raw / FASB / public / index.html, September 1999.


The Authors are1 Lecturer, Department of Business & Economics, United International University2 Lecturer, Department of Accounting & Information Systems, Jagannath University

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Iqbal, M. Zafar, Trini U. Melcher and Amin E. Elmallah (1997), International

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April - June 2013 The Bangladesh Accountant 83

With a print run of 2500 and growing, The Bangladesh Accountant reaches the movers and shakers of industry, commerce and the accounting profession in Bangladesh. The quarterly journal contains scholarly articles, commentary on current matters and technical information to inform and educate its readers. It is a highly valued publication avidly read by all who wish to keep abreast of the latest developments in the accounting profession and business and commercial issues in general. Circulation includes many major companies and financial institutions, governmental and semi-governmental organisations, NGOs and international accounting and professional bodies.

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in wealth creationthe chartered accounting professionals in this regard has major role to play. a...

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