Intelligence & Insight from CA Sri Lanka

June 2014 | www.casrilanka.com

Managing a Rs6.7 trillion Debt Portfolio P.32

Need Integrated Thinking Mervyn King

ISSN 2279-3860

9 772279 386000 vol.2 • Issue. 2 the Abacus | June 2014 1 Contents June 2014

Features

COVER STORY 26 | Mervyn King: You need integrated thinking from input to outcome South Africa is a pioneer in Integrated Reporting and Professor Mervyn King one of its leading advocates. IR is the new form of corporate reporting that goes beyond the numbers and looks at business in a broader sense, telling its story in a way more easily understood by ordinary people, or the shareholding public.

32 | Managing a Rs6.7 tn Debt Portfolio Dhammika Nanayakkara, Superintendent of Public Debt of the Central Bank of Sri Lanka, is one of 50 Chartered Accountants working in the bank regulator Professor Mervyn King: You need integrated thinking from input to outcome (PAGE 26) whose governor himself is a CA. Nanayakkara has the task Port City - creating new land of managing Rs6.7 trillion in (PAGE 44] public debt, a not inconsiderable responsibility given the multiple risks involved and its impact on the economy.

48 | Fayezul Choudhury: Imperative For Accounting Profession to Grow With Economy Founded in 1977, the International Federation of Accountants (IFAC) is the global organisation of the accountancy profession. Fayezul Choudhury: Imperative For Accounting Managing a Rs6.7 tn Debt Profession to Grow With Economy (PAGE 48) Portfolio (PAGE 32) 2 the Abacus | JUNE 2014 Contents June 2014

Clement Chan: We are Moving Towards a System Upgrading Service Culture Credit Unions – Banking of Principle - Based Standards (PAGE 38) (PAGE 14) and Social Responsibility (PAGE 18)

08 | Periscope

14 | Upgrading Service Culture The 21st century has been called the Age of the Customer, in which excellence in service has become the raison d’etre for organisational activities, in both business and the public service.

18 | Credit Unions – Banking and Social Responsibility Will the conventional banks ever provide “a New Moral World” of happiness, enlightenment, and prosperity?

A Predictable Fading, But…. (PAGE 24) 20 | Lead with Gratitude and Inspire the Gift of Perspective, Potential, and Productivity Encouraging employees to express gratitude can boost morale and improve corporate competitiveness

24 | A Predictable Fading, But…. The challenges facing highland tea plantations will force their decline. How they respond to these will determine the disruptiveness of the decline

38 | Clement Chan: We are Moving Towards a System of Principle - Based Standards The evolution of a single set of internationally accepted accounting standards is a priority in the rapidly-globalising world economy today.

Watery Gateway to the World (PAGE 61) 59 | Update

4 the Abacus | JUNE 2014

Intelligence & Insight from CA Sri Lanka The evolving financial reporting framework Institute of Chartered Accountants of Sri Lanka (CA etting the new set of accounting standards that’s been introduced Sri Lanka) is one of the largest adopted across different national jurisdictions and cultures remains professional organizations a work in progress. The 2014 South Asia conference on Financial Re- in Sri Lanka in which 5,400 porting for Economic Development, the first of its kind in Asia which chartered accountants have GCA Sri Lanka had the privilege of hosting, provided an opportunity to discuss obtained membership. The the current state of play in applying the rules. We took the opportunity to inter- Institute provides insight and view visiting delegates, experts in different fields, who took part in the confer- leadership to the accountancy ence, jointly organized by the Confederation of Asian and Pacific Accountants, and finance profession in Sri International Federation of Accountants (IFAC) and the World Bank. It brought Lanka as well as globally. together around 200 regulators, policy makers, business leaders, academics and professionals. Our well qualified members Mervyn King, one of the standard bearers of Integrated Reporting that compa- are trained to provide financial nies are increasingly adopting the world over, adorns our cover. He outlines how knowledge and guidance based it emerged and why South Africa became a world leader in IR and its importance on the highest professional, for companies in the future. technical and ethical In our Focus On section you can read about why training is essential to be standards, thereby assisting a competent company director and mull the bad habit of tax dodging through communities and organizations transfer pricing in Periscope. gain long-term sustainable And in our travel story this time we take you to Prague, one of Europe’s excit- economic growth. ing capital cities, on a tour of mystery and magic.

Contributors PHOTOGRAPHY CA SRI LANKA © 2014 CA SRI LANKA. All rights reserved. No Mark Hager Shafraz Farook 30A, Malalasekera Mawatha, part of this publication may be reproduced or Padraig Colman Ruvin de Silva 7, Sri Lanka distributed in any form without the prior writ- Rohan Gunasekera T : 0094-11-2352000 ten permission of the publisher. The views and Shamindra Kulamannage F : 0094-11-2352060 opinions expressed in this publication are those Sravasti Ghosh Dastidar E : [email protected] of the authors. CA Journal’s publications con- DESIGN & LAYOUT sultant is Capital Media (Pvt) Ltd., Indika Sriyan Gammudali 22, Flower Terrace, Colombo 7. Phone 0112577387

6 the Abacus | JUNE 2014

A word from the President

Maintaining our versatility and vision

s the torch bearers of Sri Council Prof. Mervyn King. It dem- Lanka’s accounting profes- onstrated the role and importance of sion, CA Sri Lanka is deter- accounting and auditing to enhance mined to stay ahead and the business climate, boost shared Abe relevant with changing times. We prosperity and strengthen public finan- have consistently played a key role in cial management across the region. ensuring Sri Lanka enjoys a robust and The decision to hold this conference sound financial landscape, by impart- in Sri Lanka, the first of its kind in ing the required skills and knowledge Asia similar in concept to the annual in our members. conference held in the Latin America Corporate directors play a critical and the Caribbean region, was not by role in their capacity as the trustees of accident. It is because of the phenom- shareholders in safeguarding public enal impact and influence Sri Lanka interest and propagating good corpo- has in the international financial and rate governance. In keeping with our accounting arena. Our members today continuing objective to offer the best give leadership to regional account- and most pertinent programmes for ing bodies, while some others enjoy a the advancement of our profession- strong presence at various internation- als, CA Sri Lanka together with the al level committees on accounting. The Securities and Exchange Commission accounting profession in this country recently launched the Corporate Direc- has embraced and rapidly adapted to tors Programme. This aims to enhance changes taking place in the profession existing competencies and help them globally and locally. The standing of grapple with new regulations and chal- our accounting profession today is on Our members lenges while effectively fulfilling their par with any country in the world. today give leadership corporate role and obligations. Last year, we kicked off the second The inaugural programme on 26th phase of our infrastructure develop- to regional accounting June 2014 received an overwhelming ment project, a big part of which is bodies, while some response. I am certain that the Corpo- now complete, giving members and rate Directors Programme will truly be students better facilities such as a others enjoy a strong an enriching, insightful, and rewarding well-stocked library. We will continue experience for directors. to develop our infrastructure to offer presence at various CA Sri Lanka was the proud host of better and improved services. international level the Financial Reporting for Economic Among the significant recent events Development Conference which was were a CEOs’ Forum, a CFOs’ Forum committees on jointly organized by the Confedera- and the Board Meeting of CAPA. In the accounting tion of Asian and Pacific Accountants coming months we will host several (CAPA), International Federation of Ac- other programmes to enhance the countants (IFAC) and the World Bank. knowledge and skills of members and The conference convened over 200 students, ensuring they are kept up to policy makers, regulators, business date with the changing trends, helping leaders, academics and professionals, them to maintain their versatile and including a galaxy of internationally visionary image for which they are celebrated accounting and financial sought after the world over. personalities such as IFAC Chief Execu- tive Fayez Choudhury and Chairman of Arjuna Herath the International Integrated Reporting President - CA Sri Lanka

8 the Abacus | JUNE 2014

Periscope

Govt debt ‘bail out’ for banks

The private sector, especially speeds. Asia Securities stock concerns during periods banks, are virtually being brokers said this recurring where private investments ‘bailed out’ by increased gov- trend could be viewed as an moderate. Despite the drop 70.7% in profits, rising public debt ernment borrowing and not “automated balancing act” drop in volume of loans being crowded out as widely within the market mechanism disbursed in 2013 from a during periods where private held, a new research report itself rather than a conscious year ago credit growth declines has says. A significant trend effort of a particular entity. helped the banking sector as traced in the report by Asia Higher private sector growth a whole to remain profitable Securities was that growth leads invariably to lower pace in the face of growing bad 72.6% loans coupled with the drop in total assets of the banking of public debt expansion as Year-on-year increase in in lending. The change in the sector outpaced the growth it leads to higher tax revenue volume of investments in total loans and advances generation and hence reduces into government structure of banking assets is in 2013. the scarcity of funds avail- securities indicated by the drop in the “Assets growth continued able in the public sector. The volume of loans disbursed unreservedly despite the reverse remains true when in 2013 and the simultane- moderation in private lending private sector investments ous increase in volume of 16.6% investments into government activities during the year” moderate, the report said, growth in total assets Asia Securities stock brokers with public borrowings tend- of the banking sector securities. said in its banking sector ing to increase in the face of outpaced the growth in “The private sector in review. “This can be attrib- dwindling tax revenue caused total loans and advances general and banks in particu- of 8.8% year-on-year in lar benefit from this devel- uted to the shift in allocation by moderation in private sec- 2013. of banking sector loanable tor investments. opment rather than being funds from private lending “The rate of public debt crowded out by the govern- towards instrumental govern- expansion is in inverse pro- ing sector as the asset com- ment as it is widely held” the ment borrowing in the form portion to the rate of growth position gets concentrated Asia Securities report said. of treasury securities, similar of private investments in an within a lower yielding asset “This is so given that govern- to what took place in 2009.” economy” the report said. class. ment borrowing in times of The reverse trend - expan- The growth in banking “This is reflected in the moderation of private invest- sion of loans and advances sector assets tends to outpace drop in profits of the sec- ments yields a secure source at a higher rate than total the growth of loans and tor in 2013 and also during of return for the surplus assets - was seen during the advances when the pace of 2009” Asia Securities said. funds of the private sector following two years (2010 private sector investments “However, in the absence of which the latter is unable to – 2011) when private sector moderate. But this reduces this mechanism, the bank- acquire or riskier to acquire activity grew at break neck the profitability of the bank- ing sector may face cash flow through other means such as direct investments.” This phenomenon pro- vides the banking sector with Inverse Growth Pattern of Loans and LKR bn Investments - Change in Asset Structure % Yield on Assets space to ‘invest’ its surplus 600 548.2 funds profitably without hav- 13.44 13.38 ing to expose itself to risks 14 12.56 500 478.7 11.45 involved in private lending, 72.6% 12 and hence, enabling them to 400 rise 10 pay interest on deposits when 70.7% 10.21 9.87 private investments and con- 300 dip 277.4 8 9.38 8.58 sumption are not sufficiently 6 absorbing the loanable funds 200 160.9 of the banking system. 4 “Therefore, rather than be- 100 2 ing crowded out, the private sector is almost being bailed 0 0 out by increased public debt Loans Investments (Gvt Securities) 2010 2011 2012 2013 Loans Investments during times of slowdown 2012 2013 of private investments” the Source: Compiled with CBSL data stock brokers said. the Abacus | June 2014 9

Taxes high on essential goods External debt seen heavy

Increased this would mean relative incomes ► Net external debt as a share of GDP is al- government debt that the process in the economy most triple the ‘BB’ peer category median means that it has under examination from fixed income 45% to borrow more or causes a transfer earners (salaries raise taxes to repay of aggregate and wages) towards ► Expected non-performing loan ratio for the loans. High incomes from fixed that of variable the banking system in 2014 prices of essential income earners incomes. 6 goods owing to tax towards that of “This shift Fitch Ratings has confirmed markets from the QE-related hikes, depreciation variable incomes in proportional Sri Lanka’s Long-Term Foreign search for yield given its and higher through the unified aggregate incomes and Local Currency IDRs at relatively closed capital account. electricity rates are operation of fiscal towards variable ‘BB-’ with a stable outlook but The government has been hitting fixed income and monetary incomes (profit, noted that the country’s external able to secure some US dollar earners while also mechanisms in the interest, rent etc.,) debt is high. The rating agency financing through issuance on raising costs for economy in times under relatively said public finances are weak the bond markets twice in 2014”. banks, a report of moderation high essential relative to peers despite fiscal Fitch also said Sri Lankan by Asia Securities in private living costs, falling consolidation with both the banks’ performance is says. investments.” interest rates and budget balance (-5.9% of GDP supported by high real GDP “The government This is because higher level of in 2013) and government debt growth and monetary easing, is compelled to tax increases are taxation depletes burden (78.3% of GDP in 2013) but the non-performing loan cover the ensuing mostly directed the savings growth more than double the ‘BB’ ratio (NPL ratio) for the banking category medians of -2.7% and system was relatively high at loan repayments at financing of fixed income 35.9% of GDP, respectively. 5.6% in 2013, and it may rise by resorting to interest and capital earners while It acknowledged that the 2014 further to more than 6% in 2014. further borrowing payments of public increasing it on the budget “signals commitment” “However, the banking sector or resorting to debt of which over part of the variable to medium-term debt reduction is not very large relative to the increased taxation.” 50% is owned by income receivers” to maintain a gradual fiscal economy, with the credit to “Sri Lanka’s domestic entities. the report said. consolidation path, although GDP ratio at only around 40% at fiscality The relatively Given that the the process is “slow and to a end-2013.” (government higher level of latter group of large extent built on revenue A Stable Outlook reflects revenue collection), prices of consumer savers tends to projections that may turn out too Fitch’s assessment that upside whose pivot is essentials following amass a higher optimistic.” and downside risks to the rating formed by taxes the depreciation portion of their Fitch said Sri Lanka’s current are well balanced. account deficit has fallen from But Fitch said a negative on the most of the currency savings in less 6.7% of GDP in 2012 to 3.9% in rating action could be triggered necessary means of coupled with liquid, high 2013 and is expected to narrow by economic overheating, which subsistence, leads tax increases interest earning further to 3.2% by 2015 due to could be illustrated by a surge in to the latter’s price and higher term deposits, solid income from tourism and inflation, pressure on the rupee increases (rather electricity tariffs the savings remittances. and widening of the trade deficit. than as a result of under a falling composition of “Nonetheless, the current Failure to achieve a reduction increased demand rate of interest the economy in account deficit remains in government budget deficits in the system due in the economy turn tends to shift persistent and is only for a from currently high levels will to budget deficits)” leads to two key towards term relatively small part financed by also be seen as negative as the report said. developments deposits from FDI inflows, which are relatively would intensification in external “Given that regarding that of savings, low” it noted. financing risks, particularly a consumer taxes proportional increasing the cost “Hence, net external debt renewed widening in the current (45.1% of GDP in 2013) is almost account deficit combined with occupy around aggregate incomes of funds of the triple the ‘BB’ peer category a fall in capital inflows, or a 80% of Sri Lanka’s and savings. banking sector in median of 15.9% of GDP. decline in foreign exchange total tax revenue, One is a shift in its turn. External liquidity is weak.” reserves. Fitch said Sri Lanka’s capital But a prolonged period account restrictions had of real GDP growth that is protected it from the volatility consistent with moderate and of Quantitative Easing by the stable inflation and external United States that affected other equilibrium could trigger 80% countries. positive rating action as would 50% “Quantitative easing (QE) by significant improvement of Sri Lanka’s of public debt total tax the U.S. Federal Reserve has in external finances, with is owned by revenue comes so far not led to severe market sustained smaller current domestic from consumer pressures for Sri Lanka” it said account deficits, higher levels of entities taxes in a report. non-debt capital inflows (foreign “The country benefitted less direct investment) and a lift in than many other emerging foreign exchange. 10 the Abacus | JUNE 2014

Periscope

NBT pushes up effective March exports hit new high

Sri Lanka’s export earnings in March 2014 tax rate increased sharply - by 28.6% from a year ago - to US$ 1,070 million continuing the compared with the improvement in external trade from the 41.4% previous quarter, 87.7% second half of 2013. ▲ the report said. Increase in export “This was the highest monthly export Effective Tax Rate “Commercial earnings from value ever recorded” the Central Bank said. Bank’s loan book minor agricultural Spending on imports increased by 8.2% to products US$ 1,672 million in March 2014. contracted margin- As a result of an increase in inflows ▲Rs.1,144 Mn ally on a quarter- from workers’ remittances, along with the Total loan loss impairment, up 124% on-quarter basis significant growth in earnings from tourism, in 1Q2014 to Rs.418 billion as the current account deficit in the first at 31 March 2014, quarter of 2014 narrowed substantially. The balance of payment in the period The 2% Nation Building Tax 28.6% below our expecta- Year-on-year January to March 2014 is estimated to (NBT) introduced to the banking tions, on account of increase in exports have recorded a surplus of $828.3 million system from 1 January 2014 has lower private sector to US$ 1,070 compared to a surplus of $153.6 million in pushed up the effective tax rate demand for credit” million in March the same period of 2013. of Commercial Bank. it said. However, 2014 Export growth came from all major According to CT Smith Stock- export categories with the largest as at 31 March 2014, contribution to overall growth from brokers the Effective Tax Rate Commercial Bank’s industrial exports, which grew by 25.7% (ETR: including Financial Value financial assets and year-on-year, to $779 million. Added Tax) rose to 41.4% in the investments held The leading driver of the growth in first quarter of the 2014 financial for trading rose by industrial exports was export of textiles US$ and garments which grew by 32.6% year- year - the highest since 4Q2010 - Rs.33 billion during on-year to $457 million in March 2014, from 39.8% in 1Q2013. the quarter to Rs.163 reflecting significant increases in exports CT Smith Stockbrokers said in billion and the 1,862 to both traditional and non-traditional a report that Commercial Bank’s deposits base rose markets. reported earnings per share of 5% QoQ to Rs.472 mn Export earnings from transport Cumulative trade equipment increased by more than six Rs.2.7 for 1Q2014, while up 2% billion deficit in first three fold due to the export of ships, boats and from a year ago, were below “On account of months of 2014, floating structures. Rubber product exports expectations. This was owing revised spreads, down by 13.5% also increased by 10.9%, mainly due to an to lower net interest spreads, fund growth and year-on-year increase in export of rubber tyres. negative loan growth, worsening impairment assump- But earnings from gems, diamonds and jewellery fell by 21.9% year-on-year, due to asset quality and relatively higher tions, Commercial the substantial decline in diamond exports effective tax rate. Bank’s net profit as a result of low global demand. The bank’s deposits growth forecasts are revised Export earnings from petroleum products remains strong while there were down by 8% each 20.3% which mainly comprise bunkering and impairment increases due to in- for 2014E and 2015E Increase in export aviation fuel fell by 14.4% due to a decline creased non performing advanc- to Rs.10,780 million earnings from tea to in export volumes despite the increase in $155 million prices. es. Total loan loss impairment (up 2% YoY) and Agricultural export earnings grew by rose 124% to Rs.1,144 million in Rs.11,792 million (up 22.4% in March 2014 to $257 million, mainly 1Q2014 from a year ago, on ac- 9% YoY) respec- due to tea and coconut products. Export count of worsening asset quality tively.” earnings from tea increased by 20.3% to $155 million, the highest monthly value. “This was a combined outcome of a 14.3% increase in export volume and an Average tax buoyancy - how increase in the average export price of one kilogram of tea by 5.2% to $5.02” the well revenue mobilization tracks Central Bank said. Earnings from coconut product exports more than doubled due to GDP growth - for the past 5 years, improved performance in both kernel and which is significantly below unity non-kernel coconut products in terms of both price and volume. 0.78 and indicates that tax collection Earnings from rubber exports declined has been unresponsive to the by 32.1% year-on-year in March 2014, due to significant declines in both export pace of economic expansion volumes and prices. the Abacus | June 2014 11

within the state-owned bank- No worries over credit growth, NPLs ing institutions. Credit growth and non-per- “Hence, the impact on forming loans (NPLs) are at listed banks shouldn’t be sig- “more than satisfactory levels” nificant especially given that once the effects of pawning the latter have taken sweeping advances are discounted, Asia 6.5% steps to reduce exposure to Securities stock brokers said. 12.8% pawning advances.” Amount of non- As at March 2014 credit performing loans Credit growth to the Recent reports highlighted growth to the private sector private sector without the continuous contraction in of the banking pawning advances as at without pawning advances sector by March 2014 credit growth to the private reached 12.8% Year-on-Year February 2014 Year-on-Year sector despite the lowering while overall growth fell to of market and policy interest 5.1% YoY in the corresponding rates hand in hand with the period. “This means the core It also means that “NPLs lower losses due to the liquid- recent spike in non-perform- sectors of the economy con- which are mostly concen- ness of gold as collateral.” ing advances of the banking tinue to absorb healthy levels trated within the pawning The report also notes sector to 6.5% by February of credit disbursements,” the sub-category (over 75%) can that the majority of the gold 2014 from 3.7% at the end of brokers said in a report. be written off with relatively backed loans are concentrated 2012.

