E-Commerce and
Accounting Principles
an observation
By Mahender Khari
Khari & Co International Accountants
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E-COMMERCE
Accountability Procedures?
Banking
Travel
Gambling
Professional Advice
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E-c
shift in buyer behaviour
Sell online- e- procurement
 E-care for customers
 E-care business partners
 E- learning
The web continues to produce new value models
that need to be translated into more appropriate
accounting standards for accountability.
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ACCOUNTING PRINCIPLES
CA 1985 Sch 4 requires the preparation of company
accounts to be based on the principles of:
- going concern
- consistence
- accrual
- prudence
Consider:
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Fundamental changes in the market and/or in technology
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Forced reductions in operations, e.g. necessitated by outsourcing abroad
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Loss of key customers
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ACCOUNTING RULES
CA 1985 sets out two alternative sets of accounting rules
- the historical cost of accounting rules
- the alternative accounting rulesQ: Should we price/capitalise information according to its value or its
cost?
Q: Could these accounting rules be applied to E-c transactions worldwide?
Q: Should we adopt legal approach as opposed to substance-over-form for
accountability of financial data?
Q. What does the conventional wisdom say?
“Mathematically arrived values raise many questions about the reliability
of the financial data”. Source AIA journal
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ACCOUNTING STANDARDS
“CA 1985 s 256 defines accounting standard as “statements of standard accounting
practice issued by such body or bodies as may be prescribed
by regulations”
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Accounting Standards are developed in the UK by
ASB/FRC/FRRP/UITF
Financial Reporting Council
Financial Reporting
Review Panel
Accounting Standards Board
Urgent Issues Task Force
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FINANCIAL STATEMENTS
Comprise of:
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Balance Sheet
Income Statement
Statement of Changes in
Equity
Cash Flow Statement
Notes
Accounting Policies
Directors Report;
NO SPECIFIC REQUIREMENT TO
DISCLOSE E-C GENERATED
TRANSACTIONS
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ACCOUNTING QUALITIES
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Understandability
Reliability & Relevance
Verifiability
Predictability
Comparability & Consistency
Suitability for decision making=usefulness
COMPLEXITY & DECREASE TRANSPERANCY =E-c
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IAS 1
Presentation of Financial Statements
• Basis for Presentation
• Comparability – Previous Period and Other Entities
• Going Concern Basis
• Accrual Basis
• Classification
• Annually or More Frequently
• Current and Non-current Assets
• Short and Long-term Liabilities
“Fair presentation requires faithful representation of the effects of
transactions, events and conditions in accordance with the definitions
and recognition criteria for assets, liabilities, income and expenses”
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FRS 28 CORRESPONDING
AMOUNTS
The fast pace of E-c is in fact causing first year’s trading results to be different to the second year,
the second year’s results to be significantly different to the third year etc…
Q: Would it not be misleading to compare results?
Many financial statements show in their P&L Account a high cost of digitalisation in year one but
low subsequent marginal costs. This is a prime example of non-comparability one year with the
next. This is because information is costly to produce but cheap to reproduce.
The technology infrastructure makes information more accessible and hence more valuable but its
value is difficult to quantify.
The accounting practices are in favour of “historic cost basis”. However, the cost of same
information, in the world of E-c can and often does fluctuate from one period to the next.
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…FRS 28 Corresponding Amounts
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Audit practice ignores the impact of E-c and places too much
emphasis on accounts rather than assessment of the E-c-related
global risk.
The professional judgement accorded to accountants in
expressing their opinion on financial statements is proving to
be a step behind the fast-paced E-c.
Old practice of accountability can produce misleading results
when transactions are bundled together regardless of
distinction between E-c and non E-c-related activities.
The legitimacy of the techniques used by the accounting
profession in the E-c world is open to questioning.
