Tuesday 28 June 2011

The key rationales that support and against the development and widespread application of International Financial Reporting Standards

Evidence of support for IFRS
A growing body of evidence indicates that the goal of international convergence of accounting, disclosure and auditing has been widely accepted.

All dimensions of accounting are becoming converged worldwide.
Increasing numbers of highly credible organizations strongly support the goals of the IASB.

National differences in the underlying factors that lead to variation in accounting, disclosure, and auditing practices are narrowing as capital and product markets become more international.

International standards will improve the comparability of international financial information.

Time and money will be saved on international consolidations, the components of which now are subject to different national laws and practices.

There may be a tendency for accounting standards throughout the world to be raised to the highest possible level.

Widespread application of IFRS might also result in:
Improved managerial decision making within multinational enterprises.
Improved allocations of corporate investment money worldwide.
Better international understandability of financial statements. Cost reductions in accounting information processing and financial disclosure costs for multinational enterprises.
Greater international credibility for published financial statements.
Some countries disallow IFRS for domestic firms but allow foreign companies to use them.
U.S. and Japan, for example will allow foreign countries listing on their respective exchanges to file financials prepared in accordance with IFRS without reconciliation to U.S. or Japanese GAAP.

International Convergence Issues
The complicated nature of standards such as financial instruments and fair value accounting
The tax-driven nature of the national accounting regime
Disagreement with significant IFRS, such as financial statements and fair value accounting
Insufficient guidance on first time application of IFRS
Limited capital markets = little benefit
Investor satisfaction with national accounting standards
IFRS difficulties in language translation
Significant differences in standards currently exist.
The political cost of eliminating differences.
Overcoming “Nationalism” and traditions. 
Perhaps it will not provide significant benefits.
It will cause “standards overload” from some firms.
It diverse standards for diverse places is acceptable.

Monday 27 June 2011

Distinguish between the terms “harmonisation” and “convergence” as they apply to accounting standards

Just start with thinking about the fact that prior to the introduction of IFRS, most nations had their own national accounting standards.
The ideal position to move to from this point - where there would be no differences at all in the accounting standards in place in every country - is FULL CONVERSION - in this case each nation totally removes its old, national standards and adopts only IFR standards - and nothing else. This is the accounting standard setters ideal as every company's performance could be very fairly compared as they would all be using exactly the same rules (or very close to this) for the recording and reporting of their key business transactions.
However, the reality is, as we saw during the semester with the EU, there have been a lot of concessions made to powerful countries - such as Germany and Japan and China - which allows them to only "harmonise". Under this guideline, nations simply and gradually change/modify one standard at a time until they have all their old, relevant accounting standards aligned or consistent with any matching IFRS - e.g. there is an international standard on segments - IFRS 8 as we have seen - each nation that is "harmonising" only will modify their existing segment reporting standard to be as closely aligned with the IFRS 8 std. as possible - but differences will and do occur as we have seen as a result of legal rules etc. that operate within each nation.
Once all the national accounting standards are aligned with matching IFR standards - then, for the business transactions covered by the IFR standard, there is a form of convergence - i.e. all the nations should be adopting the same or very similar, global rules for that business transaction.
However, this convergence process is flawed in that nations such as the US retain a range of their existing national standards - which listed companies have to comply with as well as the IFRS - i.e. THEY HAVE NOT FULLY CONVERTED TO COMPLYING ONLY WITH IFRS - this is very confusing to the market - as US company reports are complying with over 300 accounting standards related to a wide range of business transactions while Australian companies by comparison ONLY HAVE the IFRS in place and nothing else.
Where there is doubt and "opaque" practices, mismanagement and fraud can occur and the investment risk in those countries increases as a result.
Thus: Harmonisation is the slow process of modifying existing national accounting standards to be more aligned, one by one, with any matching IFRS - it leads to inconsistent accounting rules across countries as the alignment is not perfect.

Saturday 25 June 2011

Five characteristics of development factors that help to predict low levels of transparency and disclosure in the financial statements of German listed companies

1.  Traditionally bank credit plays a major role in corporate finance


2. German accounting and financial reporting are heavily influenced by tax law
The reason for this link between taxation and financial reporting is historical. When corporate income taxation was introduced in Germany in 1874, the requirement for annual accounting had already ben codified in the Commercial Code in 1862. It was convenient to link corporate income taxation to existing financial statements.


3. German rules allow companies to smooth income over time by using hidden reserves.


4. EU directives and the forces of globalization have influenced in German financial reporting. The 1985 Accounting Act implemented the Fourth, Seventh, & Eight Directives and transformed them into German Commercial Law. Although the EU’s Directive requires companies prepare a “true and fair view” in their financial statements, it appears extensive note disclosures are seen as a way of achieving without changing the tax-based, income smoothing approach to financial statements.


5. Since the EU decided to adopt IFRS in January 1 2005, all German listed companies are required to use IFRS in preparing their consolidated financial statements. However, German accounting practices differ from IFRS in some important respects. For instance, German accounting law contains no specific rules in some areas, such as the translation of foreign currency financial statements of foreign subsidiaries, disclosures of fair values of financial assets and liabilities, and earnings per share.

Tuesday 21 June 2011

What is ROI, RI, and EVA ?

