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Dispatch (Asia version)
| by Nazatul Izma Abdullah and Peta Tomlinson 03 Jun 2006 Topic: News |
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Within days of releasing its Non-Performing Loan Report, Ernst & Young China was forced into an embarrassing backflip, retracting the findings as “factually erroneous”. A press release stated that the report, released one week earlier (last month) estimating the bad debts of China’s big four banks, “cannot be supported”. The firm’s explanation was that the report “did not go through our normal internal review and approval process” before being released to the public. Ernst & Young immediately announced an internal inquiry. Yet the incident highlights the challenges of verifying financial information in a country with one of the world’s fastest growing economies, and a desire to attract foreign investment. It also underscores a critical shortage of internationally-qualified accounting professionals in China, already racing to fulfil its WTO commitments, and which earlier this year announced its move towards global accounting and auditing rules. Recognising a need for at least 300,000 accountants, China has formed partnerships with international accounting bodies, with last year’s agreement between ACCA, Oxford Brookes University and Beijing’s Tsinghua University to develop a foundation programme regarded as a milestone. Rather than simply importing skilled staff from overseas, training local accountants at home and in their mother tongue is essential, says Professor James Xie, director of the School of Accountancy at the Chinese University of Hong Kong. In 2002, the university joined hands with the Shanghai National Accounting Institute to run a Master of Professional Accountancy (MPAcc) Programme for China’s elite CFOs. The programme, taught in Shanghai by Hong Kong and US professors, was heavily over-subscribed from the outset, and now two classes are run each year. The programme is differentiated because the selected students are high achievers who must have a Bachelor’s Degree and seven years’ leadership experience. Professor Xie says this is a prime example of what can be achieved by other countries (including Hong Kong) to help China meet its shortfall. “We can offer a Master’s Degree, which they [the Shanghai institute] cannot, but they have a market force with various connections to founding industry, which we don’t. We enjoy a very successful co-operation.” Chinese IPOs hot property in HK The thousands of people who queued across Hong Kong for a vastly oversubscribed Bank of China initial public offering (IPO) in May demonstrated that, despite global stockmarket volatility, the heat has not gone out of Hongkongers’ passion for IPO investment. Shares in the government-controlled Bank of China (BOC), China’s second largest lender by assets, were estimated to be at least five times oversubscribed. In preparation for its offering, it was reported that the Bank of China printed three million application forms in a city of about seven million people. “This IPO is launched at a right place, right time,” commented Xiao Gang, BOC chairman. But it was not alone. The China Construction Bank was reportedly 42 times oversubscribed at its launch in December 2005. As the world’s biggest IPO in four years, this reflected a trend that has seen money raised in the Greater China region through IPOs steadily increase over the past five years, surging 214% in 2005 alone, according to PwC research. Edmond Chan, a partner in PwC’s Capital Market Services Group, says Hong Kong is proving popular as a single launchpad for mega-sized Chinese listings. “Hong Kong’s stockmarket has grown in sophistication and maturity as an important international capital formation centre. At the same time, the Hong Kong stockmarket continues to be seen as the major international fund-raising platform by Chinese enterprises because of its well-established finance and legal systems, geographical proximity to China and good corporate governance standards.” The total amount raised through IPOs in the Greater China region increased by 49% to US$25.57bn in 2005, compared with US$17.16bn in 2004. About 97% of the money was raised in the Hong Kong market, which was ranked as the world’s fourth largest fund-raiser in 2005. Looking ahead to the next 12 months, PwC expects more People’s Republic of China-based financial services and other companies coming to Hong Kong’s capital market, which it describes as “the gateway for both domestic and international funds”. “As China’s economy continues to grow, we expect that 2006 will be another robust year for IPO activities in Greater China, and we will be seeing an increase in average size of offerings,” Chan said. The Malaysian Government has allocated RM200bn for development under the Ninth Malaysia Plan (9MP), which charts the country’s growth from 2006 to 2010. This sum, the largest ever for an MP, represents an increase of 17.6% over the RM170bn which had been allocated under the 8MP. According to the 9MP report released on 31 March, chief beneficiaries of this largesse will be sectors like education and training, energy and public utilities, and commerce and industry. Expectations of a balanced budget over the plan’s lifespan have been defenestrated. The 9MP projects an overall fiscal deficit of RM107.6bn or 3.4% of GDP. The deficit will be funded by domestic borrowings and an increased revenue base. The Federal Government aims to collect RM683.13bn in taxes during the 9MP, up from RM461.39bn in the 8MP, with income taxes accounting for nearly RM300bn. The plan’s rosy assumptions, such as projected 6% real GDP growth per year in an environment of price stability, have come under fire. Research organisations described expectations of 6% growth and subdued inflation as optimistic, given global threats such as skyrocketing energy prices and the downside risks wrought by inevitable measures to tame the US budget and external deficits, all of which will affect the highly open Malaysian economy. Erring on the side of prudence, economists have trimmed forecasts to an average of 4%-5% over the life of the 9MP, in line with the average of 4.5% achieved during the 8MP. accounting for Islamic transactions The Malaysian Accounting Standards Board (MASB) issued guidance in April on accounting for zakat (tithe) and ijarah (Islamic leasing) in Islamic financial transactions. These are in line with Malaysia’s development of a comprehensive Islamic financial system that is increasingly liberalised and