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21st March 1999

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International Accounting Standards document to be released soon

The International Ac counting Standards Committee (IASC) has announced that it had approved a standard on accounting for financial instruments and plans to issue the relevant document very soon.

IASC is the body trying to forge a common set of financial reporting rules for cross-border listings. This is stated in an article by Denny Beresford in the London "Financial Times."

The article goes on to say that the IASC has successfully completed its core set of global accounting standards and it now remains for the International Organisation of Securities Commissions (Iosco) which includes the Securities and Exchange Commission of the US to review those standards which is expected to take a year or more.

The most favourable outcome at least from the IASC's perspective, says Beresford, is that Iosco and SEC will endorse the core standards and allow them to be used to prepare financial statements required by securities regulators in any country.

Many countries, says the article, already accept IASC standards but Canada, Japan and the US are important exceptions.

The IASC has, says the article, also released a proposal to review its organisation and operations in order to prepare for "an even more influential role in the future". Beresford, on a personal note, says that as a one-time critic of IASC's due process procedures he is quite pleased to see that meetings are now open to the public and that many other improvements are under way.

But rather than concluding that IASC is now "entering into the home stretch of this marathon race, it is more accurate to say that the race has just begun".

The writer goes on to say that as Iosco and others evaluate the quality of the core standards that process alone will represent a formidable challenge to IASC's work to date. But, says Beresford, "The real impediments to global accounting standards go beyond the standards themselves to the fundamentals of how they are developed and then applied".

The two missing ingredients in the present process are what Beresford calls "disciplined application" of the standards and the necessary 'creative tension' in developing the standards.

In Beresford's view, disciplined application does not just mean that the national stock exchange, securities regulator or similar group requires companies to follow prescribed standards. That is already the case in a number of countries and, says the writer, the United Nations and the World Bank have pointed out that companies often say that they are following IASC standards when they are not.

What is needed, therefore, he says, is a mechanism to ensure uniform compliance with the standards which means rigid enforcement by international auditors and follow-up action by government regulators, to impose penalties for non-compliance.

The writer gives a specific example. He says that one of the more serious accounting issues in the US has involved so-called "in process" research and development (R&D) projects acquired as a part of a purchased business.

US accounting rules require companies to write off the assigned amounts immediately rather than treating the amounts as part of goodwill and recording the expense over 20 years or more.

The problems, says Beresford, is how to determine the amount to be assigned to R&D, out of the total acquisition price. Companies, he says, overstate the R&D amount in order to take the expense all at once rather than "penalising" future income statements.

But the SEC has made several companies lower their assigned amounts and restate earlier financial statements to correct the error. Beresford observes that, "without some sort of worldwide SEC, many of the judgement calls inherent in the IASC's standards will be subject to this same diversity of application and the result unacceptable non-comparability of company reports".

A lack of what the writer calls "creative tension" in standards setting means that the IASC has not yet had to deal with opposition from business people and accounting firms to almost all new accounting proposals.

But if the proposed standards are not challenged aggressively, the final rules and the underlying rational are apt to be too idealistic. Relatively few companies, says Beresford, bother to respond to IASCs proposals at present and the international accounting firms generally do not develop a single worldwide position.

With the IASC's plans to open up and otherwise improve its processes, it is possible that there will be more "creative tension" in the near future. The writer concludes that, "until a substantive enforcement mechanism is in place, global accounting standards are likely to remain a long way from the finishing line".


Effect of Asian currency crisis hits the rubber industry

By Dr. L.M.K. Tillekeratne

Director, Rubber Research Institute and Dr. I. N. Samarappuli

Director (Research), Board of Investment

NR Consumption by different Sectors
A Summary Sheet
1996 Vs 1997
No. of Companies NR Consumption (MT)

    Product Type   1996    1997       1996        1997
    Change over previous year

    Quantity%

 1. Tyre Retreading       26      28          4,600        5,404 804   17.5

 2. Industrial Solid          3         3        12,900      12,796 (104)  (0.8)

    Tyres

 3. Pneumatic Tyres        5        5           6,100        4,416 (1,684)  (27.6)

    & Tubes

 4. Footwear      10      13      6,860      5,250       (1,610)  (23.5)

 5. Flooring      5           7       2,700      3,465         765      28.3

 6. Other Rubber           6           14      3,990       4,934     944   23.7

    Products

 7. Latex Dipped          16          25     19,230     20,100       870    4.5

    Products

8. Latex Foam               3            4        3,970       5,400     1,430   36.0

Total        74                99       60,350  61,685    1,335     2.2

Figures in parenthesis indicate negative values.