ROI (Return-on-investment):
To calculate ROI, simply get profit divided by total assets of the firm
ROI = profit / assets
Disadvantages of ROI: Actions that increase divisional ROI can make the corporation worse off & conversely. ROI gave the illusion of insight and control when managers were taking actions that increased ROI but decreased the long-run value of their business units. These perverse incentives happen whenever performance is measured by a percentage or a ratio.
RI (Residual Income):
RI is calculated as net investment base multiply by risk-adjusted, then deducted by ner income before tax
To simplify:
RI= Net income (before tax) – ( net investment base x cost of capital (risk-adjusted ))
The RI measure will always increase when we add investments earning above the cost of capital or eliminate investments earning below the cost of capital.
Thus, this evaluation method can eliminate the ROI perverse incentives, and more closely align manager’s incentives with the value of the firm
Econimic Value Added (EVA)
EVA is a specific form of RI (developed by Stern Stewart) with adjustments made to the inputs (i.e. Accounting numbers, e.g. earnings and assets; Investments in intangible assets, e.g. R&D, advertising, training; Leased assets; Changes in general and specific price levels; Depreciation methods.
And adjustments with purpose of correcting distortions introduced by generally accepted accounting principles (GAAP)
EVA more closely aligns with economic income. However, cares need to be taken that ensure any adjustments made to GAAP are warranted, otherwise it would lead to manipulation.
Market participants may apply a different set of adjustments. EVA and residual income contain little news beyond earnings. Under EVA, there is little incentive for managers to seek out the top level (high yield) investments as long as their investments are just above the company’s cost of capital. Although EVA doesn’t create incentives to over or under-investment per se, it may create the perverse incentive to heavily invest in mediocre investments rather than seeking out high performing investments. Investing in too many mediocre projects, rather than high performing projects not only affects risk, but may affect liquidity. Thus, EVA should be used only as one indicator among many. 

The performance evaluation systems

The performance evaluation system is one the three legs of organisation architectures (i.e 3 legs of stools). To be successful in the competitive environment, the first thing that every firm need to consider is whether their 3 legs of stools are in balance.
To measure the performance of the firm, firstly, you need to classify the firm’s divisions into 5 centres (i.e. Cost Centre, Expense Centre, Profit Centre, Revenue Centre, and Investment Centre)
For now, we just focus on Cost Centre, Profit Centre, & Investment Centre.
Cost centre:
Task: Produce some output
Decision rights: Input mix (labour, materials, and outside services) used to produce the output
Evaluation: Efficiency in applying these inputs to produce output (i.e. use budgeted cost vs output.) Note: Quality must be easily observable and must be monitored
Profit Centre:
Task: Run a specified part of the business profitably.
Decision rights: Input mix, selling prices, marketing techniques, but nothing on the cost side
Evaluation: Profit (i.e use actual versus budget).
Investment Centre:
(this centre is quite similar to profit centre, but it has a power over the expenditures of the company):
Task: Run a specified part of the business, earning an adequate return on investment
Decision rights: Similar to profit centres but with additional decision rights for capital expenditures.
Evaluation: Using ROI, RI, & EVA

Friday 17 June 2011

What is Market Sentiment

In technical analysis, sentiment comes in only two flavours — bullish (the price is going up) or bearish (the price is going down). At any moment in time, a bullish crowd can take a price upward, or a bearish crowd can take it downward. When the balance of sentiment shifts from bullish to bearish (or vice versa), a pivot point emerges. A pivot point is the point (or a region) where an up move ends and a down move begins (or the other way around). At the pivot point, the crowd itself realizes that it has gone to an extreme, and it reacts by heading in the opposite direction. As far back as the early 1900s, traders observed that if they were patient and waited for a pivot point to develop, they could trade at the right psychological time — just as the crowd is beginning a new move. When the crowd is reaching an emotional extreme, the crowd is usually moving in the wrong direction. A reversal point is impending. You should do the opposite of what the crowd is doing, or at least get ready to.

How to start trading

If you don’t already know trading basics, you need to get a few things under your belt to get the most out of this blog — things like what a securities exchange is, exchange hours, what trades in after hours, what brokers do (and don’t do), trading conventions like “bid and offer” and order types, how to read a brokerage statement, and oh yes, what securities you plan to trade. After that, all you really need is a newspaper that publishes securities prices, a sheet of graph paper, and a pencil. Fortunes have been made with nothing more than that. But these days, a computer, an Internet connection, and at least one piece of software that allows you to collect data and draw charts are also standard issue. You can also do charting directly on technical analysis Web sites without buying software. Don’t skimp on tools to put in your technical analysis tool belt. Buy the data, books, magazines, and software you need. Pay for lessons. Get a trading coach. You wouldn’t try to make a cordon bleu dinner on a camp stove with three eggs and a basil leaf, so don’t try to make money in the market by using inadequate tools. Your first task when you’re ready to take your technical knowledge out for a trial run is to earn back the seed capital you put into the business, the business of technical trading.

Thursday 16 June 2011

What is Technical Analysis ?

Technical analysis is the study of how securities behave and how to exploit that information to make money while avoiding losses. The technical style of trading is opportunistic. Your immediate goal is to forecast the price of the security over some future time horizon in order to buy an sell the security to make a cash profit. The emphasis in technical analysis is to make profits from trading, not to consider owning a security as some kind of savings vehicle. Therefore, technical analysis dictates a more active trading style than you may be used to.

