Balance Sheet Reporting Practices By Listed Companies Of Bangladesh

Balance Sheet Reporting Practices by Listed Companies of Bangladesh Mohammad Farhad Hossain* Mohammad Moniruzzaman Siddiquee**

Abstract: This paper tries to find out balance sheet reporting practices by the listed companies in Bangladesh. Among the non-financial companies, the most widely used balance sheet style follows the equation as [NCA + (CA – CL) = E + NCL], (83 companies, 34%); followed by the style with equation [E + NCL = NCA + (CA – CL)], (45 companies, 19%). Variation in balance sheet reporting is none in financial sectors like banking, and insurance due to regulation. The variation is evident in nonfinancial sectors as very high, even within the sector. Variation in use of balance sheet style is very high in sectors like engineering, food and allied, and pharmaceutical. Both engineering and pharmaceutical companies follow seven different types of balance sheet styles; the figure is six for food and allied sector. Most of the listed companies of Bangladesh present their balance sheet in English language (226 companies, 93%). 31st December is the most widely used balance sheet reporting date (127 companies, 52%) followed by 30th June (97 companies, 40%). Most of the companies use report format (203 companies, 84%). In the balance sheet assets are arranged as fixed assets first with least liquid first and more liquid last, then current assets second with less liquid first and most liquid last.

INTRODUCTION It is true that comparisons of financial statements are vital to significant financial and operating results, and to the determination of credit indices and cyclic trends. Choi and Levich (1991) in a survey of institutional investors, corporate issuers, investment underwriters and market regulators in Germany, Japan, Switzerland, the UK and the US concluded that the comparability of financial statements is important to investors. However, the lack of uniform balance sheets and uniform principles has questioned the purpose of financial reporting as evidenced by Choi and Levich (1991) that accounting differences may affect balance sheet items and measures of capital adequacy or credit worthiness that indirectly affect managerial decisions and firm valuation. As there are wide differences in financial reporting around the world, discussions are going on about the harmonization of financial reporting from regional and international paradigm. The pressure for international accounting harmonization is constantly increasing because the products of accounting in one country are used in various other countries (Nobes and Parker, 2002). Accounting harmonization has been viewed by its proponents as an effective means of facilitating cross-border economic activities and of reducing overall costs of compliance with different national accounting standards (Rivera, 1989; Choi and Levich, 1990; Fleming, 1991). However, opposing the idea accounting academics like Briston, 1978; Samuels and Oliga, 1982; Ndubizu, 1984; Hove, 1986, 1989; Taylor, 1987; Goeltz, 1991; Hoarau, 1995 argued that accounting harmonization represents an imposition of Western accounting concepts, with a particularly strong Anglo-American bias, on settings in which these concepts are inappropriate and, consequently, harmful. *

Associate Professor, Department of Business Administration, Jahangirnagar University, Savar, Dhaka-1342, Bangladesh Lecturer, Department of Business Administration, Jahangirnagar University, Savar, Dhaka-1342, Bangladesh

**

1 Electronic copy available at: http://ssrn.com/abstract=1138104

Another criticism is that the fact that accounting is flexible in nature and can adopt to different number of situations but if accounting standards are harmonized it is believed that they would not be flexible enough and the standards set internationally cannot possibly fit for the wide range of national circumstances, legal systems, stages of economic development, and cultural differences. Harmonization of accounting standard could prove dangerous to the companies as the standards could cut profits and inject volatility into the balance sheets of the companies (Parker, 2002). Despite the debate, it can easily be inferred that if all companies use the same definitions and rules to communicate their financial accounting information, not only the effectiveness of accounting information as a communication device will be increased, but also user’s costs of understanding the data will be reduced. A solid understanding of domestic reporting practices will help us move on to regional and international accounting harmonization. Voon (undated) reported that as globalization works its way through local economies via deregulation and modern market reforms, there is a need for the convergence of local financial reporting standards with International Accounting Standard (IAS). Thus a study of countryspecific reporting practices may create an impact on the discussion on the accounting harmonization attempt. Our study aims to explore the balance sheet reporting practice by the listed companies in Bangladesh. The objective of this study is to find out the most widely used balance sheet reporting in Bangladesh, which includes reporting formats, marshalling of assets, language of communication, etc. around different industries or sectors classified by the Dhaka Stock Exchange (DSE) Ltd. The findings of this study can be useful for the study of developing market accounting; and of course for any attempt of accounting harmonization.

