Friday, March 30, 2007

Book Value and Accounting Principles..Is it Fair?

Continuing from my previous post, Day 4 and Day 5 of the 3rd Phase of the MDP programme focussed on the topic of "Finance Analysis for Managers". Financial analysis is the measurement of the financial impact of the levers of operational decision-making and management control. Being an engineer all my life, this is one topic which I really look forward to out of the so many modules of the MDP that I have to undergo.

The objectives of this module was to acheive a better understanding of financial statements, measure of financial performance and also to improve business performance. I was also hoping to properly understand the meaning of so many financial terms and jargons we normally encounter on daily basis such as ROI, ROA, book values, Income statements, Assets and Liabilities and many more terms which I bet my accountant friends will know it like the back of thier hands. In fact I have to admit, before this course, I always viewed finance as secondary to engineering. This is so especially to me ,from the system security stand-point and also being a die-hard technical man. However, to some extend, this module has somewhat altered my perspective on how we should view finance from a an accountant perspective and understand why certain seemingly unreasonable decisions being made in the company.

Over the years I have so many accountant friends. Some are good and some are better and some already left the company for greener pasture. But for some reason, I have never had the oppurtunity to properly sit down and discuss any issues related to financial statements or balance sheet of the company. Maybe, I was to be blamed because I never asked them or maybe they just thought the we the engineers have no business talking about finance! Well, thats life and our success in this transient world is still being assessed on how much asset or liabilities that we have and that is essentially a role of everyone's to play.

Ok enough for that, the finance module instructor was Mr. Vincent Loh who is an experienced management consultant who runs his own management consulting practice operating from Kuala Lumpur and Hong Kong. He started his carrer in 1976 in London as a qualified chartered accountant. He has over 25 years of knowledge, exposure and management experience in business leadership and general management. His last posting before going on his own was as a Group GM of the Royal Selangor Group which saw thier best performing years during his tenure.For his age, I think Vr Loh is very enthusiastic and energetic person. He has very good english accent and his method of presentation is very lively and spirited. just take a look at the following photo of him in class to get an idea!

Mr Loh stressed that the golden rule of Finance is COMPARE. Our financial result will always be compared to our budgets, historical performance, KPIs Targets, Industry Norms and also, our competitors. Any public listed companies are legally required to issue Financial Statement at least once a year. Financial statement will enable the reader to evaluate the company's performance, it's customers, the suppliers and also, the competitors. The most important items to be read from a Financial Statements are Income Statement, Balance Sheet and Cash Flow Statement. The accountancy world has also some conventions or accounting standards (policies and guidelines) to be followed when reporting the financial statement. In general, the rules are similar such as Annual accouting period of 1 year, Income is recognised when it is earned and not invoiced, liabilities incurred by must be accrued for in accounts, short term (< 1 year) assets, long term asset (>1 year) and written off long-term assets over a period of years depending on thier useful life.

Mr Loh discussed in detail the definitions of Income Statements and Balance Sheet. He used the company's Annual Report since 2004 to get his message cleared to us. Along the way, he also cracked many jokes and also philosopical qoutes that never seized to amaze me. Although he is a very knowledgeable accountant, he has this tendency to blame the accounting worlds on account frauds and also accounting window-dressing activities occured worlwide. He told us that in accounting principle, value of people does not exist. In other words, people are not an asset to any company but they can be libilities except if they are David Beckham or Tiger Woods. Thats why accountants like the idea of corporate restucturing, layy-off and VSS so much when they are the CEOs !

We were also made to evaluate the company's financial performance from to 2004 to 2006 using the common sizing principle. Well, in engineering we would name it the normalise method when you choose a common denominator to get a per unit value. It is very obvious that the company has made so much improvement especially in 2006 when our Return on Equity (Net Profit/Shareholders Funds) is at 10.9% and our Return on Asset (Operating Profit/Total Assets) stood at 6.1%. Our gearing for 2006 is at 1.4 times and this is still below the industry's norm of 1.0. Just for comparison, the ROE of PLUS, YTL and Malakof are respectively at 25.6%, 15.3% and 14.8% which will put our company, very far from the top industry players. What struck me the most about the 2006 Income Statement was on the saving of 1 Billion we made on Fuel cost despite the steep increase in oil price last year. I really think that the management should order a thorough check on this and understand from where all the savings came.

Of course, they are so much that the company's does for the country that cannot be reflected in the accounting book values. As a public listed company with many social responsibilities, we developed people, gave scholarships, build university, build bridges, build communities and so many more that it will all go to expenditure in the income statement. Where or what are the returns for all of these then? well, that's beyond accounting principles. To me a good accountant must not only see success as simple as those shown on the annual balance sheets but also must also view it from the human perspective as well. Without good people, we can never acheive the improved Financial Performance as we got in 2006. I think it's time to really identify the good ones among us and reward them accordingly...

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