Sunday 12 June 2011

Home Loan Analysis

Home loans are one sort of mortgage which is similar with credit union. There is a large market which offers numerous produce of home loans to Australian homes existing in every corner of Australia. This report summarises a pair of datasets regarding RBA cash rate and 198 standard variable home loan products’ detail information.
Due to the collapse of the Bretton Woods System and American extremely loose monetary policy and oil dollars rolling into the third world countries in late 1970’s and early 1980’s, the cash rate had a large reduction. After 1990’s Asian Financial Crisis, the cash rate fell down and never rises again. Then the first part of the report includes the chart of RBA cash rate historical change data through 1976 to 2010 and the analysis of this chart which highlights the main trend and feature of cash rate change.
Another part of report shows five different factors that impact the variable rate to which factors (if any) most influence the variable rate of these 198 kinds of home loans products. There are over five tables and charts being used to summarise five relevant factors that are institution type, redraw, portability, offset, total upfront fee and yearly service fee respectively. This report illuminates the key features and analysis paragraphs for each factor. It can be seen that institution type influenced the variable rate most and other factors had tiny impacts on the variable rate.
In conclusion, this report talks about the historical data of cash rate from Reserve Bank of Australia and the data of different home loans products in current market. Furthermore, this report analyses these two datasets in terms of the variation of historical cash rate as well as the influences from the different factors of the home loan products. From all the findings we find that the institution type influenced the variable rate most. However, other factors had tiny impacts on the variable rate. The advice for consumer is that they should pay attention to the institution type when they choose home loan service in the future as it impacts variable rates the most.

In Australia, there are different types of home loans products currently available in the market that provided by banks and other organizations. Interest rate is one of the major determining factors in many borrowers’ decision. Two types of interest rates - variable rates and fixed rates are based on different financial market indicators. According to Gambacorta(2008), variable rate refers to an interest rate that fluctuate over time based on the changes of an underlying interest rate index. Moreover, variable rates can be influenced by kinds of factors such as institution types, total upfront fees and yearly service fees. This report will focus on analyzing two sets of data which are interest rate data and historical data respectively.


2.0 Outliers
Outlier is an observation that lies an excessive distance from other data which lies outside the overall pattern of a distribution. However, sometimes it is difficult to realize what factors caused this situation. Therefore, it is important to identify the outlier due to it is possible to affect the accuracy and cause the systematic errors if people cannot handle it properly.
Z score formula is adopted to identify potential outlier. When the Z score is above 3.0 or below -3, it is considered to be an outlier. It has been calculated that from the data that has been provided, the Z score is within the range of -3 and 3 (see appendix 1). As a result, the outlier will not remain in the data of this report.

3.0 Historical analysis on cash rate tendency

Cash rate is the interest rate paid by bank which affected by transactions between the central bank and other financial institutions. Figure one illustrates the variation in the percentage of cash rate from May 1976 to March 2010. As can be seen in this line graph, there was a significant increase in cash rate during the first six years and it reached a peak at 20.77% in August 1982. However, an obvious decline was seen in cash rate since September 1983 and the percentage dropped to 4.76% which was the lowest point within nearly eight years. Moreover, the cash rate fluctuated a lot over the next six years and it reached a peak again in November 1989 at 18.18. Whereas, from this year onwards, the growth of cash rate was suddenly replaced by a sharply downward trend. This is probably because RBA tried to decrease the negative effects which were brought by savings and loan crisis in the early 1990s to Australia. It is interesting that after September 1991, although the cash rate still changed with some ups and downs, it tended to be stable and maintain below 10%. Besides, from May to September 2009, the percentage of cash rate keeps remaining at 3% which is the lowest data over the 15 years. It shows that the world economy seems to be growing again and Australian economy is recovering as well after the global financial crisis which started from 2008.

4.0 Current market 
The global financial crisis had resulted in the economic downturn since 2008. In Australia, in order to decline the negative effects brought by this severe crisis, the main financial institutions decreased the percentage of home loan interest rates at that time. However, at the beginning of 2010, RBA improve the interest rates which means homeowners have to pay more on their mortgages. Meanwhile, there are some major banks include ANZ, the Commonwealth Bank also followed the RBA, lifting their interest rates by a few points. On the other hand, it shows the world’s economy is growing while the economy in Australia is recovering as well. In this section of the report will focus on the home loan variable rate and what factors influence it.

4.1 Distribution of variable rate

The distribution of variable rate will be discussed in the paragraph below. This histogram demonstrates the changes of variable rate in relation to the different types of institutions. According to the data that has been provided, the institutions are tending to the interest rate of 5.75 to 7 percent which located in the third, fourth and fifth highest group of rate in the graph. In addition, only four institutions have the lowest rate and two have the highest rate. Therefore, it can be concluded that most institution may located in the interest rate group that is not too high or too low. This can be also revealed in the Table1 that the mean and the median is within the range of 5.75% to 7%. The reason for this circumstance is that if the rate is too low, institutions may be not able to earn profit and if the rate is too high, customers may not choose them. 
sum
1268.57
mean
6.41
max
7.26
mini
5.67
median
6.38

4.2 Bivariate relationships
4.2.1 Relationship between variable rate and institutions types

This paragraph will analyze the different institution types in relation to variable rate. Accordingly, most bank institutions concentrate on the rate between 5.75 and 7.25 percent. A vast majority of banks is located in the group of 7 to 7.25 percent which is the second largest group. Furthermore, there is no apparent relationship in terms of the types of financial institutions. Therefore, the types of financial institutions may not influence the variation of interest rates predominantly. 