ATM outsourcing in the offing Power purchase renewal Banks are likely to share auto- mated teller machines in Sri creates dividend uncertainty Lanka in the future and also 3,000 Non-renewal of the power impact to be mitigated by the outsource their deployment purchase agreement of the fact that the holding company’s and management to third party Heladhanavi electricity plant, leverage adjusted for its wholly service providers, according to a key source of dividends to owned subsidiaries is low. Fitch LankaClear, the national pay- Hemas group, could reduce the said it expects the group is likely ment infrastructure provider. conglomerate’s earnings. to maintain financial leverage “What’s happened in devel- The PPA of Heladhanavi, a (measured as gross adjusted oped economies - what’ll come Number of ATMs islandwide 100MW plant run as a joint ven- debt/Operating EBITDAR) at next is - there’s something called ture between Hemas Holdings less than 3.0x over the medium the ‘brown label’ ATMs and the ‘white label’ ATMs which and state-owned Lakdhanavi, term, despite ongoing new will follow once the infrastructure is in place,” says Suni- is up for renewal in December investments and expansions mal Weerasooriya, General Manager / CEO of LankaClear. 2014. across the group. Weerasooriya said the brown label’ ATM is where a “The plant is the main The ratings agency gave bank outsources their complete ATM network to a third dividend contributor to Hemas Hemas Holdings’ billion-rupee party to run while retaining their branding and they pay Holdings. In the event Helad- debenture issue a final rating of by the transaction. hanavi’s PPA is not renewed, ‘A+(lka)’. The ‘white label’ concept is where banks say they dividends paid to the holding Hemas Holdings is likely to don’t want to have their own ATM network at all and company are likely to decrease,” use the proceeds for refinancing instead piggyback on other third party providers’ ATM Fitch Ratings noted. How- existing debt, which will length- networks. ever, Fitch expects this negative en its debt maturity profile.

Rs US$ 140 1,663 bn mn 31% Sri Lanka Cumulative workers’ Government Insurance remittances in first investment ratio Corporation three months of this in 2013, up from asset base year, up 12.2% 28% in 2010 12 the Abacus | JUNE 2014

Periscope International

Trade mispricing - Tracking tax evasion curse of resource-rich developing countries in commodities

Corrupt and opaque financial Tax evasion by transnational accounting practice practices deprive resource-rich corporations (TNCs) using that allows vertically 60% transfer pricing is not integrated companies to developing countries of “stagger- Share of global value chains limited to the commodities log transactions between ing” amounts of money, accord- across geographic regions in international trade sector, so compliance and its subsidiary units that ing to UNCTAD Secretary-General punishment should fall do not involve an arms- Mukhisa Kituyi. within the wider discourse length exchange of cash for “For example, the Africa of tax evasion and tax goods – the key accounting Progress Panel recently estimated havens, according to principle being to apply UNCTAD. fair market value to each that trade mispricing deprived US$38 BN Amount lost by sub-Saharan “Transparency efforts in cashless entry. countries in sub-Saharan Africa Africa each year owing to bad the commodities sector can “But to evade taxes, TNCs of approximately US$38 billion financial practices focus on imparting specific can manipulate the value per year, and that other illicit knowledge to tax authorities of transactions between outflows deprived them of an ad- of the commodities value subsidiaries in different chain’s activities and prices, tax jurisdictions values, ditional US$25 billion” Dr. Kituyi so that they can identify for example by overstating said. “These illicit outflows are centre of that debate” he said. transfer pricing-related the transportation costs greater than the total inflows of Dr. Kituyi said that global irregularities charged by aid and foreign direct investment value chains – which describe a in TNCs’ tax the importing that these same countries receive sequence of activities undertaken filings.” subsidiary, or Resource by understating to bring products to market that us$ on an annual basis,” he told the owners in the price of UNCTAD Global Commodities are coordinated by several firms commodity raw materials Forum in Geneva. The sensitive across geographic regions – ac- dependent 597 shipped by issue of transparency, and the count for more than 60% of all developing bn the exporting linked matter of global value international trade. countries - subsidiary. Both are indirectly entries would Whereas in the past such chains in the commodities sec- deprived shift the TNC’s tor, was probed by experts from chains were controlled by verti- of value 1.4 overall taxable intergovernmental organizations, cally integrated companies, Dr. when the Tn income to a lower academia and the private sector Kituyi said “advances in trans- purchasing tax jurisdiction.” Estimated losses at this year’s Global Commodities portation and communication company An example of evades paying by African transfer pricing technologies have disaggregated Forum. taxes on the countries in irregularities was Since its creation in 1964, supply chains globally”. net resource fair market outflows, revealed in 2011 UNCTAD’s aim, Dr. Kituyi said, “This new, disaggregated value of its mostly through with the leak “has been to identify solutions framework shifts the types of op- operations in tax evasion of an audit by that transform the commodity portunities available to com- their country. accounting firm In the Grant Thornton sector from a poverty trap to an modity-dependent developing commodities of tax filings by engine of growth.” countries” Dr. Kituyi added. context, Mopani Copper Acting Director-General of the Arancha González, Execu- vertically integrated TNCs Mines Plc, a Zambian United Nations Office at Geneva tive Director of the International can evade taxes in the company that owns mines Michael Møller said that “con- Trade Centre, said the interna- country where they produce and processing facilities their raw materials, by Trading company sumers want to know where their tional community has to “col- using transfer pricing to Glencore controls Mopani, goods are coming from, that they lectively change the mind-set that shift their taxable income to the second largest mining have been produced sustainably richness of natural resources and a lower tax jurisdiction. company in Zambia, and without corruption, and that dependency on commodities is a A recent study by the through a holding company taxes have been paid.” curse”. Citing ITC programmes in African Development registered in the tax haven Bank and Global Financial of the British Virgin Islands. Møller placed the discussion agricultural commodities sectors Integrity estimated that, Mopani’s 2000-2008 tax into the context of the post-2015 such as cotton, spices and fruit, between 1980-2009, African filings in Zambia leaked development agenda, the goals Ms González said that private countries lost between on the internet showed of which are now being debated voluntary standards aimed at US$597 billion and $1.4 the auditors had found by a body of the United Nations increasing transparency and trillion in net resource overwhelming evidence outflows, mostly in the form that Glencore and Mopani General Assembly. “The global improving governance were deliv- of tax evasion. had actively manipulated value chain and how to make it ering measurable benefits to the Used responsibly, transfer pricing in their work better for developing coun- small and medium-sized enter- UNCTAD says, transfer books to shift their tax tries has to be placed firmly at the prises working in those sectors. pricing is a benign liability away from Zambia.

14 the Abacus | JUNE 2014

By Vinod Moonesinghe Upgrading service culture The 21st century has been called the Age of the Customer, in which excellence in service has become the raison d’etre for organisational activities, in both business and the public service. If that is so, then Sri Lanka still belongs in the 19th century. Neither the commercial nor the government sectors possess a service culture, with its prioritisation of the fulfilment of customer needs. There are cultural and economic barriers to such an orientation within our society.

fter the Boxing Day Tsunami of the number of tourists going to Thailand in a 2004, many overseas tourists in Sri month is more than double the annual number Lanka remarked that the locals had This of arrivals in Sri Lanka. Thailand has consistently first seen to the wellbeing of the solicitousness scored second place as Lonely Planet’s most Aforeigners, whom they looked upon as their ‘value for money’ destination in the world – and is one of the guests, before seeing to their own interests. most endearing Sri Lanka does not even feature on the list. In Thailand, on the other hand, many foreign There are many reasons why Sri Lanka - tourists felt abandoned by the people of their features of our which has probably the world’s greatest varia- host country. This solicitousness is part of the culture tion of climate, ecology and culture, packed sense of hospitality which is one of the most into a tiny area - scores so badly in the tourism endearing features of Sri Lankan culture. Yet, stakes. One of them may be the fact that we do the Abacus | June 2014 15

PerspectivePerspective

not really deliver good service. tion, which indicates the prevalence of a sys- Some years ago, making sure that a foreign temic defect rather than just a series of isolated former VIP was housed adequately at a top Most people faults. The lack of a corporate service culture Colombo hotel, I appraised the management of will take the extends to almost the entirety of the business his importance and requested that there be no easy way sector, and further, to society as a whole. shortcomings in his accommodation. However, out and not It is not unusual for a customer to be faced the next day I discovered that the lavatory in his with personnel who apologise for mistakes and bathroom did not function. argue, some blame it on other members of their organisa- Although this is anecdotal, the accumulation voting with tion or, indeed, on their organisation itself. of anecdotal evidence points to the absence of their feet. The Of course, the customer-interface employees a service culture in our hospitality industry. It result is that should realise that the difficulties the service- lacks commitment to providing the customer institutions provider might be having are not the customer’s with prompt, professional, and courteous continue problem. service; responding to individual needs and I had occasion to argue with a police of- ensuring they are fulfilled; communicating with to pursue ficer about whether or not I could turn down the client clearly; and, most importantly, accept- customer- a road. He told me that I should have used a ing responsibility for the standard of customer unfriendly detour which I was unfamiliar with. I pointed service. policies and out that the detour should have been signposted To be fair, this deficiency is not confined procedures properly, saying this was the procedure in other to the tourist trade, but is characteristic of Sri countries. The policeman replied that this was Lanka’s business sector. For example, shopping Sri Lanka. at a local supermarket, when I got to the check- It is not just the government, but the public out counter, I found no-one there to serve the itself which accepts this situation. Most people customers. I contacted the complaints depart- will take the easy way out and not argue, some ment of the supermarket chain, but received no voting with their feet. The result is that institu- feedback on what action was taken. tions continue to pursue customer-unfriendly That chain needs a corporate service culture; policies and procedures. The public continues that is, the pattern of basic assumptions that to act as if, since this is Sri Lanka, excellence it uses in its business - the norms and values does not matter and they should accept what- shared by its staff - and which drive its daily ever treatment they are dished out. priorities, excludes excellence in its provision of On the subject of dishing out, most of the customer service. The mentality of its employees take-away restaurants, which have sprung up does not prioritise customer satisfaction and besides the roads leading from Colombo to its its activities do not contribute demonstrably to extra-municipal suburbs (and inside the suburbs realising customer aims and intentions. themselves), serve food of limited variety, dubi- On another occasion, a refrigerator which I ous quality and indifferent taste. Yet the eating had bought from a reputable retail chain, was public continues to consume their products, defective. It being under guarantee, I took it to complaining (in private) all the while. their after-sales service provider, and was told Several indigenous food outlets have tried to that they would have to import the part. Finally, emulate the success of the foreign fast-food fran- after telling me repeatedly that there was a delay chises, but with poor results. The reason is that in shipping, the after-sales service provider they copy the products and appearance, but not closed down. The staff at the outlet at which I the service philosophy of the model institutions. had bought the item from thought the matter In the advanced countries, a service culture most amusing. Hardly excellence in serving the is deemed fairly important by governments customer. as well as by businesses; in all sectors, service An acquaintance complained to me about the consciousness has top priority in strategic and lack of service provided by the ‘privilege’ or ‘pri- operational ideology - it is not a marginal con- ority’ services of banks operating in Sri Lanka. cern. The most important factor determining Often the designated personnel are not available, the success or failure of an organisation - be it the ‘priority’ cashiers’ stations are not manned, private or public - is considered to be customer and the other employees do not appear trained service. Misleading advertising and slick market- adequately to deal with ‘privilege’ clients. ing are no longer sufficient. The issue is not such individual instances of The importance of a service culture is so great shortfalls in service, but their widespread repeti- that there are consulting firms specialised in 16 the Abacus | JUNE 2014

Perspective

advising clients on re-organising and managing their internal ‘climate’ for service to customers, developing positive employee attitudes and com- Many firms mon staff goals and routines. prefer to The troubles in Sri Lanka’s corporate culture recruit go fairly deep. The broader public’s lack of dis- McDonalds cernment prevents customer satisfaction becom- ing of singular importance to profitability in our employees to business environment, which makes a change to serve at the greater service-orientation less likely. executive level Unfortunately, the existing work culture makes the creation of a more service-centred orientation difficult. One problem is the lack of competence or adequate training. The profi- ciency of junior staff is hampered by the ‘guru mushtiya’ effect, whereby more senior staff do not transfer their knowledge to less experienced employees, fearing they might lose their com- petitive advantage if they do so. Recently I was asked by a customer-relations employee of a private-sector firm to fill a cli- ent satisfaction form. I had several concerns which were not catered for by the form, so I began outlining them to her. She did not take notes, and ended the discussion abruptly by saying ‘whoever is handling the form will deal with whatever you have written’. Clearly, an insufficiently-competent person had been put on the all-important customer interface to collect customer-satisfaction data! In an organisation with a strong service culture, this matter is unlikely to have surfaced: what the employee has to do when a customer rest of the country to follow. For example, the makes an unusual request would be apparent to local McDonalds franchise follows the corporate them, because of the existence of clear norms philosophy of its parent in the USA and has a within the culture that enable them to respond well-trained staff committed to service (indeed, in a uniform manner. The staff must internalise many firms prefer to recruit McDonalds employ- the perception that their business is about pro- ees to serve at the executive level). viding customer service. Some domestic retailers use trained cus- New employees are formed by the culture of tomer-relations personnel as floor-walkers, the organisation. If a strong service culture is which shows that they know the importance of lacking, the employee who is keen and service- a service culture. There are several consultants minded will be stifled and brought down to who have experience of both the international the level of the others. On the other hand, the approach as well as of local conditions, whose pressure to conform will cause even medio- expertise could be utilised. cre personnel to react positively in a robustly Of course, the first step is to acknowledge customer-oriented environment. that there is a problem. Apart from one or two What is required is a system of customer ser- documents by experts, one searches in vain in vice to be in place, which motivates and informs the literature for references on the necessity to all members of the staff, whatever their distance build a service culture in Sri Lanka. In particu- from the customer interface, ingraining in them lar, there appears to be no recognition by the the behaviours and attitudes to perform consis- government of this need. There needs to be tently and excellently. commitment on the part of both business and So what is to be done? There are several government to change both organisational and institutions which can act as beacons for the national thinking.

18 the Abacus | JUNE 2014

By Padraig Colman Credit Unions – Banking and Social Responsibility Will the conventional banks ever provide “a New Moral World” of happiness, enlightenment, and prosperity?

by 10% to £2.38bn, from £2.17bn in 2012, with the investment bank’s bonus pool increasing by 13%.The level of personal service is unlikely to improve. Credit Unions originated in the 19th century, based on the ideas of Robert Owen in the UK, Herman Schulze-Delitzsch in Germany and Al- phonse Desjardin in North America. Owen was born in Wales but moved to Manchester, then to Scotland (where he achieved commercial success operating on principles that became the basis for the cooperative movement in Brit- ain). He then bought a town in Indiana which he renamed New Harmony. Unfortunately, the utopia failed. Owen’s vision was of “a New Moral World” of happiness, enlightenment, and prosperity through education, science, technol- ogy, and communal living. A Credit Union is a member-owned finan- cial cooperative, democratically controlled by its members, and operated for the purpose of promoting thrift, providing credit at competi- tive rates, and providing other financial services hen I called in at Midleton to its members. Many Credit Unions also provide Credit Union just before services intended to support community devel- Christmas, I was immediately There are no opment or sustainable international develop- offered a piece of cake and a hidden fees ment on a local level. Wglass of red wine. This was around 10am and or transaction Credit Unions have played an important role there was already a good deal of red-faced charges in Irish society since the 1950s. The Irish Credit conviviality in the branch. Whenever I stopped Union movement has achieved one of the high- by to make a deposit or withdrawal, the est membership penetrations of any country, manager would call me in for a friendly chat. with over 50% of the Irish population now hold- I have a similarly cordial relationship with my ing membership. Credit Unions in Ireland today local Sampath Bank manager but one could nev- vary dramatically in size, membership and in the er imagine such a thing with conventional banks range of services they offer. However, they all in the UK or Ireland. If one tries to phone the share a basic philosophy and set of principles. Croydon branch of Barclays, one finds that all Ireland in the 1950s could have been a third branches have the same telephone number and world country. There was high unemployment when one dials that number, one finds oneself and poor housing, which led to sickness and speaking to someone in Bangalore rather than malnutrition. State unemployment benefits were Croydon. Barclays plan to cut 12,000 staff this low and did not last indefinitely, leaving many year. The bank’s total bonus pool for 2013 rose families in abject poverty, relying on loan sharks. the Abacus | June 2014 19

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Banks and other financial institutions did not repayments are accepted with no penalty. advance credit without substantial collateral or It is ironic, in the light of what I have written guarantees; you had to be a homeowner in order £ in these pages about the shortcomings of the to get a loan and very few people owned their Central Bank of Ireland as a financial regulator, own homes in the 1950s. 2.38 that it should publish a report critical of Credit Nora Herlihy (a teacher of under-privileged Unions. In Credit Union Prism Risk Assessments, children), Sean Forde (a baker) and Séamus P Sharon Donnery, Registrar of Credit Unions, MacEoin (a civil servant) decided to do some- bn wrote: “Regrettably, we found the majority of Barclays bank’s thing about it. They recognised the root of the credit unions we engaged with needed to make total bonus pool problem as the scarce availability and poor for 2013, up 10% significant improvements. ...We also noted in management of money and resolved to identify from the year a small number of cases certain attitudes and a system that would allow people to gain more before behaviours indicative of an unwillingness to control over their finances. comply with legal and regulatory requirements In 1956, a government sponsored savings and associated absence of appropriate risk man- campaign prompted a co-operative in Dun agement systems and compliance programmes.” Laoghaire, County Dublin, to set up a thrift so- Ms Donnery pontificates: “As with all other ciety, which was reformed as the Dun Laoghaire financial institutions, they depend on public Borough Credit Union – the first in Ireland. confidence for their success and members need Barclays The movement advanced through the 1960s plan to cut to be assured that their savings are safe.” in a series of spectacular leaps. By the end of the Despite the shortcomings of the Central Bank, decade, 180,442 people had joined 336 unions three executives of Anglo Irish Bank are each spread throughout the 32 counties and their 12,000 facing 16 charges of illegal activity. savings amounted to almost £9 million. Most staff this year Research indicates that Credit Union custom- members of Credit Unions are savers rather than ers are more satisfied with service quality than borrowers, which can be a problem for their bank customers are. A survey showed that Credit viability. Unions rate significantly higher than banks on I was a member of Midleton Credit Union in 11 of the 14 service quality questions: access; County Cork. Their motto is Not for profit. Not courtesy; communication; credibility; security; for charity. But for service. Midleton has 18,000 empathy; tangibles; basic service; fairness; fix- members and provides a full range of financial Over ing mistakes; and guarantees. People between services to members. Midleton Credit Union was the ages of 18 and 34 have a high regard for the formed in 1968 solely to help its members and community-owned lenders. Four out of 10 young aims to offer fair and reasonable rates on savings 50% adults are members of Credit Unions and half of the Irish and loans. It provides loans for cars, holidays, of this group would consider a loan of around population have Christmas, weddings and just about anything membership in €6,300. Young adults see Credit Unions as more one can persuade the manager to agree to. Pay- Credit Unions understanding than banks. ment periods range from one to five years. Loans In Sri Lanka, the World Council of Credit are insured at no direct cost to the eligible mem- Unions is strengthening Credit Unions in areas ber. Repayment protection insurance is available affected by the conflict with the intent of restor- as an optional extra. There are no hidden fees ing financial stability and a broader sense of or transaction charges. A loan of €10,000 repaid security. monthly over five years would mean monthly It would seem that in Ireland the public, payments of €209.82. The typical interest rate of chastened by the antics of the casino banks, have 9.5% is high compared to the 2% on my Bank of more trust in Credit Unions than banks, what- Ireland mortgage, but I found the Credit Union’s ever Ms Donnery might say. Is there a lesson flexibility helpful in the refurbishment of my for the rest of the world? Banking (the service derelict cottage and the refurbishment of my that should protect savings and supply loans for very mouth when I had extensive and expensive social uses such as productive development) is dental treatment. Repayments are calculated too important to be left in the hands of a small on the reducing balance of the loan. This means number of private bankers who, by definition smaller interest repayments as you repay your seek only to maximise their profits. Credit loan. Repayment terms can be adjusted to suit Unions bring a measure of democracy, coopera- your particular circumstances. You can repay tion and mutuality to the ugly world of finance. the loan earlier or make larger repayments than They are an example of what biologist EO Wilson agreed with no penalty. Additional lump sum called “the delicate web of reciprocity”. 20 the Abacus | JUNE 2014