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Comparison not helpful
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Outsourcing = redundancies, currency risks,
lack of direct control, political uncertainties,
Net Asset valuations = not reliable
Forecast= not reliable
Taxation= various mitigating schemes in
market
Income & expenditure= fluctuates due to
market forces
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Is hamonisation possible?
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Is there a justification why accounting rules and
standards should be fundamentally and vastly
different ?
US, China, Japan and Taiwan e g differ in their
accounting language.
Different traditions in accounting and different legal
and economic realities of the new E-c world,
contribute to varied practices. The objective being, to
communicate in a manner that the entrepreneurs of Ec world understand.
To make Business life easier use same accounting
rules .
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US FASB and IASB
MOU
“Shared objective to develop common accounting standard for use in the
world’s capital markets.
Consistency, comparability, and efficiency of financial statements, enabling
global markets to move with less friction
Roadmap for the removal for the reconciliation requirement for non-US
companies that use IFRS and are registered in the United States.
Committee of European Securities Regulators to identify area for improvement
of accounting standard.”
“First, the Boards will reach a conclusion about whether major differences in
focussed areas should be eliminated through one or more short-term standard
setting projects, and, if so, the goal is to complete work in those areas by 2008.”
“Second, the FASB and the IASB will seek to make continued progress in other
areas identified by both boards where accounting practices under US GAAP
and IFRSs are regarded as candidates for improvement” (source: International
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Accountants)
EU-HARMONISATION
switch to IFRS
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Variety of legal & tax systems in existence
Directives for Company Law harmonisation
4th & 7th Ds adopted into national legislation by EU countries
Formats, valuation rules, & preparation & presentation of
consolidated accounts
Anglo-Saxon= T & F V= as a whole, where as French &
German prefer precision
EU Directive, not fitting in the global tax philosophy, and having little regard to the
practical aspects of the offshore world, is hoping to collect consumer taxes online.
Its wishful thinking.
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IFRS FOR LISTED COMPANIES
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Wef 2005 global standard for financial reporting
except in US
Cross border implications/consistency in application
National variations in interpretation
EU, Australia, China, Switzerland=IFRS
Legal issue = who has jurisdiction in cases of conflict
= EC of Justice will have busy time ahead
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COMPLEXITIES OF INTERNATIONAL TRADING
Monaco
HOLDING COMPANY
HOLLAND
Beneficiaries
Cyprus
Subsidiaries
Singapore
Mauritius
UK
Via Nominees
BVI
Buys from China
Trading partnership
with India
Sells to Eastern
Europe & Far East
Sells to Europe
Bank account in
Singapore
Trust (exotic
location)
Management
Charge
Bank
account in
Mauritius
Bank
account in
India
Bank account in
Switzerland/UK
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Taxation
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Let us take taxation as an expense or cost for example;
No consensus is in sight, as to which jurisdiction is entitled to
impose taxes on internet transactions e.g digital products such
as software and e-books e g VAT.
“Nexus,”= deemed presence in the taxing jurisdiction to justify
levying of tax- how do you tax an out of state supplier?
Opinions and practices differ in US and EU countries. There is
no Accounting standard yet that could give us practical
guidance on that issue.
International Financial Reporting Standards, however
sophisticated, in such circumstances will only serve a limited
purpose.
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Transfer of property to foreign
corporation
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1.
2.
3.
4.
5.
6.
7.
8.
9.
A US person transferring property to a foreign corporation has
reporting obligations;
Connection with foreign foundations/stiftung/trusts.
Receipts of gifts from outside US
Transactions with foreign corporations/persons
Acquiring an interest in foreign corporations =25%
Acting as a director/agent of foreign corporations.
Nominee relationships
Report foreign disregarded entities.
Foreign partnerships.
Foreign bank accounts.
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Summary
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Development of a common accounting
language = long way away
E-c activities = remain difficult to police
Taxation= no accountability, no taxability
IFRS & US GAAP harmonisation= a
possibility but long way away
Next 5 years= exploit the legitimate loopholes
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