4.2.2 Relationship between variable rate and redraw facility

Figures 4 represents the relationship between interest rates and redraw facility. As can be told from the chart, when variable rate is intermediate between 5.5% and 6%, all financial institutions allow customers to redraw their extra funds. However, there are some mortgage lenders reject borrowers’ requests of redrawing money when interest rate fluctuates between 6% and 7%. If borrowers’ money is tight, they can access the funds later when interest rate is above 7%. The redraw facility gives borrowers an incentive to make extra loan repayments, because it helps them repay the debt and saves money on interest which is one of the most significant advantages of this home loan feature.

4.2.3 Relationship between variable rate and loan portability

The bar chart above shows information about variable rate and loan portability. It can be observed that this relationship is similar to variable rate and redraw facility. Around 23% financial institutions do not permit borrowers to move a mortgage from one property to another when the interest rate varies from 5. 75% to 7%. But when the interest rate is over or below that range which was just talked about, almost all lenders agree that borrowers can transfer the outstanding balance of the existing mortgage loan at the same rate. This may because the interest rates are higher than the traditional loans to some extent, so borrowers need to have perfect credit.

4.2.4 Relationship between variable rate and offset facility

This bar chart illustrates whether the financial institutions have offset facility in relation to the variation of interest rate or not. It can be shown from figure 6 that the percentage of institutions to offer offset facility seems to be distributed similarly. That means the amounts of institutions in different groups are distributed equally. Offset facility can not only decline the unpaid balance of customers’ home loan but also accelerate the speed of paying home loans. The reason why some financial institutions refuse to offer offset for customers might be the risk of paying back the loans. 

4.2.5 Relationship between variable rate and total upfront fee

Figure 7 gives a description about the association of variable rate and total upfront fees. Based on this data, the scatter diagram shows a strong positive relationship. It means that the more total upfront fees are required, the more variable rate will be allocated. Hence, the total upfront fee plays an important role in the variation of interest rate. In addition, this figure also most points concentrate between 6 and 7 percent of variable rate. In the next section of the report the relation between one year service fee and variable rate will be examined. 

4.2.6 Relationship between variable rate and yearly service fee

With respect to Figure8, the yearly service fee and the variable rate are displayed. Figure8 indicates a weak negative relationship of the yearly service fee and variable rate. The correlation is calculated to be -0.097 which means the tendency of linear regression goes down slightly. Subsequently, decreasing of yearly service fee may give rise to the increase of variable rate. 

5.0 Conclusion 
In conclusion, the variable rate of home loan is an important factor in relation to diverse home loan products in the current market. It has been proved that the Z score of the values is between -3 and 3 which indicates that the data can be treated as an outlier. The historical data illustrates that the cash rate changes frequently for the reason of financial crisis. Moreover, in consideration of the factors including institution type, redraw facility, mortgage portability, offset facility, total upfront fee and yearly service fee, it has been discovered that total upfront fee and yearly service fee may impact the variation of interest rate.

Loan Repayments

Jack and Jill take out an investment loan to purchase a rental property
worth $980,000.  They have a deposit of $100,000.  The loan is to be repaid in equal monthly instalments over a term of 10 years

SOLUTION
You have purchased a rental property worth $980,000 by using an investment loan with the interest of 7.29% pa nominal with interest added monthly. Then, you will repay in equal monthly instalments over a term of 10 years. Your first deposit is $100,000.  Therefore, this report will address problems regarding of your investment loan for the rental property.

a) Monthly repayments
The monthly repayments are $10,349.56
Supporting calculation:
Amount borrowed is 980,000 – 100,000 = 880,000 Interest rate is 7.29% per year, which implies .0729/12 or .6075% or .006075 per month The term is 10 years, which gives 10 x 12 or 120 repayments. Repayments = 880,000/PVIFA(120, .006075)  = 10,349.56

b) Interest claimed for tax purpose

By getting the total interest of each 12 months period, we have the interest in very year over 10 years. And the interest you need to claim each year for tax purpose is shown in the figure 1. The chart has demonstrated that the interest decreases years after years. It can be explained that the principle payments are reduced after one payment has been made each year.

c) If you decide to pay out the loan immediately before making the 50th payment, you will need to pay the amount of $599,043.02. It has been calculated as below.
Balance owing after the 50th payments: 
PV = C x PVIFA(r,n)
= 10,349.56×[1 – (1 + .006075)^(-70) ]/.006075
= 588,693.47

Balance owing just before the 50th payment: 
PV             =           588,693.47 + 10,349.56
               =          599,043.02

d)At the end of year three of the loan, a gift of $100,000 is put against the loan to do either option 1 or 2:
  1.Keep the same term and reduce monthly payments
  2.Keep the same monthly payments and reduce the term
Data analysis:
Principle payment after year 3:         679,334.86 
After year 3, there are still 84 payments to go.
Principle payments after put 100,000 against the debts: 679,334.86 - 100,000 = 579,334.86


For option 1: The new repayment will be: $8,826.07 by using the formula PV = C x PVIFA(n,r)
Supporting calculation: 
PV   =  C x PVIFA(n,r)
        =  C x {[1-(1+r)-n]/r}
Therefore:  C      =  PV/PVIFA(n,r)
                              =  PV/{[1-(1+r)-n]/r}
        =  579,334.86/{[1-(1+ .006075)-84]}/ .006075
        =  8,826.07

For option 2: According to the repayment schedule (table 2), after adding $100,000 to the payments, 15 months are reduced. There are only 105 payments remaining, and you only have to pay $6,422.96 instead of $10,349.56 in the last payment (105th payment).