By Dr. Kevin Freiberg & Dr. Jackie Freiberg Lead with Gratitude and Inspire the Gift of Perspective, Potential, and Productivity Encouraging employees to express gratitude can boost morale and improve corporate competitiveness

omplaining is a dead-end road; it about fixing things and making their little corner feeds depression and hopelessness. of the workplace better. The next time you No one (even your therapist) wants find yourself complaining or you find yourself to hear about how unfair you think participating in a dialogue where others are Cthings are or how life is stacked against you. complaining, ask yourself (or be courageous and Leaders who embrace and inspire gratitude ask them), don’t run to their bosses, human resources, or “What is the ROI here, what’s the return on whoever will listen every time they encounter a investing in this discussion?” problem. They gravitate toward people who, like “Is this conversation adding any value?” themselves, are truly interested in and hopeful Want to know the fastest way out of being the Abacus | June 2014 21

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a complainer and feeling sorry for yourself? work environment. After a year, we would send Gratitude. Gratitude stems from acknowledg- them back. Perhaps this would give them a ing that where we have arrived didn’t happen The discipline deeper sense of appreciation for what they actu- solely on our own. Do YOU take credit for all of being ally have. In reality, the grass is rarely greener. you have? Who among us is not “drinking from grateful Look, we are not big on funky exercises that wells dug by others?” Yet, we live in a world that will have a promise a lot and deliver a little. But, if you want screams, “I owe nothing, but I have a right to to become more grateful, tap potential, shift per- everything!” And so we forget by taking what we powerful effect spective, drive productivity up, and give com- have for granted and living as if the world owes on you, your plaining a permanent rest—try making a daily us everything. team, and your list of ten things for which you are grateful or try An ungrateful heart loves to complain and productivity keeping a gratitude journal. Why not give grati- always sees what is wrong with the world. An tude journals to your team? The discipline of ungrateful heart cynically makes nothing out being grateful will have a powerful effect on you, of something. Gratitude, on the other hand, your team, and your productivity. This daily dis- sees what is good and right with the world and cipline has the potential to radically transform usually finds something meaningful in nothing. your perspective about life and work. Whether Leaders who see their team through the lens of you decide to work with a journal or a list, force gratitude will always see the untapped poten- yourself and your team to reflect upon the good tial in people and inspire them to achieve what in your life. When you make your entries, don’t cynics think is impossible. We’ve worked with forget to consider the pain and frustration you the U.S. Marines for more than 20 years, and we have avoided, as well as the blessings you have are always inspired by their example. A motto received. Commit to making your entries every the Marines live by is this, “The difficult we do day for the next 30 days. immediately, the impossible just takes us a little Is there a compelling case to be made for do- longer!” How’s that for tapping potential and ing this? Yes! In our book BOOM!, we noted that inspiring achievement and accomplishment! people who keep gratitude journals on a weekly Perhaps more great things would happen if more basis are more alert, enthusiastic, energetic, leaders and their teams embraced this motto as attentive, and far more determined than those well. who focus on the hassles or neutral events in Without a doubt, gratitude fuels potential and their lives. Those who replace bitterness and transforms our perspective. When you are in resentment with gratitude report higher levels awe of what you have, the immediate response of fulfillment, vitality, and optimism as well as is a deep sense of appreciation: “Whom do I lower levels of stress, frustration, and depres- repay?” “What does it mean to give back in life?” sion. They exercise more regularly, report fewer “How can I be a better steward of what I have?” physical symptoms, and are more likely to live These questions leave little room for envy, longer than the ungrateful. Does this sound like entitlement, or complaint. It’s hard to complain a key strategy for becoming more productive, when we are truly thankful, but it’s hard to be developing a better perspective, and tapping thankful when we think we are entitled and take into your true potential at work? We think so! so much for granted. American philosopher Eric And the good news is—it’s free! Hoffer said, “The hardest arithmetic to master In his book Authentic Happiness, Martin is that which enables us to count our blessings.” Seligman describes another exercise that has So you didn’t rock the world today, maybe you life-changing potential. Seligman asked students just changed it slightly. Or, if you didn’t change it in his Positive Psychology class at the University even slightly, at least it didn’t get worse. of Pennsylvania to select one important person We have been able to work with people in from their past who had made a positive differ- some of the most admired companies in the ence in their lives and whom they have never world. Yet, we are constantly amazed at how properly thanked. Each student was to bring this many people working in great companies com- person to class and present a testimonial—just plain about what they DON’T have. On more long enough to cover one laminated page—to than one occasion we have felt compelled to say, the unsuspecting guest. Seligman called it “What you have in terms of culture is incredibly “Gratitude Night”. You know what happened . . . special. You better protect it and promote it with People got choked up, and the fear of embarrass- your life.” Sometimes we wished we could offer ment gave way to tears of joy and appreciation them a sabbatical and set them up in another as the students found a vehicle for expressing 22 the Abacus | JUNE 2014

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4. In making the appointment, do not tell the per- son what it is about, only that you want to meet. For many of us, gratitude 5. Give a laminated version of your testimonial as does not come a gift. naturally; 6. Let the recipient react without being rushed, it must be then spend some time reminiscing about the signifi- cultivated. Will cant events that brought you to this point. conducting a gratitude Gratitude is a sign of wisdom and maturity, audit be easy? a hallmark of confident humility. Show us a corporate culture infused with gratitude and we Hardly will show you a culture of civility, compassion, and courtesy. It is a culture where people are not weighed down by the toxicity of complaining, a culture where people find the freedom to soar. We are so very grateful for our work with compa- nies like Southwest Airlines, Sundance Resorts, Wells Fargo, and Ernst and Young. These are not just consulting or writing projects, nor are they just speeches or events; they are esteemed clients who have profoundly influenced us, they are role models of wise, mature, and gratitude- inspired cultures. All of these companies work deliberately and strategically at promoting and Authentic Happiness by Martin Seligman. protecting a culture wherein gratitude is deeply rooted. For many of us, gratitude does not come how thankful they were for those who meant naturally; it must be cultivated. Forcing yourself the most to them. At the end of each presenta- to make a daily list of your blessings is essential tion, the laminated version of the testimonial to making this practice a habit. Will conducting a was given to the guest. Written evaluations at the gratitude audit be easy? Hardly. But when you’re end of Seligman’s class indicated that “Gratitude having an extremely difficult week, it is exactly Night” was not only the high point of the class, what you need. When you feel like you’re in a but for many of the students and guests, one of dead-end job, your boss is dysfunctional, your the greatest nights of their lives. colleagues are biding time, work is killing you, Are you looking for a way to close out the you’re frustrated and fed up; the last thing you’ll year on a high by celebrating and thanking want to do is write down the things for which people for their contributions? What’s keeping you are thankful. But that’s the point of develop- you from identifying several people at work ing this daily discipline. It teaches you to look and doing the same thing? What’s keeping you for what IS working in your life and trains you to from initiating a monthly, quarterly, or bi-annual focus forward. It’s paradoxical. The very thing gratitude luncheon? If you move on this idea, you need to do most to get out of a funk and stop Seligman suggests several criteria: complaining is the very thing you feel least like doing. This is why inspiring a spirit of gratitude 1. Choose the person because of your deep-felt must be based on a visceral decision of the will gratitude, not because of romance or an opportu- and not on a FEELING. Just do it! nity for future gain.

2. Take your time (several weeks is not uncommon) and be thoughtful in the words you choose. Dr. Kevin and Dr. Jackie Freiberg are owners of San Diego Consulting Group, a consulting firm dedi- 3. Do it face-to-face. Writing a letter or making a cated to equipping leaders for a world of change. call will not have as much impact. www.freibergs.com

24 the Abacus | JUNE 2014

By Shamindra Kulamannage A Predictable Fading, But… The challenges facing highland tea plantations will force their decline. How they respond to these will determine the disruptiveness of the decline

hundred and fifty years after being the resulting unraveling would be disruptive. first planted in Ceylon and making This is the challenge facing tea growers here. a gigantic contribution to the Averages Everything from the reversal of quantitative economy since; the tea industry can often be easing in the US, the lingering impacts of the Anow is gradually fading. In the next twenty Arab Spring to Russian intentions in Crimea misleading as years, growing tea, especially in the highlands they are in the will impact tea prices. Ninety five percent of the where private sector controlled plantation firms Lankan tea crop is exported and many factors, dominate, will become increasingly unviable case of the tea far beyond the control of growers here, weigh on because of rising costs and unavailability of industry international commodity prices. labour. Highland plantations may not disappear On the face of it, the tea industry is doing altogether but their footprint and the economic just fine. Last year, 2013, it set a new export contribution will shrink relatively and in record of $1.5 billion. Exports have exceeded a absolute terms over the next couple of decades. billion dollars for five years consecutively. Over Industries fade and new ones emerge as decades a kilo of tea was sold for a $2 average countries grow. It’s the least competitive ones at the auctions although its local currency price where value addition is sparse that are culled increased because the Rupee weekend. How- first. Although they may not fade away com- ever since 2009 demand drove prices above $3 pletely, their low returns will make them unat- consistently. In 2013 the average auction price tractive for investment. Investing in higher value was $3.5 a kilo. addition and innovation can however stall this However averages can often be misleading as process. Unless an industry anticipates, plans for they are in the case of the tea industry. Tea grow- and addresses challenges surrounding an eco- er fortunes are sharply split between the Re- nomic structural change that affects its future, gional Plantation Companies (RPCs), which have the Abacus | June 2014 25

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most of their tea lands in the central highlands of for a further pay rise. Estate revenue is depen- the country and small holders, who grow most dent on the Colombo auction price of tea which of their tea at lower elevations surrounding the Most of the here is the highest in the world. Prices of Kenyan central hills. To understand the challenges facing existing and Indian tea, the other two major tea export- tea and plantation companies that grow it, it’s workforce is ers (most Chinese tea isn’t exported), are $0.5 important to separate these from the RPC’s other due to retire to $0.7 less on average, than a kilo of Sri Lankan crops like rubber and oil palm and also from the tea. People in the Middle East, the former CIS small holder-controlled tea plantations, usually in the next nations and elsewhere will drink more tea as someone’s back yard. twenty years their economic circumstances improve, driving Sri Lanka’s biggest tea estates are managed by while the up the commodity’s price globally. However 20 listed and some government-controlled Re- young would thousands of acres of tea are being planted in Af- gional Plantation Companies created in the early rather do rica in fertile land where productivity is higher. 1990s by combining state-owned estates growing anything else These new producers will supply much of the tea and rubber. The government-owned estates increasing demand as has been happening over were leased for 50 years to the newly created than pluck tea the last few decades. RPCs. When these RPCs were privatized and By 2012, Sri Lanka’s tea production had listed in the Colombo Stock Exchange twenty roughly doubled from 1990 levels, but its share years ago, many of Sri Lanka’s most successful of the global crop had declined to seven percent private firms invested in them. from 21% in 1960. China, India, Kenya and other The challenge that has so far bewildered Asian and African countries grabbed most of the the RPC’s - that produce 30% of the crop – is new consumers in the now annual 4.7 billion twofold. Firstly its people and secondly it’s the kilograms a year tea market. financial unviability of growing tea in the high- Land productivity in the lowlands, where lands. For decades now the millions of people tea is a relatively new crop is two to three times who live in plantations have been unwilling to higher than in Sri Lanka’s highlands. This is work there, because of low pay, difficult work- because lowland tea bushes are young – most of ing conditions and the ignominy of being a tea it planted during the two decades – and these plucker. The RPC workforce has shrunk 40% in lands have never before been used for agricul- the last twenty years from 345,000 at the time ture. In the two decades to 2011 lowland tea of privatization to 208,000. Most of the exist- acreage has doubled to 110,000 hectares. In ing workforce is due to retire in the next twenty roughly the same period highland tea acreage years while the young would rather do anything had halved to 41,000 hectares. else than pluck tea. In 21st Century post war Tea plantations have generally taken few risks Sri Lanka the industry’s popular refrain that it or innovated. Few plantations have been willing cares for workers ‘from womb to tomb’, sounds to leave their comfort zones to build their own suspiciously like a recruitment slogan for the brands or block out sections of their estates slave trade. for their employees to farm on an out-grower Many estates already suffer from a shortage of model. These may offer some solutions to the workers. In the next two decades – if Sri Lanka’s challenges. For an industry used to incremental economic growth accelerates – jobs in the hotel, change the challenge of the transforming eco- construction and other fast growing sectors will nomic landscape as Sri Lanka moves upwards be far more attractive for educated young people in the middle income rankings will come as a living in plantation areas. Highland tea planta- shock. Estates in the highlands will run short of tions don’t have an effective enough strategy workers, be forced to automate in an industry to deal with its diminishing labour force other where new investments are unattractive due to than incremental working condition improve- their low returns. ments which haven’t successfully stemmed the It shouldn’t come as a surprise that uncom- exodus in the past. Combined with performance petitive industries, even ones over a century old, incentives a plantation worker’s daily wage is The RPC workforce will fade so that resources like human capital Rs620 whereas even low skilled work outside the has shrunk can speed the growth of other more competi- estates can earn twice as much. tive ones. It’s up to the tea industry leadership The second challenge is the financial unvi- to determine if in their fading it will go kicking ability of tea as a crop in the highlands. Seventy 40% and screaming or with a dignified air about the percent of RPC costs are on account of labour in the last twenty decline. Evidence suggests the tea industry, and the plantations aren’t able to meet demands years especially in the highlands, is nearing its end. 26 the Abacus | JUNE 2014

Advantage Mervyn King: You need integrated thinking from input to outcome

By Vinod Moonesinghe South Africa is a pioneer in Integrated Reporting and Professor Mervyn King one of its leading advocates. IR is the new form of corporate reporting that goes beyond the numbers and looks at business in a broader sense, telling its story in a way more easily understood by ordinary people, or the shareholding public. It measures a company’s total value, taking into account how it creates value with positive impacts on society and environment and how it could avoid destroying value by acting negatively. Mervyn King, Chairman of the International Integrated Reporting Council, and a leading advocate of Integrated Reporting 28 the Abacus | JUNE 2014

Companies which do Integrated Reports as South Africa headed towards democracy, and have seen their share prices go up. King the Johannesburg Stock Exchange, the Society of was in Sri Lanka recently for the 2014 South Accountants of South Africa, the Law Society and Asia conference on Financial Reporting for the Institute of Directors, together felt the need Economic Development that brought together for guidelines on corporate governance. Because regulators, policy makers, business leaders, of unequal opportunity under Apartheid, the ma- academics and professionals from across Asia jority of citizens had never been in the economy. to discuss the state of financial reporting. In Now there was to be democratic equal oppor- this interview King tells how IR emerged and tunity, but the special circumstances required its importance. special solutions. At the urging of Mandela, King agreed to chair what became known as the King 30% Originally a justice of the Supreme Court of Committee on Corporate Governance. South Africa, Dr Mervyn Eldred King resigned, King is of the opinion that the sage advice of of Unilever as he says cryptically, “for a number of reasons.” Adrian Cadbury is the secret of South Africa’s factories operate An opponent of Apartheid, he supported Helen world lead in the field of Integrated Reporting. on renewable energy Suzman, the sole non-racialist democratic liberal Cadbury, responsible for the Cadbury Report in South Africa’s Parliament. In 1981 he became on Financial Aspects of Corporate Governance, Chairman of Operation Hunger, which was told King that he had himself made an error in dedicated to feeding some 2 ½ million children, disbanding his committee, because afterwards mainly in the rural areas where the hardship was others, such as Turnbull, Smith, and Greenbury, greater. had to be appointed. These did not have continu- He knew Nelson Mandela from before he was ity, which is vital since corporate governance is jailed, and kept in touch with him in prison via dynamic, and global events such as the Global Fi- Mandela’s daughter, who worked in his organisa- nancial Crisis or even events happening in one’s tion. After Mandela’s release, King was one of 12 own country can have a huge impact. Cadbury invited to dine with him. advised King to keep his committee going, which advice was followed: his committee has met in every quarter since 1992 and stayed up to date on The sage advice of Adrian Cadbury is the what is happening in the world, which kept it a secret of South Africa’s world step ahead of the rest of the world. The committee came out in 1994 with its first lead in the field of report on corporate governance – which became known as King I — advocating that the company Integrated Reporting had not just to concern itself with the sharehold- ers, but with many stakeholders. - Mervyn King A company might certainly take a decision that will benefit one stakeholder more than an- Since then, he has become a leading advo- other, but it should be explained that it was in the cate of Integrated Reporting. King is Professor interest of the company, of all stakeholders. That Extraordinaire at the University of South Africa became known as the ‘inclusive approach’ to gov- on Corporate Citizenship, Honorary Professor at ernance, as opposed to the ‘exclusive approach’, the University of Pretoria and Visiting Professor the hitherto hegemonic attitude of shareholder at Rhodes University. Today, in addition to being primacy – in which, as King describes it, the Chairman of the International Integrated Report- company is a castle surrounded by a moat of ing Council (IIRC), a global coalition of regula- shareholders, and would occasionally let down tors, investors, companies, standard setters, the drawbridge to let the other stakeholders the accounting profession and NGOs advocating come on board. communication about value creation in corpo- “We were brought up,” he says, “on the rate reporting, headquartered in London, he also theory of shareholder primacy: the shareholder chairs the Asian Centre for Corporate Govern- was the only or main stakeholder. Of course this ance in Mumbai. Based in Johannesburg, he jokes doesn’t apply because there are many stakehold- that he ‘lives in an aeroplane’, because there is ers that make it possible for a company to carry always some event he is involved in somewhere on business.” in the world. Businesses require labour, because without He is very obviously enthusiastic about Inte- it no amount of capital will make money. It grated Reporting, the fascinating history of which requires society, because society buys the busi- he relates, (“a long story” he chuckles), starting ness’ products: it is part of society, it is not apart with the end of Apartheid, around 1992. This was from society. A business is interdependent with the Abacus | June 2014 29

