CONTENTS

President’s Message 3

From the Editor 4

Fair Value Accounting in Sri Lanka: Auditors’ Perception of Usefulness and

Awareness, and Challenges Faced by Audit Profession 5
By Jayanthi Kumarasiri and Abeyratna Gunasekarage

World Economic Recession and Sri Lanka

By R.A. Jayaweera 10

Churchillian view of The Economy and the IMF Program

An Interview with Dr Koshy Mathai, IMF Representative in Sri Lanka
17

Reminiscence of an Articled Clerk in the Early Days of the Institute 19

By Rex Olegasegarem

ICASL Events 23

Quarterly Technical Update 24

1
 THE CHARTERED Administration
ACCOUNTANT Chief Executive Officer/Secretary
The Opinions, views and - Aruna Alwis
statements published in
this Journal are those of Director Finance -
the respective authors/ Vasani Manodara
contributors. The Institute of
Chartered Accountants of Sri Director Examinations -
Lanka is neither responsible W.W. Wijeratne
nor does it necessarily
concur with the author/ Project Director/Director
contributor unless otherwise Members/CPD -
stated. Sunil Karunanayake
Copyright © 2009 by The
Institute of Chartered Chief Administration Officer -
Accountants of Sri Lanka. Udeni Munasinghe

Reproduction in whole or Chief Information Officer -

The Official Publication of part without the Institute’s G. Wickremasinghe
The Institute of Chartered (or other copyright holder’s)
Accountants of Sri Lanka. prior written permission, is Head of Technical -
Established 1959 Volume 45 strictly prohibited. Chamila Cooray

Head of Education and

A brief outline of Council Training - Nilushi Dissanayake
The Institute of Members 2010/2011
Brand Communication
Chartered Accountants Manager - Lasantha Amarakoon
of Sri Lanka Mr. D T S H Mudalige - President
Mr. Sujeewa Rajapakse -
Manager Student Services -
Vice President Sujeewa Munidasa
The Institute of Chartered Accoun- Mr. Ganaka Amarasinghe
tants of Sri Lanka is the national Mr. T Dharmarajah Manager Business School -
professional accounting body of Mr. W N I C Fernando Damayanthi Fernando
Sri Lanka established by an Act Mr. Channa Gunasekera
of Parliament, No. 23 of 1959. Mr. Arjuna Herath Manager Multimedia English
The Council of the Institute is Mr. J M U B Jayasekera Language Centre -
responsible for the administration Achala Kodikara
Mr. S Manoharan
and management of the Institute.
Mr. Jagath Chandana Perera
The Council also conducts qualify- Manager Studies -
ing examinations, supervises and Mr. Shan Shanmuganathan
Kanchana Gunasekera
regulates student education and Mr. S Swarnajothy
training, secures the maintenance Prof. M W Wickremarachchi Manager IT Training -
of professional standards among Mr. Lasantha Wickremasinghe Nilmini Jayasooriya
members and the advancement of Mr. Velupillai Kanagasabapthy
the profession. Ms. Coralie Pietersz Manager Technical -
Subashini Withanachchi
The Institute is a member of
Journal Committee
the International Federation of Chairman - Manager Technical -
Accountants (IFAC) and the Channa S. Manoharan Upendra Wijesinghe
International Accounting Standards Editor/Secretary –
Committee (IASC). It is also a Sunil Karunanayake Manager Technical -
member of the Confederation of A R Rasaih Nadeeshani Dissanayake
Asian and Pacific Accountants
A N Fernando
(CAPA) and a founder of the South Manager Quality Assurance -
Asian Federation of Accountants Purajitha Taldena
Priyanjith Fernando
Kamal Saseedaran
(SAFA).
Ranganath Abeykonge
Manager CPD and Taxation -
Keerthi Handapangoda
The Institute is the sole authority Priyadarshini Dharmasena
Dammika Rajapakse
for setting standards in auditing
I Mohammed
and accounting in Sri Lanka and Manager Training -
the application of such standards is Renuka Liyanaratne Nimanthi Gamage
mandatory for business enterprises Dinuk Hettiarachchi
specified in the schedule in the Sri A P S M Sanjeewa Thushara Examinations Consultant -
Lanka Accounting and Auditing Mohamed Rasheed M Rashmi K.L. Perera
Standards Act No. 15 of 1995. K H Saman Kumara

2
 President’s Message
O ur Institute proudly and
fittingly celebrated its golden
jubilee last year. Today we
have emerged as the premier
national accounting body in
Sri Lanka catering to a wider
student population while our
membership has grown to 4000
with nearly twenty five percent
of them serving overseas. This
is a tribute to our founders who
worked with determination and
courage to build up the ICASL to
its present eminent status. We
cannot be complacent and sit
on our laurels. Today we live in a
highly-networked global village
with vast changes taking place
among our midst. In Sri Lanka,
it’s an era of great resurgence
after ending a 30-year conflict
that stifled the economic growth
and general well-being. The
economy is now poised to take
off with a projected growth of
7% offering many opportunities
for economic development.
As a responsible professional
organization we must look to
the future.
We have embarked on our
strategy, “Need for Change”,
setting a direction for ICASL and
the Chartered Accountants to
follow at a time of great change
in the accounting profession. By
taking account of this change
and anticipating what may
happen over the coming years,
we have sought to ‘future-
proof’ our objectives for action.
This strategy aims to mark out
the Chartered Accountant as
the professional of the highest
standards and skills.
The Challenge Of Change
Globally, we expect the demand
for accountants to continue to
grow. Compliance requirements
are rising and international
business is becoming
increasingly complex. The
‘internationalization’ of business
means that the mastery of
international standards in
accounting and auditing, ethics
and accounting education will
be crucial. The expertise of
Chartered Accountants, as
globally-established and well-
regarded professionals, will be
sought in more markets than
ever before.
The education of accountants
will change. There will be
a greater push towards
specialization and lifelong
learning. Corporate social
responsibility and the reporting
of environmental issues
will be a stronger focus for
business everywhere – this
needs to be reflected in the
lifelong education delivery for
Chartered Accountants.
Shaping debate wherever we
have members is fundamental
to how we are perceived as
an Institute. Given that CAs
operate in many countries, our
ideas and thought leadership
must be intelligent, valuable
and capable of influencing
change in the business world.
At ICASL, we believe
in competition and co-
operation. We will work with
other bodies in the public
interest. ICASL will continue
as a strong, independent
Institute, whilst recognizing
its global membership, its
excellence in training and high
standards.
Meeting The Challenge
Our objectives aim to ensure
that the focus on the individual
CA in a global business
environment can be achieved.
Keeping CAs ‘Clearly Ahead’
is the fundamental goal of the
council, staff and resources of
ICASL.
Facing new challenges
requires new approaches.
Our examinations, education
and training will continue to
embrace the needs of modern
business, as well as examine
the introduction of technology
to help employers and students.
ICASL will be innovative in its
thought leadership as never
before. The services that
we provide to members will
be delivered in new ways,
with more relevance to their
individual needs. In these core
functions of a professional body,
we aim to provide a benchmark
of quality for others to follow.
We have worked hard to create
themes that are achievable and
measurable to take the Institute
forward. The mission is simple –
to enhance the global standing
of the Chartered Accountant.
By sticking to this strategy, that
will be achieved. We recognize
our membership as our utmost
strength no doubt. I together
with my council would welcome
your thoughts in this enduring
journey into the 51st year of the
ICASL.
Sujeewa Mudalige
President
3
From the Editor
It is our pleasure and privilege
to welcome the new president
Sujeewa Mudalige and the
new council that took office in
early 2010. While we record
our appreciation to the outgoing
Chairman Sujeewa Rajapakse
who served us four fruitful years
we look forward with enthusiasm
to the new Chairman Channa
Manoharan who is bubbling
with ideas to give a new look
to the “Chartered Accountant’’
now on to its 47th year. ICASL
celebrated the Golden Jubilee
with a series of events last year
and the president Sujeewa
Mudalige has great plans to
take ICASL to greater heights
during his regime.
While we reach you with the
first quarter Journal somewhat
behind time we are happy
to deliver it with a complete
new look and few more
features. Given the heightened
interest on the concept of
“Fair Value Accounting”
4
Chartered Accountant
A b e y r a t n a Gunasekarage
with Jayanthi Kumarasiri
who are academics resident
in Australia present their
experience in Sri Lanka titled
“Fair Value Accounting in Sri
Lanka: Auditors’ Perception
of Usefulness and Awareness
and Challenges Faced by
Audit Profession”. Chartered
Accountant R A Jayaweera
presents his views on effects
closer home in his presentation
“World Economic Recession
and Sri Lanka”. Sri Lanka
too faced many economic
hardships following the global
economic fallout resulting in a
major decline in foreign reserves
thus adversely affecting
country’s external financing; it
was in this background that the
IMF came up with a standby
agreement that aroused public
interest. An interview given by
Koshy Mathai, IMF resident
representative in Sri Lanka
styled on the Churchillian model
based on the “World War 11”
consequent to his first public
appearance in Sri Lanka gives
a good insight into the recovery
of Sri Lankan economy. Rex
Olegasegarem, a member
of the founder’s batch of the
ICASL now resident in Australia
presents his visit down the
memory lane inclusive of the
happy-go-lucky A r t i c l e d s h i p
days.
We were compelled to curtail
the articles to make way for
the Quarterly Technical Update
published by the Technical and
Research division that will be a
regular feature in the future.
Sunil Karunanayake
 Fair Value Accounting
in Sri Lanka:
Auditors’ Perception of Usefulness
and Awareness, and Challenges Faced
by Audit Profession
By Jayanthi Kumarasiri and Abeyratna Gunasekarage

Abeyratna Gunasekarage [BSc Bus. Adm.
(USJP, Sri Lanka); MAcc (Dundee, UK); PhD
(Dundee, UK), ACA (Sri Lanka)] is a Senior
Lecturer at the Department of Accounting
and Finance, Monash University, Australia.
Jayanthi Kumarasiri [BSc. Bus. Adm.
(USJP, Sri Lanka); BCom Hons. Acct. & Fin.
(Canterbury, New Zealand)] is an Associate
Lecturer at the Department of Accounting
and Finance of the Faculty of Business and
Enterprise, Swinburne University of
Technology, Australia.

Introduction for a different reason. FVA has the main findings of a questionnaire
been blamed for exacerbating survey which investigated Sri
Fair Value Accounting (FVA) the recent global financial crisis Lankan auditors’ perceptions of fair
has been an important topic which has led to the collapse of value measures.
of debate in the accounting many leading financial institutions
world among standard setters, around the world (see, for example, What is Fair Value
practitioners, government bodies Anonymous, 2008; Leone, 2008). Accounting?
and academics. The main reason However, whether FVA played a FVA is an accounting practice
for this increased interest is the contributing role in current credit which reports assets and liabilities
introduction of many accounting crisis is still an unresolved issue. at their estimated current value
standards by the International (Ramanna, 2008). In FAS 157: Fair
Accounting Standard Board (IASB) The increased use of fair value Value Measurements, the term ‘Fair
and the Financial Accounting measures in financial reporting Value’ is defined as “the price that
Standard Board (FASB) which brings considerable challenges to would be received to sell an asset
either recommends or mandates preparers of financial statements, or paid to transfer a liability in an
the use of fair value measures in auditors and setters of accounting orderly transaction between market
financial reporting. The preference and auditing standards. The participants at the measurement
for fair value accounting over the Institute of Chartered Accountants date” (FAS 157, Paragraph 5).
The estimation of fair value is
Auditing financial statements based on fair value measures particularly problematic for assets
and liabilities that do not have active
has been a challenging task for auditors in developed markets and that consequently
countries which have been using FVA for many years require a considerable level of
(see, for evidence, Roger et al. 2006; Ramanna, 2008; professional judgment (Ramanna
Ramanna and Watts, 2007). It is interesting to know and Watts, 2007; Ernst & Young,
whether the Sri Lankan auditors share similar perceptions 2005). It is argued that auditors
with respect to their understanding of FVA concepts and face a major challenge with respect
auditing financial statements based on fair values; the to providing an assurance of the
appropriateness of fair value
current study intends to address this question. measures, as most of the current
auditors are not q u a l i f i e d or
sufficiently competent to judge or
historical cost accounting by the of Sri Lanka (ICASL) intends to
evaluate the techniques and valuation
FASB and the IASB comes from promote the application of FVA
processes used in arriving fair value
the belief that financial statements in Sri Lanka. This intention was
measures (Roger et al., 2006).
based on fair values can provide highlighted at the 2007 South Asian
more relevant, comparable and Federation of Accountants (SAFA) Fair Value Accounting in
faithful representation of assets conference. It is therefore important
to ascertain the views of Sri Lankan
Sri Lanka
and liabilities (Barth, 2007).
Very recently, FVA grabbed the audit professionals about fair value In general, Sri Lankan accounting
attention of the accounting world measures. In this paper, we present standards and the accounting