As it is shown in figure 2, if you choose option 1, your monthly repayment will be $8,826.07. In other words, you will save the amount of $1,523.48 per month over 84 months remaining. However, if you prefer option 2, you will finish off the loan term quicker than option 1 by 15 months, thus no interest charged for 15 months. Two options have their own benefits; hence the best option would depend on debtors’ budgets for the months. 

Markets & International Trade

Along with the globalisation of the world economy, governments around the world have used variety of policy instruments to intervene in international trade which protects domestic jobs, industries, and national security. According to Gans, King and Mankiw (1999, 178), tariff is the oldest and simplest instrument of trade policy. It is also a form of tax that imposes on imported goods in order to increase the price of goods and generate the government’s revenue. One of the major purposes of tariff is to protect and enhance the domestic producers from international producers (Frijters, Dulleck and Torgler 2010, 300). In Australia, tariff has been added in every imported car and component. This has taken away billion of dollar from consumers and taxpayers. Therefore, this essay will explain how tariff impact on the car industry as well as who lose and benefit in the situation. It will also examine who lose and benefit if the tariff was abolished. 

The impact of tariff is shown below: In figure 1, it shows that before tariff there was a world price for the market. It is presumed that the world price is lower than equilibrium price. Hence there were imports for this market which is from Q51 to QD1 (Gans, King and Mankiw1999, 300).

Figure 1. A market without tariff

Figure 2. After tariff
                When the tariff imposed, it causes the price increasing as shown in figure 2 (price with tariff). This is because the importers have to pay the world price plus the tax on the goods. This action decreases the volume of imports. However, the domestic producers can now sell their goods at the same prices the importers sell. As a result, the domestic supplier increases from Q51 to Q52. Domestic customer has to pay a higher price, therefore, the amount of customer decreases from QD1 to QD2.  The total quantity traded has reduced (Gans, King and Mankiw1999, 300).


Figure 3. Social welfare allocation after tariff


                After the tariff, the market reallocated. The initial customer surplus was A, B, C, D, E, and F. After the imposition of the tariff, the new customer surplus is A and B. As for producer surplus, it had only G and the area C has been added after the tariff. Area E donated to the government revenue. However, the total quantity traded has reduced which reflected by the deadweight loss D and F (Gans, King and Mankiw1999, 300).
In Australian car industry, the tariff contributes to the increasing car price; reduce the quantity of imported cars available in order to boost the domestic car producers. The tariff has not only brought many benefit to domestic manufacturers, and the Australian Government, but also brought many drawbacks to consumers and importers. First of all, the domestic producers can sell car at higher price than the world price as the tariff has increased the price of imported cars. Therefore, they can control the price and quality of productions. According to Katharine (2008), the tariff has helped Holden (an Australian car manufacturer) become the bestselling car company in Australia. Secondly, the government has generated huge revenue from tariff, it was about $17 billion in 2000 (Tim 2000). On the other hand, consumers and importers have to buy and sell at very high costs comparing to the world prices. This has limited the demand on imported cars, and therefore the imported cars availability. Consequently, domestic manufacturers and the Australian Government gain benefit from tariff when consumers and importers have to suffer from the disadvantages.
In another case, if the tariff was abolished, the positions would completely change as the government, domestic producers would lose and consumers and importers would gain the benefit. This would also reduce domestic manufacturing producers’ ability to compete with international producers and they may lose their position in the market (Vanessa 2006). This would make the international producers gain the market share intensively, and may dominate the whole national market although customers may have many benefits regarding of the decreasing in car price.
As this essay has showed, the tariff has been used to protect national industry, particularly car industry. It has enhanced domestic car industry compete with international industry within nation. Moreover, the Australian Government has generated billions of dollars from this policy. However, consumers and importers have faced the increasing price made by tariff. Although tariff can protect the domestic industries, domestic firms should improve their technique in economic perspectives in order to improve the industry and the nation as a whole.  

Reference list
Gans, J.S. S.P. King and N. G. Mankiw. 1999. Principles of microeconomics. Sydney: Harcourt Publishers.
Frijters, P. U. Dulleck and B. Torgler. 2010. Introductory Economics for Decision                 Makers. Australia: South Melbourne.
Katharine, M. C. 2008. Car industry tariff to stay. Age. June 7.
TIM, C. E. 2000. Zero tariff rate to cost government $17 billion: report. Age. August 1.
VANESSA, B. 2006. Resource boom is beating domestic producers. Age. November 23

Saturday 11 June 2011

Environmental Economics and Taxation

QUESTION:
Preserving the environment is high on the agenda for both governments and society. Governments around the world are using a variety of instruments to change environmentally harmful 
1. Identify a current or proposed Australian tax that has aspects of an environmental tax. Explain your choice.
2. Explain how environmental taxes can correct for externalities.
3. Discuss whether the environmental tax you identified in (i) is a fair tax. 