the resources it uses. These include the manufac- Today, value is a different concept, as compa- tured and financial resources added according nies deal with declining natural assets, and they to financial reporting standards, but also other must consider how the cash flows are created, capital resources which are not, such as hu- because they might well go out of business if they man capital, intellectual capital, natural capital do not. If they don’t apply their minds, he thinks, – many companies use natural capital without our grandchildren certainly won’t see the 22nd owning it, such as air and water – and of course century: “The whole world will be like Beijing.” the country’s infrastructure, for example their “Meanwhile,” he says, “we have natural as- lorries run on the public highway. sets diminishing, because you can’t grow coal, King explains that a company has to learn you can’t grow gold, you can’t grow iron... So what the legitimate needs, interests, and ex- if you think you can just carry on as usual, then pectations of the stakeholders are, and have to welcome to stupidity.” be taken into account in the decision-making This was the discussion going on at the turn process so that management can manage on a of the century. In 2002, in the context of the more informed basis, and the board of direc- Johannesburg Earth Summit, the King Commit- tors can understand better how to meet those tee on Corporate Governance revised its report. expectations. This should, logically, make for The revision, known as King II, recommended better judgement calls, and so actually benefit sustainability reporting by companies; they the shareholders in the end. were to report on their non-financial aspects, on Towards the end of the 20th century, the realisation dawned that financial reporting was Integrated thinking revolves around the not telling the whole of the story of ‘the state of play’. An analysis of the companies listed in the question of true value, how a company great stock exchanges of the world showed that makes its money, and how that impacts only about 20% of the market capitalisation of companies was represented by net asset value in financially, socially and the balance sheets according to financial report- ing standards. According to King, directors were environmentally not making stakeholders aware of what went on in their companies, and why the market was, - Mervyn King through demand and supply, fixing values that were 80% above the financial and manufacturing how their business was impacting socially and assets which were shown on balance sheets. environmentally and the nature of the quality of This disparity led to the assessment that there their governance. This became a requirement for should be standards for reporting on the non- listing on the Johannesburg Stock Exchange. financial aspects, and that developed into the By 2009, King’s thinking was absolutely realisation that business is at the junction of the clear: there was an interconnection between the economy, society, and the environment and actu- resources used by a company and its relation- ally has an impact on them. The biggest users of ships with its various stakeholders, the two could natural assets are in fact organisational entities, not be divorced. In the next revision, King III, be they public companies or private companies. governance, strategy and sustainability were inte- So the question arose about value creation. grated and made applicable to all entities, public, “‘When I was a young corporate lawyer,” he private and non-profit. says, “young accountants, young business people Integrated thinking, he declares, revolves were taught value depended on cash flow. So around the question of true value, how a com- 48 the question was the present value of expected pany makes its money, and how that impacts world bodies future cash flows, but no one thought about how financially, socially and environmentally. Identi- are on the the cash flow was made, was created.” fying the positive aspects, and how to enhance International However, it was a very changed world which them; identifying the negative aspects and how to Integrated was moving into the 21st century, especially since eradicate or ameliorate them. Reporting it had gone through the population explosion of He gives an example, the business of dyeing Council the 20th century: there were now 7 billion people fabrics. The toxic chemicals used to dye fabrics on the planet and every night 1/5th of them went should be treated before going down the waste, to bed hungry, and 1/5th were without potable which costs money. Obviously, the bottom line water. In a few decades the Earth would have will go up if the chemicals just go in the waste another two billion people. without spending money on treatment. However, “I could put up a sign saying ‘no vacancy’,” those chemicals enter the riverine system, killing quips King. fish and other aquatic life, and costing society 30 the Abacus | JUNE 2014

more money to clean the water. So society and Another concrete example: the Coca Cola the environment end up, in fact, subsidising the Company. Nine years ago, he says, the Coca Cola business. A hypothetical example, the price you Company realised that they couldn’t function pay for a hamburger. “You’ve heard of the free without water, the scarcest natural asset on plan- economy,” he states, “well I’ll tell you what’s free et Earth. So they started their long-term strategy – the subsidisation by society and the environ- of water re-use, replenishment and recycling. ment in the cost of that hamburger. That’s built Coca Cola spent a hundred years building their in, but you’re not paying for it.” brand, making it recognisable instantly, even by The price you pay is not the true cost of the aroma. It was then the best brand in the world, as hamburger, because the cow has been force-fed Apple is today. with antibiotics to keep it free of disease and Then, mounting criticism by civil society of growth agents to make it put on weight rapidly; Coke as the reason for child obesity caused sales it is transported to the abattoir in a diesel lorry, of Coke to plateau in America. So Coca Cola be- which has polluting emissions. gan a new marketing campaign on the 13th May Value today is not just a monetary value ir- 2013: they would not advertise to children under respective of how a company makes its money the age of 12; they would put nutritional labelling and its products, but the total value, taking into on all their containers, cans and bottles; they account how it impacts positively on society and would reduce the calorie count of their products environment (which adds value) and how it acts as much as possible; and they would encourage exercise for children, even create exercise yards, The big shareholders are no longer wherever in the world they had a bottling plant. “So you see,” explains King, “here is a wealthy families, but pension funds, company which, for over a hundred years, had superannuation funds, focussed just on creating its products, not seeing that its product itself had an impact and could the money belonging to have an impact on its business, on its bottom line profit. Now it looks at that impact, and that’s called integrated thinking.” people on the street It is not sufficient, however, for a company to - Mervyn King think on an integrated basis. It needs to report to its shareholders, and that information also goes negatively (which destroys value). Obviously this to all the stakeholders. The language of interna- value still must take into consideration the net tional standard reporting is generally unintelligi- profit, but it is critical how that profit is made. ble to most people (“like you trying to read Japa- Some concrete examples: Unilever has got nese”). Only one in a thousand, he believes, will about 30% of their factories on renewable en- understand financial reporting standards – and ergy, all their products are packaged in recycled many accountants do not keep abreast because material, they are re-engineering all their prod- of their complexity and changeability. ucts and they have almost no waste or landfill. He makes what he himself calls a “glib but Now they are beginning to get real benefits very profound statement”, that in order to be from these positive measures, and are starting an accountant you must be understood. The to outstrip their major competitor, Proctor and stakeholders must be able to comprehend what Gamble. Danish company Novo Nordisk has been they are being told. Where does a company get doing this integrated thinking for 7 years and its money? The big shareholders are no longer they are also outstripping their competitors. wealthy families, but pension funds, superannua- King articulates what he means: “Integrated tion funds, the money belonging to people on the thinking is accepting that you use resources, that street. The money that banks lend to companies you have ongoing relationships with stakehold- belongs to people on the street, who deposit it in ers, that these are interconnected and this cre- banks. “Who supplies labour to the company?” ates your business model. How does the com- asks King, “People on the street. Who buys the pany make its money (not how much money is product? People on the street.” made) – risk management, governance structure, The integrated report is just the company strategies – it has an impact financially, socially telling its story in ordinary, clear and concise and environmentally. And then it has a product, language so that it can be understood. A financial an output. But it doesn’t stop there because the report, done according to financial reporting output goes into society and has an impact on standards is still required, because the stakehold- society and the environment. So you have got to ers need to be aware of the numbers. However, think on an integrated basis right from the input in the information age, it is possible to have the to the outcome.” more detailed information online, while the the Abacus | June 2014 “You know, governance was never intended to be a mindless quantitative exercise: 31 I’ve got an audit committee, tick, I’ve got a remuneration committee, tick, I’ve got non- executive directors, tick. It is about quality, it is about the honest application of mind to the company and to act in its best interest for maximisation of total value – see I didn’t say book value I didn’t say economic value – total value. So integrated reporting is part of governance. It is critical that there is good quality governance but not this mindless report itself explains in easy language in 30-50 ‘do this’, ‘do that’, ‘do the other’, you know a pages profit, loss, expenses, and sustainability. whole set of rules. Because then a company In November 2009, the International Fed- spends a lot of time on conformance instead eration of Accountants (IFAC) and the United of performance, which is a social and economic need.” Nations Environmental Programme (UNEP) asked King to address a meeting in Geneva under the Mervyn King Chatham House Rule (participants are free to use the information received, but may not reveal the identity nor the affiliation of any other partici- Securities Commissions (IOSCO), the Institute of pant). At that meeting, agreement was reached in Internal Auditors; the President/Chief Executive principle that the answer was integrated thinking of IFAC; the world chairs of the Big Four auditing and the integrated report, as financial reporting firms and representatives of NGOs such as the by itself didn’t fit the purpose since it “wasn’t World Wildlife Fund. The result of this meeting, telling the story”. at which (King thinks, surprisingly) both the FASB Meanwhile Charles, Prince of Wales had set up and the IASB agreed that Integrated Reporting is the Accounting for Sustainability (A4S) trust in the future, was that the International Integrated 2005, with Sir Michael Peat of the famous audit- Reporting Council was formed. Since then, sev- ing firm Peat Marwick (which merged with KMG eral other world bodies (48 in all) have joined. to found KPMG) as chair. The Prince was con- King sees increased use of Integrated Report- cerned that the royal household was investing in ing in the future. He avers that it is acknowl- companies, the reports of which did not set out edged, amongst all the institutional bodies that the impact they had on British society and the en- in the world dealing with corporations and cor- vironment.At that time King was chairman of the porate law, that corporate reporting as has been Global Reporting Initiative (GRI) in Amsterdam, known since the Great Depression no longer fits which was setting standards for non-financial the purpose; financial reporting simply does not aspects of reporting. Sir Michael invited him to tell the whole story, that a new form of reporting tea and asked his advice on this problem. King is necessary. Since the turn of the century, many responded that the key was Integrated Report- new methodologies have been tried out, such as ing, which would explain, in comprehensible reporting added value statements, broad busi- language, how the non-financial impacts were ness–based reporting, but none have gained trac- embedded along with the financial impacts into tion. A system is required that makes business a company’s long-term strategy, so the reader sense. Integrated Reporting is not a do-good fac- could make an informed assessment whether tor, it is not mere camouflage. The research and the business of that company would sustain communications company Black Sun discovered value, long-term. that companies which used integrated thinking In applying integrated thinking, corporate and did Integrated Reports have increased their social responsibility (CSR) is incorporated into market capitalisation; they are able to raise capi- strategy, considering how a company makes its tal more cheaply and are able to borrow more money and how its product impacts, positively easily, because they provide more information and negatively, on society and the environment; than a company reporting only on its financials, enhancing the positive aspects, and eradicat- on which a bank can measure risk. ing or ameliorating the negative aspects. On the Also, King considers, companies which other hand, integrated thinking doesn’t replace practise this integrated approach are attracting sustainability because the sustainability issues the Net Generation, the desired age cohort of need to be identified. Nor does it replace finan- i-tech-savvy young people who are now coming cial reporting because money is the only metric. out of universities. They do so because the bright As for the Triple Bottom Line, the company oper- young mindset wants to distinguish between ates in a triple context, financially, socially and companies which are actually being subsidised environmentally, but reports in monetary terms. by society and the environment, and those which Integrated thinking incorporates all that in its have applied themselves to the problem of the strategic philosophy. 21st century, between ‘business as usual’ and As a result of this discussion, the Prince con- ‘business as unusual’. They do not want to be vened a meeting of the leaders of corporate re- with companies that will go out of business, and porting: King as chair of GRI, Sir Michael as chair they do not want to add to the crisis the planet is of A4S, the chairs of the International Accounting in – they want to help solve it. Standards Board (IASB), of the IFRS Board of “The other thing is” King chuckles, “that if you Trustees, of the Financial Accounting Standards are not operating as a good corporate citizen, Board (FASB) of the USA; the presidents of the then society reacts: Arab Spring, the Wall Street World Bank, the International Organization of occupiers, St Paul’s Cathedral.” 32 the Abacus | JUNE 2014

Dhammika Nanayakkara, Superintendent of Public Debt of the Central Bank of Sri Lanka

Jagath Perera says forensic accounting probes are like a jigsaw puzzle the Abacus | June 2014 33

Portrait

Managing a Rs6.7 tn Debt Portfolio

hammika Nanayakkara hails Dhammika Nanayakkara, from a very rural area in Superintendent of Public Debt of the Anuradhapura, having stud- ied at Central College, Anu- Central Bank of Sri Lanka, is one of radhapura and going to the 50 Chartered Accountants working in UniversityD of Sri Jayewardenepura in 1986. It the bank regulator whose governor was at university that he became aware of the chartered accountancy profession when his himself is a CA. Nanayakkara has batch mates began talking about the qualifi- the task of managing Rs6.7 trillion cation. This was a time when student unrest and politics led to frequent interruptions of in public debt, a not inconsiderable university lectures. Realising accountancy responsibility given the multiple could be an alternative path, Nanayakkara opted for that as well. He got through the risks involved and its impact on exam in 1987 and two years later the economy. In this interview, he completed the final exams while in his third describes how accountancy training year in university. Joining the Central Bank was a dream helps him perform his job and the Nanayakkara had while still a school boy, issues concerning government having read the bank’s annual reports as a commerce student and growing aware of its borrowing. contribution to the economy as the country’s apex financial institution. Soon after gradu- BY Rohan Gunasekera ation he joined Hatton National Bank as a management trainee, one of six recruited at the time. By then he had already sat for the Central Bank entrance examination. When 34 the Abacus | JUNE 2014

the results came, Nanayakkara found he had topped the batch well ahead at that time. Today, of course, we are on par with - coming first in the open competitive exam for selection to other countries.” the Central Bank. He quit HNB and joined the Central Bank in He feels the CA training provides a particular kind of profes- March 1993. The switch led to a break in his practical train- sionalism. “Unless you demonstrate a certain professional cali- ing for the Chartered Accountancy which delayed his getting bre you can’t become a Chartered Accountant,” Nanayakkara membership of the Institute of Chartered Accountants of Sri stresses. “You not only need to have the knowledge but need to Lanka till 2004. Nanayakkara recalls how, along with other know how to use that knowledge - application of that knowledge students, he had to lobby the ICASL, through submissions to in solving problems. That’s provided by the Chartered Account- its governing council, to get the Central Bank recognised as an ancy syllabus and helped me a lot in my Central Bank career.” approved entity for practical training. That paved the way for a The risks emanating from the debt portfolio he manages lot of Chartered Accountants and CA students to join the Central are huge. “If the government wants to borrow and we go to the Bank. “Since then we’ve seen a new generation coming in” says market without a plan it’s going to have a huge supply pressure Nanayakkara. and then interest rates might shoot up” he explains. “You need “A lot of youngsters have joined the Central Bank while to manage the debt portfolio in such a manner that you will not doing their Chartered Accountancy studies. There’s a two-way disturb the market’s smooth functioning, because we set the benefit. The institution benefits by having a lot of Chartered benchmark. This is the risk-free interest rate. Accountants so its functions can be performed in a very profes- All other financial instruments traded in the market - like a sional and precise manner, and the individuals themselves get loan or investment in the stock market - are going to be based to work in one of the best institutions in the country.” upon the benchmark rate. So we need to maintain discipline Despite having held well paying overseas jobs during studies and execute a carefully articulated borrowing programme to or while working as a consultant, Nanayakkara always opted finance the government’s requirements. Otherwise it’s going to come back, feeling he owes it to the country and institution, to affect the market interest rates. Then you’ll see cycles of having benefited from free education and Central Bank training. rates going up to 20-25%. But in the recent past that wasn’t the For instance, he worked in Oman for three and a half years on case because we articulated a medium-term debt management secondment from the Central Bank, first in Oman’s central bank strategy.” His department analyses underlying risks of the debt as a senior bank examiner and later as a consultant for training portfolio and prepares a risk mitigation strategy and borrow- Omanis in bank supervision. He was earning nearly $15,000 a ing programme in such a manner the market does not see any month when he opted to come back. surprises. They watch how the market behaves and then enter Nanayakkara, who has a Masters degree in financial deriva- the market and get whatever is needed without disturbing the tives and treasury operations from the American University in market’s smooth functioning. the United States, became the Superintendent of Public Debt on Discipline, Nanayakkara says, is a key professional skill the January 1, 2012. He also did a stint as chief dealer at the Central CA education gave that helps him do his present job. “You need Bank, responsible for managing the country’s foreign reserves. to go into the very source of various issues. I’m managing a debt “I’m very happy that I’m managing the country’s biggest stock of Rs6.7 trillion, the country’s biggest portfolio. Unless portfolio here - managing the public debt of over Rs6.7 trillion,” I know precisely the source of risk, I will not be able to do it. he says. “We’ve managed to maintain interest rates at low levels You need certain analytical skills which I acquired from my despite that fact that the government needs financing for its Chartered, go into root causes and then come to an educated budgetary requirements - cash flow requirements. Also, we have judgement as to what vulnerabilities you face. reduced the volatility in the domestic market interest rates and, If you look at the course material and exam papers of the because of the stability we managed to bring in, a lot of foreign ICASL, they are not only trying to have you pass an exam and investors now have real interest in investing in Sri Lankan finan- make you a Chartered Accountant - a paper qualification - but cial products.” they also want to create competent professionals capable of He feels that it was because of his Chartered Accountancy handling complicated issues.” That’s important for Nanayakkara he managed to join the Central Bank, it being a qualification in performing his present duties because of different types of required by the banking regulator, as he was still completing his risks. These, if not properly managed, could have a contagion university education at the time. effect on the stability aim of the Central Bank - economic and “The second factor - because of my chartered accountancy price stability and financial system stability - and have an im- background I was posted to the bank supervision department. pact on the interest rate structure, that will again affect private Today that exposure and my professional experience helps me sector investment and pricing of various financial instruments. perform my duty in an effective manner.” “Also, if I don’t manage it properly there’s going to be some Of course, the degree also helps but the Chartered Account- crowding out effect. That’s why you need to have that balancing ancy not only provides theoretical knowledge but practical ability. Not only that, I’m running a multi-currency portfolio - training as well, including work experience with others, looking US dollar, yen, euro, Australian dollar. into complex issues. I must know precisely the exchange rate risks that have an “My Chartered Accountancy helped me secure a position in impact on my portfolio. Because my objective is to minimise the central bank of Oman also, 10 years ago. That again helped the cost of borrowing while providing the required financing of me gain a lot of experience. If you compare the Sri Lankan government cashflow, while maintaining the portfolio risk at the financial markets with the Omani financial markets, they were lowest possible level.” the Abacus | June 2014 35

Why is there a shift to increasing external and commercial Debt to GDP ratio (% GDP) borrowing by government? Foreign Debt Domestic Debt A: Sri Lanka is a developing country with a per capita of about 100 US$ 3,300. The savings generated within the country is not 86.3 81.9 78.4 79.1 78.3 sufficient for financing the aggressive investment drive of the 80 government. As a result, the government needs to bridge the 60 36.5 36.1 35.6 36.5 34.1 Savings-Investment Gap of about 4 per cent of the GDP from foreign sources. 40 The current policy framework has been focused on elevating 49.8 45.8 42.8 42.6 44.2 both savings and investments in order for the country to attain 20 a higher economic growth and enhance the level of savings and 0 investments in the medium term. Yet, in view of the savings- 2009 2010 2011 2012 2013 investment gap in the country, government has borrowed from foreign sources in addition to raising funds through domestic sources to meet a part of its resource requirements for capital expenditures. How do you assess the sustainability of public debt – is Sri Sri Lanka has emerged as a lower middle income country. Lanka heading for a debt trap? The contracting of commercial loans in recent years corre- A: There has been a clear declining trend in public debt as a sponds to the country’s graduation into middle-income country percentage of GDP over the years and Sri Lanka is projected to status. With the graduation, the contracting of external finances achieve public debt to GDP level of around 65% by 2016. via concessional terms has eased out. On the other hand, the Also, the average time to maturity of debt portfolio in the country cannot put on hold its public investment programmes. country is increasing in recent years. For instance, Sri Lanka Therefore, like any other emerging country, Sri Lanka has to now stretches its T-bond up to a 30-year maturity horizon. depend on commercial sources for financing her public invest- From another perspective, Sri Lanka’s budget deficit is con- ments. The public investments as a percentage of GDP remained tinuously on a declining path. Such a decline is commendable around 5.5% in 2013. The ratio of external debt to GDP is on a with an expected primary surplus in 2014 while maintaining a declining path. However, still a sizable portion of Sri Lanka’s sizable public investment programme. project financing comes via multilateral and bi-lateral sources. In recent years, sizable investments in infrastructure consti- Unlike the concessional financing which come with a lot of cov- tuted a major financing requirement in the government budget. enants, the obvious advantage of commercial financing is the Such investments are expected to yield positive spill over effects flexibility of usage of finances by the borrower without adhering and contribute to higher economic growth and increased pro- to certain conditionality which may not be market driven. ductivity in the future. Also, the recent commercial borrowings such as Interna- Although, the debt level of the country in absolute terms has tional Sovereign Bonds (ISBs) are raised at highly competitive increased due to the financing of much needed mega invest- interest rates by the government. It can be seen from the Table ments in infrastructure, the level of debt expressed in terms of that much of the borrowings are still at reasonably low inter- GDP, which has been considered internationally as the prime est rates. Sri Lanka is now in a better position to service these indicator of debt sustainability, has gradually declined since debts as some of the infrastructure projects are now yielding 2002 owing to the benefits of prudent management of debt and new income generating activities. In particular, the new infra- robust economic expansion. structure base in the country would facilitate the growth strat- The total debt stock reported as at end-2013 amounted to Rs. egy based on five hubs plus tourism to diversify the economy 6.8 trillion which was the face (future) value of the total debt and improve the resilience of the economy to both internal and obligation of the government at maturity of such debts. This is external shocks. 78.3 per cent of the current value of GDP. However, the nomi-