5
framework is mainly based on
historical cost principles: however,
an increase in the usage of fair
value accounting is visible with the
introduction of several fair value-
related accounting standards during
the last decade. For example,
standards such as Business
Combination (SLAS 25), Investment
Property (SLAS 40), Impairment
of Assets (SLAS 41), Financial
Instruments: Presentation (SLAS
44) and Financial Instruments:
Recognition & Measurement
(SLAS 45), which are mainly based
on the FVA principles, encourage
preparers of financial statements to
use fair value measures whenever
possible.
As far as auditing standards are
concerned, Sri Lanka does not have
a specific auditing standard relating
to auditing of financial statements
which are based on fair values. The
ICASL follows SLAS 18: Auditing
of Accounting Estimates which is
in compliance with International
Standard of Auditing 540:
Auditing Accounting Estimates.
The importance of transforming
historical cost accounting to
FVA has been highlighted by the
President of ICASL at the 2007
SAFA conference. He explained
the initiatives taken by the ICASL
such as the syllabus revisions and
the adoption of new FVA standards
to facilitate the acceptance of
fair value measures. A partner
6
from KPMG Sri Lanka expressed
similar views when he stressed
the importance of FVA and
demonstrated the readiness of the
accounting profession to accept
the paradigm shift to FVA (The
Sunday Times, Sept. 2, 2007). The
Chairman of the Auditing Standards
Committee of the ICASL revealed
to the authors that the Institute
was in the process of developing
an auditing standard, which is
similar to ISA 545: Auditing
Fair Value Measurements
and Disclosures, by the end of
2008.
Auditing financial statements
based on fair value measures
has been a challenging task for
auditors in developed countries
which have been using FVA for
many years (see, for evidence,
Roger et al. 2006; Ramanna, 2008;
Ramanna and Watts, 2007). It is
interesting to know whether the
Sri Lankan auditors share similar
perceptions with respect to their
understanding of FVA concepts and
auditing financial statements
based on fair values; the current
study intends to address this
question.
Structure of the Study
The study was based on a
questionnaire survey. The questions
included in the survey were
structured to gather information
on auditor’s (i) perception of the
usefulness of fair value measures,
(ii) awareness about fair value
accounting and auditing standards,
(iii) views about the challenges
faced with the increased use of
fair value accounting in financial
reporting, and (iv) suggestions
to overcome such challenges.
The questions were designed
on the basis of issues raised by
the academic and professional
literature as well as the exposure
drafts and discussion papers
issued by the IASB and FASB on
fair value measures. These closed-
ended questions were structured
with a five-point Likert scale
such as ‘strongly disagree’ (1),
‘disagree’ (2), ‘neither agree nor
disagree’ (3), ‘agree’ (4) and
‘strongly agree’ (5) and the
participants were asked to indicate
their response by circling only one
scale:
The questionnaire was distributed
among 160 senior auditors (i.e. audit
partners and audit managers) in 18
leading Chartered Accountancy
firms operating in Colombo. The
final sample consisted with 81
questionnaires, representing a
response rate of 50.63 percent,
out of which 33 (40.7 percent)
were from Big 4 accounting firms
while the remaining 48 (59.3
percent) were from Non-Big 4 firms.
The participants had an average
of 6.7 years of experience in the
profession.
Auditors’ Perception and
Awareness of FVA
Three main questions were asked
in order to examine whether the
auditors believed that fair value
based financial reports would be
more useful in Sri Lanka compared
to those based on historical cost
accounting. The relevant questions
and the mean scores generated for
them are reported in Table 1.
The Sri Lankan auditors surveyed
in this study believed that fair value
accounting was a better basis for
financial reporting, compared with
historical cost accounting. The
statement relevant to this aspect
generated a mean value of 4.06.
They were also in agreement
with the view that financial
statements based on FVA reduced
the information gap between
what users expect from financial
statements and what they actually
receive from them; the mean score
for this statement was 3.73. They
believed that financial statements
based on fair value measures were
more useful to users of such reports
than those based on historical cost
accounting; the relevant statement
was given a mean score of 3.95.
Two of the above three mean
scores are either above or close
to 4 (‘agree’ scale) while the other
is above 3.5 indicating that the
respondents agreed with the stated
statements. More importantly, these
mean values deviated from 3 (i.e.
neutral position) in a statistically
significant fashion.
Even though the auditors agreed
that FVA was a better basis for
financial reporting, they did not
demonstrate a strong level of
awareness about accounting and
auditing standards relating to this
issue. The statements relevant to
this aspect and their mean scores
are presented in Table 2.
The auditors did not seem to
have an adequate awareness on
fair value accounting standards/
auditing standards at either the
international or local level. The
statements which tested their
awareness of FAS 157 and ISA 545
generated mean scores of 2.54 and
2.82 respectively. The first mean is
significantly lower than 3 thereby
leaning towards disagreement with
the statement while the other is
statistically indistinguishable from 3
indicating an indifferent position. A
similar response was documented
for the respondents’ awareness of
SLAS 45. The relevant statement
generated a mean score of
3.04 which is also insignificantly
Table 1: Auditors’ Perception of Usefulness of Fair Value Measures
Statement Mean Score
Fair value accounting is a better basis for financial 4.06**
reporting than historical cost accounting for financial
statement users
Financial statements based on fair value accounting 3.73**
reduce the information gap between what users expect
and what they actually receive from financial statements.
Financial statements prepared using fair value 3.95**
measurements are more useful to users of such reports
than those prepared using historical cost accounting.
Note: An *(**) indicates that, on the basis of one sample t-test, the relevant mean value is
statistically significantly different from 3 (i.e. midpoint) at the 5 percent (1 percent) level.
different from 3. ICASL introduced an understanding was lacking
SLAS 45 in November 2007 and at the time of the survey. This
the standard became effective finding highlights the necessity of
from 1 January 2009. This survey obtaining adequate knowledge
was conducted in April/May 2008 about the relevant standards
– five to six months after the before performing their functions
introduction of the standard but which involves auditing fair
before financial statements had value measures. In this respect,
to comply with its requirements. professional and academic bodies
However, the findings of the survey in Sri Lanka have a responsibility
reveal that these auditors do not to provide the training necessary
seem to have gained awareness for auditors to improve their
on this standard during this period. knowledge about this issue. This
Nevertheless, the Sri Lankan is of paramount importance; if
Table 2: Auditors’ Awareness of Fair Value Standards
Statement Mean Score
Auditors have a clear understanding of the US Financial 2.54**
Accounting Standards Board’s FAS 157: Fair Value
Measurements
Auditors are well aware of the requirements of the new 2.82
International Standard on Auditing, ISA 545: Auditing Fair
Value Measurements and Disclosures
Auditors have a clear understanding of the SLAS 45: 3.04
Financial Instruments: Recognition and Measurements
Before auditing items measured at fair value, auditors
need to gain knowledge about the processes used by the 4.24**
client in arriving at those measurements.
Note: An *(**) indicates that, on the basis of one sample t-test, the relevant mean value
is statistically significantly different from 3 (i.e. midpoint) at the 5 percent (1 percent) level.
auditors surveyed in this study the auditors do not possess the
believed that gaining competency competency to perform their
on fair value measures was professional duties with confidence,
important; the relevant statement it may have a negative impact on
achieved a mean score of 4.24 the credibility of the professional
which is significantly higher than opinion that they deliver.
3. The auditing standard ISA 545:
Auditing Fair Value Measurements Challenges Identified by
and Disclosures emphasises the Auditors
importance of auditors having a
clear understanding about the The survey also attempts to identify
accounting and technical aspects challenges faced by auditors
behind fair value measures. The in auditing financial statements
lack of knowledge on fair value- based on fair value measures. The
based accounting and auditing statements in Table 3 were tested
Standards suggests that such for this purpose.
7
Table 3: Challenges in Auditing Fair Value Measures

Statement Mean Score

Auditing financial reports based on fair value accounting 4.04**

is more challenging than those based on historical cost
accounting
The biggest challenge faced by auditors with fair value
measurements is the verifiability of such measurements
Note: An *(**) indicates that, on the
4.06** basis of one sample t-test, the relevant
mean value is statistically significantly
different from 3 (i.e. midpoint) at the 5
percent (1 percent) level.

Clearly, auditors believed that Table 4: Order of Factors Contributing to Challenges

auditing financial statements
based on fair value measures Mean Score Mean Score Mean rank
Statement given by generated by based on
was more challenging to them
than auditing those based on participants Friedman test Friedman test
historical cost accounting; the
statement which captures this Techniques used to 4.09 5.23 1
opinion received a mean score of ascertain fair value
4.04 which is significantly higher measures differ across
than 3 (i.e. indifferent view). They different industries
perceived that the verifiability Most of the relevant 4.10 5.21 2
of fair value measures was the assets and liabilities
biggest challenge that they faced are not traded on active
when dealing with FVA by giving markets
this statement a significant mean
score of 4.06. These findings are Fair value measures 3.94 4.85 3
in agreement with the existing frequently incorporate
international literature which estimates of future
identifies verifiability of fair value events and conditions
measures as the biggest challenge (amounts and time of
faced by current audit profession cash flows, discount
(Roger et al. 2006; Fernando, rates etc.)
2007). Ascertaining fair
3.88 4.79 4
value measures is
In this context an attempt was more complex than
made to identify the relative ascertaining Historical
importance of a number of factors Cost
that might have made verifiability
of fair value measures challenging The assets and liabilities 3.85 4.68 5
to the respondents. Based on the are valued by using
extant literature, eight factors were managerial assumptions
developed and the mean scores and mathematical
received for them were subjected models
to Friedman test in order to rank
Ascertaining fair value 3.74 4.20 6
them from highest challenging
measures is a time-
factor to lowest challenging factor.
consuming task
The findings of this exercise are
reported in Table 4. Auditors lack of technical 3.55 3.65 7
knowledge about fair
The evidence from the Friedman value measures
test reveals that the most
challenging factor was the ‘usage Opportunities available 3.35 3.37 8
of different techniques across to auditors to gain
industries’ (mean score = 4.09; knowledge about fair
rank = 1) followed by the ‘non- value measures are
availability of active markets for limited
assets and liabilities’ (mean = 4.10;
rank = 2) and ‘the incorporation the evidence uncovered in previous On the basis of this evidence, it
of estimated future events and studies that were conducted in can be argued that the challenges
conditions’, (mean score = 3.94; developed countries; for example, faced by auditors in verifying fair
rank = 3). The ‘complexity of studies by Wilson and Ernst & value measures are common to
ascertaining fair value measures’ Young, (2001), Carmichael (2004), auditors in any country irrespective
and the ‘involvement of managerial Ernst & Young (2004), Roger et of whether they are located in a
assumptions and mathematical al. (2006), Wines et al. (2007) and developed or a developing country.
models’ (with mean scores of 3.88 Hernandez (2004) find that the In this context, it is appropriate to
and 3.85 respectively) were ranked above factors act as constraints view auditing fair value measures
4th and 5th. These responses of on auditors when auditing fair as a universal challenge faced by
Sri Lankan auditors corroborate value-based financial statements. auditors.

8
Suggestions to Overcome cost accounting. However, they do and Business Research, special
Challenges not seem to be fully aware of fair issue, pp. 7-15.
value-based accounting/auditing Carmichael, D., (2004), “The PCAOB
Table 5 reports the responses standards at the international and and the Social Responsibility of the
received on the ‘suggestions to local level. They perceived auditing Independent Auditor”, Accounting
overcome challenges in auditing fair value measures to be a Horizons, Vol. 18, pp. 127-133.
fair value measures’. challenging task, mainly due to the
Ernst and Young, (2005), “How Fair
Table 5: Suggestions to Overcome Challenges is Fair Value?”, IFRS stakeholder
series.
Statement Mean Score
Fernando, S., (2007), “Auditing Fair
Auditors should be provided with more comprehensive 4.23** Values in Financial Statements”,
professional training on fair value measurements than Press releases, The Institute
they are currently receiving of Chartered Accountants of
Sri Lanka.
Until auditors are competent enough to audit financial 4.01** Hernandez. F.G., (2004), “Another
reports that are based on fair value accounting, they Step toward Full Fair Value
should be provided with necessary expert support Accounting for Financial Instruments”,
Accounting forum, Vol. 28, pp. 167-
Fair value accounting should be limited to assets and 3.40* 179.
liabilities for which active markets are available
The Sunday Times, (2007) “Fair
Value: a Paradigm Shift”, (2 Sept,
Accounting/auditing professional bodies have the ability 3.90** 2007). Available; http://sundaytimes.
to address the challenges faced by auditors in auditing lk/070902/FinancialTimes/ft334.html
fair value measurements
Leone, M., (2008), “Europe in lock
Note: An *(**) indicates that, on the basis of one sample t-test, the relevant mean Step with U.S. Fair Value”, CFO.com
value is statistically significantly different from 3 (i.e. midpoint) at the 5 percent Available: http://www.cfo.com/article.
(1 percent) level. cfm/12382799?f=home_featured.
The mean scores reported difficulty in verifying such values, Ramanna, K., (2008), “The Implications
in the above table reveal an and suggested that the provision of Unverifiable Fair Value Accounting:
overwhelming level of agreement of adequate professional training Evidence from the Political Economy
by participants on the suggestions on FVA was important to overcome of Goodwill”, Journal of Accounting
made to overcome perceived this challenge. and Economic, Vol 45, pp.253-281.
challenges. The key suggestions Ramanna, K. and Watts, R.L.,
that they overwhelmingly agreed These findings indicate that the (2007), “Evidence on the Effect of
were the ‘need for comprehensive Sri Lankan auditors are not in a Unverifiable Fair-value Accounting”,
professional training on fair value position to meet the challenge Harvard Business School working
measurements’ and the ‘need for of auditing fair value measures paper, No. 08-014.
expert support until they achieve mainly because of their lack of
the competency on fair value Roger, D.M., Rich, J.S. and Wilks,
awareness of fair value-based
T.J., (2006), “Auditing Fair Value
measures’. Both these statements accounting and auditing standards, Measurements: A Synthesis of
generated mean scores above 4 and the difficulty with verifying fair Relevant Research”, Accounting
which were statistically significantly value measures. In particular, Horizons, Vol. 20, pp. 287–303.
different from midpoint (i.e. 3). Also, without gaining a thorough
their response to the suggestion awareness on the requirements Wilson, A. and Ernst & Young, (2001),
that ‘fair value accounting should of relevant accounting and “Fair Value Measurement: Where the
be limited to assets and liabilities for auditing standards and underlying Conflicts lie”, Balance Sheet, Vol. 9,
which active markets are available’ valuation techniques, auditors pp. 26-33.
deviated significantly from the cannot be expected to exercise Wines, G., Dagwell, R. and Windsor,
neutral view thereby leaning due care in the verification of fair C., (2007), “Implications of the IFRS
towards agreement. Nevertheless, value measures. In this context, it Goodwill Accounting Treatment”,
they placed a strong trust on the is important to provide adequate Managerial Auditing Journal, Vol.
ability of professional bodies that professional knowledge and 22, pp. 862-880.
they belong to in addressing any training on fair value measures to
challenges faced by the audit auditors before expecting them Acknowledgements: The authors
profession in auditing fair value to perform audit functions on fair would like to thank the following
measures; the relevant statement value-based financial statements. individuals for the help that they
generated a mean score of 3.90 This responsibility lies with the extended during the course of
which was significantly different professional and academic conducting this research project:
from 3 at the 1 percent level. institutions in Sri Lanka. Mr Richard Fisher for supervising
Jayanthi’s honours project;
Conclusion Miss Gayathri Goonathilake for
References administering the survey and acting
This study investigated the Anonymous, (2008), “Insurers as the point of contact for the
perceptions of Sri Lankan auditors Say Fair Value Accounting was a respondents, Mr Lal Nanayakkara,
Mr Sujeewa Rajapakas and Mr
on fair value measures. According ‘Powerful Accelerant’ to Credit Crisis”,
Insurance Journal, Available: http:// Jayamini Kariyawasam for reviewing
to the results of the study, the early drafts of the questionnaire
participants believed that financial www.insurancejournal.com/news/
national/2008/12/31/96675.htm. and providing valuable feedback;
statements based on fair value and Professor David Power for his
measures were more useful and Barth, M., (2007), “Standard-setting comments on an earlier draft of this
informative to users than those Measurement Issues and the article.
prepared on the basis of historical Relevance of Research”, Accounting

