The Hindu Business Line : Let discretion be your tutor with this `special' vehicle

HERE is an innocuous paragraph from the Institute of Chartered Accountants of India's Guidance Note on Securitisation, where ``accounting in the books of the investor'' is explained: "The Investor should account for the PTCs and/or debt securities acquired by it as an investment in accordance with Accounting Standard (AS)-13, `Accounting for Investments'. However, where in case of an Investor, AS-13 is not applicable because of the Investor being specifically exempted from the application of AS-13, the investments in PTCs and/or other securities should be valued and accounted for as per the relevant accounting principles applicable to the Investor."

PTC is not a transport corporation but pass-through certificate, defined as "instruments acknowledging a beneficial interest in the securitised assets such that the payment of interest on such instruments and the repayment of the principal are directly or indirectly linked or related to realisations from the securitised assets."

The guidance assumes added significance in view of the new interest in special purpose vehicle (SPV) that the Finance Minister proposed for funding infrastructure projects. However, SPVs or SPEs (that is, entities instead of vehicles) got a bad name not long ago because of Enron's fondness for them. To know more about the messy US tale, dip into the Report of investigation of Enron Corporation and related entities regarding Federal tax and compensation issues, and policy recommendations, prepared by the staff of the Joint Committee on Taxation about two years ago.

Volume I of the Report runs to 745 pages, as you may check in www.house.gov. It contains general observations, findings, and recommendations; general background information including the methodology and scope of the investigation and a history of the company; detailed discussion of certain of Enron's tax-motivated business transactions and other business tax issues; and detailed discussion of Enron's pension plans and compensation practices. The primary focus of the review was Enron's use of "tax shelter arrangements, off-shore entities, and special purpose entities".

SPEs were at the crux of the company's ``financing, operational, and accounting strategies''. These entities, formed by the company or its employees, conducted transactions with Enron and its affiliates. "Instead of selling assets to, or transacting hedging transactions with, independent third parties, Enron engaged in transactions with unconsolidated, or `off-balance-sheet', SPEs that Enron did not include in its financial accounting statements."

Ask accountants what they understand by the phrase `off-balance-sheet', and you'd find that their answers vary. The ICAI is yet to grapple with the concept, so you may draw inputs from a variety of other sources on this. Such as www.fasb.org of the Financial Accounting Standards Board or the FASB for Guidance to Improve Financial Reporting for SPEs, Off-Balance Sheet Structures and Similar Entities; www.syntheticdebt.com that tells you about the reform in this area and impact on `synthetic leases'; and Conspiracy of Fools: A True Story, a book by Kurt Eichenwald on the Enron collapse.

Given the mischief potential of SPEs, there is counsel from Hamlet to guide: "Be not too tame neither, but let your own discretion be your tutor: suit the action to the word, the word to the action; with this special o'erstep not the modesty of nature." Perhaps, the Government has to make a more forceful case for SPVs that it wants to ride in, rather than stop with mere glib statements.

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Look under the hood

The Original Equipment Suppliers Association (OESA), the Chief Financial Officers' Council and the Ernst & Young Global Automotive Centre have brought out a new study titled A Look Under the Hood, which examines the "financial measures, practices, and performance metrics among the automotive supplier community" with the idea of exploring financial practices and processes, identifying the challenges in customer and supplier relationships, quantifying cost pressures on suppliers, and suggesting how to obtain performance benchmarks.

"Engineering design and analysis and warranty costs were the two activities with the most significant increase in movement from customers to suppliers," notes the study. On the level of cost analysis routinely conducted, findings are that most suppliers (92 per cent) perform cost analysis at a product level, 39 per cent at a market level, and 14 per cent at a channel level.

"With business intelligence — such as tracking cost information for non-conformance costs (scrap, rework, premium freight, and so on) — you have financial data that can tell you the story of a company," is an insightful quote from Ashoka Achuthan of Siemens VDO, cited in the report. Worth a look.

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A call to compassion

There is a mail from Tosh K. Toshniwal, FCA, written in much anguish that the CA Institute is not sensitive to the problems of the small professional in practice, "particularly the younger generation being produced every six months who wish to go in for practice." Tosh writes that the small fry has to constantly fight for bare survival even as big business goes off on `personal contacts and referrals'. If we deny this fact and argue that the opportunities are the result of pure competence, then it is a serious question on the Institute's production process, indirectly accepting sub-standard quality of output, argues the correspondent. "Is it not the responsibility of the Institute to discuss and address this issue, have some `committee' to do some brainstorming on this subject also with an open and compassionate mind and realise that this matter is far more important than any other matters on hand, in priority?" asks Tosh, and I'd add my voice too to the question!

Tosh has an exciting idea: "Every professional firm with `n' number of years existence, `y' number of partners and `x' amount of billing should be made to `network' with `z' number of professional firms of less than `a' number of years existence. Thus, for at least two-three years, newly established firms will be involved in execution of premium assignments, nurtured in the knowledge and art of practical application of latest tools, and exposed to the large establishments as to how they work. Such `networking' should not be left to the discretion of the participating firms but arranged by the Institute itself and monitored." I can hear what some senior CAs are already muttering, "Networking? Not working!"

AccountSpeak@TheHindu.co.in

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