Outstanding Lender Amount Rs. Grace Period Repayment Avg. Interest Amount, Category Billion (Yrs) Period (Yrs) Rates (a) Grace Period, Repayment (% p.a.) Period and Average Bi-lateral 823.18 0 - 21 6 - 40 2.44 Interest Cost of Foreign Multi-lateral 903.54 0 - 18 4 - 50 0.85 Debts by Category at the Commercial 941.17 5 - 11 0 - 20 6.35 end of 2013 Export credit 292.54 1 - 13 1 - 21 1.96 (a) Interest paid in 2012/Disbursed outstanding debt as at end 2011 - Total 2,960.42 Average 2.58 Source: Central Bank of Sri Lanka & Ministry of Finance 36 the Abacus | JUNE 2014

Public Debt-to-gdp ratio In addition, the Average Time to Maturity (ATM) of the do- % mestic debt stock has also improved in recent years as a result 110 of the prudent debt management policies adopted by the gov- ernment and the Central Bank. The ATM of the domestic debt 100 stock which stood at 2.1 years in 2010 improved to more than 5 years in 2013 due to the issuance of longer dated Treasury 90 bonds. A conducive debt threshold for a country depends upon a number of factors. The government and the Central Bank envis- 80 age in its MTDS to bring down the public debt to GDP level of 79.1 per cent in 2012 to around 60.0 per cent by 2017. In this 70 endeavor, the primary objective of the MTDS is to ensure that the government’s investment related financial needs are met at 60 the lowest possible cost with a prudent risk horizon. 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 What are the prospects for reducing government borrow- ing by reducing government spending and curbing private consumption? nal value of the outstanding debt stock as at end-2013 was only A: As already highlighted, the declining budget deficit is ex- Rs. 6.4 trillion or 73.3 per cent of the GDP. Hence, from a more pected to further consolidate public expenditure and provide practical viewpoint, the official figure of the country’s total pub- more space within the government borrowing programme. lic debt obligation would decline further.Also, Sri Lanka under- The detailed path of debt components supported by public goes periodic surveillance by international agencies, including finance consolidation provides more opportunities to reduce rating agencies in which prime attention is often placed on the government spending. Because of the increasing ATM, refinanc- country’s public debt level. A recent one was the IMF staff mis- ing risk is getting low, the debt stock’s stability has enhanced sion during September 17-25, 2013 to conduct Post-Programme and the debt portfolio’s rollover risk is reducing. Monitoring as a part of the enhanced surveillance for countries Further, the recent public expenditure is mainly on account which have had “exceptional access” to IMF resources, as is the of public investment programmes to create a more enabling case for Sri Lanka and it found no such concerns. environment for private sector development. The evolution of public debt in Sri Lanka since the 1950s Such infrastructure is already generating income and expect- shows that the Debt/GDP has gradually been declining from ed to contribute towards a speedy advancement in the private 2001. The public debt crossed over 50 per cent of the country’s sector in the coming years. GDP in 1964 and surpassed the 75 per cent level in 1980. By 1985 and 1986 it remained at 80.3 per cent and 86.8 per cent of GDP, Isn’t it risky to let foreign debt rise to levels when the gov- respectively. The level of public debt to GDP peaked in 1989 to a ernment has to borrow to service the growing loan repay- level of 108.7 per cent. However, with the ending of the internal ments and interest costs? conflict in May 2009, Sri Lanka envisaged a strategy to enhance A: The external finances are mainly used for the public invest- the country’s prosperity by achieving robust economic growth. ment programme of the country. These projects are long term The public debt to GDP levels also declined from a level of and expected to yield desired outcomes in coming years easing 86.2 per cent in 2009 to 81.9 per cent in 2010 and to 79.1 per out the debt service payments in future. For example, the cent by 2012 as given in the chart. As per the Medium Term power sector Return on Investment on average is around 20%. Debt Management Strategy (MTDS) of the government, the Debt The power sector related cost of capital is much lower than to GDP ratio is expected to be reduced to around mid-60s by 20%. The debt level increases in absolute terms as the country 2016. needs massive investments in basic infrastructure, which would

ATM – Upward Indicator 2012 2013 2014 2015 2016 trend Debt / GDP 79.2% 78.3% 74.3% 70.6% 65.0 Medium- Short term Domestic Debt / Total Domestic Debt 25% 24% 23% 21% 22% term targets for Sri Lanka Average time to Maturity of Domestic Debt (yrs) 3.2 4.8 5.5 6.0 6.5 Foreign Currency Debt / Total Debt (%) 46% 44% 40% 37% 35% the Abacus | June 2014 37

Growing Year Total holdings (US$ Mn) Foreign holdings (US$ Mn) Total Foreign Foreign demand holdings as a Netflow for Bill Bond Total Bill Bond Total % of total (US$ Mn) T-bills 2010 5,082 16,217 21,299 503 1,622 2,125 9.98% 466.70 and Bonds 2011 5,978 18,298 24,276 631 1,802 2,433 10.02% 227.29 2012 5,558 19,557 25,116 625 2,487 3,112 12,39% 892.68

2013 5,995 22,863 28,858 571 3,123 3,694 12.80% 492.68

2014 6,315 23,325 29,640 705 3,047 3,551 12.66% 92.89 MARCH

eventually take the country to higher levels of GDP. However, national investors and provides a benchmark to private sector the interesting proposition is that such a growth in GDP substan- institutions. tially reduces the exposure at the time of servicing such debt as a result of returns yielded by such mega investments. Isn’t it risky to increase dependence on foreign borrowing Also, from another perspective, as discussed previously, for deficit finance at a time of tighter global liquidity condi- external debt as a percentage of GDP is on a declining trend. tions? A: There has been a significant improvement in terms of Sri Could higher government borrowing crowd out private bor- Lanka’s foreign borrowing during times of tight global liquidity rowers in international markets? conditions. The proportion of foreign currency debt is amongst A: In 2013, the government encouraged the private sector to the lowest in the peer group. Our debt burden has shrunk far explore financing opportunities abroad and did not issue any faster than peers. our borrowing costs are declining and we sovereign bond in the international market. As a result, many have a diversified investor base. There’s growing demand for private sector institutions and state-owned banks explored the T-bills and Bonds. opportunities available in the international capital markets and succeeded. Further, in recent years, private sector projects How can investment made with foreign loans taken at com- received a growing trend of cash from international agencies mercial rates generate the returns needed to service these such as International Finance Corporation. Also, a significant debt obligations? amount of FDI’s flew into the country via both equity participa- A: Commercial loans raised contribute only a small portion of tion and direct foreign inflows to start ventures in the country. projects financed mainly by the multilateral and bilateral pro- The presence of government in the international capital jects funded by the government. Average returns over a period markets often contributes to furthering the interest of inter- of time of these projects are significantly higher than the debt service payment cost. Commercial loans provide a degree of flexibility and thereby efficiency in project implementation. Major share of funds raised in international capital markets are for infrastructure development projects. These infrastruc- Sri Lanka sovereign USD Bonds- ture projects already support the country’s economic progress tighter yields reflect increased investor and private sector advancement. confidence Could the government use improvements in the balance of Yield at Issue % payments to reduce foreign debt rather than increase it? 9 A: The balance of payments (BOP) records financial transac- 5YUS$ 10YUS$ 8.3% tions made between consumers, businesses and the govern- 8 ment in one country with others. When a country experiences 7 6.8% a Savings- Investment Gap, foreign inflows into the country are 6.0% required to bridge the gap. Such inflows, over a period of time, 6 6.1% 6.0% 5.9% 5.1% has positive spill over effects and could be of equity or direct in- 5 vestments than debt creating inflows in to an economy enabling reduction in debt stock. 4 The expectations built with BOP developments contribute to 2007 2014 reducing borrowing costs of a country and results in improve- ment in debt dynamics. 38 the Abacus | JUNE 2014

Interview

Clement Chan: We are Moving Towards a System of Principle -Based Standards

The evolution of a single set of internationally accepted accounting standards is a priority in the rapidly-globalising world economy today. However, there exist numerous obstacles, both actual and perceived, to the implementation of such a unified system, arising from disparate national economies and from divergent cultural norms. The difficulty of dealing simultaneously with a multitude of national differences led logically to the institution of regional groupings of national and other territorial jurisdictions. One such consortium, the Asian-Oceanian Standard-Setters Group (AOSSG) brings together the jurisdictions in the fastest-growing but possibly the most disparate, region in the world. We discussed how his organisation is responding to the exigencies of the complex task of reconciling the varied jurisdictional and regional deviations to the established worldwide paradigm with Clement Chan, the Chair of AOSSG, who addressed the recent South Asia Conference on Financial Reporting for Economic Development, hosted by CA Sri Lanka.

BY Vinod Moonesinghe the Abacus | June 2014 39

Clement Chan, Chair, Asian- Oceanian Standard- Setters Group during a panel discussion 40 the Abacus | JUNE 2014

A major obstacle to establishing a unified, have standards that cater to different situations. high-quality set of accounting standards today, “Therefore,” he says, “we are moving towards according to Clement Chan, is to ensure their a system of principle-based standards.” consistent application in the face of various However, having said that, he continues, it is I think it is an national and cultural practices. This hurdle is unavoidable that there will be circumstances in ongoing battle. a major challenge, since the development of which the national standards-setters, because We have to the world economy across national and other of some specific reasons, will find that compli- territorial boundaries necessitates the adoption ance with IFRS will be an extreme difficulty, and keep on telling of a common accounting benchmark, such as not imposable in their own national situation. people the the International Financial Reporting Standards It is for this reason that the AOSSG, which is a (IFRS). grouping of the accounting standards setters reason why “We have heard,” he says, “many stakehold- in the Asian-Oceanian region, from Australia to national carve- ers in our jurisdictions, in the national econo- Uzbekistan, which includes CA Sri Lanka, was out or local mies of our region, complaining that certain created. parts of the standards have not been working for The background to its formation, says Chan, modification their economy and not really working for their was the establishment of the International is not a good domestic situations, for some specific reasons. Accounting Standards Board (IASB) as a cen- choice, is not And therefore, based on those difficulties, they tralised body to institute global-wise accounting have wanted to have particular carve-outs or standards. Towards the end of the “noughties”, the right way national modifications of the IFRS.” it became clear that the IFRS were becoming In response to such views or arguments, he accepted widely across the Globe – apart from a makes clear the AOSSG has been telling people few jurisdictions, noticeably the US and Japan, that IASB is neither shutting its ears, nor shutting which have not adopted IFRS, much of the rest its door to them. However, it would rather that of the world has already done so. those jurisdictions which are seeing some diffi- However, says Chan “it was a common secret culties, instead of saying “this is not what I want, that the Anglo-American interest was very this is not what I like, therefore I cannot follow strong, so much so that a lot of people were say- it, I want to carve it up or just modify it”, follow ing that the IFRS were actually drafted to cater the IFRS in full and then raise the issue through for the UK and the American economies.” the proper channels. As time went by, as their economies grew This is on the grounds, Chan explains, that if faster than those of UK and US, the rest of the this procedure is followed, then the integrity of world sought to have a louder voice in how IFRS will be protected very well. On the other things should be, on how they should be re- hand, if everyone decided on a specific carve- ported; demanding a bigger say in the interna- out or national modification, if they picked and tional standards setting procedure. There was chose, if every time they saw something they did a growing realisation that the voices of the less not like and then decided they would not adopt developed economies, of the growing econo- it, ultimately there would be different standards mies, of the emerging markets should be heard for different economies. He points out that there as well. There was a clear need to create fora for are ways to change the standard at the national discussing common issues. standard-setting level if there is something which The idea of forming a regional group of stand- is a real issue. For that reason, he stresses, in the ards setters as a forum for the countries in the long run the AOSSG encourages people to adopt Asian-Oceanian region to exchange their ideas, the IFRS in full, with no national modification but also to have a joint voice in matters relating or carve-out, because of the need to preserve a to IFRS, was initiated by China, Japan and South unified set of universally applicable accounting Korea in 2008. They formed the AOSSG to dis- standards. cuss issues, share experiences on the adoption “I think it is an ongoing battle” he says, refer- of IFRS and to contribute to the development of ring to the challenge of ensuring the consistency a single high-quality set of inclusive global ac- of application of IFRS. “We have to keep on counting standards. telling people the reason why national carve-out “To the credit of IASB,” says Chan, “they have or local modification is not a good choice, is not been encouraging regional groupings of stel- the right way. You have to explain, but once you lar centres to be formed, so that the individual explain the reasons, I think most people can see smaller stellar centres could have a say, which the merit of those reasons.” may in their own right find it very difficult to However, the AOSSG does realise that it is not have their voices heard. The IASB encourages easy to come up with a unified set of accounting regional bodies to be formed so that, collectively norms for the whole world, because it needs to through the regional bodies, the voices of other the Abacus | June 2014 41

Clement Chan, Chair, Asian-Oceanian Standard-Setters Group, addresses the session on Financial Reporting Supply Chain at the 2014 FRED conference, the first ever of its kind in Asia and the first time CA Sri Lanka hosted such an event. stakeholders, that is, the smaller sort of econo- he avers, could be seen as a testament to that mies can be heard as well.” appreciation. It was against that background, based to a “There are only 12 seats,” he says, “represent- certain extent on the misgivings in the non-UK, ing the whole world. As you can imagine, the non-US jurisdictions, that AOSSG was formed. major economies such as the US, Japan China, The seat on There was also the problem of there being two and the UK, they all have a seat there in their ASAF provides blocs, Europe and the US, which didn’t always own right, but other than that, the regional the AOSSG agree and the formation of another group grouping like the Latin American and the Asia- which could articulate a different viewpoint was Oceanic (our group), also have a seat in that with a regular thought to be an advantage. forum. So you could observe, from that angle, channel to the On 17 April 2009, the group’s preparatory that the recognition of our regional grouping is IASB, enabling meeting took place in Beijing, with its first there.” formal meeting taking place in Kuala Lumpur, ASAF, he notes, is a very influential and it to have hosted by the Malaysian Accounting Standards powerful group in the standard setting world. It regular contact Board, with the participation of 21 standards is the foremost advisory group to which the IASB with and to setting bodies from the region, including CA Sri turns to on a regular basis, when discussing the Lanka. The AOSSG plans to play an important revision of existing standards, or considering the advise the latter role in encouraging the adoption of IFRSs in the potential issues that could go onto the formal on various region, and its very formation was indicative of agenda of the IASB, or conferring on the existing the recognition that many jurisdictions in the technical projects that are officially on the agen- issues relating region have adopted or converged with IFRS. da. So, the seat on ASAF provides the AOSSG to standard Many others have also announced timetables or with a regular channel to the IASB, enabling it to setting road maps for convergence. have regular contact with and to advise the latter In its relatively short history, declares Chan, on various issues relating to standard setting among its many accomplishments has been gain- and hence have a positive influence on decision ing recognition by the IASB as one of the major making. active players in the standards setting world. Another very fine achievement of the OA SSG That he himself, as Chairman of the AOSSG, in its short history was that it managed to push was invited to be one of the 12 members of the on to the official agenda of IASB some of the Accounting Standards Advisory Forum (ASAF), technical projects that it has sponsored. For 42 the Abacus | JUNE 2014

We always encourage people to try to raise the issue within the established channels, such as the IFRS interpretation

committee, The 2014 South Asia conference on Financial Reporting for Economic Development brought together or channel some 200 regulators, policy makers, business leaders, academics and professionals from across Asia. through us example, the AOSSG is promoting the revision of IASB consistently for a period of 3 years. Eventu- the International Accounting Standard (IAS) 41 ally the IASB actually amended the standard, (which prescribes the accounting treatment and so that it generally resulted in the deferred tax disclosures relating to the biological transforma- liability on investment properties being limited tion of biological assets – plants and animals – to the tax effect of any claw back of deprecia- into agricultural produce at the time of harvest, tion allowances that would occur on sale at the as well as certain government grants). The current carrying amount, to suit the Hong Kong AOSSG requested the IASB to consider amending situation, thus resolving the issue at hand. IAS 41 by adding a definition for bearer biologi- National and cultural differences can have an cal assets (BBAs) and including BBAs within the impact, presenting a challenge to the jurisdic- scope of IAS 16 Property, Plant and Equipment. tion’s adaptability to IFRS. But the IASB does not This has now moved on to the IASG official tackle this category of challenges. The standard- agenda for revision. setters at the national level realise that there are “In such cases,” says Chan, “we always some kind of cultural issues as well; and if there encourage those people to try to raise the issue are, then the AOSSG will face them, will try to within the established channels, such as the IFRS manage them by looking to the very heart of the interpretation committee, or channel through matters of concern. us. If there is an issue which is really, effectively The perfect example of a cultural issue arising a question for IASB to look at, so as to amend the would be one that is generated by religious law, existing standard to cater to or rectify that kind such as Islamic finance, which has been a very of difficulties, the IASB is willing to do that.” important issue for AOSSG, due to the many When the international standards are intro- jurisdictions within the region, such as Indo- duced, at first there are some problems for some nesia, Malaysia, and the Middle East countries, specific economies. However, when such issues which have Islam as their main religion. Modern are raised consistently through the proper chan- Islamic finance arose from a notion that con- nels, such as the interpretation committee or ventional structures of financing may contain the IASB itself, then they will be examined and elements “haram” (taboo) to Islam’s Shariah attempts will be made at rectification. legal system. A multitude of novel alternative “Is- He provides an example: in Hong Kong, lamic” financial arrangements, combining classi- which adopted IFRS formally in 2005, the cal trade-based contracts and other transactions, treatment of deferred tax presented a major have been created, which are believed to comply problem, as there was no capital gains tax. with the principles of Shariah law, while being to The original income tax standard, IAS 12 was some extent economically equivalent to similar flawed because it required the recognition of conventional types of financing. deferred tax liabilities arising from revaluation There are two opposing views on account- of leasehold investment properties that are not ing for such Islamic financial operations (a) that subject, in Hong Kong, to any form of taxes upon IFRS can be applied and (b) that, notwithstand- disposal. The AOSSG raised this matter with the ing any apparent similarities to the transactions the Abacus | June 2014 43

addressed by IFRS, a separate set of Islamic as Australia, he points out, faced this problem. accounting standards is required. The complica- When at first the banking system traced the loan tion arose in attempting to find a compromise loss potential, they were based on the incurred between these contrasting attitudes. loss. However, because of the switchover from “The IASB,” says Chan “is actually looking incurred loss to expected loss, they now use It would be to us, as the leader for the Islamic Finance task a whole different set of indicators. These are foolhardy to force, to study further into how we could make more of a predictive nature and, he believes, say that there a statement or adjust IFRS so that it will become will act as a more reliable early indicator of consistent with Islamic ideology.” potential loan loss, enabling more reliable and won’t be any The AOSSG established a Working Group on relevant data for the expected loss model. culture-driven Financial Reporting Issues relating to Islamic “I think that it is a matter for you” he says, or local-driven Finance which identified, examined and dis- “to do your adjustment to cater for the changing cussed the issues concerning Islamic Finance. standard. I don’t think that is something that In- differences It concluded that the challenge to standard- dia cannot do. If you have the will, you will have setters and stakeholders was to enhance the a way to deal with it”. He cites China as another cross-border comparability of Islamic financial good example, in which, although inherently the transactions, while being mindful of religious economy, the way that commercial decisions are sensitivities. It did not, however, resolve the taken and commercial transactions are done, issue, although it did prepare the ground for an make it difficult for IFRS to be implemented, the eventual solution. Chan is of the opinion that it motivation to adjust has brought convergence to should be possible in the end to find some kind IFRS closer. of common ground, so that the principle of the “China definitely has its own challenges”, he IFRS could be applied under the terms of the says. “But because of the determination to get Islamic laws as well. onto the bandwagon, the government as well as “It is a matter of whether you have the will the privately-owned commercial interests are or not,” he says. “If you have the will, you will working very hard, are working wholeheartedly find a way to deal with it. It would be foolhardy to adopt the IFRS as much as possible.” to say that there won’t be any culture-driven Chan notes that China is almost fully con- or local-driven differences. There will be, but I verged with IFRS, which is very important for think it is a matter of adopting the right attitude its economic development to continue. It now to manage the matter when it arises.” ranks as the second largest economy in the Sometimes problems crop up because peo- world and because of that economic develop- ple perceive local conditions to be obstacles. ment, there is expected to be a continued flow Chan cites the example of the response of his of companies expanding their business from Indian colleagues on various questions, such as China to the rest of the world or going out to agricultural standard IAS 41 (mentioned above) raise capital. This makes it absolutely crucial for and IAS 39 (which deals with the recognition them to have their financial statements pre- and measurement of financial assets, financial pared under IFRS, so that the rest of the world liabilities, and some contracts to buy or sell can have an understanding of, and therefore non-financial items) – which was replaced in Jan- have confidence in their financial statements. uary 2013 by a new standard called IFRS 9. In What progress does Chan see in Sri Lanka on the case of the latter, many financial institutions the application of IFRS? Chan thinks that CA Sri in the region find compliance difficult with the Lanka hosting both the fifth annual meeting of new impairment standard using the concept of the AOSSG at the BMICH in November 2013, as expected losses, instead of the existing incurred well as the Conference on Financial Reporting loss standard. for Economic Development, organised by CAPA, “I think a lot of people were wondering”, were a testament to the determination of the says Chan, “about the adoption of the expected government of Sri Lanka and the local profes- loss provision, that India might not have the sion to be actively involved in the development infrastructure to provide very current indicators of the accounting profession. of loan loss and therefore the adoption of the “I see a lot of encouragement,” he says, “I expected loss provision in place of the incurred see a lot of positive signals and encouragement, loss might present a challenge for them. I think and although the economy is admittedly not this kind of difficulty is a perfect example of one of the biggest economies in the world, as how people perceive the local condition as the far as the accounting profession is concerned, hurdle. Do you think India would be the only I would definitely rate them as one of the most country having that difficulty? I don’t think so.” active and visionary in the profession in the Even countries with economies as advanced region.” 44 the Abacus | JUNE 2014 the Abacus | June 2014 45