ANSWER:
As environmental issues are considerable nowadays, governments among nations are implementing variety of instruments to protect and improve the environment. In particular, Australian Government has many interventions to prevent environmental negative behaviour; those include market based instrument, command and control policies, and tax system. However, this essay will only focus on carbon tax which is known as an Australian environmental tax as well as how it correct for externalities. It will also examine whether the tax is fair or not.


Most of environmental problems including air pollution are caused by environmental externality. According to Frijters, Dulleck and Torgler (2008, 234) environmental externalities is a source of market failure which often arises in environmental issues because it is very difficult to exclude individuals from using environmental resources or from polluting a common resource. To correct this externality and limit environmental deterioration, D’Ascenzo (2003) states that tax system could reduce different types of environmental expenditure by providing an incentive to undertaken that expenditure. For instance, Australian Government has used a carbon tax to maintain the level of carbon dioxide emissions in nation (Cornwell 2006, 65). Humphreys (2007, 2) explains that carbon tax involves manipulating the price and quantity of carbon released into in the atmosphere from human activity as it sets a fixed price of carbon and allows the quantity emitted to fluctuate. The carbon tax has helped to reduce emissions of 20% of 1988 levels by 2005 (Cornwell, and Creedy ). Cornwell and Creedy (2006) explains that the carbon tax can reduce carbon dioxide emissions because the carbon tax would increase the price of fossil fuels and thus consumer prices, both directly for fuels and indirectly for manufactured goods. These price changes would reduce the levels of final demands, and therefore fossil fuel use and aggregate carbon dioxide emissions.
Also, the following graph can explain how the tax can correct for externalities thoughtfully.

Tax


Assuming that there is a polluter A; in figure 1, MC_p is the private marginal cost curve for polluter A; MC_s is the social marginal cost curve made by polluter A; and D is the social demand curve.
If there is no outside control, the polluter A will produce the product with quantity Q_m to gain maximum profit, which is an “efficient quantity” only for the polluter A rather than the whole society. If put the social cost into polluter A, it will effective for the whole society. Therefore, the quality of polluter A should be in the intersection between social cost and social demand which means firm A should produce the products with Q*. To change polluter A’s producing quantity from Q_m to Q*, it is effective that add an extra cost which is tax into the private marginal cost of polluter A. From the figure 1, a new marginal cost curve appeared which are MC_p, and the vertical distance between A and P* will be the externality tax.

Carbon tax is a fair tax as it brings many benefits to the environment and society….states that with a $30 per tonne carbon tax could be used to replace the current fuel taxes with little or no economic cost.  This has an effective reduction of 75% in the fuel levy, which would lead to a reduction in petrol prices by about 30 cents per litre, and help to offset recent high petrol prices (Humphreys 2007, 6). In addition, the carbon tax can encourage technology transfers and reduce the tension between environment protection and poverty alleviation (Shinji, and Jin 2009). Furthermore, with a $30 per tonne carbon tax, the government could lift the income-tax-free threshold to $15,000 (Humphreys 2007, 6). As a result, the carbon tax could improve the environment, technology, and people’s living standard.

As this essay has showed, a carbon tax was introduced to protect the environment from damage as it can reduce carbon dioxide emissions. It also contributes to the government tax revenues and improves people’s living standard by reducing income tax and replacing fuel taxes. Moreover, the carbon tax has improved the technology and created better perspectives between environment protection and poverty mitigation. Therefore, the carbon tax is an effective method used to prevent environmental harmful behaviours as well as increase people’s living standard within environmental aspect.








Fiscal & Monetary Economics

QUESTION:
In response to the recent global financial crisis the Australian government and the Reserve Bank of Australia made various interventions designed to avoid/bring Australia out of a recession.  Identify the theory that supports such interventions and using the concepts of fiscal and monetary policy evaluate the success of these interventions. 
ANSWER:
Recently, the Australian government and the Reserve Bank of Australia (RBA) made variety of expansionary fiscal and monetary policies to cope with the recession and bring the economy out of the recession. The government has invested $42 billion for Economic Stimulus Plan (Commonwealth of Australia 2009). Meanwhile, the RBA lowered the interest rate to increase spending (AAP General News Wire 2008 ). The theories of fiscal and monetary policies show that these interventions were appropriate and successful. Therefore, this essay will examine theories of fiscal and monetary policies that support these interventions as well as evaluate their success.
In the crisis, the government spent its budgets to recover the economy, which is known as expansionary fiscal policy. In Keynesian theory, recession is a wave of pessimism about the future and, the state has more expenditure to stimulate demand and overcome initial pessimism (Frijters, Dulleck, and Torgler 2008, 145). The theory supports the government responses to the recession by giving away $42 billion for Economic Stimulus Plan including targeted cash payments of $20.9 billion from December 2008 to February 2009, and $22 billion National Building (Treasury, 2009). As a result of these interventions, Australian consumer confidence increased by 12.7% in June 2009 (Swain 2009, 10). It also can create more work opportunities. While the global economy remains weak, these figures emphasises the appropriateness of the fiscal policy response of Australian Government.
Besides the expansionary fiscal policy, the Reserve Bank Australia (RBA) reduced the interest rate as its expansionary policy. As the RBA has a lot of money, it can set the interest rate itself, and commercial banks will align the interest rate according to the RBA (Frijters, Dulleck, and Torgler 2008, 147). Therefore, it reduced the interest rate from 7.00% to 3.50% between 2008 and 2009 (Reserve Bank of Australia 2010) in order to increase the borrowing and spending, and prevents people from saving money, thus the economic activity can increase and aggregate demand is stimulated. As a result, the real GDP growth increased 3.6% in 2008-2009 (Australian Government 2010), this can show that these interventions had an effective impact on the Australian economy.
As this essay has showed, fiscal and monetary policies were implemented in order to bring Australia out of the recession. These interventions have been successful in recovering the Australian. In addition, fiscal and monetary policies theories also support these interventions. However, the effect of these interventions will have in a short term run, so in a long term, their exact nature will matter to a large extent.