integrated with the international financial system. The accounting for zakat on business only deals with financial reporting issues related to zakat, and treats zakat as an expense. The calculation of the basis for zakat is outside MASB’s purview. Meanwhile, the technical release on ijarah uses the premise that an asset under Islamic leasing is split between the underlying asset which belongs to the lessor and the right which belongs to the lessee. Malaysia has recently issued Private Entity Reporting Standards (PERS) in a move designed to ease financial reporting compliance for over 500,000 private non-listed enterprises. Announced on 23 February, PERS creates two-tier or differential reporting for public listed and privately held entities in the Malaysian market. Previously, all companies operating in Malaysia were subject to the Financial Reporting Standards (FRS), an equivalent of IFRS, which took effect on 1 January 2006. The implementation of, and compliance with, IFRS for more than half a million small and medium enterprises (SMEs) had proved to be onerous and too complex for SMEs, which are typically accountable to stakeholders who are owner-managers. In announcing the two-tier reporting, the Malaysian Accounting Standards Board (MASB) explained that PERS consist of selected pre-IFRS MASB standards which are IAS-compliant and meant to reduce the burden of compliance by SMEs. The Malaysian accounting standards setting body deleted certain standards deemed unnecessary to PERS, such as those covering interim reporting, segmental reporting, fair value accounting, earnings per share, related party transactions and business combinations. “If a private entity requires the use of an accounting treatment outside the scope of PERS, it may use the accounting treatments of the FRS to fill in the gap,” clarified MASB executive director, Dr Nordin Mohd Zain. He noted that PERS is an interim measure until the IASB issues its standards for SMEs, slated for 2007. Meanwhile, PERS brings Malaysia in line with markets such as the UK, where Financial Reporting Standard for Smaller Entities (FRSSE) applies. Elsewhere in Asia, the Hong Kong Institute of CPAs released its standards for SMEs in August 2005, and Singapore has yet to do so. At the regional level, the ASEAN Federation of Accountants (AFA) recently announced that it was starting work on its version of PERS. AFA has invited MASB’s Nordin to spearhead the ASEAN PERS, thereby tapping Malaysian expertise. early retirement for financial planners? Sweeping changes to Australia’s superannuation laws will be a boon for industry funds and self-funded retirees, but a potential disaster for the financial planning industry, according to KPMG in Sydney. Treasurer Peter Costello announced the reforms in the Federal Government 2006/07 Budget, which forecast a surplus of A$10.8bn, the ninth surplus in 10 years. Under the proposed changes, effective from 1 July 2007, Australians aged 60 and over who have already paid tax on their superannuation contributions and earnings will no longer pay tax on their superannuation benefits. The plan will also abolish reasonable benefits limits, and the ability to make deductible superannuation contributions will be extended to the age of 75. This simplified system, while welcomed by many, will shrink business for financial planners, says KPMG tax partner Guy McAliece. “Currently, Australia’s superannuation system is so complex that most retirees require some form of financial advice. The proposed simplification removes much of the need for this. Those who rely on financial planning distribution networks, such as superannuation master trusts, may find they are less attractive compared to industry funds that provide simple, streamlined services, usually at a lower cost,” McAliece said. In addition to a reduced demand for their advice in the future, financial planners could find their business is impacted immediately, he predicted. “The proposal may bring the industry to a standstill while consultation takes place and retirees defer seeking advice until after 1 July 2007. Who in Australia will buy a complex retirement plan tomorrow?” However, the Association of Superannuation Funds of Australia (ASFA - “the Voice of Super”) welcomed the reforms. The 2006 Budget plan could sweep away some of the frustrating complexity of Australia’s superannuation system in a surprise package of highly positive changes, said Philippa Smith, CEO. “While we still need to crunch the numbers, these changes could make a significant difference to the adequacy of super in the long-term. ASFA’s calls for greater adequacy and simplification have been heard. We are delighted.” The Singapore Exchange (SGX) is aggressively courting more China and foreign listings to expand its market value. Singapore’s strategy of attracting international companies to sell shares in the country has boosted the market’s value by more than a fifth this year, noted SGX’s head of listings, Lawrence Wong, in an International Herald Tribune report. As of the end of April 2006, the Singapore market was valued at about S$489bn, with Chinese companies accounting for about 5% of the total. And as of 5 May, SGX said that mainland China companies account for more than 40% of the number of total foreign companies listed on SGX. The debut of Midsouth Holdings Ltd in May marked SGX’s 100th China listing. As of last month, 15 foreign companies including 11 Chinese companies had listed their shares on SGX. There were a total of 44 foreign listings, including 25 China listings, in 2005. Size matters too, and SGX wants to draw bigger companies from China. The average market value of Chinese companies listed on the Singapore exchange in 2006 rose to S$150m, up from S$98m last year. Going forward, SGX intends to draw more initial public offerings from other regions of China by forging ties with Chinese provinces like Zhejiang and Wuxi. China’s lack of a comprehensive capital structure has forced mainland Chinese companies to go overseas - particularly to Hong Kong and Singapore - in search of funding. SGX is also keen to further diversify its pool of foreign initial public offerings by tapping non-Chinese companies, such as larger companies from India and south-east Asia. While acknowledging that China continues to play a significant part in SGX’s listing strategy, Gan Seow Ann, senior executive Vice President and group head, Markets, SGX, said: “In building SGX as an Asian Gateway, we aim to attract larger size, quality listings.” In brief...
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