Idea Priyath Bandu Wickrama, chairman of SLPA, which is in charge of the project. it is the only local institution with experience and technical expertise for the work

Port City creating land

BY Rohan Gunasekera The Colombo Port City project that will enlarge the island by 233 hectares will create more land next to where demand is highest from business, and give a fillip to the construction industry 46 the Abacus | JUNE 2014

Reclaiming land from the sea is expensive but the planned new port city project on the south- ern side of the new Colombo South Harbour, billed as Sri Lanka’s single largest foreign direct investment, will create an entirely new city from scratch. The Colombo Port City Development Project will reclaim 233 hectares (575 acres) from the sea just north of the Galle Face Green. The work includes reclamation and building a 3.25km long breakwater along with a canal, yacht marina, roads and other infrastructure like electricity, water, and sewerage systems. China Harbour Engineering Company Ltd. part of China Communications Construction Co., (CCCC) got the $1.43 billion deal, based on an unsolicited proposal. The Engineering consult- ant for the breakwater construction is the UK’s URS Infrastructure & Environment, which also provided consultancy services on the Colombo The project will done hydrographic modelling for the project. South Harbour project. The Chinese are expected enlarge the island, Wickrama said a management company 100% alter the skyline and to start work by December 2014 once the final owned by SLPA will be set up to manage the new provide a greenfield agreements have been signed with the Board space to build a city city and earn revenue by leasing the land. It aims of Investment. The reclamation alone will take from scratch to attract international shipping and logistics about two years. firms to set up headquarters there, and shopping The Sri Lanka Ports Authority is in charge of malls, hotels and builders of apartments and the project as it is the only local institution with offices. The SLPA expects to collect hefty revenue experience and technical expertise for the work, by leasing land for these projects. which includes maintaining the canal and arti- The new land created by the project will be ficial beach, says SLPA chairman Priyath Bandu 233 released on the market gradually, not all of a sud- Wickrama. den, so as not to disturb land prices, Wickrama No SLPA or government funds will be used hectares said. He estimates the value of a perch will be Area to be reclaimed in the project which will be funded entirely by almost Rs8 million. China. The SLPA says the project will draw invest- “The project will be completed in 39 months. ments worth US$20 billion. “The port city The government will get 125 hectares at no cost project will bring in a lot of foreign investment” to itself,” Wickrama said. said Wickrama. “Already we have two investors Of the rest, 88 hectares will be owned by 3.25 who have given their commitment and we are Sri Lanka but given on a 99-year lease to CCCC confident more will follow.”The feasibility of link- which will also get 20 hectares on a freehold ba- km ing the port city to the Katunayake Expressway sis as a return on their investment. The Chinese Length of breakwater is also being studied to ensure it has the best investor can lease these lands to other investors connectivity. to cover costs and earn revenue. The city project will require heavy dredging The project comes under the Strategic Devel- like that seen during the construction of the Co- opment Projects Act which entitles it to a host US$ lombo South Harbour, the first terminal of which of concessions. CCCC gets a 25-year corporate is now operational. tax holiday while the project company, China The total dredging volume is about 30 million Harbour Engineering, will be exempt from tax 1.43 bn cubic metres. The total requirement of rock is on dividends for 25 years. China Communication Investment by Chinese three million cubic metres which will be trucked investor Construction Company is a Chinese government- from a quarry in Kaduwela. Already, more than owned Fortune 500 company listed on the Hong 200,000 cubic metres of rock have been stock- Kong and Shanghai stock exchanges. piled on the project site in preparation for the The Chinese proposal for land reclamation commencement of work. and urban development was cleared by the The Chinese contractor is expected to hire Standing Cabinet Appointed Review Committee 39 about half-a-dozen vessels, called trailer suction of the Department of Public Finance. Environ- hopper dredgers, for dredging and dumping on mental impact assessment clearance was given months the reclamation site. The dredging site is 15 - 30 in December 2011. Lanka Hydraulic Institute has Project duration km north of Colombo port. the Abacus | June 2014 47

Extending The Tax Free Zones Construction Boom

Work related to the port city project will help extend The Port City project is part of a bigger the ongoing construction boom, says Professor government initiative designed to exploit Sri Chitra Weddikkara, President, Sri Lanka Institute 25 Lanka’s geographic location astride the main of Architects and Dean of the Colombo School of years East-West shipping route across the Indian Construction Technology. A relatively stable, condu- Corporate tax Ocean by making it a maritime hub like Sin- cive environment for the construction industry has holiday for investor gapore and Dubai. been created only now, following the nearly 30-year While the SLPA hopes to lure interna- ethnic war. tional shipping lines and logistics companies The construction industry is inherently cyclical to set up headquarters in the new city, the and the conflict made matters worse, resulting in US$ port free zones legislation that has been long periods of stagnation. Now, though, many announced is intended to provide the tax international players are coming into the market, 20 bn benefits that will encourage entrepot trade says Weddikkara, a former president of the Institute Anticipated and off-shore business. of Quantity Surveyors. investments in the The Commercial Hub Regulation No. 1 port city She likens the Port City project to similar reclama- of 2013 declared Colombo and Hambantota tion and urban development projects elsewhere like ports as free ports where no taxes will be Dubai’s Palm Island. charged from investors, creating a legal “From the construction industry point of view it structure similar to Dubai and Singapore is certainly a good thing. It will help create jobs and which are successful trade and transport give plenty of work for contractors and consultants hubs. and put Sri Lanka on the global map.” Tony Restall, an expert on free zones, says The port city project will help extend the boom his company has investors lined up who are and the upward phase of the industry cycle and willing to invest in the island if only they are reduce volatility, Weddik- assured proper incentives like tax breaks and kara said. transfer of capital incentives. “The Port City project “The whole idea of having a free zone is is only just starting. It 20 that it’s a country within a country. And that will keep the construc- country within a country has its own tax tion boom going for a - rules and regulations.” while.” Restall’s firm Development Services While there is plenty 30% International Ltd (DSI), based in Thailand, of work, the industry of the cost of a offers free zone and economic development feels there isn’t enough project be given to management and consultancy services and technology transfer tak- local contractors does bench mark studies of countries for and consultants - ing place. construction industry investors. These look at location, logistics, “Many international proposal land, utilities and cost of local labour. He players are coming but works with investors ranging from people the technology transfer who want a small office to be a trader and a is not enough,” says Weddikkara. “There’s no legal broker to those who want to build oil refiner- mandate for local content in these projects.” ies. The construction industry is lobbying the govern- “What we’re proposing to Sri Lanka is, if ment to ensure this happens. you can sort that out, it’s not a major prob- “We have submitted a memorandum to govern- lem - you will attract the investors. Undoubt- ment to make it mandatory for transfer of technol- edly you will attract the investors, because ogy and value addition to local contractors. Now we you’ve got everything else. need the opportunity to do big projects. But most of “A lot of countries around the world the work is going to foreigners as they have the expe- say ‘oh we already have in place free zone rience. We proposed that work involving 20-30% of legislation’. But that free zone legislation is the cost of a project be given to local contractors and not international free zone legislation, it’s consultants.” “The whole national free zone legislation. The whole Weddikkara also feels the greenfield nature of the idea of having idea, and the success behind the UAE free port city project makes it useful. zones, is that in the free zones, basically you “Getting extra land for development with the port a free zone will never pay tax.” city project means there’ll be no need for demolition is that it’s a Restall also suggests simplifying documen- or retrofitting. Instead we can start from scratch. country within tation as in Dubai, saying investors haven’t And it will bring a lot of exposure to the country. a country” got the time to wade through large amounts We’ll be in the global market, like Singapore and of paper work, and procedures for cargo Dubai.” clearance. 48 the Abacus | JUNE 2014 the Abacus | June 2014 49

Interview

Fayezul Choudhury: Imperative For Accounting Profession to Grow With Economy

Founded in 1977, the International Federation of Accountants (IFAC) is the global organisation of the accountancy profession. With 179 member institutions from 130 countries and jurisdictions – among them the Institute of Chartered Accountants of Sri Lanka (CASL) – it represents approximately 2.5 million accountants in public practice, education, government services, industry, and commerce. It endeavours to strengthen the profession and to benefit all professional accountants, as well as the levels of society impacted by their responsibilities.

By Vinod Moonesinghe

ayezul Choudhury, who became of England and Wales, with an MA (Hons) in Fayezul Chief Executive Officer of IFAC in Engineering Science and Economics from Choudhury, February 2013, was previously with the University of Oxford, he has had a career Chief Executive the World Bank, where he was the spanning 40 years. We spoke to him dur- Officer of the International World Bank’s spokesperson on ing the South Asia Conference on Financial Federation of Fglobal accounting and auditing issues. A Fel- Reporting for Economic Development, hosted Accountants low of the Institute of Chartered Accountants by CASL, at which he was a special guest. 50 the Abacus | JUNE 2014

Interview Fayezul Choudhury

Being the CEO of IFAC, what do you see as Without good ing profession in developing countries and we IFAC’S most significant accomplishment as try to bring that knowledge to bear, to try and the global organization for the accountancy accounting improve the quality of accounting in the develop- profession? expertise, ing world. We believe that it is something that is A: We are a public interest organisation, we are the private fundamentally important to economic growth, not-for-profit, and our objective is to ensure that and that is the theme of this conference. accountancy is undertaken in the context of the sector cannot Another priority is knowledge dissemination. benefit of society – we hope that, since we do grow in a All our member bodies, to some extent have very not have commercial interests, our motivation is sustainable useful knowledge resources, so we have been try- seen as pure. We support standard setting and ing to prepare a platform for sharing that knowl- having a quality regime, so that incorporated fashion edge using web technology. What we call a global bodies must comply with certain standards. We and capital knowledge gateway, to put all this knowledge in try to promote accountancy development in the one place where it can be accessed by 3 million developing world, we try and share our member markets accountants from around the world, plus others bodies’ knowledge across the globe and we try to cannot be who are interested. The final area that we focus speak out on themes that are important for the efficient on is what we call ‘speaking out’ on topics which global accounting community. Because we are are important for the accounting profession and global we can participate in events like this con- where our global voice is important. For exam- ference; we can bring in international organisa- ple the theme of this conference is the financial tions. Our main accomplishment is in providing a reporting supply chain, who is accountable for global platform for accounting issues. what, which we believe is an important issue to put on the table, for accountants and regulators What has been IFAC’S greatest challenge, what to discuss. So we try and create a platform and are its priorities? the momentum to add such issues. A: Because we are global, we represent both the very large and also the very small organisations; How do you see the growth of the profession we represent a number of different segments of in the SAARC region within the context of the the accounting world: auditors in large practices, current and anticipated environment? auditors in small and medium-sized practices, A: That is a very good question. Macro-economic accountants in business and accountants in the growth is uneven, but the SAARC region is grow- public sector; and of course spanning the globe. ing at a very impressive rate and in order for that So we have to try and ensure that the issues we growth rate to be sustainable, we believe that it is deal with are of interest to all of our members, very important that certain what I call ‘corner- that we do not focus exclusively on one set of is- stone professions of society’ develop. You need sues relevant to only one set of the membership. the rule of law so you need judicial institutions, So in generating our strategic direction, our pri- you need lawyers. But you also need accountants orities must balance the variety of our stakehold- because without good accounting expertise, the ers and we must make sure that we identify the private sector cannot grow in a sustainable fash- issues that are of interest and concern to as many ion and capital markets cannot be efficient. And of them as possible. in the public sector it is very important that you Our first priority is support for setting the have good public sector financial management global standards for auditing and assurance, because it is the citizens’ money and it needs to for ethics, for education and for public sector be spent wisely; and how it is being spent needs accounting. Their standards are set by independ- to be very transparent, based on consistent, ent boards, but we provide staff support and reliable and comparable data. And that is what logistical and material support for them. The accountants do: produce consistent, reliable and second is what we call our compliance advisory comparable data. panel, which tries to make sure that all our As the economy grows it is imperative that member bodies comply with what we call our the accounting profession grow with it, to meet statement of member obligations, of which there the challenges of the future as well as maintain are seven that you have to comply with in order the progress of today. In the context of a region to be recognised by IFAC. We monitor all our of high growth and tremendous potential, and members and make certain that they are working also tremendous need, like South Asia, that the towards compliance with that. We have a deep profession grows is very important. The growth knowledge base on how to develop the account- of the accounting profession has been uneven, in the Abacus | June 2014 51

some countries it is very large, strong, producing many accountants; in others it is much smaller. The challenge there is to provide the momentum, so that the professional accounting organisations within the country can stimulate more young people to join the profession, and to ensure that they are subject to a rigorous qualification process so that they can go out into the work force, either in the private or the public sector, to participate in the country’s economic growth.

What significant risks are faced in the SAARC region in terms of strengthening the profes- sion and contributing to the development of strong economies? A: I think probably two. One is the risk that the Fayezul Choudhury, not really creative, not very charismatic. We have professional accounting organisations in some Chief Executive Officer, a rebranding challenge, globally. The work of countries may not be of a high quality that en- IFAC makes a point auditors is quite complex; to address the chal- during the conference sures that the quality of people passing through lenges they face, they must be very professional, the process and emerging with accounting smart, articulate and persuasive. So you cannot qualification is also high. There is also the risk be the boring, clerical type, to be effective. And that the professional accounting organisations accountants don’t always stay in audit, but also may not be effective in guaranteeing that the move on to industry, becoming accountants, accountant complies with the ethics, codes and If you get an finance directors, CEOs, they sit on boards, and standards of the institute. It is very important, they go into other areas of business entrepre- that they be effective with ethics, codes, disci- accounting neurship – because it is excellent training. If you plinary processes and continued professional qualification, get an accounting qualification, you really do development which work, to make sure that the understand how the business works, from the accountant remains highly skilled with high ethi- you really do bottom up, from the perspective of the numbers. cal codes, and therefore trusted. understand That is your foundation, and you can do with The second risk is simply attracting the right how the it what you will. So if you want to be safe and quality of entrants into the accounting profes- predictable, if you want 9-5, you can do that. But sion. Young people these days have many more business if you have a different type of personality, that educational options and career choices than works, from enjoys different types of challenges, you are well before. For example, the business administra- the bottom equipped to do that as well. Communicating that tion qualification is much easier to get, than the story, especially to the younger people, is very accountancy charter; it is much more general, up, from the important. so you can go straight into the work force and perspective of earn an entry level salary. Accountants have a the numbers What is the strategic plan for the develop- very rigorous qualification and must go through ment, adoption and implementation of high- a training period during which they are paid less quality international standards? than their peers. Attracting the next generation A: The development of the standards is an of the best and the brightest into the accounting elaborate process undertaken by standards set- profession is also an important challenge. And if ting bodies, and overseen by something called we can’t meet that challenge, then the risk obvi- the public interest oversight board, because in ously is that we don’t have the right number of standard-setting you need the technical expertise accountants and we don’t have accountants who that accountants can provide, but you also want are really top tier. to avoid the conflict of interests of accountants setting their own standards. So there is a very There is an attitude towards accountancy in elaborate public interest oversight process, at the world in general, that it is a boring profes- every step, making sure, through a variety of sion. Isn’t this a challenge? measures that the standards-setting board is fully A: I agree, the label ‘accountant’ in the past was involved with the public, that a wide range of in- another way of saying, or elaborating on ‘boring’: puts and perspectives are being considered and not risk-taking, paying much attention to detail, balanced and that the development work is on 52 the Abacus | JUNE 2014

Interview Fayezul Choudhury

Dr. Sarath Amunugama, Deputy Minister of Finance and Planning, second from right, made the keynote address at the conference inauguration. At extreme left is Arjuna Herath, President, CA Sri Lanka with Sujeewa Mudalige, President, CAPA next to him.