Sri Lanka is the seventh largest natural rubber producing country in the world. In 1997 out of the 106,000 mt of natural rubber produced, nearly half (45%) has been consumed locally for making value added products like solid tyres, pneumatic tyres and tubes, late based dipped products and Rubber Production and Export of Sri Lankafootwear.

In general, the economy of Sri Lanka has not been adversely affected by the currency crisis that occurred in South East Asia (SEA) starting on July 2 1997; compared to other SEA countries due to following factors.

a. Majority of foreign investments in Sri Lanka were not confined to SEA countries only like Korea, Taiwan, Malaysia and Indonesia.

b. Sri Lankan rupee was allowed to devalue gradually over time as a floating currency.

Among the SEA countries, Malaysia had been the largest recipient of Foreign Direct Investment (FDI) during the past decade followed by Indonesia, Thailand, South Korea and Philippines. In comparison to US $ 32348 mn and $ 18198 mn received by Malaysia and Indonesia respectively the investment in Sri Lanka in terms of FDI is not significant at all.

Total FDI attracted by Sri Lanka between 1985 and 1996 amounts to just over US$ 800 mn only. A further amount of US$ 85 mn has been invested in Sri Lanka during the 1st half of 1998. Hence, the distribution of FDI between these Asian countries clearly explains the reason why Sri Lanka did not experience a noticeable impact of the Asian financial crisis.

Other issue that needs to be investigated is that the nature of international borrowing and capital account convertibility adopted in Sri Lanka. Owing to the borrowing restrictions enforced by the Sri Lankan monitoring authorities, opportunities given to the private sector for borrowing money from the lending organizations in international financial market is limited.

Further, the capital convertibility becomes important only if Sri Lanka has substantial foreign investments. One of the reasons for less foreign investments in Sri Lanka during the past decade is the war that is going on from 1983 and if not for that definitely there would have been very much more foreign investments in the country by now and the situation in the country as a result of SEA financial crisis would have been much worse.

Out of the US $ 19.7 billion invested in Malaysia, investments from Japan alone is US $ 8.2 billion. In Indonesia out of US $ 48.3 bn total investment, US $ 22.0 bn is from Japan. In Thailand out of US $ 61.7 bn investment, US $ 37.9 bn is from Japan. But in Sri Lanka, out of the total investment though South Korean component is about 20%, the balance 80% is evenly distributed among all countries in the world.

However, due to the possible drop in both export revenue and FDI, the possibility of Sri Lankan economy getting affected in the future remains fairly strong.

As a result of the currency devaluation in major rubber producing countries in the world viz. Thailand, Indonesia and Malaysia, the effective farm-gate price paid to their rubber farmers rose rapidly and hence they produced more rubber since July 97 than the anticipated target figures for 1997.

Releasing of buffer stocks kept in Thailand during this period to ease their economic problems, worsened the situation for rubber and as a result rubber production recorded a surplus of over 10% by the end of 1997. Hence, the global rubber price dropped rapidly until May 1998, recording a figure of Rs. 45 per kg. for average grades of RSS from the figures above Rs. 65.00 recorded before July 1997.

Similarly in the case of other industries like the garment industry and commodity export industries, the revenue fell far below the expected targets. Due to the financial hardships faced by South Korea, Malaysia and Hongkong, a fall in foreign investment in Sri Lanka too, is expected.

Even though the total rubber production in the country dropped from 112000 mt to 106000 mt in 1997, the amount of latex crepe produced out of the total production remained even slightly above the production in 1996. This was mainly due to the attractive premium price paid for this top quality commodity in the world market.

In order to maintain this position for this commodity in the world market, RRI owned "Dartonfield Estate" gained ISO 9002 in the middle of 1998 while few other crepe factories in the country are already very close to gaining this important standards registration. However, Sri Lankan authorities have taken all necessary precautions to prevent an over supply situation of latex crepe rubber in the international market. The environment safe water soluble bleaching agent introduced to the crepe industry by RRI Sri Lanka is now exported to both India and Indonesia by Chemanex Ltd.