9
 World Economic
Recession and Sri Lanka
By R.A. Jayaweera FCA
Senior Partner, P.E. Mathew & Company, Chartered Accountants

Although a few months only have evident. Although vehicles collide Economies never developed in
passed since the world economic there, we will not be affected since a straight line. Downward and
collapse has begun to receive our we drive on a safer road. We are upward trends were visible from
attention, it is evident that the world strong,” were issued. The Sri time to time. There was a great
economy had commenced its Lankan public was kept in blissful depression during the 1930s.
slowdown at a snail’s pace in 2007 ignorance. But its effects were not evenly
and had been trotting towards a felt throughout the world. Its
recession. The Dollar, the financial Is it correct to say that we had to epicenter was in the United States
unit of the United States of America, face grave consequences of the of America. The world then was
the country considered to be the world recession as a result of our not so closely knit as today. Since
strongest and the richest in the links with world economy through then there had been economic
world commenced its crisis as early international trade? Although downturns from time to time. Sri
as 2004. The Dollar was accepted the statement is correct to some Lankan economic growth rate
as the international financial unit. extent it does not reveal the reduced to a minus value in 2001.
The strength of an economy is whole truth. We would not have Volume of trade in many business
reflected in its financial unit. The received many of the economic enterprises in Sri Lanka declined.
involvement of a crisis in the benefits that we have enjoyed Much earlier, during the 1970s an
world economy did not catch our had we not been linked with economic crisis was experienced
indicators. Or else the trumpeters, world economy. In addition to and in Sri Lanka. Increased fuel prices
who were in charge of the indicators in consequence of the recession were a significant cause for that
while watching the situation imported through our association crisis. The effects of the crisis were
closely, followed a deaf and blind with the world economy, there minimized by internal economic
controls.
The present economic recession is second only to the Great The present economic recession
Depression of the 1930s. But it is said that the bottom of the is second only to the Great
precipice of the falling economy is not discernible as yet. Depression of the 1930s. But it is
It may even be greater than the Great Depression. Since said that the bottom of the precipice
countries are knitted together firmly today than ever before, of the falling economy is not
discernible as yet. It may even be
not only the countries in the epicentre but even countries in greater than the Great Depression.
the periphery like ours feel the effects of the tremor of the Since countries are knitted together
downfall. firmly today than ever before, not
only the countries in the epicentre
but even countries in the periphery
attitude. Or else they were not able existed inherent characteristics like ours feel the effects of the
to comprehend what they saw and within the Sri Lanka economy too, tremor of the downfall.
heard. They were not sensitive for a recession. Facts discussed
to the changes. Consequently, henceforth will bear testimony Although we were able to minimize
signals such as, “No danger is to this. the striking force of the tremor and