of them grow to become very large entities, but they are the ones creat- ing employment and wealth. So to deal with that sector effectively is of crucial importance. We have the Small and Medium-sized Practices Committee, which is drawn from 18 experts from around the globe, to develop our strategies and work with us to achieve that strategy, of how to support the SMP sector. track and is fine. But the next step after writing It is an We have also launched, as I the standard is to get countries to adopt them, mentioned earlier, a few months ago, the Global and then to get them to implement them. obsolete Knowledge Gateway, which is a resource that When I mentioned that every professional concept in tries to pool all the guidelines and best practices accounting organisation, to be a member of today’s world across the world, topic by topic, that anyone IFAC, has to commit to these seven statements of around the world can access. It has an SMP com- member obligation, a number of those relate to that just a set ponent and, as time goes on, we will have more the adoption and implementation of internation- of numbers and more references to that. al standards. So that is the mechanism through tells you the We believe that this will be a tremendous which we drive the adoption and implementation resource for, say SMPs from Mongolia and Brazil of standards and we try and provide technical full story to the United States, to learn what the SMPs in assistance where we can and we try and lend of how a Sri Lanka are doing. The notion is that we are our voice because sometimes these are deci- a global accounting community and we have to sions that a professional accounting organisation company is learn from each other – it is wasteful to reinvent cannot take. The government or regulator has doing the wheel, country by country. We are trying to to take them. So, on a country by country basis put all that knowledge together in a way that it when asked we try and help in advocacy. But can be accessed easily so that people can learn even in many countries out there it is a relatively from each other and adapt the best practices slow process; there is always a trade off. People from other countries to their own local context. sometimes don’t want to give up their national We think that this will be a powerful tool and will standards and their national authority to some have significant benefit for SMPs. international concept. But we are getting there, we have got pretty extensive adoption and imple- What is IFAC’s focus on Integrated Reporting, mentation in most of our standards. which has emerged as a major initiative to facilitate transparency and accountability? What is IFAC’s approach to support the A: We are strong advocates of the concept, diverse needs of Small and Medium Enter- because it is an obsolete concept in today’s world prises (SMEs) and Small and Medium Practices that just a set of numbers tells you the full story (SMPs)? of how a company is doing. The company should A: Clearly they are a vitally important constitu- explain to its stakeholders and, more broadly, ency. IFAC is very aware of the fact that our to society at large its overall performance, the member bodies have a large number of members resources it is using, and the prospects for those who are primarily in the small and medium resources. The numbers are the resultant of what type of practices, who primarily serve the SMEs. your inputs are and how you interact with them The development literature is unanimous in its to conduct your business. view that SMEs are the engines of growth — huge The International Integrated Reporting Coun- corporations won’t be set up overnight and cil (IIRC) is doing great work. We have a number employ tens of thousands of people, it starts of people seconded to it to help it in its work. with an SME. Some of them stay as SMEs, some These are very early days as you know. The IIRC the Abacus | June 2014 53

is doing a number of pilot studies, a number of You have bodies in the SAARC region? large companies are testing it to see what the A: I do not want to do a comparison, because implementation issues are and to see what an a first-rate every country has its own different context. This integrated report looks like, so again people can professional is my first visit to Sri Lanka. I have met the senior learn from each other. So we are very involved in organisation; members of the Institute in other fora but this every step of that process, and we are trying to is the first time I am dealing with them on their contribute positively. It is work-in-progress, but you produce own turf, and I am extremely impressed. The it is heading in an exciting direction and we are high-quality wonderful news is that everyone is on the same fully engaged. accountants page. At the conference, we heard from the Gov- ernor of the Central Bank, who is an accountant, How do you see the accounting bodies within and from the Deputy Minister of Finance. Both the SAARC region supporting the sustainabil- those very senior policy makers understand the ity of organisations, markets and economies importance of accountancy and they have a regu- via the development of the accountancy lar dialogue with the Institute and the Institute profession? has responded very well. You have a first-rate A: In the private sector the accountant’s role is professional organisation; you produce high- to ensure the integrity of financial transactions quality accountants. The Minister mentioned and clear and transparent communication of that you export many high-quality accountants results, both for internal and external use by as well! I think that is very good news, as you stakeholders and financiers. Without it, you don’t are poised for a significant period of economic have stable entities – you might have companies growth. I think it is a very good alignment. growing, but they collapse because they were not properly controlled. As companies grow they Are you familiar with CA Sri Lanka’s new cur- need more access to finance, to capital markets; riculum? capital markets rely on the quality of financial A: Not in detail. But I think its concept of also information to base their decisions on whether to allowing different tiers of qualification is very lend or invest; it is, clearly critical from that per- important. I analogise it to the medical and the spective. But it is also crucial in the public sector, legal professions. If you just train doctors, you which gets less publicity – government needs to are not going to provide a quality health service. be accountable to the people: that is what de- You need doctors, you need medical techni- mocracy is all about. Part of that accountability, cians, you need nurses; that is a continuum that is the transparent availability of believable data, provides for a good health care system. If you on what is happening and why. This often gets look at the legal practice, you can’t just produce lost in the political sloganeering, but is vitally lawyers, you also need paralegals, you need legal important. So one of the things that we promote clerks – overall that is what contributes to an very actively is sound public sector finances. One efficient legal system. Accountants are the same. example, and it is widespread across the world, You can’t just have high-quality, very skilled is governments not recording all their assets and professional accountants if the people they are liabilities. The big issue in the West is pension supervising are not trained to the level of work obligations: it is meaningless saying the budget they do. Getting this continuum is very impor- is in surplus or has a very small deficit, if you tant, so that the disciplines and skills of account- haven’t recorded a huge liability in the future for ing pervade the accounting and finance function your pension obligations, for your social health- from top to bottom. It is just common sense and care services. If I am a private sector company it creates a better employment situation – be- and I go to my banker and shareholders and say cause it is a pyramid, there are more people at “here is my balance sheet, by the way 50% of my the bottom and the middle than there are at the liabilities aren’t recorded because they are in the top. You are training people for the volume of future”, no one would accept that. We are work- employable people with the right skills. For the ing very actively to raise awareness of this issue SMEs, sometimes the smaller ones, in their initial and engage civil society organisations to keep the stages, can’t afford or don’t need the full, pukka pressure on governments to do the right thing. chartered accountant, but someone who has ac- counting skills that are relevant and sufficient for As a full member of IFAC where would you see their needs. So I think the idea of having various the progress that CA Sri Lanka has accom- tiers of qualifications is absolutely the right way plished in comparison with the other member to go. the Abacus | JUNE 2014 54 THE ABACUS | JUNE 2014

ADVERTORIAL

This outstanding HNB achievement is attributed to the renewed focus Assurance and energy with which the records two recently segregated Life highest and General distribution teams ever GWP commenced in Q1 their operations.

Manjula de Silva - NB Assurance PLC lived up to its Managing Director of HNB Assurance reputation as the fastest growing insurer in Sri Lanka by recording a enabling the Company to end its last year as a growth of 24% in its turnover meas- composite Company on a high note. H The Company was also able to deliver an 8% ured by Gross Written Premium in the quarter ended 31st March 2014. Its Life Insurance growth in its Profit After Tax. The profit declared GWP grew by 34% outpacing the Life Insur- for the period of Rs. 53.9 Million is derived ance market which grew by only about 10% entirely from the General Insurance business in the first quarter of 2014. The Company’s as the Company recognizes a profit from Life achievement in the General Insurance sector Insurance only after the year ? end actuarial was equally impressive as it recorded a growth valuation is completed. of 16% while the General Insurance market recorded a decline by about 1%. HNB Assurance PLC is one of the fastest The combined GWP of Rs. 1.14 Billion growing Insurance Companies in Sri Lanka achieved in the quarter turned out to be the with a network of 51 branches. HNBA is a highest ever recorded by the Company in a sin- composite Insurance company with a rating gle quarter. The combined GWP achievement of A (lka) by Fitch Rating Lanka for “National of Rs. 538.3 Million in the month of March also Insurer Financial Strength Rating” and “National established a new record as the highest ever Long- term Rating”. HNBA is also rated within GWP recorded in a month. the Top 100 Brands and Top 100 companies in According to Manjula de Silva, Managing Sri Lanka by LMD. It recently won international Director of HNB Assurance, ?this outstand- awards for Brand Excellence and HR Excel- ing achievement is attributed to the renewed The Company lence and also won many awards for its Annual Reports at the Award ceremonies organized by focus and energy with which the two recently was also able to segregated Life and General distribution teams the Institute of Chartered Accountants of Sri deliver an 8% commenced their operations?. He is hopeful Lanka, ACCA Sri Lanka (Association of Char- that the momentum built during the first quarter growth in its tered Certified Accountants) and SAFA (South will be carried through during the entire year Profit After Tax Asian Federation of Accountants)

56 the Abacus | JUNE 2014

Focus On - Technical

Global governance standards needed to lure investors

Sri Lanka’s corporate sector directors to seriously consid- needs to have world-class er how such a program can governance standards to be add value to their profession- able to attract foreign invest- al career and make the best ments, the head of the capital use of it now, noting that the markets regulator said. SEC might consider making “Global fund managers it a mandatory qualification should see Sri Lanka as a for holding a directorship of a place where companies are listed company. managed by world-class “We like to see all corpo- professionals to the highest rate directors in this country global standards” declared find time to go through these Dr. Nalaka Godahewa, Chair- programmes. I don’t think man of the Securities and seniority in the corporate Exchange Commission (SEC). world should be considered Dr. Nalaka Godahewa, Chairman of the Securities and Exchange Commission “Our corporate govern- an excuse to avoid your ance standards should be 20th May 2014. The programme, starting responsibility to continuously second to none. Our com- It is jointly organized by 26 June, 2014, will be con- upgrade and enhance your pany directors should be able the Institute of Chartered ducted over ten sessions with knowledge about the job.” to provide leadership to these Accountants of Sri Lanka (CA a combination of lectures, The Corporate Directors companies. That’s the future Sri Lanka) together with the panel discussions and work Programme would help we have to aspire for and get SEC aiming to help corporate group sessions. The panel strengthen the understand- ready for”. directors enhance their exist- will consist of representatives ing of and the responsibilities The SEC and the Colombo ing competencies and gear from the corporate com- implicit in a board mandate Stock Exchange (CSE) have themselves to take on new munity, regulatory agencies, and the laws and regulations, been very actively promoting regulations and challenges. corporate lawyers, financial performance and compliance Sri Lanka as an investment It targets executive and analysts and auditors and as- and corporate social respon- destination for global fund non-executive directors of surance providers. sibilities of the board and the managers and present the public listed companies, di- “We may be local in scale directors. Directors face a island as a fast emerging com- rectors of state-owned enter- but we have to think global” dynamic corporate environ- mercial hub which is ready to prises, shareholder directors Godahewa said. “We need ment with changing laws, meet global expectations, he of family-connected compa- to prepare our corporate rules and regulations. told the launch of the Corpo- nies and senior professionals entities to face tomorrow’s “So unless you make an rate Directors Programme on aspiring to be directors. global challenges. For that we effort to constantly upgrade need to continue to enhance your knowledge and enhance the quality of our corporate your skills you are in danger leadership. of becoming obsolete in next “The size of the country to no time” Godahewa said. has nothing to do with what “It is a common belief that you can achieve if you think non-executive directors being world class. Look at our part time members of the own apparel industry. We board have fewer responsi- are second to none in global bilities towards the company. standards. There are several But the law makes no differ- Sri Lankan companies who ence between an executive Training will help directors strengthen their understanding of the have already proven to be director and a non-executive laws and regulations, performance and compliance, governance and world class.” director and both can be held corporate social responsibilities. Godahewa urged company to the same standard.” the Abacus | June 2014 57

How, not how much Fine tuning boardroom behavior

How companies make counting profession and money is as impor- NGOs advocating com- tant as how much munication about value they make, a leading creation in corporate advocate of Integrated reporting. Reporting said at the King emphasized launch of the Corporate that integrated report- Directors Programme. ing is a clear and un- “Integrated Report- derstandable way to tell ing is not about how stakeholders how the much money you make board has applied their but how you make minds collectively to Corporate Directors Programme Chairman Asite Talwatte it and while making the sustainability issues money how it im- relevant to the business, The idea of formulating and de- Directors Programme will truly pacts financial, social, while giving stakehold- veloping a special programme for be an enriching, insightful, and a environment aspects” ers a long term strategy corporate directors which could rewarding experience for direc- said Professor Mervyn for as far ahead as 20 to eventually evolve into an SEC tors, helping them fine tune their King, Chairman of the 30 years. accredited qualification was initi- performance in the boardroom. International Integrated ated by the Institute of Chartered The programme was developed Reporting Council Accountants. with a view to ensure directors of (IIRC). “Integrated Its President Arjuna Herath all listed companies are familiar He noted that an in- Reporting said that CA Sri Lanka had been with what is expected of them as tegrated report, unlike contemplating the launch of the directors, while ensuring that they the more conventional is not about Corporate Directors Programme have the capacity to effectively financial report which how much for a long time, as far back as a fulfill their corporate role. primarily focuses on the money you decade since the launch of the Corporate Directors Pro- financial aspect, shows Code of Best Practice on Corporate gramme Chairman Asite Talwatte how a company sustains make but Governance with the SEC. said that it is unique in its struc- the value creation, how you “We believe that there is a need ture and content, bringing in all enhancing the impact make it” for the Code of Best Practice on dimensions of directorship at a suf- on society, environment Corporate Governance to be un- ficient level of depth and breadth and finance. derstood in its proper perspective, making it practical, futuristic and “An integrated Integrated Report- and the true spirit of it entrenched interactive. report shows how an ing helps a company’s when embracing and adopting it. It “We have recognised the organization brings stability, as it not only is in this context that CA Sri Lanka importance of conformance and sustainability into their focuses on the financial along with the Securities and Ex- performance, while providing a organization, so readers aspects but looks at change Commission embarked on platform to discuss sustainability can make an informed other significant areas; this programme” he said. and corporate social responsibil- assessment to under- social and environmen- Herath noted that the Corporate ity.” stand how the business tal. will sustain on the “Stakeholders expect longer term” said King, that the company has a former judge of the not profited at the Draft Code of Ethics open for comments Supreme Court of South expense of the environ- The Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) has Africa, and Chairman ment, human rights, published the draft of the Code of Ethics 2014 for members’ comments. Emeritus of the Global a lack of integrity or The latest revision has taken into consideration the relevant amendments Reporting Initiative society. Companies can- made to the Code of Ethics globally and the draft Code was developed (GRI) in Amsterdam. not solve 21st century based on the Handbook of the Code of Ethics for Professional Accountants The IIRC is a global problems with the same 2012 Edition published by the International Ethics Standards Board for coalition of regulators, mindset their boards Accountants (IESB). investors, companies, used when they created The draft Code of Ethics 2014 publication is open for comment until standard setters, the ac- them.” 31st August 2014. 58 the Abacus | JUNE 2014

Focus On - Technical

SME development in Forum on Role of the CFO Chief Financial Officers (CFOs) are coming under increasing scrutiny while their roles as CFOs continue to be ‘stretched’, Matara and Badulla declared Fayez Choudhury, Chief Executive Officer of the Inter- national Federation of Accountants (IFAC), at a CFO Forum CA Sri Lanka recently organized. The forum, on 19th May 2014 at The Institute of Char- Gamanayaka, Managing Cinnamon Grand Colombo, concluded with a panel discussion tered Accountants of Sri Director of Perfect Busi- comprising of Choudhury, Rob Ward – Head of Leadership and Lanka conducted three ness Solution Services (Pvt) Advocacy of the Institute of Chartered Accountants Australia, programmes focusing on Ltd, for the accountants Aravinda Perera – Managing Director of Sampath Bank PLC and Small and Medium Sized and other professionals Nandika Buddhipala - Chief Financial Officer of Commercial Entities (SMEs) develop- who seek to improve their Bank PLC. The session was moderated by CA Sri Lanka Presi- ment in conjunction with knowledge of computer- dent Arjuna Herath. Deutsche Gesellschaft für ized accounting in connec- Internationale Zusam- tion with SMEs. menarbeit (GIZ) in April Accounting Standards for small entities and May 2014. CA Sri Lanka kicked off a seminar on Sri Lanka Participants Accounting Standards for got a thorough Small and Medium Sized understanding Entities (SLFRS for SMEs) at Solis Hotel, Matara on of the 30th April 2014, which was applicable conducted by Upendra financial Wijesingha, Head of Tech- nical at CA Sri Lanka. reporting The participants who framework were CFOs, accountants, and auditors of SMEs got for SMEs and a thorough understanding the benefits Having identified difficulties in applying SLFRS for SMEs for of the applicable financial of adopting the smaller sized entities even though it has simplifications, the reporting framework for Technical division of the CA Sri Lanka is currently in the process SMEs and the benefits of SLFRS for of developing Accounting Standards for smaller sized entities. adopting SLFRS for SMEs. SMEs A smaller sized entity normally has few employees and is often The seminar educated par- owner managed, has low or moderate levels of revenue and as- ticipants on which entities sets; and does not hold or issue complex financial instruments; are eligible for SLFRS for During the training or issue shares or share options to employees or other parties in SMEs, principles in SLFRS programme, Gamanayaka exchange for goods or services or have investments in subsidiar- for SMEs and the difference covered a multitude of ar- ies, associates or joint ventures. between SLFRS for SMEs eas including computerized For most smaller sized entities the requirements in SLFRS and the full SLFRS. accounting systems and for SMEs in relation to accounting for business combinations, CA Sri Lanka also its environment, process- financial instruments, borrowing cost, share based payments, conducted two separate ing techniques used for and deferred tax, are either not relevant or not cost effective. training programmes on computerized accounting, A sub-committee was appointed by the Accounting Stand- Computerized Accounting computerized trading com- ards Committee to develop a separate accounting standard for Package – Sage 50 on 21st pany with main modules, smaller sized entities. The sub-committee consists of Nishan May 2014 in Matara (ESOFT G/L with cash book and Fernando, Kapila Atukorala and Sanath Fernando and is chaired Regional Campus) and bank reconciliation, ac- by Ajith Ratnayake. The objectives of the standard would be 22nd May 2014 in Badulla counts payable/receivable to provide an Accounting Standard for smaller sized entities, (ESOFT Computer Studies). ledger, financial and cash which is easy to understand and apply, cost effective for those The training programme flow budgets and financial entities; and accommodates the needs of its intended users, was conducted by Madura reporting. preparers and auditors. the Abacus | June 2014 59

Update

SME-friendly accounting Erandi Kanchana, A/L’s all-island first standard contemplated chooses CA Sri Lanka

reason for this is financiers, whether banks or other financial institutions, have difficulties in relying on the information provided by the financial statements due to the lack of a clear and coherent accounting principle applica- tion. The IFRS for SMEs is a globally recognized standard, and when applied correctly will allow financiers to better assess the company’s performance and A recent ‘Round Table Discussion on Proposed Amendments & Emerging Issues for SMEs’ held at risk, as well as give better confidence re- CA Sri Lanka was invaluable for CFOs, auditors, garding the company, reducing barriers accountants and finance divisions of SMEs, giving in access to finance. an opportunity to voice any reservations they may have on specific amendments which will be “The SME sector in Sri Lanka has conveyed to the IASB. been identified as the backbone of the nation’s economy, and in the final Erandi Kanchana, first islandwide in CA Sri Lanka is keen to help small and analysis, a common set of accounting the commerce stream at last year’s medium enterprises to adopt tailor-made standards would no doubt strengthen the GCE Advanced Level, chose the International Financial Reporting Stand- sector’s profile in the long term” Herath Institute of Chartered Accountants of ards (IFRS) given its inherent advantages. said. Sri Lanka (CA Sri Lanka) to fulfill her “A comprehensive set of internation- “Given that the local standard is dream of becoming a globally sought- ally accepted financial accounts can based on its IFRS equivalent, local SMEs after Chartered Accountant. prove to be a vital springboard for SMEs would be able to establish a comparable “From the inception I always want- to access finance and attract local and set of financial statements with SMEs ed to become a chartered account- foreign investment” said Arjuna Herath, in the world, where over 80 countries ant, and hence I chose CA Sri Lanka President, CA Sri Lanka. have already adopted this international because of its prestigious standing in “It is not a question of when, but how standard.” the accounting world and because it is Sri Lanka’s SMEs will leverage on SLFRS In Asia, the SME sectors in Bangladesh, recognized even abroad” she said. for SMEs to benefit from them.” Bhutan, Cambodia, Fiji, Hong Kong, Kanchana who has already com- Herath said there is a specific standard Myanmar, Singapore and Sri Lanka have menced her studies in chartered applicable to SMEs but some of them adopted the IFRS for SMEs. accountancy at CA Sri Lanka noted considering compliance with the SME From 2012, some SMEs in Sri Lanka that chartered accountants enjoyed standard or those in the process of adopt- adopted the SLFRS for SMEs. Since then, unlimited job opportunities all over ing the standard have cited a few techni- new amendments were announced by the world and, unlike most other pro- cal accounting difficulties. IASB to the IFRS for SMEs on which fessions, enjoy job security. Many of these difficulties arise out SLFRS for SMEs was developed. However, Kanchana, a student of Rathnawali of the fact some of the principles in the these proposed amendments require Balika Vidyalaya, Gampaha obtained standards do not apply to specific pecu- analysis and debate amongst the SME three As with a Z-score of 2.7138 at the liar contexts or circumstances. sector to ensure that the sector articu- A/L examination, a result of her deter- However, says Herath, this need not lates its financial reporting requirements mined commitment and dedication to deter compliance as the institute will be and that these amendments will indeed studies. able to provide guidelines to deal with simplify rather than further complicate “From the very beginning I studied these accounting technical difficulties and the standard. hard and concentrated on my studies the benefits that will accrue on compli- One of the major obstacles in adopting to the utmost, with the aim of achiev- ance far outweigh arguments against. these proposed amendments as it is will ing exceptional results at the exams, One of the biggest challenges SMEs be the ‘no revaluation’ of property, plant and I believe I owe it to my hard work face is in the access to finance. The main and equipment clause. for the results I got at the ALs.” 60 the Abacus | JUNE 2014

Update

CA Sri Lanka joins ‘Cautious’ implementation of Integrated Reporting with DUKE CE again 40 1/3 years Average mortality of companies which existed two rate of corporates decades before the new millennium failed to exist by the year 2000