Reference List
AAP General News Wire. 2008. Fed: More rate cuts needed to boost economic activity –             AiGroup. Sydney. http://gateway.library.qut.edu.au/login?url=http://       proquest.umi.com.ezp01.library.qut.edu.au/pqdweb?did=1545826411&sid=2&       Fmt=3&clientId=14394&RQT=309&VName=PQD
Australian Government. 2010. Australian Fact Sheet.           http://www.dfat.gov.au/geo/fs/aust.pdf
Commonwealth of Australia. 2009. National building.             http://www.economicstimulusplan.gov.au/community_infrastructure/pages/default.aspx
Frijters, P., U. Dulleck, and B. Torgler. 2008. Introductory Economics for Decision Makers.          South Melbourne: Cengage Learning.
Swain, R. 2009. Rba Economics Competition 2009. Sydney: The University of Sydney.             http://www.rba.gov.au/econ-compet/2009/pdf/second-prize.pdf
Treasury. 2009. Budget 2009-2010.                                                  http://www.budget.gov.au/200910/content/overview/html/overview_key_initiatives.htm

Strategic Management Case Study

AYB 321 STRATEGIC MANAGEMENT ACCOUNTING
Case Study on Svenska Handelsbanken: Budgeting, Beyond Budgeting and Organisational Architecture

1.     Introduction: SH’s Approach

In 1970s, Svenska Handelsbanken (SH) eliminated budgets and has also changed completely its organizational strategies since then. SH has adopted beyond budget system because the traditional budgeting process is seen to be an unproductive negotiation process, artificial and almost unresponsive with the market and business reality. Therefore, they would rather manage the business according to what really happens than rely on a fictitious budget. Besides that, SH has also changed product marketing concept to customer driven marketing concept, focusing on providing high quality service and maximising customer profitability. In order to achieve this approach, SH has decentralised decision rights to lower managers, thus local knowledge of branch offices can be used efficiently.

2.     How SH Achieves the Five Purposes of Budgeting

Although Svenska Handelsbanken has abandoned the traditional budgeting system, it still acquire the five purposes of this type of forecast system including planning,  facilitating communication and coordination, allocating resources, controlling profits and operations, and evaluating performance and providing incentives.

2.1. Planning

Svenska Handelsbanken has delegated planning to branch managers, and required these managers to set an operational plan. Customer targets, products offered, prices and individual responsibilities are considered in these plans during discussions between the branch manager and staff. Costs to implementing these plans cannot exceed 40 percent of income, which every employee must contribute to. As the branch managers have an advantage of their local knowledge, and closer relationship with their customers, they can effectively design products, and prices that their target customers are willing to consume.
Along with this implementation, the financial department prepares a rolling cash forecast quarterly which provides an early signal to the trend of cash flows (i.e. increasing or decreasing in value), thus supports investment plan, and liquidity requirements plan.

2.2. Facilitating Communication and Coordination

Minimisation of interference is considered crucial. A policy was established to eliminate head office directives or reports. In case of a poor decision was being made, the expectation was that senior managers would only send an e-mail or make a brief phone call to inquire about the issue. The final decision ultimately remained with the local manager.
Service agreements regarding price, type, amount and level of a particular service are created between a planning committee headed by the CFO and representatives of the sellers (support services) together.
Finally, the managing director spends some time with branches to hear about their views on the local markets, customers, or other issues. Assumptions in their operation plans might also be challenged during this time.

2.3. Allocating Resources

Using beyond budgeting, business unit managers are not restricted to their expenses as long as those expenses satisfy that unit operation’s relevancy. In relation, the bank does not allocate capital to unit managers, whereas unit managers are charged with capital costs. Then, SH measures revenues and expenses assigning to the unit manager’s operations by using cost-to-income ratio. In addition, being understanding the local situation best, the local branch managers are devolved to manage their own financial, and human resources. By doing so, SH can allocate resources effectively, and top-managements can monitor how accurate these managers allocate resources, thus possible actions will be taken place if necessary.

2.4. Controlling Profit and Operations

There are a number of measures the bank use to assess their competitive situation. These measures include return on equity, cost-to-income ratio, profit per employee, and total profitability. Managers are judged by these ratios. If a branch was underperforming, the regional controller would be made aware and have to address the enquiries about the situation with head office management.
At head office level, transaction volumes, productivity measures, customer acquisitions, defections, and the level of customer discounts being granted by branches are also monitored. Written reports from all parts of the organisation are provided to the management group regarding the previous month’s performance on a monthly basis 

2.5. Evaluating Performance and Providing Incentives

The bank uses the handicap system to evaluate performance and provide incentives.
At the regional level, regions are compared to each other using return on equity (ROE), cost to income, profit per employee and total profit metrics. Each year, the best region is awarded a trophy cup. Each branch manager is held accountable for KPIs and they share lessons learnt with other branches to improve regional standing
In regards to evaluating performance of employees, 85-90 percent of employees at SH are paid straight salaries based on market considerations and their individual performance. A few employees in investment banking are eligible for bonuses in order to be comparable to competitor firms.