10
be resilient we could not and would
not detach ourselves completely
from the situation and remain
unconcerned. No one could expect
us to be unconcerned either. In
this instance one may recollect
the dreadful terrorist bomb attack
at Dalada Maligawa where it was
claimed that the damage was
minimal as the section affected
had been a construction of
wattle and daub. Fewer inclusion
of wherewithal of the modern
economy or what is designated
as “modern” in the economy might
have prevented a full-scale intrusion
of the forces of recession into our
economy which has resulted in an
increased resilience. This theory
may stay valid in the future as
well. Non-inclusion of “novelties”
as such is not backwardness. It is
only shedding what is imprudent.
Judging what is prudent and what
is not in an economy is highly
controversial.
Numerous forces are active
within an economy of a country.
Therefore, it is difficult to come
to a compromise as to which is
good and which is bad, which is
beneficial and which is harmful
and which is favourable and which
is unfavourable. The market is
recognized as the umpire. It is taken
for granted that market signals to
economic activities are logical and
conformity to such signals, results
in optimum utilization of resources.
It now appears that charging the
market with unlimited powers of
decision-making without even a
jury is one reason as to why it was
unable to control the dreadful forces
that led to economic recession by
engaging brakes.
Comprehension of the philosophical
profile in the analysis of world
economic downfall or recession is
beneficial for human existence. A
person running with an unrestrained
speed and falling down fatigued can
be a good comparison for the world
economic downfall. The man who
falls down needs rest. He needs
to regain his lost strength. But will
he run again with the speed of a
rhinoceros? Or will he trot contented.
Opinions, advices and lessons
given in favour of a contented
economic posture were enormous.
Documents written and songs
sung were vivacious. “Sustainable
Development”,“Environment
friendly Development”, “You are
not the owner but the protector
of this Land”, “Resources under
your command are a borrowing
from the future generations”
were some of the titles of these
enormous advices. But none of
them were self-oriented. They were
unobserved preaching. Nobody
adhered to them. Therefore a
disobedient child had ultimately
been caned.
Unlike beyond human control
phenomena of the earth, the solar
system or the space further away, all
the causes that led to the recession
were caused by man and can be
managed by man. These causes
were created and the outcomes
enjoyed by a minority of men. We
single them out and call them the
First World. Let us call the majority
comprising millions who had no
direct connection to these causes
and resulting outcomes the Second
World. The fate of the people of the
second world was as much the
same as the fate of the passengers
in the bus hastily driven, breaking
all norms, by the careless driver
through the closed railway gate at
Yangalmodara. Until the collision
brought them disaster some of the
passengers might have remained
contented and overjoyed about
the bus driver’s careless but fast
driving thinking that they will reach
their destinations well in advance.
There may had been others who
disagreed and dissatisfied.
The fate faced by the driver of the
bus who overestimated capabilities
and ignored norms and limits and the
fate of its passengers carry many
things in common to be compared
with the economic recession. What
were the economic capabilities
that existed and could have been
existing? What were the norms of
economic activity? What were the
limits? How were those norms and
limits violated? Why was the social
organization not able to observe,
11
control and prevent the disastrous
behaviour until they reached a point
of complete destruction? Were the
decisions of the Market umpire
wrong? Why were the people
appointed to sense and regulate
silent? Why weren’t the warning
signals lighted before the collapse?
What were the whistle-blowers
doing all the time? Does all these
mean that macroeconomics has to
be reinvented?
Within a given timeframe, technical
level and available resources, an
economy possesses an optimum
production possibility. Knowhow
and traditions inherited through
generations will, to a certain
extent, influence in deciding this
optimum production possibility.
The production possibility of
an economy is displayed by its
production possibility boundary. An
economy, very often, will not attain
its highest production capability.
It is not possible to do so. The
reason being either, the totality of
goods and services produced at
such optimum possibility level is
not to be required for consumption,
or an effective total demand for
the purchase of that total quantity
of goods and services does
not exist. Then the market will
not issue go-ahead signals to
production. Demand is influenced
by the income level of and utility
of such goods and services to the
consumer. Even in the absence of
a successful economic demand
generated through an increase
in income or readjustment of
utility, if a pressurized demand is
created by some other means for
a certain good or service as if by
a magical power, the market will
issue a go-ahead signal for the
production of that good or service.
Such signals were in fact issued.
It is similar to a command given
to activate an anti-aircraft missile
system at the mistaken identity of
a flock of birds. The market was
subjected to a deception of judging
the puffed-up consumer as a real
economic consumer. The puffed-
up consumer had behaved like a
juggler. The apparent demand was
not consumer economic based.
Economic activities were triggered
by the command of the market
misguided by this boosted demand.
The economy started to run at an
enormous unrestrained speed of
a flying horse. This overheated
economy provided the foundation
for and fuelled the overconsumption
and the premature consumption
and vice versa. The ultimate result
was a collapse of the exhausted
runner of unrestrained speed.
When a certain good or service
was driven by this pressurized
12
demand, overconsumption and
premature consumption of many
other goods and services were
also accelerated simultaneously.
The prices of all those goods and
services went up. All economic
activities accelerated one after the
other obtained a high speed. All
countries one by one were seen
joining this glamorous economic
drama. The whole world began
to dance swaying hands and legs
like an audience of a pop musician
on stage. Sri Lanka too, of course
those Sri Lankans belonging to the
first world, were seemed dancing
according to this neo-economic
rhythm. That’s why it was told at
the very outset that the effects of
the economic recession were not
of a complete imported nature.
Puffed-up consumer and the fast
track, unbridled economic dance
were fuelled by all sorts of financial
instruments and derivatives.
Much of those latest financial
instruments and derivatives were
seen in America and Europe.
Financial instruments existed in
the world at all times. Examples
are a promissory note for a loan,
a Deed for mortgaging a land,
Treasury Bills, a Share Certificate,
a debenture and a cheque. Money
too, is a financial instrument. Most
of these financial instruments
are subjected to some kind of
regulation. But certain financial
instruments and derivatives
sprung during recent years are
void of regulation. Expectation
was that they will be controlled
by the market itself. One such
financial instrument is the Credit
Card.
Instead of restricting one’s
consumption to what he or she
can earn today and tomorrow, the
credit card enables him or her to
consume today the anticipated
earnings of the day after tomorrow
and the day following it. Purchase
of a good or service which is not
essential today or that which
might be required after income
level goes up in some future day
is a premature consumption.
Purchase of a good or service
depending solely on fashion and
outward appearance despite that
it can be compensated by an
already available good or service
is overconsumption. Consumption
over and above the generally
accepted level of consumption
of an economy at a given time
period is also an overconsumption.
But unlike in physics where
an objective measurement
like, “standard temperature or
pressure” is available; there is
no methodology in economics to
measure the generally accepted
level of consumption. It appears
that macroeconomics has not
turned yet to this side of the story.
There is a possibility of preparing
a some kind of a measure using
personal income as a parameter.
Overconsumption is always
extravagant. Extremely high unrea-
listic standards compelling too
much caution against almost
everything is also a root cause for
extravagant consumption.
While the irresponsible and
indiscriminate use of future earnings
for present-day consumption had
caused an economic downfall,
another crime which was causing
a damage many times greater was
taking place. That was the misuse
of other peoples’ earnings for
another’s extravagant consumption
and pseudo-prosperity. Although
neglecting and belittling one’s
own future could be regarded as
an economic miscalculation and
a delusion, making use of others
earnings for one’s consumption was
a cheat and a fraud. People who
had been forced to intoxication by
overconsumption could not witness
this fraud. They were deceived by
fairy tales like six percent monthly
interest for deposits. The people
who were puffed up with this income
for a short period not knowing that
the days of the bonanza were
numbered expected to run this
endless race of consumerism. And
they fall victim to cheat and fraud.
Individuals, who stole other people’s
earnings in this manner, lived in
America as well. Out of them the ill-
famed Bernard Madoff involved in a
fraud of about 65 million U.S.Dollars
was sentenced in June 2009 and is
serving a jail term of one hundred
and fifty years in a prison in North
Carolina. The Auditors responsible
for the certification of his fraudulent
statements of account is facing
severe charges punishable with
more than one hundred years in
jail. There were “Sakwithi” and
others in Sri Lanka. They cheated
the people and escaped. The
people cheated themselves and
suffered. The wealth robbed from
the deceived people was used for
overconsumption.
The regulatory bodies responsible
for safeguarding the society against
such irregularities were asleep.
They awoke only after the ringing
of the final bell. We have heard the
usual explanation for not being able
to perform their duty. The hierarchy
of the Golden Key Credit Card
Company was arrested. Millions of
rupees withdrawn by the directors
and high officials of the company
as monthly salaries and other perks
were not out of income earned in
business. It was robbing income
earned by others and deposited with
them. The expenditure by some
of the high-ups in the company
through their individual credit
cards exceeded several hundred
million rupees. A major part of this
expenditure had undoubtedly been
utilized for the purchase of foreign
property and the maintenance of
an extra-luxurious lifestyle which
again is consumed abroad. This
type of jugglarized pressure in
demand created the temporary
“prosperity” in the economies of the
“developed” and “rich” countries
the deception of which made them
assumed the unrestrained speed of
the flying horse. In the end, those
overheated economies as well
as the jugglarized consumers all
collapsed. A popular saying to fit
the times has been introduced into
the economic literature. “The best
way to rob a bank is to own one”,
goes the saying. The collapse of
“well-reputed” banks in America
and Europe bear testimony. The
Golden Key Credit Card Company
is our native example. It is now
crystal clear that the donation of a
house to a poor person selected at
random, granting of a scholarship
for a poor student, granting of
financial assistance to a small
businessman appearing over the
television with a heart-breaking
story, and spending for publicity of
such “meritorious acts” an amount
much higher than the amount really
spent over the “meritorious acts”,
were through plundered money and
not through their own earnings. This,
in a way, resembles treating guests
at somebody else’s wedding.
The damage caused by the persons
who had plundered others’ earnings
for their businesses was not limited
to the amount plundered. The total
damage is beyond recognition.
They changed the market signals
by force. It was like turning the
hands of the clock on your own. For
instance, they paid salaries several
times higher than the normal
market salaries to some of their
employees. This was changing
job market indicators by force.
Other businessmen who needed
similar services and who had to
observe these forcibly altered
indicators faced a dilemma. They
could not earn such “high returns”
to pay these inflated salaries.
Paying a lesser salary left the
man unhappy. This unhappiness
affected the performance and
productivity. Similarly, if a person
can earn as much as six percent
interest per month, he need not
work hard. Someone would have
assumed that it was wiser to sell
his paddy field and deposit the
proceeds in a company which
offered an interest of six percent on
its deposits monthly. Many other
similar occurrences would have
taken place. It is because of these
multiple impact reactions that an
estimation of the loss to economy
is difficult.
The other drastic economic
distortion occurs when the
production cost of a business having
plundered money does not include
the cost of capital. As the payment
of high monthly interest promised
to depositors is only a deception
and not an actual outgoing from
earnings, the capital accumulated
was free of charge. There is no fair
play and he wins the price war in the
market. Reasonable businessmen
who lose the race will be pushed out
of market leaving it at the mercy of
these jugglers. It is a great loss for a
country to lose good businessmen.
Such loss is immeasurable. This
grave economic crime which swept
throughout the world causing
the economic recession was
simultaneously taking place in Sri
Lanka. That is why it is incorrect to
say that economic recession was
imported to Sri Lanka. Its seeds
were germinated in Sri Lankan soil
as well.
There are a few more sources of free
capital the people having access
13
to when engaged in economic
activities could be detrimental to the
rational players in the market. Two
such sources are (a) corruption and
fraud and (b) donations coming to
Non-Governmental Organizations.
When the holders of this free
capital enter into economic activity
they act irrationally. They can pay
above the market salaries and
price their products below market.
The rational economic player could,
therefore, be driven out of market.
The foul player succeeds not
because of efficiency but because
of his extra power of free capital.
His survival ends with the end of
free capital inflow. The economy
suffers for ever as rational players
were driven out.
Laissez-faire (leaving them
alone) is a corner-stone of free
market economy. When analyzing
reasons leading to the world
economic recession, one topic
under discussion today is whether
some sort of state intervention
has become necessary and to
what extent such intervention is
necessary. Countries who had held
the free market system at a very high
esteem also have taken this matter
into discussion. Because when
it reaches the verge of collapse
it is the government which has to
intervene. The bailout package of
the American government to save
the collapsed banks exceeded
seven hundred billion dollars. It
is one hundred times the national
government budget of Sri Lanka
for the year 2009. It was expected
to save the banks by a process of
taking over the assets mortgaged
to the banks but not convertible
into cash and reimbursing the
banks with some agreed value
for such mortgages. This, in other
words, is taking over of the bank’s
sins by the Government. There
was a protest to the use of tax-
payers’ money to redeem the sins
of others. These “others” were not
holy men. At the inception of the
party they paid their top managers
unprecedented and exorbitantly
high salaries and bonuses which
were not reasonable by any
standard. These high salaries and
bonuses fuelled overconsumption
and premature consumption. A
similar situation has arisen in Sri
Lanka. When the Pramukha Bank
collapsed, the government had to
intervene and take over the sins.
When the persons who collected
deposits promising high interests
absconded, the depositors
insisted the government to pay
them. But the Government of Sri
Lanka has not agreed in keeping
with its policy or inability to pay.
If someone is pointing his finger
14
at the Government when his
estimation had gone wrong, the
proposition as to why shouldn’t
the government intervene at the
very outset is reasonable. But the
question arising here is whether
even the government is capable
of making correct estimations. The
crucial point is what is correct? Is
what is correct for the government,
correct for the public as well?
There’s no simple answer to
the debate because underlined
reasons were not simple. The
argument from another direction
is that the government should not
intervene seriously simply because
of misconduct by a few at the height
of the economy.
State intervention in the market has
taken place repeatedly in Sri Lanka.
A recent example is the introduction
of a very high fertilizer subsidy.
The objective was to increase the
income of the farmer with the end
result of raising his purchasing
power. Government intervention in
this case is justifiable as it is aimed
at supporting a section of the
people to at least attain a general
consumption level which they had
failed to reach. It is paradoxically
different from intervening to save
those who had fallen from their
heights of overconsumption. The
World Bank and other agencies
who have presented themselves
to provide policy advice and
grant aid to poor countries do not
accept or are not willing to accept
the fact that the majority are not
in a position to reach a generally
accepted level of consumption
because of the overconsumption
of a minority. Until and unless
this basic factor is accepted and
solutions drafted accordingly, it
will not be possible to prevent the
occurrence of serious economic
crises in countries throughout the
world. Consequently, no world
peace from country to country
could be attained.
It is no use preaching to a person
with no food to eat, no house to live
in and no immaculate clothes to
wear, the glamour of complacency,
or leading a simple life or an
environment-friendly life or about
the happiness derivable through
the lessening of expectations and
desires. No use telling fairy tales
about future prosperity. No crises
can be prevented or peace attained
through such preaching.
It is said that the seriousness of
the economic disaster could have
been reduced if a considerable
intervention of the Government
had been there. The Head of an
American company dealing with
forward-buying, giving evidence
before a Committee of the United
States Congress has said that
if not for their activities, the
enhanced oil prices could have
been reduced. Because of the
prices inflated by the activities of
such companies the whole world
faced a crisis. They inflated the
prices in order to gain abnormal
profits and exorbitant salaries and
bonuses. Such unlimited income
was utilized for overconsumption.
As referred to in this
document time and again
the epicentre of the crisis is
overconsumption and premature
consumption.
The relative share of agriculture,
industry and services in gross
national product is a criterion
for measuring the stage of
development of an economy. It is
assumed that an economy whose
services hold a higher percentage
in its relative share has attained a
higher stage of development than
an economy whose percentage
is lower. This does not mean
that total output in agriculture or
industry has been reduced. It
means that the services sector
has expanded and grown at a
higher speed than the other two
sectors and the monetary value of
its output has increased. Also, it
could be a result of the reduction
in the relative prices of agricultural
products. Simultaneously, the
share of expenditure for food in
the consumers’ expenditure list
also decreases in such situations.
Food expenses of an American
which was 30% of his income have
been reduced to 10% during the
last 30 years. This does not mean
that the American meal has been
reduced in its content. His income
has increased and food prices
have relatively been decreased.
The list of other requirements
has been lengthened. He has
reached an income level to afford
them.
Services economy has no base of
its own. At the first or a subsequent
step it will combine with agriculture
or industry. In this sense, the
foundation of an economy is
agriculture and industry. For
instance, transport falls within the
service economy. There’s nothing
to transport if there is no agriculture
or industry. Insurance falls within
the service sector of the economy.
Vehicles are insured. Vehicles
are linked with transportation
and transportation is linked with
agriculture or industry. This means
in the final analysis insurance
cannot exist without agriculture and
industry.
Beside transportation and
insurance, finance, trade, tourism,
health, education, entertainment,
art, dancing and music fall within
service economy. At a glance a
higher level of living standard is
a reflection of an increased and
expanded service economy. “Higher
Living standard” has a relative
meaning. There may be different
views as to whether the “higher
living standard” chased after in an
unprecedented speed in the recent
past was bearable by the economic
foundation and the pressure exerted
by the financial economy, was
beneficial or harmful. There may be
various schools of thought. When
debates become more and more
critical and academic it becomes
difficult to come to conclusions
as to what is right and wrong,
what is correct and incorrect?
Final judgment will be based on
empirical evidence. The judgment
passed and the punishment has
now been announced. What
the judgment says? The over-
consumerist upscaling of lifestyle
norms irrespective of the ability to
pay chased after and acquired by a
minority, the first world, are too heavy
and can no longer be borne by the
economic foundation (agriculture
and industry). That superluxury
living style is not realistic. What
is the punishment levied? The
overconsumption and superluxury
lifestyle of the first world should be
suspended and even the generally
accepted level of consumption of
the second world should also be cut
considerably for ‘n’ number of years.
The number ‘n’ is still unknown. In
short, the economic recession was
enforced. The punishment is for the
entire world. But the weight of the
punishment is different from person
to person. Those who had risen to a
very high level of overconsumption
had a deeper downfall. Those who
had climbed a minor height had a
minor fall. Everyone fell one upon
the other according to his merits
and demerits.
During the recent past, prices of
certain goods increased artificially.
These price hikes cannot be
explained by the principles of
supply and demand of economics.
As mentioned earlier, it was the
purchasing power of the consumer
raised high by financial instruments
which has caused this. He who did
not need a new house also bought
a new one. A more luxurious motor
car was bought in addition to the one
already in possession. Excessive
demand from a pair of shoes
to a diamond necklace, from a
recreationery trip to an over the sky
tour was experienced. Obviously,
prices increased as it should have
been. A series of cross-adjustments
of prices also took place. When
the prices of oil increased, efforts
at producing biofuel from maize
and sugar led to an increase in
the prices of maize and sugar and
related products. Because wheat
fields were converted into maize
cultivation, the price of wheat
increased. Bread prices increased.
When palm oil was used as fuel,
its price increased. As a result
of changes in consumer pattern
because of increased income, the
quantum of meat consumption
increased (especially in China).
Prices of meat products increased.
Overconsumption and premature
consumption created a situation
of inflation. Two passengers in
two parallel trains running in the
same direction will not feel the real
speed. Similarly, overconsumption
and inflation, for a short period of
time, ran parallel with accelerated
economic activity catalyzed by such
overconsumption and inflation.
Nobody experienced the real speed
until collision. Overconsumption
at high prices created a massive
consumer deficiency, a scarcity
15
and a loss. Consumer deficiency is
the complete opposite or reciprocal
of the consumer surplus referred to
in economics. Consumer surplus
occurs when, depending on his
satisfaction (utility), the value
placed by a consumer to a certain
article exceeds the market price
of that article. For instance, a
consumer in search of a beautiful
dress decides to purchase the
material of his choice at the first
shop if the price is below rupees
five hundred. That means his value
for the dress is rupees five hundred.
Thereafter he sees a dress similar
to what he has in mind in another
shop and this time he may place a
value of rupees four hundred for it
as he already has one. However,
he pays both dresses the selling
price displayed. If the selling price
of the two dresses is only rupees
three hundred and fifty each, it
is said that there is a consumer
surplus of rupees two hundred.
(500+ 400 – 700). The third similar
dress he comes across might worth
him only rupees three hundred only
since he is already in possession of
two dresses. He will not buy a third
dress as its selling price is rupees
three hundred and fifty. During the
pre and inter-recession period the
consumer had to purchase at high
prices contravening his utility and
satisfaction. For example if he had
to purchase a shirt worth rupees
five hundred in utility value for
rupees six hundred he will face a
loss or a consumer deficiency of
rupees one hundred.
One real-world illustration is how
one had to pay above the real cost
for travelling and transportation
due to increased fuel prices in Sri
Lanka. Similar consumer losses
were distinctly witnessed in the cost
of houses, medicine, milk powder,
and electrical and electronical
equipment. A consumer deficiency
and loss for that matter certainly
took place in relation to all
products and services due to
internal linkages and cross-
connections in ways and means of
production.
One clear-cut decisive situation
of deficiency and loss due to high
prices occurs when capital for
businesses is acquired at very high
interest rates. Massive deficiency
and loss can occur to a business
enterprise when it has to borrow
funds at a rate higher than the rate
that it places for capital acquisition
based on its performance and
profitability. Consequently, it has
to decide either to increase the
prices of goods and services it
produces and pass on the loss to
the consumer or face a close-down
16
where no more price increase
is possible. A reduction or no
increase situation of the salaries
and bonuses of employees will
take place. Some have passed
on the loss to banks and financial
institutions by defaulting payments
or to governments by not paying
taxes. It is only a transfer but the
economy as a whole carries the
loss somewhere within. Against
this backdrop swaying swords
against each other will not solve
the problem. It will only be an
internecine struggle. Government
exercising its penal powers to
collect taxes to the cent and
banks chasing after defaulters and
business entities offering all sorts of
cut-throat discounts are examples.
What will save the country will
be an economic philosophy
encompassing all parties including
government, banks and financial
institutions, business entities and
consumers. Until the losses accrued
to the consumers and businesses
in all the countries right throughout
the world are fully recovered the
economic recession will haunt the
world. In Sri Lanka the euphoria
over war victories was used to wrap
up this loss. Yet, if the multifarious
costs of war are added to the ill
effects of the economic recession,
a deficiency will still remain. Not
only that, time is required to turn the
war achievements into objective
economic benefits. Certain
economists opine that the bottom
of the precipice is not discernible as
yet. That opinion suggests that the
fall is much deeper. The inferred
date of return of world economy
to normalcy is pushed further. The
finger of hope is stretched towards
the year 2011.
The code of instructions
supplied to poor countries by
the developed and rich nations
and the international monetary
organizations does not signify ways
of rectifying the economic anomaly
of the distribution of income. Their
recipes of instructions contain only
advice on keeping destitute alive
once they surface. An anomaly of
wealth distribution in poor countries
is an advantage for the rich and
developed countries. Because a
market for their luxurious goods
and services will be created in poor
countries as well. The economic
burden of these luxurious goods and
services on poor countries is much
heavier than such burden on rich
countries. Because we have to pay
a large number of rupees calculated
at the prevailing exchange rate for
each dollar payable. Exchange
rate for the dollar at present is one
hundred and fifteen. At the same
time, we have to compare such
luxurious style with the people of a
nation who are not in a position to
acquire even their basic needs.
Changes also occurred in the
educational arena encouraging
the super race which was run at
a high speed ignoring the norms
and boundaries of the economic
and financial arenas. Citizens
became consumers. States
became consumer conglomerates.
Paperless transactions occurred.
Electronic mail and the internet
made this process easier. State
boundaries were faded away.
Language of the electronic media
belittled all living languages. The
technical weightage in the school
curricula increased. The objective
of education of producing a
reasonable man has slipped away.
Professional ethics and conduct
were neglected. Making profit by
cheating the public with misguiding
and incorrect information was no
longer considered a disgrace. The
level of fraudulency of behaviour
of the Enron of America and its
auditors in 2001 was revealed
to the whole world. Many similar
incidents came into light from
America and Europe. Misbehaviour
similar to Enron was revealed from
the gigantic Satyam Company of
India (a company employing about
53,000 personnel) and its auditors,
PriceWaterhouseCoopers.
Examining the world economic
recession in its economic, social
and cultural profile we find that we
in Sri Lanka also have faced all
those situations and circumstances.
Time is ripe for us and the entire
world to take stock intelligently
of the way we have behaved in
the economic sphere so far. The
entirety of economics and macro-
economics in particular has to be
reinvented. In the efforts for the
economic development and the
upliftment of the lifestyle, we have
to take not only the present but
also the future into consideration.
Economic and social peace has got
to be targeted alongside economic
development. Resources of the
world, personal, national and
international, should be utilized with
due care. In Buddhist discipline
it is stated that once a robe of a
monk is discarded, it should be cut
into pieces and used for various
purposes until using as a doormat
in the end. King Parakramabahu
the Great’s announcement that not
a single drop of rain should reach
the ocean unused bears similar
meaning. This is a lesson not for us
only, but for the whole world.
e-mail : pemco@sltnet.lk
 Churchillian view of
The Economy and the
IMF Program
An Interview with Dr Koshy Mathai, IMF Representative in Sri Lanka