In order to help the smallholders who were badly affected by the 25-40% price decline in sheet rubber and the farm-gate price paid to them for their latex by the centrifuged latex manufacturers, a cess of Rs.5.41 levied on raw rubber exports was abolished by the Government of Sri Lanka from May 1998.

This along with the gradually declining rupee value against the US dollar helped the smallholder to withstand the sharply declining rubber prices at least to some extent. Central Bank of Sri Lanka is maintaining a 10% depreciation of the rupee in 1998 compared to the 7.4% depreciation maintained throughout 1997.

Rubber products industry

The local rubber products manufacturers had to compete with manufacturers in South East Asia, when the domestic rubber prices in such countries fall sharply due to the currency crisis. For instance, during the period between Jan.- Aug. 1998, the price of sheet rubber and centrifuged latex of SEA origin was nearly Rs. 25 per kg. below Sri Lankan prices. This is a reduction of over 40 - 50% of the price of the main raw material used in the local rubber products industry.

It was at this juncture that the local rubber products manufacturers, particularly the gloves manufacturers were interested in importing both concentrated latex and dry rubber from SEA countries at low prices. However, the Government of Sri Lanka intervened and prevented importing substantial quantities of natural rubber, which could have otherwise adversely affected the local rubber plantation industry in the long-run.

The total quantity of latex imported up to August 1998 has been less than 500 mt; which is less than 2.5% of the annual latex consumption in the country for dipped products manufacture. Dry natural rubber has not been imported at all during that period. Hence, the import of latex had no negative impact on the domestic dry rubber latex price, as some of the people claim.

As a result of the recognition of the rubber products industry as a "Thrust Industry" in 1997, there was a considerable interest among products manufacturers to expand their product industries and hence even despite the currency problem, rubber consumption in the country has increased by 2.2%

However, due to the low price of rubber products introduced to the market by SEA countries, manufacture of industrial solid tyres, pneumatic tyres and tubes and the footwear industries stepped down their production by 0.8%, 27.6% and 23.5% respectively during 1997.

In terms of quantity, the decline in consumption of rubber in the three sector have been 104 mt, 1684 mt and 1610 mt respectively. Even with these figures, the decline in rubber consumption in the pneumatic tyres and tubes industry by 1684 mt was merely due to the closedown of the Kelani tyre factory as a result of an industrial dispute.

In the remaining rubber products sectors, there had been a sharp increase in rubber consumption particularly in the tyre retreading, flooring, dipped products and latex foam industries where the rubber consumption has increased by 17.5%, 28.5% and 36.0% respectively.

There is also a remarkable 23.7% increase shown in the other rubber products industries such as the tubing and hoses industry and rubberized coir mattress industries, thereby increasing the net natural rubber consumption by 2.2% over the previous year.

Based on this positive response shown by the present rubber products industries after gaining thrust industry status, the government of Sri Lanka is now considering strongly to extend more incentives for the rubber products industry to promote further expansion of the existing factories and to set up new rubber based industries. This will be one of the best ways for Sri Lanka to nullify the possible indirect effects of the SEA currency crisis on the economy of the country.


ADB prepares new micro-finance strategy

The Asian Development Bank has approved a regional technical assistance grant of US$ 400,000 to prepare a micro-finance strategy for 12 member countries including Sri Lanka, the Bank announced last week.

The Manila-based bank said that micro-finance providing the poor with loans, savings facilities and other financial services such as insurance is recognised as a powerful tool for poverty reduction and has been particularly successful in countries such as Bangladesh and Indonesia. However, it said, despite the rapid growth in micro-finance services in the region, an estimated less than 5 percent of poor households in the Asia and Pacific region have access to formal financial services.

The ADB's strategy will include expanding access to the poor to such services, the bank said.

An ADB task force on micro-finance will carry out in-country consultations in several bank's developing members, it said.

The bank said that other activities under the technical assistance will include a regional workshop in Manila to obtain further inputs for the strategy and a study of the role of central banks in micro-finance development.

The consultations and the study will cover 12 ADB members: Bangladesh, China, the Philippines, India, Indonesia, Kyrgyz Republic, Nepal, Pakistan, Papua New Guinea, Sri Lanka, Vanuatu and Vietnam, it said.