3.     How SH’s Organisational Architecture Supports their Approach

3.1. Decision Rights

Assigning decision rights is one of an important element of organization architecture and a process of placing decision rights is implemented through a firm’s centralization or decentralization. In the case of SH’s organisation, the firm’s performance is improved by decentralising decision making. It provides the lower level manager more power in making decisions. In SH, all the marketing activities at the local branch are in charged by the local branch manager while the account managers are responsible for the business relationship with customers. Moreover, there are no sales targets imposed on the branch office network, thus branch managers can make decision over the products that meet customers’ needs.
By giving the branch manager more authority in making decision, it can reduce the cost of transferring information and promote quicker response to changing market conditions because local branch managers generally have more detailed and up-to-date information about their local conditions than top managers. Also, it will encourage employees buy-in as a result of being delegated greater responsibility. Consequently, it helps the firm to achieve its approach as to provide quality services for customers and customer profitability.

3.2. Performance Evaluation

Performance evaluation is a necessary and beneficial process, which provides annual feedback to staff members about job effectiveness and career guidance. The success of SH’s approach is also supported by the effective use of performance evaluation. In SH, they evaluate the performance of the profit centers in the bank in relative terms which is one of the best ways to reduce the risk of employee’s evaluation being affected by factors outside their control.
What's more, they employ internal and external benchmarking in their performance evaluation process to compare actual with actual without budget figures.  With internal benchmarking, the cost-to-income ratio is the key to measure the performance of the branch offices among themselves. The performance of the branch manager is also considered through the performance of the branch office. In the central part of the organization such as the staff department of legal services, external benchmarking is playing an important role in evaluating the performance. They compare with the external lawyers to see if units are able to cover their costs by internally charging at or lower than the equivalent market price for their services. As a result, SH’s management approach is achieved by this successful performance evaluation system.

3.3. Rewards

Compensation is one of the most important parts of reward systems within a business organisational structure. It benefits individuals, thus business’ owners are responsible to decide which compensation package can attract and retain their employees at the lowest cost possible.
Svenska Handelsbanken manages their rewards system by creating profit-sharing system in 1973. Within this system, when SH’s after-tax return on shareholders’ equity is higher than the average for the Nordic banks, one third of the shares will be allocated to their employees equally. The employees can receive disbursement at age sixty.
Individual performance achievements are also a vital aspect in the SH’s reward systems. If a manager outperforms the other managers, they will be successful in SH as they can be entrusted with the management of a larger branch office or expected to be a head of the region.    
By doing these strategies, SH can motivate their employees to work better, particularly local branch managers will exert themselves to perform well.

3.4. Balance of the three legs with each other and with Corp Culture

In a decentralised organisation, to enhance value of employees’ decisions, there should be a control system that provides incentives for employees. It is important to develop rewards and performance evaluation systems in which compensating employees according to their performance outcomes. 
Decentralised organisation is also a part of SH’s corporate culture. This is when account managers have control over the total business relationship with their customers, all marketing activities, and designing products. Svenska Handelsbanken decentralises decision rights to their employees by granting local branch managers these controls. Importantly, SH manages rewards and performance evaluation systems by profit-sharing systems, internal and external benchmarking. Profit-sharing systems can improve manager’s performance capacity while internal and external bench marking can evaluate manager’s performance and monitor their actions. As a result, SH has balanced the three elements of their organisational architecture and its corporate culture.

4.     Conclusion

Although Svenska Handelsbanken has abandoned the traditional budgeting and implemented the beyond budgeting, they can still successfully achieve the five purposes of the traditional budgeting such as Planning, facilitating communication and coordination, allocating resources, controlling profits and operation, and performance evaluation and providing incentives. Along with this achievement, SH has also managed their organisational architectures to support their management approach by decentralising decision rights to local branch managers, using external and internal benchmarking, and implementing reward systems (i.e. profit sharing systems). As a result, this approach has made the company outperform their peer banks throughout Europe.

Bibliography

Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2009). Managerial economics and organizational architecture. Boston: McGraw-Hill Irwin.
Francke, L. (2003, February 24). Interview with Lennart Francke: Managing without budgets at Svenska Handelsbanken. (J. Daum, Interviewer)
Handelsbanken. (2010). Annual Report 2010. Retrieved May 2, 2011, from http://www.handelsbanken.se/shb/inet/icentsv.nsf/vlookuppics/investor_relations_en_hb_10_eng_ar/$file/hb10eng_medfoto.pdf
Lindsay, R. M., & Libby, T. (2010). Svenska handelsbanken: Controlling a radically decentralized organization without budgets. American Accounting Association , 625-640.
Svenska handelsbanken's outlook revised to stable: [1] (1998). PR Newswire Association LLC. Retrieved from http://search.proquest.com/docview/447276229 ?accountid= 13380
Svenska Handelsbanken: Moody's affirms all ratings of svenska handelsbanken (2007). Normans Media Ltd. Retrieved from http://search.proquest.com/docview/444635098?accountid=13380
Svenska Handelsbanken AB earnings conference call - final (2008). Voxant, Inc. Retrieved from http://search.proquest.com/docview/466189894?accountid=13380