The Sri Lankan Economy, its making inroads into a deteriorating spreads, rebuilding CBSL reserves,
setbacks and IMF assistance has economy, and continued large stable Rupee, lower inflation and
been a much talked topic in the fiscal deficits which were financed interest rates resulting in gradual
country; impending gloom and increasingly from external sources growth accompanied by recoveries
hidden agenda of promises to causing further issues when the in imports and fiscal revenues.
the lender were direct accusation global crisis brought despair. Though the outward appearance of
against the government in media CBSL’s approach in defending the Presidential directive on state
and many forums. However it the rupee by selling Dollars at the bank lending rates was initially not
was not all gloom as the prophets expense of Reserves was seen seen as positive the results have
advocated but a positive forecast as “Triumph and Tragedy,” in that been rewarding with lower cost
for a nation poised for economic the rupee was kept from falling too of funds to the industry. Global
recovery and massive development far too quickly, but at a sacrifice of recovery still being weak with
programs taking place after nearly much-needed dollars that was not expected 3.1% growth. Dr Mathai
three decades. sustainable. then turned to a description of the
IMF program, again borrowing
Dr Mathai, borrowing from the titles According to the IMF Representative lightheartedly from Churchill in
of Churchill’s famous multivolume the next phase could be seen as terming it “The Grand Alliance.”
history of World War Two—started “Their Finest Hour,” narrowing the Performance to date has been
by describing “The Gathering Trade Deficit (reasons being lower encouraging. Mathai in spelling
out the IMF program of $ 2.6
billion loan in 8 tranches linked to
quarterly reviews outlined the main
Contrary to widespread speculation, the IMF Representative targets.
firmly assured that secret conditions do not exist, adding • Reserve Accumulation
further he confirmed that July and September targets (Borrowed vs Non-Borrowed)
achieved. Problems do not exist with reserve accumulation Present reserves amount to more
than USD 5b and though concern
or monetary policy, but he cautioned that meeting fiscal has been raised on risks of borrowed
targets ahead would be challenging... funds no short-term problem exists
as much of these monies are
invested in longer-term instruments
for which the secondary market is
Storm,” that is, the build-up to the demand for imports due to the not that liquid, and money cannot
economic difficulties that peaked in Economic downturn), recovery of be withdrawn too quickly.
early 2009. He highlighted the rising remittances, dramatic change in
oil price widening the Trade deficit, investor sentiment (CSE indices • Appropriate Monetary Policy
Remittances a significant source record heights) resulting in foreign
of external financing declining, investor enthusiasm leading to • Deficit Reduction with
loss of global investor appetite higher capital inflows and lower provision for Reconstruction

17
• Structural benchmarks (e.g., tax
reform, State-owned enterprises
with particular emphasis on
Petroleum and Electricity Board,
financial sector, etc.)
Contrary to widespread speculation
the IMF Representative firmly
assured that secret conditions
do not exist, adding further he
confirmed that July and September
targets achieved. Problems do not
exist with reserve accumulation or
monetary policy, but he cautioned
that meeting fiscal targets ahead
would be challenging and would
require a further recovery in
revenues along with substantial
policy changes to reduce the deficit
as planned by the government
to 6% of GDP in 2010 and
5% of GDP in 2011 (excluding
some provision for spending on
specific, monitorable reconstruction
projects) Fiscal policy. He added
that two tranches were already
disbursed and the third could be
considered in the first half of the
18
first quarter of 2010. Dr Mathai did The Government, Opposition
caution that potential loss of the and the Trade unions must act
GSP concession could result in with responsibility in dealing with
loss of employment and concluded these nationally-sensitive sectors.
with a possible turning-point for the Investors look for Industrial
economy with the cessation of the peace and the country needs
war. scientists & Technical experts to
maximize the benefits of a rare
While the Financiers could assist opportunity after thirty years of
us through funding and close conflict.
monitoring it’s not only the Economic
factors that could take a country
forward, Industrial Peace and
discipline are essential ingredients.
In the recent past country has
witnessed a surge in strikes,
work disruptions etc bleeding the
economy. The plantation strike
despite the existence of a Collective
agreement caused immense
losses to country’s vital Agricultural
exports while the disruptions to the
distribution of Petroleum virtually
brought the wheels of Economy to
a grinding halt. Both the Port and (An Interview held with Sunil
the Petroleum sector could not be Karunanayake based on a
crippled fully due to Private sector Presentation held in Colombo in
stakes in these crucial sectors. December 2009)
 Reminiscence of an
Articled Clerk in the Early
Days of the Institute

By Rex Olegasegarem BA (Econ.), FCA, FCMA, CPA (Australia)

The year was 1959 A.D. when one. He was really the “face” of the representatives of the Accountancy
the newly formed Institute institute to the few articled clerks in firms and the aspiring candidates
of Chartered Accountants of the early days. were allowed to nominate their
Ceylon, established by an Act preferences and the selection
of Parliament (No. 23 of 1959) My foray into the Institute was also of the successful candidates
succeeded the existing Registered in 1959 (November), perhaps one was determined by matching the
Accountancy Board. The qualified from the first batch of the newly preferences. I found the interview
Registered Accountants (R.A.) recruited graduate articled clerks with the panel of partners from
of the Registered Accountancy under the banner of the Institute. the respective accountancy firms
Board and the members of the There were non-graduate articled rather interesting. Mr. Turner
Chartered Institutes of England clerks as well. I was selected Greene of Turquand Young’s (now
& Wales and of Scotland resident through the Ceylon Government Ernst & Young) & Mr. B.R. de
in Ceylon were invited to become Scholarship scheme for Graduates Silva of B.R. De Silva & Co., were
members of the new ICAC. The to sign Articles with a leading firm more interested in my sporting
first President was the then Auditor of Chartered Accountants, Ford, achievements in the University,
General, Mr. L.A. Weerasinghe Rhodes. Thornton & Co. (now from captaincy of teams, colours
(member of the Chartered Institute KPMG). The selection process for awarded to the details of the timings
of England & Wales) and the first the scholarship at that time was in recorded in the athletic events won
secretary was Mr. Nesaratnam, two stages - a panel of University by me. Mr. Turner Greene was a
a public servant. The office of the of Ceylon dons interviewed the sports fanatic and Mr. B.R. de Silva
institute located in a couple of candidates and submitted a short- was the founder and first president
rooms in a Government building list and this was followed by a of the Ceylon Track and Field Club
(CT & FC).This showed that the top
people in the accountancy fraternity
In 1959 and for some years thereafter, the normal articled at that time were not stereotyped
mundane accountants, on the
clerks had to pay a premium (ranging from Rs. 2000 to contrary they had diverse
Rs. 5000, a large amount at that time) to the accountancy interests.
firms concerned and did not receive any form of compensation
for their services, except a return of the premium in monthly In 1959 and for some years
instalments of Rs. 40 per month or a refund of the total thereafter, the normal articled
premium at the end of articleship. clerks had to pay a premium
(ranging from Rs. 2000 to
Rs. 5000, a large amount at that
time) to the accountancy firms
was manned by an ebullient, panel of representatives (either the concerned and did not receive
energetic, and efficient middle- chief partner or the staff partner) any form of compensation for their
aged gentleman, Mr Fernando. from the Chartered Accountancy services, except a return of the
He was the Administration Officer, firms interviewing the candidates premium in monthly instalments
clerk and messenger all rolled into from the shortlist. Both the of Rs. 40 per month or a refund