Mind your Business

by Business Bugs

In the millennium

Last week, we heard of how the death penalty was being re-introduced to combat violent crime but that is not all, legal eagles say.

Penalties for white-collar crime, especially for insider dealing and other frauds at the Stock Exchange will be severely enhanced, they say.The new laws however are not likely to see the light of day until the dawn of the Millennium....

FTA blessing

There are many who say that the Free Trade agreement with India is loaded against Sri Lanka but there are others who are not unhappy about it.

One automobile dealer, for instance, who imports a car assembled in India is exploring the possibility of using the agreement to get down the vehicles duty free.

That would slash the price of the vehicle by half, but competitors say it would all but eliminate them from the local market...

Change or strike

A new broom sweeps clean, they say. So, after the recent changes at the top in the national carrier, sweeping changes are on the cards.

The new bosses have decided that almost everything-from destinations and staff recruitment criteria to salary scales- need to be reviewed.

But those who are in the cockpit are skeptical and if no real changes are seen another strike is a possibility,they say.


Rs. 3.8 billion from Skanska for Kukuleganga

Skanska has signed an MOU for Rs. 3.8bn hydropower plant in Kukule Ganga. The project is awaiting approval of the Overseas Economic Cooperation Fund (OECF) of Japan, which is providing a soft loan for the plan.

Skanska will carry out the underground work for the 2X35 MW power plant. The project involves headraces and tailraces totaling 6.6 kilometers, a 140 meter pressure shaft and an underground power station. The construction time is 43 months.Skanska International Civil Engineering built the Kotmale power plant.


Polish Chamber signs MOU with Ceylon Chamber

A delegation of Polish businessmen accompanied by the President of Poland were here last week in a bid to strengthen trade ties between the two countries.

The Ceylon Chamber of Commerce signed a Memorandum of Understanding with the Polish Chamber of Commerce at a meeting held to introduce the Polish businessmen to the Local Businessmen.

The Polish delegation represented a wide cross section of trade activities ranging from industrial equipment to food and beverage and financial services.

Sri Lankan exports to Poland amounted to Rs. 1.5mn in 1998. Though this represents only 0.50 percent of total exports, Poland bought Rs. 914mn worth of tea in 1997. The Chambers hope that the signing of the Memorandum will improve these figures in future.


IT group marks 10 years with newsletter

Intermediate Technology Developers Group Sri Lanka launched a newsletter to coincide with their ten year anniversary.

ITSL's pilot projects are in the areas of new technology to rural communities, training people and ensuring program sustainability through helping to adapt the technology and the community to serve one another. The work areas cover agro processing, rural transport, building materials and shelter, energy, manufacturing, communications, research and policy disaster mitigation and finance and administration

The Group has been working with disadvantaged people since 1989. International Technology Development Group the parent organization was founded in 1968 by E.F.Schumacher, to address the issues overlooked by large scale industrial development.

Today the group works in Bangladesh, India, Kenya, Nepal, Peru, Sudan, Zimbabwe and Sri Lanka and the head office is based in UK.

According to Lahiru Perera, Country Director, ITSL "finds out what people are doing and helps them to do it better".


Keells pumps Rs.20m to improve production

By Dinali Goonewardene

Keells Food Products Limited has recorded a 169% increase in profit before tax and 50% increase in turnover for their nine months unaudited accounts. Profit before tax increased from Rs.7.48 million to Rs. 20. 13 million and turnover from Rs. 299 million to Rs.449 million.

Increased sales in the hotel industry and food service sector were the main reason for the increase in sales, MD Chula de Silva said. Profit before tax has trebled due to an increase in sales volume and concurrent cost management. The company is a price leader but said price increases during the period have been in keeping with inflation. The company claims a market share of 85%. Players in this market include Elephant House, Cargills and Bairaha. Keells food products has invested Rs 20 million in new equipment designed to improve productivity and hygiene aspects of production. Machinery purchased include a linker to maintain portion control, automated casing peeler for removing sausage skin and a high speed slicer. New machinery will enable set weights to be maintained, resulting in savings to the company. Potential for exports in the upper end of the Indian market may be pursued once the Indo-Lanka free trade agreement is operative. Import potential is low given quality concerns.

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