Amidst intensifying competition and the need for long-term sustainability amongst corporates, the Institute of Chartered Accountants of Sri Lanka is giving leadership to the implemen- tation of concepts of the internationally mooted Integrated Reporting which is currently at pilot stage amongst many countries across the world. President of CA Sri Lanka Arjuna Herath declared that while the concept was ‘very valuable’ as it focuses in depth on corporate sustainability, generating capi- tal and wealth, Sri Lanka is cautious in embracing the concept outright. CA Sri Lanka is facilitating the adoption of the best of the guidelines as deemed fit for the corporate environment in Sri Lanka. “There are countries gradually moving into Integrated Re- porting, Sri Lanka is cautious as we don’t want to jump into a new concept just because there are other countries looking at The Institute of Chartered with the authority to plan adopting this. We will develop home grown guidelines that suit Accountants of Sri Lanka is and execute strategy in best our environment” he told students and academics at the once again in the forefront their organisations. IDeA Night 2014, organised by the Department of Accountancy to inspire and ignite the Participants learn how to of the . Herath emphasized CA Sri Lanka thinking of business leaders create a strategic vision that in its capacity as the national body of accountants and the sole with a unique programme will inspire and empower authority to promulgate accounting and auditing standards of on Strategic Thinking their team/organization, the country was doing its independent research to determine conducted by the world’s how to produce strategic the extent the Integrated Reporting concept can add value to number one custom execu- intelligence in order to ana- Sri Lankan corporates, and the implications of adopting its tive education provider. lyze the current strategic concepts. The two-day programme position while discovering “Therefore we are gradually introducing the concept among in June by DUKE CE focuses how to develop compelling the Sri Lankan corporates and as a first step towards this, we on the essential element of strategies that will achieve included the most appropriate elements in Integrated Report- Strategic Thinking, giving the vision and objectives of ing criteria in our annual report awards competition last year, high-end corporate profes- an organization. which recognized the best corporate reports produced in the sionals that boost to help The programme is country” he noted. Herath disclosed that a separate segment invigorate their business conducted by Nikhil Raval, focusing primarily on Integrated Reporting will be added in strategy, while becoming a Managing Director of this year’s annual reports competition, to promote the concept effective business leaders Duke CE India Pvt. Ltd., and support companies which have already fully embraced who inspire change. who comes with close to Integrated Reporting. The CA Sri Lanka – DUKE two decades of combined “In Sri Lanka, we don’t have many companies which follow CE Strategic Thinking experience in Corporate, the Integrated Reporting concept. However there are a few Programme was specially Consulting and Academia companies producing integrated reports, and as these compa- designed for managers who and Tony O’Driscoll, Execu- nies believe Integrated Reporting is of value, we want them to head key departments, tive Director of DUKE CE, embrace it and we will recognize them for it. We will not make business units, and regional who commands an 18-year it mandatory for corporates to produce integrated reports and operations, members of industry career, having held force it on them, but if they independently find the mechanism project teams, and middle leadership positions with valuable, we will encourage and recognize their efforts” he and senior level executives Nortel Networks and IBM. added. the Abacus | June 2014 61

Business School MBA Enhancing IT skills with Certificate proves popular in Computerized Accounting

The importance of continuing to 12 years, the CA Business School stay relevant through education, is one of the country’s leading maintaining reputation and business schools providing a respecting values took centre diverse range of high-end local stage at the 2013 convocation of and foreign qualifications for the the Business School of the Insti- advancement of the Sri Lankan tute of Chartered Accountants of professional. Sri Lanka (CA Sri Lanka). A large number of students of the CA Sri Lanka Business It is one of Learn to manage day-to-day finances and enhance your School were conferred with IT skills with a specialized Certificate Course in Com- Master’s Degrees from the the most puterized Accounting introduced by the Institute of University of Southern Queens- popular MBA Chartered Accountants of Sri Lanka for the benefit of land, Australia and Postgradu- financial professionals and students. ate Diplomas in Business and programmes in Having understood the consistently increasing de- Finance. the country mand for IT-savvy financial professionals in Sri Lanka It was held under the patron- and abroad, CA Sri Lanka is offering the certificate age of Ronnie Peiris, Group programme to help update the IT knowledge of both Finance Director of John Keells Both CA Sri Lanka and the professionals and students. Holdings PLC and Professor University of Southern Queens- The 30-hour course incorporating the Sage 50 Janet Verbyla, Senior Deputy land share an exceptional as- software targets accounting professionals, accounting Vice-Chancellor, University of sociation counting over ten long students and members of the public and covers a multi- Southern Queensland, Australia. years. tude of areas which will help students and professionals Students who successfully The USQ MBA offered through completed the popular Master the Business School is one of the understand the concept of computerized accounting of Business Administration and most popular MBA programmes systems, its procedures and how the system can be ap- the Master of Project Manage- in the country, while the plied. The certificate programme conducted by the TI ment from the University of postgraduate diploma offered Training Division of CA Sri Lanka will give an overview Southern Queensland and the at the institute has successfully into computerized accounting systems, processing tech- Postgraduate Diploma in Busi- been conducted in the country niques used for computerized accounting and system ness and Finance were awarded for almost 30 years and is very change over methods. their certificates at the convoca- popular among professionals Special focus will also be given to setting up the tion ceremony. from both the accounting and general ledger, accounts payable, inventory, accounts Having been in existence for non-accounting sectors. receivable, sales taxes and on financial and cash flow budgets, financial reporting and internal control. Students who complete the programme successfully and the final examination will be awarded a certificate issued jointly by CA Sri Lanka and Perfect Business Solu- tion Services (Pvt) Ltd. The CA Sri Lanka IT Faculty offers a variety of programmes from seminars and workshops to Diploma programmes for the benefit of accounting students and accounting professionals. PBSS, which is the platinum business partner for the Sage software, has licensed CA Sri Lanka to carry out this training programme with the Sage 50 Education License. 62 the Abacus | JUNE 2014

CA EVENT Update CALENDAR

02 July Gearing up for the future Seminar on Insights to prepare the next generation of leaders to lead your organization to success. 0112352083

04 July CA Members Quiz Night Indunil – Tel: 2502077

05, 06 July Executive Diploma in Business and Accounting 2014 - EDBA Duration: 01 year Business School Siloshini - Tel: 2352000 Ext 1207

05 July OPEN DAY - School of Accounting & Business School of Accounting & Business Dinendre - Tel: 2352000 EXT 1115

07 July - 30 July [37 Standards - 19 Days] Auditing Standards Seminar Series – 2014 Dale - Tel: 2352000 Ext: 1444

08 July CA Sri Lanka hosts Asia and Pacific Seminar on How Quality Financial Reporting and Accountants Board meeting Appropriate Governance Creates Value for Owners The Institute of Chartered Accountants of Sujeewa Mudalige, Past President of CA Samanthi - Tel: 2352000 Ext 1445 Sri Lanka recently hosted the Board Meet- Sri Lanka. 21, 22 July ing and committee meetings of the Con- CA Sri Lanka’s incumbent President Cutting Edge Treasury federation of Asian and Pacific Account- Arjuna Herath was appointed as a board Management Programme with ants (CAPA), which is the largest regional member of CAPA at the Board Meeting Euromoney Training accounting organisation with a geographi- held in Colombo. Nuwan - Tel: 2352045 cal area that spans half the globe. Contd….. 04 August - 27 August The meetings held on 22nd and 23rd [37 Standards - 19 Days] May 2014 saw the participation of ac- Auditing Standards Seminar countants from the Asia Pacific region Series – 2014 including Australia, Bangladesh, Canada, Dale - Tel: 2352000 Ext: 1444 China, India, Japan, Korea, New Zealand, CAPA has a organisations in 04 August Pakistan and Sri Lanka. The CAPA meet- membership of Postgraduate Diploma in ings included the Board Meeting, Annual Business and Finance – PDBF General Meeting, Governance and Audit 23 Duration: 01 year 31 jurisdictions. Committee meeting, Public Sector FM accountancy Business School Ashara - Tel: 2352000 Ext 1203 Committee meeting, the Professional Accountancy Organisations Development The CAPA membership includes Aus- Contd….. 01 September - 10 Sep- Committee meeting and the Public Sector tralia, Bangladesh, Canada, China, Fiji, tember Financial Management Committee meet- France, India, Japan, Korea, D.P.R Korea, [37 Standards - 19 Days] ing. Mongolia, Nepal, New Zealand, Pakistan, Auditing Standards Seminar Series – 2014 CAPA is the Regional Organisation rep- Papua New Guinea, Philippines, Samara Dale - Tel: 2352081 resenting national accountancy organisa- Region, Samoa, Solomon Islands, Sri tions across the Asia-Pacific region. Today, Lanka, United Kingdom, United States of 10 September CAPA has a membership of 31 account- America and Vietnam. Convocation Ceremony - 2014 ancy organisations in 23 jurisdictions. CA Sri Lanka also hosted the CAPA Main Hall, BMICH Indunil – Tel: 2502077 The incumbent President of CAPA is Board and Committee meetings in 2012.

64 the Abacus | JUNE 2014

Update

CA Sri Lanka, ICTA, SLASSCOM in joint initiative on FAO qualification

body SLASSCOM and the government policy mak- ing arm in this area ICTA to create professionals with the right skills and knowledge specifically required for this industry” he said. Reshan Dewapura, Chief Executive Officer of ICTA said, “In the journey to be- coming the knowledge hub of Asia, accreditation of the labour force in specific skill sets is imperative. Sri Lanka as a Center of Excellence for

Arjuna Herath, President of CA Sri Lanka, Reshan Dewapura, Chief Executive Officer of ICTA and Virendra Perera, FAO no doubt will greatly Chairman of SLASSCOM FAO Forum exchanged documents for the financial accounting outsourcing professional benefit from this step taken qualification. Picture also shows Aruna Alwis, Chief Executive Officer of CA Sri Lanka, Channa Manoharan, Council in the right direction”. Member of CA Sri Lanka, Nilukshi Thambimuttu, Head of Business School, CA Sri Lanka, Jayantha Fernando, Programme Director & Legal Advisor of ICTA, Sachindra Samararatne, Project Manager of ICTA and Imran Furkan, Executive Imran Furkan, Execu- Director of SLASSCOM. tive Director of SLASSCOM noted: “Sri Lanka’s Financial Accounting Outsourcing The Institute of Chartered Ac- Financial professionals who will steer Sector is poised for spec- countants of Sri Lanka joined the FAO sector successfully in tacular growth due to a hands with the Information Accounting Sri Lanka. unique combination of skill and Communication Tech- Outsourcing Arjuna Herath, President sets prevalent in the country, nology Agency of Sri Lanka of CA Sri Lanka, speaking on which are of international (ICTA) and the Sri Lanka Sector is the landmark venture, said standards. This qualification Association of Software and Sri Lanka is known to pro- will contribute to further Service Companies (SLASS- poised for duce accountants of excep- raising the bar in terms of COM) to offer a groundbreak- spectacular tional ability of international quality and quantity of the ing professional qualification standing having the capacity workforce pool available for the Financial Accounting growth to serve not only the domes- to absorb the new business Outsourcing (FAO) sector. tic market but international volumes that are expected to The qualification, to be markets as well. come Sri Lanka’s way in the launched later this year, “This is one of the key near future.” comes at a juncture when Sri attributes as to why our coun- Over the past five years, Lanka is aspiring to become try is a preferred destina- Sri Lanka has also witnessed the Business Process Out- tion for the BPO industry. In a growth in the Business Ser- sourcing hub. order to actively support the vices sector with leading Sri This Business Services country to realize this vision Lankan companies setting Accounting qualification is of being the best outsourc- up finance and accounting expected to give the FAO ing destination in the world, services, while foreign com- sector a boost by fulfilling CA Sri Lanka has embarked panies have also extended an important need which on a journey with the active their off shore global opera- will produce highly skillful participation of the industry tions to Colombo. the Abacus | June 2014 65

Life Prague: the mysterious and magical pearl in the heart of Europe

Picture a magical city, its mystery woven from mediaeval tales, told through its homes, gardens, castles, and dreaming spires. This is Prague, the capital city of the Czech Republic, which attracts about 6 million tourists every year.

By Vinod Moonesinghe 66 the Abacus | JUNE 2014

This ‘Pearl of Cities’, being one of the few in Eastern Europe to have escaped massive damage during the Second World War, bears witness to its long and rich history through a large variety of important buildings and other tourist attractions. It has proved popular as a shooting location, for such diverse films as The Bourne Identity, Eurotrip and The Broth- ers Grimm. But it is most famed for its associa- tion with the mystical, from ancient myths, via Dr Faust to Franz Kafka’s surrealism, which has gained it the epithets ‘The Mysterious’ and ‘The Magical’. Our mother gave my sister and I, when chil- dren, a book called Legends of Old Bohemia. Its author, Alois Jirásek (pronounced alloys yi-ra-shek), wrote books and plays to give the Czechs a sense of their own past. Many of his Tourists gathered in ana and Dvořák, and (most interesting for the Old Town Square stories revolved around Prague, giving vigour of Prague, which is one me, as a science fiction fan) the writer Karel to the magical and mysterious perspective of Europe’s biggest Čapek, who coined the term ‘robot’. and most beautiful of the city, and held us spell-bound. I visited urban spaces. The Old Prague many years later, viewing the city from Town Square has been Hradčany Prague’s principal the heights in its South-Western suburbs. It is square since the 10th Libuše once had a vision of a city on the op- this aspect which I look forward to exploring. century. posite bank ‘whose fame would reach the stars’. Looking North from Vyšehrad’s ram- Vyšehrad parts, I could see it, the Castle District of I started with Vyšehrad (vish-eh-he-rad – ‘high Prague, Hradčany (har-cha-ni). It contains castle’) which, according to Jirásek, Krok, Prague Castle (the world’s largest castle) the the patriarch of the Czechs, instructed by the city’s most popular tourist destination, with gods, built on a cliff on the Vltava River. On his Romanesque, Gothic and Baroque edifices. death, his daughter Libuše (li-boo-sheh) ruled One of its towers is the Daliborka, named there, but it is now a public park. I went up after Dalibor of Kozojedy, its first prisoner on Vyšehrad’s bastions, and was thrilled by who, Jirásek says, learned to play the violin, the splendid panoramas they afford of the city the music of which could be heard in the and of the river. Below, perched on the side town, even after his beheading. The dun- of the cliff, was the Bath of Libuše, where she geons, with their instruments of torture, is said to have bathed with her lovers before showed me how cruel mediaeval European casting them to their deaths. nobles could be. I entered Vyšehrad Gardens, inland from Many of Jirásek calls it ‘St Wenceslas’ Castle’, af- the cliff, and was elated to see colossal ter ‘Good King Wenceslas’ of the Christmas statues of Libuše and her consort, Přemysl his stories carol, who lived there in the 10th century. (pronounced preh-mi-sul – whom she mar- revolved I went to visit the gothic Cathedral of St ried instead of casting into the Vltava); and around Vitus, constructed over the rotunda which of a warrior woman and her lover (whom she St Wenceslas built to house St Vitus’ relics, enticed to his death). Adjacent are the neo- Prague, giving and where his own are entombed. The Gothic Church of SS Peter and Paul; the ruins vigour to the interior, with walls covered with beautiful of Holy Roman Emperor Charles IV’s small frescos, stained-glass windows and soaring Gothic palace, whence mediaeval Bohemian magical and ceilings, looked stunning. monarchs began their coronation proces- mysterious I enjoyed Golden Lane, a street of tiny sions; the 11th century Rotunda of St Martin dwellings, which house expositions of the (Prague’s oldest standing building); and the perspective of artisanal life of yore. They were once occu- Slavin national cemetery, with the graves of the city pied by goldsmiths, but I prefer the legend 600 personalities, including composers Smet- that the denizens were alchemists em- the Abacus | June 2014 67

ployed by Rudolph II to find the Philosopher’s My science- the Mayor and Town council had him blinded, Stone and create gold. fantasy so he could not build another; he had his Like most tourists, I walked across the revenge by stopping the clock as he died. Vltava on the Charles Bridge – pedestrian-only, leanings It was Jirásek who tempted me with his it is full of hawkers and flanked by statuary of took over as stories into Josefov, the Jewish Quarter, one of many saints. I shivered at the thought of the I looked for the best-preserved Jewish ghettos in Europe. magic sword of the legendary hero Bruncvík Rabbi Loew’s Adolf Hitler, while eliminating the living Jews, (Brun-ch-vik), buried underneath. Jirásek apparently preserved the area as the site for wrote that when the Czechs are attacked by Golem – an an ‘exotic museum of an extinct race’, and enemies, St Wenceslas and his knights, who animate brought Jewish artefacts there from all over sleep under Blanik mountain, will awaken and automaton his conquered territories, now displayed come to their aid, seizing this sword, magi- created from at the Jewish Museum. I loved the Hebrew cally. The Old Town is the heart of Prague, its Clock, which runs anti-clockwise, on the Old crooked streets flanked by mediaeval build- clay Jewish Town Hall. ings. At its centre is the Old Town Square, My science-fantasy leanings took over as I with the Old Town Hall and its elaborate 15th looked for Rabbi Loew’s Golem – an animate The famous century Astronomical Clock, which I particu- mediaeval street automaton created from clay, a Judaic robot larly wanted to see. Jirásek said that a master of Prague, the which went berserk (as robots did in pre-Asi- Golden lane early craftsman, Hanus built the intricate clock, but morning. mov literature) and the Rabbi had to deacti- vate it, hiding it in the Old New Synagogue. I didn’t find it, but statuettes of it are common souvenirs. In the centuries-old ‘New Town’ is Charles Square, with its New Town Hall, from the win- dows of which Praguers, historically, threw unpopular people. Two of its corners harbour statues, of the Rabbi Leow and the Iron Man – a Darth Vader-like, ghostly knight who killed his lover. Also in the square is the baroque Faust House where, Jirásek tells us, Dr Faust lived and, in exchange for knowledge and worldly pleasures, sold his soul to the Devil, who later dragged him to hell through a hole in the ceiling. Shopping An abundance of souvenir and handicraft 68 the Abacus | JUNE 2014

Church of SS Peter and Paul shops can be found throughout the Old and New Towns, where one can buy antiques, marionettes, and golems. For more serious shoppers Prague has a tradition of gold and silver jewellery, and also has high-quality am- ber and rubies mined in the country. Onion- ware Porcelain and ceramics, tableware and curios, as well as Bohemian crystal are also Prague specialities. Genuine Bohemian crystal is heavier than normal glass, resonates more when tapped and shows a rainbow spectrum against light. It can be seen at the Moser museum in the Old Town Square – Moser Astronomical Clock in the Old Town Square once supplied crystal to the Hapsburgs and the Windsors. There are several shops nearby wide variety of flavours – I saw a profusion of which sell excellent ceramics and crystal, but Cejlonski čaj (say-lon-ski chai – Ceylon Tea) in I found it worthwhile searching outside the tea shops. city centre for bargains. Music CDs, especially The best Bohemia was a centre of lager beer produc- of Dvořák, Janáček and Smetana, are fairly tion, due to the proximity of barley and hops, inexpensive and widely available. beers are and has the highest per-capita consumption. found outside The best beers are found outside Prague, in Food and drink Prague, in Plzeň (pl-zen-ye), home of Pilsner and České The rice-and-curry of the Czechs is roast pork, Plzeň,home Budějovice (chess-kay bud-yeh-o-vi-tze), where sauerkraut and dumplings, and there is no Budweiser originated. However, Prague has shortage of restaurants serving these basic of Pilsner its own excellent beers, which can be tasted in dishes, but they get more expensive the closer and České an array of pubs. There is also a Beer Mu- one gets to the Old Town. There are several Budějovice, seum, where one can taste an assortment of restaurants which serve international menus, where lagers and ales from micro-breweries, a Czech including Indian and vegetarian, as well. The forte. The Czech spirit is Slivovitz, which is Danube marks the Northern boundary of the Budweiser made mainly in Moravia, to the South. How- coffee-drinking countries, and while you can originated ever, it is freely available in Prague, which is get kava (coffee), the Czechs drink tea, in a also famous for ‘Green Fairy’ Absinthe.