19
of the total premium at the end
of articleship. As an articled
clerk on scholarship, Ford,
Rhodes,Thornton & Co ( FRT&CO)
waived the premium requirement
and paid all my study expenses
including the correspondence
course from Foulks, Lynch & Co.
(a popular course from England
followed by nearly all articled clerks
at that time). The firm also paid me
a salary - a “princely” sum of Rs.40
per month and increased it to Rs.75
on completion of the Intermediate
examination. I believe all scholar-
ship candidates from other firms
enjoyed the same benefits in terms
of the scholarship.
The period of mandatory
apprenticeship with an accredited
firm of Chartered Accountants for
articled clerks was three years in
respect of graduates and five years
for non-graduates at that time. This
period was certainly a very busy
one, having to work very hard
maintaining strict time schedules
on all the accountancy/audit/tax
assignments and also lead the
audit teams to the clients’ offices
in the latter part of the articled
period, interspersed with very
demanding examinations. The two
examinations – Intermediate and
Finals – had two parts each, with a
choice to sit for either one or both
parts of the same examination at
the one sitting. The examinations
were difficult and to some extent
competitive as the pass or success
rates at that time was very low .This
low pass rate had more to do with
the Accountancy Board and the
Institute setting high hurdle rates
rather than the performance of the
candidates. In the context of only
a few venturing into this field at
that time, the number of successful
candidates passing both the
intermediate and final examinations
could be counted on your finger-
tips. Although providing very little
comfort to the examinees at the time
of confronting the examinations,
this approach benefited the few
successful candidates in their
ability to command a significantly
higher remuneration compared
with their compatriots in other
professions due to the supply-
demand situation.
The incidence of candidates
passing both parts of the Final
Examination at the one sitting was
so very rare that in December,1961
when Norshi Lakdawalla of
Ford, Rhodes, Thornton & Co
accomplished this feat at his first
attempt, Mr. Fernando of the
Institute came to the Company
premises to deliver the good
news to Norshi personally. Since
20
I happened to be at the office, Mr.
Fernando informed me (to my great
delight) that I had passed both parts
of the Intermediate Examination,
which I sat at the same time.
Norshi Lakdawalla was a model
articled clerk, achieving the same
result earlier at the intermediate
examination and leading the audit
teams to some of the bigger clients
at that time (Walker Sons, Brown
& Co etc.). In earlier years. Norshi
was also the All-Ceylon Table
Tennis Champion at the tender age
of fourteen years while a student
at St. Thomas’ College, Mount
Lavinia. This was another example
of the extracurricular achievements
of the Chartered Accountants at
that time.
In relation to the enormous
difficulty in passing the institute
examinations at that time, the
story gets even more interesting.
When I fronted up for Part 1 of the
Final Examination in December,
1962, the Financial Accounting
question paper unleashed on
us was more of a difficult puzzle
and completely different to any
of the past examination papers.
It was also totally different to the
examination papers of the ICA
(England & Wales) embodied in the
“Chartered Telephone” publications.
We worked on these publications
assiduously in our preparation as
our institute was modelled on the
ICA of England & Wales and our
answers were “moderated” by their
examiners at that time. On a quick
glance of the questions I realized the
first (carrying 40 marks) was very
long, intricate and some sections
unfathomable that it might take me
the entire three hours allocated for
the whole paper to unravel this one
question and yet not be assured of
getting the full marks for it. Although
shorter, the second question was
completely mind-boggling. The
third appeared to be workable up to
a point and then became equally a
maze similar to the second. By this
time I had started sweating and a
certain failure was staring at me
with only the last question left – the
shortest and worth only 15 marks
(out of a total of 100). The last
question on “containers” appeared
to be workable, hence I launched
into it hoping to collect 15 marks
in even time. However, it absorbed
nearly one hour (33% of total time)
since it had its own”twist and turns”
as I worked through. I realized that I
had absolutely no chance of working
out the more difficult problems in the
other questions within the balance
two hours. It was now a question
of collecting as many marks as
possible within the available two
hours. Alas, this task proved to be
extremely difficult as I found to my
horror that the other problems were
more difficult than anticipated at
the first glance. By this time I was
in a bath of sweat. With tension
rising to an unprecedented level,
I lost at least ten more valuable
minutes having to head for the
toilet, followed by an invigilator
although there was no possibility
whatsoever of my gaining any
unscrupulous advantage except to
recover some sanity. At this stage,
I was very tempted to give up as
I felt my working through the other
problems did not appear to be
heading in the correct direction. In
sheer frustration I crushed some of
my worksheets and put them down
on the floor. In the meantime, the
closing bell was fast approaching
and my tension was increasing
further. Then, the dreaded
announcement of “five minutes
more, please tie up your answer
sheets” came on. Fortunately,
despite the horrible situation, I
had the presence of mind to pick
up the crumpled worksheets,
straighten them out and add them
on to the answer package in the
correct sequence hoping that
some marks could be picked up
in those workings, However, I was
certain that my performance will
not secure a pass grade in that
subject and this meant that I would
have to repeat the whole of the
Part 1 examination as there was no
referral in one subject. As I walked
out of the examination hall with the
horrible prospect of certain failure
before me, I noticed the look of
bewilderment on the faces of my
colleagues. Spotting Vijayasekeran
(later, a partner of Turquand,
Young & Co, and now residing in
Perth, Australia), who was one of
the brighter students in our batch, I
asked what he thought of the paper
and his immediate response was
“ I have no chance at all of passing
this paper. It dawned on all that
no one will pass Part 1 of the Final
examination on this occasion.”
The untenable situation at this
examination produced a swell of
agitation among the examinees.
We had a protest meeting at the
Institute and a small committee was
appointed headed by that “maestro”
John Diandas of Macan Markar.
The committee was empowered
to dissect the questions for any
anomalies, evaluate them in
relation to the purpose and fairness
of the examination and also liaise
with the local examiners, external
moderators from U.K. and the
Institute. The external moderators
had commented that the questions
were more of a difficult quiz or
puzzle rather than an assessment
of the candidates’ knowledge in
financial accounting. There were a
number of anomalies as well in the
questions which made it difficult
for the candidates to work through.
The examination committee
of the Institute considered the
representations carefully and
lowered the hurdle rate or the
total marks required to pass the
paper in Financial Accounting.
Consequently six candidates
(including Vijayasekeran and
myself) passed Part 1 of the Final
examination. Perhaps, attaching
my crumpled worksheets helped
me to get over the line.
In view of the number of articled
clerks being limited, we had the
benefit of knowing well each
member of the fraternity in our
batch from all accountancy firms.
I recall there were only twenty five
signatories to the attendance sheet
for the intermediate lectures from
all firms in 1960/61. We had five
articled clerks in my batch at Ford,
Rhodes, Thornton & Co. (FRT),
with one ending up as my “best-
man” later on. However, there
were few more senior articled
clerks either preparing for the final
examinations or repeating the
intermediate examinations. This
Firm had very strict codes regarding
dress and general presentation.
We had to be clean-shaven at all
times and wear well-laundered
white shirt, white trouser and tie.
The tie can be somewhat irksome
walking or travelling by bus to the
client office in the sweltering humid
heat of Colombo and it was difficult
for the young articled clerks to
be spotlessly clean-shaven at all
times. Consequently, some of us
got pulled up for letting down the tie
knot or not using the best blades for
the shave – “ We don’t like uncouth
Frenchmen“ thundered the Anglo
Saxon senior partner. Despite
our very busy working schedule
and demanding examinations,
the articled clerks at FRT had an
enjoyable social life. Every Friday
morning, when we all came into the
office (then located on the fifth floor
of the Times building in the Fort)
for our weekly reporting session,
we would adjourn to the Colombo
YMCA cafeteria for a quick cup of
tea before dispersing to the client
offices. Our group also met for
drinks and dinner almost monthly,
and these events sometimes ended
up with singing popular songs and
bailas rather raucously, fuelled by
“high spirits”. We also ventured out
on a very enjoyable trip to Kandy
Okande and Yala in a minibus.
Apart from the thrill of watching the
bird life in Okande and the animal
life in Yala, we also enjoyed rather
excessively the fresh curd and
treacle, with some having to pay for
this excessive indulgence by way
of frequent bowel evacuations in
the most natural of environments. It
was not always easy to make it to
the next town in time.
A very memorable experience as
an articled clerk came to an end
in June, 1963 when I completed
the final examination – six months
after the minimum period as
I spread out Parts 1 and 2 of
the final examination over two
separate sittings. Two remarkable
gentlemen during this period had
a significant impact on my career.
Mr. N.G.P. Panditharatne, then a
senior partner of FRT & Co. was
my Principal and mentor, He was
well respected in the professional/
business and political circles, yet
down-to-earth, capable and very
helpful at all times ensuring that
his articled clerks wishing to move
into the commercial arena after
completion were set up in good
positions. The other gentleman
was Mr. Thillairajah, then Chief
Accountant of Whittal Boustead
21
& Co. and our lecturer/tutor in
Financial Accounting. When I
commenced my course I was not
very sure whether accounting
should be my career although
I graduated in economics with
accountancy as my special
subject. While at the University,
accountancy did not really grab me.
However, Mr. Thillairaja, brilliant in
his field brought home the basics
of accounting including “Debits
and Credits” so much alive and
meaningful that I began to enjoy
my course. When the exams were
around the corner, Mr. Thillairajah
would give us very useful hints on
how to approach them, including
saving time on long problems
and earning as many marks as
possible from difficult questions
although unable to arrive at the
ultimate correct solutions. All these
helped me in the dreaded exam of
December, 1962.
The other huge factor helping
me to enjoy the course was the
breadth and intensity of practical
experience gained at FRT & CO.
The large clientele of this Firm was
spread out into all the sectors of
the economy. The popular “Lander”
system of management information
reporting for the Plantation sector
was developed by Mr. Lander, a
former chief partner of FRT & Co.
This was an excellent management
reporting package which could
hold its own to this day and
helped to underpin the efficient tea
industry in Sri Lanka at that time.
The Lander prize for Accounting
in the Intermediate examination
for an outstanding performance
was named after this gentleman.
Subsequently, I did have the
pleasure of serving on a few
committees of the institute in
the seventies, including the
one responsible for the award
for the best Annual Corporate
Report. Hayleys Ltd was the
winner then and I note that it had
continued to win this award on
many occasions thereafter – a
remarkable performance. I had
also the pleasure of conducting
a few lectures and tutorials in
Management Accounting for the
students in the early seventies at
the request of the very respected
and capable Director of Studies,
Mr. A.T. Benedict.
The Institute has come a long way
from that time. To this day, I enjoy
reading the journals of the Institute
and it is heartening to note that the
institution has grown in size and
diversity.
I wish the Institute all the very best
for the future and am confident it will
continue to play a significant role in
the business and commercial life of
Sri Lanka.

31st National Conference of ICASL

28th – 30th October, 2010 at Water’s Edge
Annual national conference of the institute will be held during 28th-30th October, 2010 at the Water’s Edge.
The conference this year will be positioned as a business summit, and is expected to be attended by key
business leaders and policymakers. The key speakers and the resource panel will comprise of international
speakers of repute, renowned industry leaders, and key policymakers in the government.

Please Include the conference dates in your diary and attend the inauguration session of the conference on
October 28th, 2010 and the technical sessions on October 29th and 30th. You will receive an invitation for the
inauguration and a brochure to register for the technical sessions in due course of time.

“The Chartered Accountant”

Third Quarter Issue
Dear Member

Given the positive developments in the country and the emerging global recovery we intend covering the
following theme for the next issue

Economic Resurgence in Sri Lanka - Miracle of Asia

Members are encouraged to provide articles to suit this theme. Completed articles in MS word format,
not exceeding 1000 words together with the writers’ credentials and a passport size photograph should be
forwarded to reach Ms Khema Senanayake (khema.senanayake@icasrilanka.com) not later than
15th August 2010. Given the space limitations responsive articles in order of receipt will be given priority.

Thank You
Sunil Karunanayake
Editor “The Chartered Accountant”

22
 ICASL Events
20th President’s Induction

Outgoing President Mr. Nishan Fernando,

officially inducting the New President of ICASL
Mr. Sujeewa Mudalige; Vice President
Mr. Sujeewa Rajapakse in the background

From left to right : Mr. Sujeewa Rajapakse, Mr. Sujeewa Mudalige, Chief Guest Dr. P B Jayasundera, Secretary to the Treasury,
Mr. Nishan Fernando and Mr. Aruna Alwis

Pre-Election Budgetary Position Report

Mr. R Senathi Rajah Senior Partner Julius & Creasy,

President Mr. Sujeewa Mudalige handing over a memento to Mr. J M Swaminathan, Partner Julius & Creasy, Mr. Ken
Mr. Ranjith Fernando who moderated the discussion at the Balendra, Former Chairman & CEO John Keells Holdings,
“Pre-Election Budgetary Position Report” Seminar held on 30th congratulating Mr. Sujeewa Mudalige, the New ICASL President
March 2010

Interactive discussion on “Pre-Election Budgetary Position Report” Seminar held on 30th March 2010 -
L to R: Mr. Ranjith Fernando, Mr. Rienzie Wijayathileke, Mr. Chandra Jayaratne, Mr. Kulatunge Rajapakse and
Mr. Mahinda Siriwardena

23
 Quarterly
Technical Update
Published by the Technical Directorate of the Institute of Chartered Accountants of Sri Lanka

Issue 1 & 2 of Volume 6 June 2010

INSIDE THIS ISSUE:

1) Readers’ Forum
2) Code of Ethics
3) Financial Reporting
Faculty/Urgent Issues
Task Force
3.1) Sri Lanka Accounting
Standards
Application Guidance
No. 7
3.2) Sri Lanka Accounting
Standards
Application Guidance
No. 8
4) Audit Faculty/Auditing
At the recently concluded SAFA Regional Standard-Setters Conference Standards Committee
held at the Cinnamon Grand Colombo, Mr. Reyaz Mihular, Chairman of
the SAFA Committee on Accounting and Auditing Standards hands over 4.1) Sri Lanka Audit
the booklet published by the Technical Directorate of the ICASL on SAFA Practice Statements
Countries vis-à-vis International Accounting and Auditing Standards to Sir (SLAPS), Sri
David Tweedie, Chairman of the International Accounting Standards Board Lanka Standards
(see inside for more photographs). on Assurance
Engagements
(SLSAE) and Sri
Lanka Standards
on Related Services
(SLSRS) to be
reviewed
Editorial Board
4.2) Sri Lanka Standards
Chamila Cooray - Head of Technical on Review
Engagements to
be adopted by the
Subhashini Vithanachchi - Technical Manager Council
Kamal Saseedaran - Quality Assurance Manager 4.3) Sri Lanka Standards
on Assurance
Upendra Wijesinha - Technical Manager Engagements to
be adopted by the
Council
Technical Editorial Advisor
4.4) International
Richard Ebell FCA, FCMA, Dip.M, MCIM Standards on
Auditing (ISA) Clarity
Chairman, ICASL Financial Reporting Faculty Project
5) Accounting Standards
Typesetting & Graphics
5.1) Standards to be
Reza Mannan - Executive adopted by the
Council
5.2) Standards to be
reviewed
5.3) Standards under
Improvement Project
Technical Directorate II adopted by the
The Institute of Chartered Council
Accountants of Sri Lanka 6) Global Scene
Tel / Fax : 2594118 (Direct); 2352000 (Gen.); • Hedging is a good idea
Email : technical@icasrilanka.com

24
Readers’ Forum
Quotes
Economic depression cannot
be cured by legislative action
or executive pronouncement.
Economic wounds must be
healed by the action of the
cells of the economic body -
the producers and consumers
themselves.
Herbert Hoover
Better to remain silent and be
thought a fool than to speak
out and remove all doubt.
Abraham Lincoln
An onion can make people
cry, but there has never been
a vegetable invented to make
them laugh.
Will Rogers
It is necessary to help others,
not only in our prayers, but in
our daily lives. If we find we
cannot help others, the least
we can do is to desist from
harming them.
Dalai Lama
I’ve learned that people will
forget what you said, people
will forget what you did, but
people will never forget how
you made them feel.
Maya Angelou
Code of Ethics
NEW CODE OF ETHICS FOR
PROFESSIONAL ACCOUNTANTS
The Institute of Chartered Accountants of Sri Lanka (ICASL) takes pride in leading
the profession towards reshaping and rebuilding the business world following
a period of economic bleakness. The ICASL understood the importance of
introducing a new Code of Ethics to govern and guide the profession. In driving
the business world towards truly sustainable development, the ethical conduct of
professionals is very important. Ethically-minded professionals are of great value
in safeguarding the interests of stakeholders. These considerations led the ICASL
to adopt the latest International Federation of Accountants (IFAC) Code of Ethics
for Professional Accountants.
The new Code of Ethics is in 3 parts.
Part A: General Application of the Code
Sets out the fundamental ethical principles that all professional accountants are
required to observe including integrity, objectivity, professional competence and
due care, confidentiality and professional behaviour. These fundamental principles
serve as a conceptual framework for the Code as it is not possible to define every
situation that can be encountered.
Part B: Professional Accountants in Public Practice
This part of the Code, which applies only to Professional Accountants in Public
Practice, covers in detail areas such as professional appointments, conflicts of
interest, second opinions, fees and other types of remuneration, marketing
professional services, gifts and hospitality, custody of clients’ assets. It also
includes a conceptual approach to independence that takes into account for each
assurance engagement, threats to independence, accepted safeguards and the
public interest. It requires firms and members of assurance teams to identify and
evaluate circumstances and relationships that create threats to independence
and to take appropriate action to eliminate these threats or reduce them to an
acceptable level by the application of safeguards.
Part C: Professional Accountants in Business
This part of the Code covers areas such as potential conflicts, preparation and
reporting of information, acting with sufficient expertise, financial interest and
inducements, which are relevant to Professional Accountants in Business.
The Governing Body of the ICASL believes the New Code of Ethics will strengthen
the profession and encourage trust in it.
The New Code of Ethics for Professional Accountants is available on the ICASL
website and became effective on 1 January 2010.
25
Financial Reporting
Faculty/Urgent
Issues Task Force
SRI LANKA ACCOUNTING to pay further contributions if
STANDARDS APPLICATION the fund does not hold sufficient
GUIDANCE NO. 7
Issued & published by the benefits relating to employee
UITF
RECOGNITION OF RETIREMENT
BENEFITS
ISSUE
Many corporates establish an
independent Trust Fund, to which
annual gratuity provisions are
transferred. These Trust Funds are
generally considered as separate
legal entities. Gratuity obligations,
at retirement are usually paid by
the Fund.
Clarification is provided on whether
the Company, in the above
circumstance, can recognise
interest income earned by the fund
during the period, in arriving at the
retirement benefit charge for the
year.
STANDARDS
SLAS 16 Retirement Benefit Costs
SLAS 16 Employee Benefits
(Revised 2006) – applicable for
financial statements beginning on
or after 1st July 2007
DISCUSSION/ANALYSIS
SLAS 16 – Employee Benefits
(Revised 2006) defines Post-
employment benefits as “employee
benefits (other than termination
benefits) which are payable after
the completion of employment”.
These include, for example,
retirement benefits such as
pensions, gratuity and other post-
employment benefits, such as post-
employment life insurance and
post-employment medical care.
SLAS 16 (Revised 2006) paragraph
24 further states:
“Arrangements whereby an
entity provides post-employment
benefits are post-employment
benefit plans. An entity applies
this Standard to all such
arrangements whether or not
they involve the establishment
of a separate entity to receive
contributions and to pay
benefits”.
Post-employment benefit plans
are classified as either defined
contribution plans or defined benefit
plans, depending on the economic
substance of the plan.
26
“Defined contribution plans are
post-employment benefit plans
under which an entity pays fixed
contributions into a separate
entity (a fund) and will have no
legal or constructive obligation
assets to pay all employee
service in the current and prior
periods”. (SLAS 16 [Revised 2006]
paragraph 7).
Thus, the employer only has the
obligation for agreed contributions
into such plans. This is charged as
an expense for the year.
On the other hand,
“Defined benefit plans are
post-employment benefit plans
other than defined contribution
plans”. (SLAS 16 [Revised 2006]
paragraph 7).
In this situation the entity has
an obligation to make good
any shortfall in the payment of
retirement benefits as stipulated
by the entity. Therefore, the entity
is, in substance, underwriting the
actuarial and investment risks
associated with the plan. Therefore
it is apparent that the expense
recognised for a defined benefit
plan is not necessarily the amount of
the contribution due for the period.
(SLAS 16 paragraph 13 and SLAS
16 (Revised 2006) paragraph 49).
SLAS 16 Retirement Benefit Costs,
which is applicable for financial
statements beginning up to 1st
July 2007, also defines Retirement
Benefit Plans, Defined Contribution
Plans and Defined Benefit Plans in
a similar manner.
The Standards also proceed to
state that defined benefit plans may
be unfunded, or they may be wholly
or partly funded by contributions
by an entity, and sometimes its
employees, into an entity, or fund,
that is legally separate from the
reporting entity and from which the
employee benefits are paid. Such
funds may even be administered
by third parties. The payment of
funded benefits when they fall
due may be the obligation of the
reporting entity or the fund itself,
and payment may depend not only
on the financial position and the
investment performance of the fund
but also on a reporting entity’s ability
and willingness to make good any
shortfall in the fund’s assets. This
is a critical criterion to be assessed
in accounting for retirement benefit
obligations.
For Retirement Benefit Plans, where
the employer retains the obligation
to pay the agreed level of benefits
if there are insufficient funds in the
plan, the employer should recognise
the outstanding pension/retirement
benefit obligation as a liability or
asset at each balance sheet date.
In determining the amount an entity
is encouraged to use actuarial
valuation techniques (valued by
a professionally-qualified valuer
or as described in the Standard).
This is also enhanced in paragraph
46 of SLAS 16 Retirement
Benefit Costs, which states that
“the uncertainty inherent in
projecting future trends in rates
of inflation, salary levels and
earnings on investments is
taken into consideration in the
actuarial valuations by using a
set of compatible assumptions.
….” The revised standard also
endorses this principle.
A number of steps are identified in
determining the pension/retirement
benefit surplus (asset) or deficit
(liability).
1. Use actuarial techniques to
make a reliable estimate of the
amount of benefits employees
have earned in return for their
services in the current and prior
period.
In doing so the company
should use unbiased reliable
demographic and financial
assumptions, such as expected
employee turnover, life
expectancy, and discount rates
and salary increments etc.
2. Determine the present value of
the defined benefit obligation
and the current service cost
by discounting the estimated
benefits using the projected unit
credit method.
3. Determine the fair value of the
plan assets. The expected return
on plan assets is a component of
amounts recognised in the profit
or loss, each year, in relation
to a defined benefit plan. The
expected return ideally equates
actual return, in the long term.
Further, reporting the actual
return in a single period would
introduce significant volatility
into the employer’s profit or
 loss. Thus, the difference
between the expected return
and actual return is considered
under actuarial gains or losses
for the period.
4. Determine total actuarial gains
and losses and those which
should be recognised.
Actuarial gains and losses
comprise the differences
between actuarial assumptions
previously made and what has
actually occurred, experience
adjustments, and the effects of
changes in assumptions for the
future.
5. Determine the level of any past
service cost where a plan has
been changed or introduced in
the period.
6. Determine the gain or loss
resulting from a curtailment
or settlement of a plan, if
appropriate.
Thereafter the results may be
recognised on a net basis, in
determining the retirement benefit
obligation as at the balance sheet
date as shown below:
The present value of the defined
benefit obligation at the balance
sheet date xxx
Plus : any deferred actuarial
gains or xxx
Minus : any deferred actuarial to an entity if:
losses (xxx)
any past service costs one or more intermediaries,
not yet recognised (xxx)
the fair value of the plan is under common control
assets at the balance defined as Key Management
sheet date (xxx)
Amount recognised as the defined
benefit liability at the balance
sheet date xxx
These steps are automatically
carried out in performing an
actuarial based valuation, whether
carried out by a qualified actuary
or otherwise. In doing so, the
calculation of the present value
of defined benefit obligations and
assessment of fair value of the
pension assets should be carried
out with sufficient regularity, to
ensure that the amounts recognised
are not materially different to those
that would be determined as at a
balance sheet date.
Opinion
The Company shall use the steps
given under the Discussion/
Analysis above, in determining
the charge for the year, and the
defined benefit obligation as at
a date, that takes into account
the income earned by the fund
during the said period.
31st December 2007
SRI LANKA ACCOUNTING
STANDARDS APPLICATION transactions with
GUIDANCE NO. 8
Issued & published by the
UITF
APPLICATION OF SLAS 30
(REVISED 2005) RELATED
PARTY DISCLOSURES, FOR
FINANCIAL INSTITUTIONS
ISSUE
SLAS 30 – Related Party
Disclosures (Revised 2005)
requires a considerable amount
of disclosures to be made in
financial statements of companies.
Disclosures are more complex
due to the nature of the business
of financial institutions. Financial
institutions would generally include
banks, finance companies, and
other entities which provide
financial services.
Clarification is sought on the
following:
1. Whether the Corporate
Management of a financial
institution shall be included
under the definition of Key
Management Personnel (KMP),
in addition to the Board of
Directors.
2. If Corporate Management of
a financial institution can be
Personnel, is such financial
institution required to disclose
loans and advances including
credit card balances, deposit
account balances etc. of
Corporate Management, even
if loans and advances, deposits
have been granted/accepted
at the rates that are applicable
to the general public or have
been granted under schemes
which are uniformly applicable
to all staff of such financial
institution?
3. In the event the Corporate
Management is not included
under the definition of Key
Management Personnel, whet-
her the financial institution
is required to disclose the
transactions and balances
pertaining to any member of the
Corporate Management Team
in the financial statements,
if such person is appointed
as a Nominee Director of a
subsidiary.
4. Should the financial institution
disclose the number of Key
Management Personnel?
5. Is it adequate to disclose
balances pertaining to
Related
Parties and Key Management
Personnel, which are
outstanding at the year-end
only?
STANDARDS
SLAS 30 Related Party
Disclosures (Revised
(2005))
SLAS 23 Revenue Recognition
and Disclosures in
the Financial
Statements of Banks
SLAS 33 Revenue Recognition
and Disclosures
in the Financial
Statements of
Finance Companies
DISCUSSION/ANALYSIS
Sri Lanka Accounting Standard 30
Related Party Disclosures (Revised
2005) specifies the following
definitions,
“Related party A party is related
(a) directly, or indirectly through
the party:
(i) controls, is controlled by, or
with, the entity (this includes
parents, subsidiaries and fellow
subsidiaries);
(ii) has an interest in the entity that
gives it significant influence
over the entity; or
(iii) has joint control over the entity;
(b) the party is an associate
(as defined in SLAS 27
Investments in Associates
(Revised 2005)) of the entity;
(c) the party is a joint venture in
which the entity is a venturer
(see SLAS 31 Interests in Joint
Ventures (Revised 2005));
(d) the party is a member of the
key management personnel of
the entity or its parent;
27
(e) the party is a close member
of the family of any individual
referred to in (a) or (d);
(f) the party is an entity that is
controlled, jointly controlled or
significantly influenced by, or
for which significant voting
power in such entity resides
with, directly or indirectly, any
individual referred to in (d) or
(e); or
(g) the party is a post-employment
benefit plan for the benefit of
employees of the entity, or of
any entity that is a related party
of the entity”.
“A related party transaction is
a transfer of resources, services or
obligations between related parties,
regardless of whether a price is
charged”.
“Key management personnel
are those persons having authority
and responsibility for planning,
directing and controlling the
activities of the entity, directly or
indirectly, including any director
(whether executive or otherwise) of
that entity”
Further FAS 57 Related Party
Disclosures, (Statement of Financial
Accounting Standard) adopted by
the Financial Accounting Standards
Board of U.S, defines Management
as:
“persons who are responsible for
achieving the objectives of the
enterprise and who have authority
to establish policies and make
decisions by which those objectives
are to be pursued. Management
normally includes members of
the board of directors, the chief
executive office, chief operating
officer, vice presidents in charge
of principal business functions
(such as sales, administration, or
finance), and other persons who
perform similar policy making
functions. Persons without formal
titles also may be members of
management.”
As per the above definition, a Key
Management Personnel (KMP)
are persons who have authority
and who are responsible for the
policy making function of an entity.
Therefore if there is a very high
degree of delegation of authority
& responsibility to Corporate
Management in planning, directing
& controlling activities (policy
making) directly or indirectly, they
may be considered as KMPs of the
financial institution. The financial
institution may evaluate this
28
position on a case-by-case basis,
prior to identify its employees as
Key Management Personnel.
SLAS 23 Revenue Recognition
and Disclosures in the Financial
Statements of Banks explains
the disclosure of related party
transactions in the following
manner.
Paragraph 68
“Certain transactions between
related parties may be effected
on different terms from those with
unrelated parties. For example, a
bank may advance a larger sum
or charge lower interest rates to
a related party than it would in
otherwise identical circumstances
to an unrelated party; advances
or deposits may be moved
between related parties more
quickly and with less formality
than is possible when unrelated
parties are involved. Even when
related party transactions arise
in the ordinary course of a bank’s
business, information about such
transactions is relevant to the
needs of users and its disclosure is
required by Sri Lanka Accounting
Standard SLAS 30, Related Party
Disclosures (Revised 2005)”.
Paragraph 69
“When a bank has entered into
transactions with related parties, it
is appropriate to disclose the nature
of the related party relationship,
the types of transactions, and the
elements of transactions necessary
for an understanding of the
financial statements of the bank.
The elements that would normally
be disclosed to conform to Sri
Lanka Accounting Standard SLAS
30, Related Party Disclosures
(Revised 2005), include a bank’s
lending policy to related parties
and, in respect of related party
transactions, the amount included
in or the proportion of:
(a) each of loans and advances,
deposits and acceptances and
promissory notes; disclosures
may include the aggregate
amounts outstanding at the
beginning and end of the period,
as well as advances, deposits,
repayments and other changes
during the period;
(b) each of the principal types of
income, interest expense and
commission paid;
(c) the amount of the expense
recognised in the period
for losses on loans and
advances and the amount of the
provision at the balance sheet
date; and
(d) irrevocable commitments and
contingencies and commitments
arising from off balance sheet
items”.
SLAS 30 (Revised 2005) requires
the disclosures pertaining to related
party transactions in the financial
statements and states:
Paragraph 13
“To enable users of financial
statements to form a view about the
effects of related party relationships
on an entity, it is appropriate
to disclose the related party
relationship when control exists,
irrespective of whether there have
been transactions between the
related parties”.
Thus, related party identification
and disclosures are required
irrespective of the existence of
transactions between them. These
disclosures are believed to be
essential because the external
users need to be aware of the
interrelationships between related
parties, including the level of
support provided by related parties.
This will enable external users in
their economic decisions.
Thereafter the Standard deals with
the disclosure requirements in
relation to KMPs.
Paragraph 16
“An entity shall disclose key
management personnel comp-
ensation in total and for each of the
following categories:
(a) short-term employee benefits;
(b) post-employment benefits;
(c) other long-term benefits;
(d) termination benefits; and
(e) share-based payments”.
Therefore, it is evident that
related party transactions may
be disclosed in total, under the
various or relevant sub-categories,
rather than including details on an
employee basis.
This is further enhanced by
paragraph 22 which states the
following:
“Items of a similar nature may be
disclosed in aggregate except when
separate disclosure is necessary
for an understanding of the effects
of related party transactions on the
financial statements of the entity”.
Thus credit card details, loans and
advances etc., may be disclosed in
aggregate as discussed above.
Further disclosures that explain the
transactions are required under
paragraph 17 of the Standard.
Paragraph 17
“If there have been transactions
between related parties, an entity
shall disclose the nature of the
related party relationship as well as
information about the transactions
and outstanding balances
necessary for an understanding of
the potential effect of the relationship
on the financial statements. These
disclosure requirements are in
addition to the requirements
in paragraph 16 to disclose
key management personnel
compensation. At a minimum,
disclosures shall include:
(a) the amount of the transactions;
(b) the amount of outstanding
balances and:
in arm’s length transactions are
made only if such terms can be
substantiated”.
Similar principles are discussed
in SLAS 33 Revenue Recognition
and Disclosures in the Financial
Statements of Finance Companies,
in relation to related party
transactions and disclosures.
Opinion
1. For the Corporate Manage-
ment of a financial institution
to be included under the
definition of Key Management
Personnel, they should
be responsible, directly
or indirectly, in carrying
out planning, directing
and controlling activities
(policy making activities).
Nevertheless such financial
institutions will have to decide
on a case-bycase basis.
2. Corporate Management of a
financial institution who are
defined as Key Management
Personnel, are required to
disclose loans and advances
including credit card balances,
deposit account balances etc.
even if loans and advances, or
deposits have been granted/
accepted at the rates that are
applicable to general public
or have been granted under
schemes which are uniformly
applicable to all staff of the
financial institution. However,
they may be disclosed in
aggregate.
3. This issue will not be
applicable, for Corporate
Management included un-
der the definition of Key
Management Personnel. On
evaluation of the position
on a case-by-case basis if
Corporate Management does
not come under the definition
of a Key Management Person-
nel, there are no disclosures
required.
4. SLAS 30 (Revised 2005) does
not require the disclosure of
the number of KMPs.
5. The nature of the related party
relationship, information abo-
ut the transaction and the
balances outstanding as at
the end of the financial year/
period should be disclosed.
31st March 2008

(i) their terms and conditions,

including whether they are
secured, and the nature of the
consideration to be provided in
settlement; and

(ii) details of any guarantees given

or received;

(c) provisions for doubtful debts

related to the amount of
outstanding balances; and

(d) the expense recognised during

the period in respect of bad or
doubtful debts due from related
parties”.

Therefore, it is evident that all

transactions made with related
parties shall be disclosed in the
financial statements. This shall
include all transactions during
the year as well as the year end
balances.

Further paragraph 21 of SLAS

30 (Revised 2005) states the
following:

“Disclosures that related party

transactions were made on terms
equivalent to those that prevail

29
Audit Faculty/Auditing Standards Committee

The following Sri Lanka Audit Practice Statements (SLAPS), Sri Lanka Standards on Assurance
Engagements (SLSAE) and Sri Lanka Standards on Related Services (SLSRS) are to be reviewed

1 SLAPS 1000 Inter-Bank Confirmation Procedures

2 SLAPS 1004 The Relationship Between Banking Supervisors and Banks’ External Auditors

3 SLAPS 1005 The Special Considerations in the Audit of Small Entities

4 SLAPS 1006 Audits of the Financial Statements of Banks

5 SLAPS 1010 The Consideration of Environmental Matters in the Audit of Financial Statements

6 SLAPS 1012 Auditing Derivative Financial Instruments

7 SLAPS 1013 Electronic Commerce—Effect on the Audit of Financial Statements

8 SLAPS 1014 Reporting by Auditors on Compliance with International Financial Reporting Standards

9 SLSAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information

10 SLSRS 4400 Engagements to Perform Agree-upon Procedures Regarding Financial Information

11 SLSRS 4410 Engagements to Compile Financial Information

The following Sri Lanka Standard on Review Engagements is awaiting Council adoption

1 SLSRE 2400 Engagements to Review Financial Statements

The following Sri Lanka Standard on Assurance Engagements has been adopted by the Council

1 SLSAE 3400 The Examination of Prospective Financial Information

International Standards on Auditing (ISA) Clarity Project

The International Auditing and Assurance Standards Board (IAASB) commenced a project to clarify the International
Standards on Auditing (ISAs), the so-called Clarity project, in 2004. The Clarity project was completed in February 2009.

Improvements arising from the Clarity Project broadly comprise the following:
• Identifying the auditor’s overall objectives when conducting an audit in accordance with ISAs;
• Setting an objective in each ISA and establishing the auditor’s obligation in relation to that
objective;
• Clarifying the obligations imposed on auditors by the requirements of the ISAs and the

language used to communicate such requirements;
• Eliminating any possible ambiguity about the requirements an auditor needs to fulfill; and

improving the overall readability and understandability of the ISAs through structural and
drafting improvements.

The Technical Directorate of ICASL, with the support of resource personnel from audit firms, is in the process of constituting
Subcommittees for the Improvement Project under the “ISA Clarity Project”.

30
Seminar Series on Accounting Standards
Auditing Standards The following Standard is to be adopted by the Council

1 SLAS 43 Agriculture

The following Standards are to be reviewed

1 IFRS 1 First-time Adoption of International Financial

Reporting Standards
2 IFRS 4 Insurance Contracts
3 IAS 6 Exploration for and Evaluation of Mineral Resources

Improvement Project II
The following Standards under Improvement Project II (in line with
the International Financial Reporting Standards 2007 Bound Volume)
have been adopted by the Council

1 SLAS 3 Presentation of Financial Statements

A series of seminars on Auditing
Standards was held recently. 2 SLAS 5 Inventories

The Sri Lanka Auditing Standards 3 SLAS 9 Cash Flow Statements

2009 Bound Volume has been
published and is now available for
sale at the ICASL Library 4 SLAS 10 Accounting Policies, Changes in Accounting
Estimates and Errors

5 SLAS 12 Events after the Balance Sheet Date

6 SLAS 13 Construction Contracts

7 SLAS 18 Property, Plant & Equipment

8 SLAS 19 Leases

9 SLAS 20 Borrowing Costs

10 SLAS 21 The Effects of Changes in Foreign Exchange Rates

11 SLAS 24 Accounting for Government Grants and Disclosure

of Government Assistance

12 SLAS 25 Business Combinations

13 SLAS 26 Consolidated and Separate Financial Statements

14 SLAS 27 Investment in Associates

15 SLAS 28 Operating Segments

16 SLAS 29 Revenue

17 SLAS 30 Related Party Disclosures

18 SLAS 31 Interests in Joint Ventures

19 SLAS 34 Earnings per Share

20 SLAS 35 Interim Financial Reporting

31
Improvement Project II ……./contd...

The following Standards under Improvement Project II (in line with the International Financial
Reporting Standards 2007 Bound Volume) have been adopted by the Council

21 SLAS 36 Provisions, Contingent Liabilities and Contingent Assets

22 SLAS 37 Intangible Assets

23 SLAS 38 Non-current Assets Held for Sale and Discontinued Operations

24 SLAS 39 Share-based Payments

25 SLAS 40 Investment Property

26 SLAS 41 Impairment of Assets

27 SLAS 42 Accounting and Reporting by Retirement Benefit Plans

The Statutory Accounting Standards Committee has made a decision to upgrade all Standards in line with the International
Financial Reporting Standards 2009 Bound Volume under Improvement Project III in the year 2010. Hence the Standards
adopted under Improvement Project II will not be gazetted or be applicable for the preparation and presentation of financial
statements. The improvements made under Improvement Project II could serve to provide advance notice of changes to
the existing Standards that would be incorporated in and continued with Improvement Project III.

In addition to the above, the following Standards will also be taken up under Improvement Project III:

1 IAS 12 / SLAS 14 Income Taxes

2 IAS 19 / SLAS 16 Employee Benefits

3 IAS 32 Financial Instruments: Presentation

4 IAS 39 Financial Instruments: Recognition & Measurement

5 IFRS 7 Financial Instruments: Disclosures

Laughter the best medicine…

A Police Officer in a small town stopped a motorist who was speeding down Main Street.

“But, officer,” the man began, “I can explain”

“Just be quiet,” snapped the officer. “I’m going to let you cool your heels in jail until the chief
gets back.”

“But, officer, I just wanted to say”

“And I said to keep quiet! You’re going to jail!”

A few hours later the officer looked in on his prisoner and said, “Lucky for you that the chief is
at his daughter’s wedding. He’ll be in a good mood when he gets back.”

“Don’t count on it,” answered the fellow in the cell. “I’m the groom.”

32
Regional Standard-Setters Conference

Regional Standard-Setters Conference held at the Oak Room, Cinnamon Grand Colombo on 24th November 2009.

Annual Report Awards 2009

Overall winners of the Annual Report Awards Competition held at the Oak Room, Cinnamon Grand Colombo on 25th
November 2009.

33
Global Scene
International Finance:
Hedging is a
Good Idea
Hedging is an important part of
effective financial management
for any business. It reduces the
risks associated with holding
an investment. Hedging is done
using derivatives – call options,
put options, short selling, futures,
contracts, etc. These methods help
reduce the volatility in a portfolio.
Hence, a hedge is a kind of
insurance for an investment against
risk.
In detail
Though there are different kinds of
derivatives available in the market,
all of them provide similar benefits
to a business. Companies can use
Forwards, Futures, Swaps and
Options to hedge their risks.
Forwards are deals whereby a
party agrees to sell a particular
commodity, financial instrument
or foreign currency at a particular
price on a specific future date.
Futures are similar to Forwards
except that they are traded on an
exchange. Thus, the terms of the
contract are standardized. Futures
have an advantage in that they
eliminate the credit risks that are
a part of the forwards contract.
Swaps are also similar to Forwards
contracts. But, the account
settlement in case of Swaps is done
on a regular basis, for example, at
the end of every month. An option
is defined as a contract that gives
the holder “the right, but not the
obligation to buy or sell a specific
asset at a specific price.”
How hedge helps
Derivatives play an important role in
the financial risk management of a
company. For instance, a company
that is dependent on large quantities
of oil for its daily operations has to
hedge itself against the volatile oil
prices. Or else, the volatile global
oil market would deal a heavy blow
on its operation costs.
One such example is Dallas, US-
based Southwest Airlines Co. The
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34
company has a structured hedging
programme to ensure that it is 100
percent hedged during the current
period and hedged up to 50 percent
of its exposure for up to two years
later. CFO Laura Wright says that
the company plans the programme
well in advance – establishes the
required budget and builds up its
positions. Using call options, fixed-
price agreements and strike prices
for the future, Southwest utilises
the hedging methods to the best of
its advantage.
No outsourcing
The option of outsourcing the
hedging activity is available, what
with many a company providing
hedging services. But, financial
analysts warn companies against
using such services. A hedging
plan should be tailor-made for
each company, depending on the
conditions specific to the company
and the industry. According to
Robert Brooks, Professor of
financial management at University
of Alabama, inappropriate hedging
activities and non-competitive
pricing can lead to companies
incurring heavy losses. In fact,
these losses can even run into
six or seven figures for a single
hedge.
Bring in the treasurer
A treasurer understands the
financial position of a company the
best. He has a clear idea about the
risks facing the company and the
steps, i.e., the hedging methods that
can be best employed to minimise
these risks. If a company decides
to outsource hedging operations,
treasurer is the person who should
advise on what to outsource.
Matt McLaughlin, president,
Midstream Partners LLC, a
consultancy firm, says that
before making a decision on the
company’s hedging strategies, its
Treasurer needs to be clear about
the objectives of the company. How
the company chooses to protect
itself against risks, the steps it plans
to take, the time periods involved,
etc. are some of the factors that
need to be considered. Once the
company is clear on these issues,
a decision can be taken on whether
to outsource the hedging to an
investment bank.
Accounting standards
The past few years have witnessed
many scandals surrounding hedging
and accounting for hedging. Yet,
hedging is still considered an
effective and important part of risk
management strategies.
The spate of accounting scandals
in the US led to the strict
implementation of accounting
standards for hedging operations.
Financial Accounting Standard
(FAS) 133, which came into effect in
2001, deals with financial reporting
of derivatives and hedging activities.
In introducing this standard, the
Federal Accounting Standards
Board (FASB) brought about
more transparency in accounting
practices of companies.
The responsibility for following the
standards in line with the guidelines
is vested with Treasurers and
Corporate Accountants. FAS133
is a very detailed standard and
runs into several hundred pages.
Often, it’s confusing to follow.
However, the need for increased
transparency in the accounting
practices of companies has made
it important for managements to
follow the rules.
The accounts and auditing staff
value the company’s hedging
instruments complying with the
FAS 133. Non-compliance can
have adverse impact, with the
hedging instruments failing to
qualify for hedge accounting. FAS
133 stipulates that the company
shows how effective its hedging
instruments are, and to what extent
they can set off the risks. The
portion of the gain or loss that the
derivative incurs to cover up the
exposure is the “Effective portion”
of the derivative.
If the hedging instrument does
not qualify to be used in any
accounting year, then the company
has volatility in its financial results,
since the gain or loss made on the
derivatives would be accounted for
in a different accounting period.
“The material above has been
reprinted here with the kind
permission of The Manage Mentor
(www.themanagementor.com) -
Asia’s first Knowledge Portal for
Professionals”