The discussions in this paper are arranged in following way. First, some literatures are discussed on the issue of balance sheet reporting practices in different times and different regions. Then, in the subsequent sections, methodology of this paper is discussed. A brief overview of the regulatory environment of balance sheet reporting is discussed in the next section. Then, findings of this paper are discussed in the next section followed by conclusions. BALANCE SHEET REPORTING PRACTICES As late as May 31, 1865, the annual report of the Boston and Maine Railroad exhibited in place of the modern balance sheet a “Balance Account, after closing books.” Three classes of debit accounts appeared: Construction Accounts (the cost of road and equipment), Property Accounts (supplies such as wood, oil, iron rails, ties, and coal), and Asset Accounts (cash, notes, bills, prepaid insurance, and sundry receivables). Two classes of credit accounts were brought out in strong relief: the Capital Stock Account and Liabilities. A General Reserve Account (the undivided profits to date) was classified as a liability and used to balance the statement. Before that their annual report, as of September 30, 1856, contained a “Statement of Liabilities and Assets” with accounts classified in the order suggested by the title (Nelson, 1947).

2 Electronic copy available at: http://ssrn.com/abstract=1138104

Dicksee (1909) stated that under the Italian system of bookkeeping, which is still practiced in some oldfashioned merchants' houses, it is the custom at every balancing, after the nominal accounts have been closed, to transfer the balances of the real and personal accounts into one account, usually called in England and the United States the ‘Balance Account,’ and in France the ‘Balance de Sortir,’ or ‘closing balance’.” Although in some respects the “balance account” was similar to the “balance sheet”; nevertheless, some fundamental differences were appearing – differences that involved more than bookkeeping procedures, statement form, and terminology. Sprague (1913) expressed his belief concerning the balance sheet’s importance stating that the statement “may be considered as the groundwork of all accounting, the origin and terminus of every account” and placed the assets in the left-hand register, and insisted that “the rights of others, or the liabilities, differ materially from the rights of proprietor.” Although some companies issued annual reports at that time but did not include balance sheets or, if balance sheets were included, the financial information was often minimal. Even, at the beginning of the 20th century most companies did not classify balance sheets, and in the statements of the few companies that did, there was no consistency in the grouping of items. Dicksee (1909) warned that “nine out of ten published balance sheets include items under ‘Assets’ and ‘Liabilities’ which are certainly not either one.” Canning (1929) became disturbed over the differences in definition and accounting practice and gave evidence of a deep conviction that a study of texts would not bear sufficient fruit to yield a harvest of adequate understanding. Foulke (1968) notes that it was after 1900 that public accounting firms commonly used the terms ‘current assets’ and ‘current liabilities’. Earlier Foulke (1945) writes that the classification of current assets is undoubtedly the most important classification in a balance sheet, as current assets largely determine the going solvency of a business concern. Despite the lack of significant balance sheet classifications at the beginning of the century, by 1940 the basic format for reporting current assets on the balance sheet had been adopted. Instead of following British precedent established under the Companies Acts, the American (or Continental Europe) balance sheet had its own characteristics, especially in regard to the classification and position of current assets (Normand and Wootton, 2001). Although there was little need for classified balance sheets immediately after the Civil War, it was impossible not to have them by 1940, because of the business world that was transforming from sole proprietorships with little need for financial statements to corporations with regulatory requirements to provide basic financial statements to their different stakeholders. Besides current items, several accounting historians (Claire, 1945; Schiff, 1978; Vangermeersch, 1970, 1971/72, 1986; Reed, 1989) in investigating evolution of financial statements have concentrated on the overall development of financial statements or upon the presentation and valuation of long-term assets on the balance sheet. Vangermeersch (1979) examined in depth the changing role and format of the balance sheet over the years.

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Balance sheet presentation style differs from country to country with a few exceptions. For example, the balance sheet in Japan is divided into sections on assets, liabilities, and net assets, and the section on net assets is divided into owners’ equity and items other than owners’ equity. Owners’ equity is further divided into paid-in capital, capital surplus, and earned surplus. In the UK, the vertical format balance sheet typically shows two years figures, with a single column for each year. In the US, they tend to split each year into two or three columns, with sub-totals for assets, liabilities and equity (they may call it “capital”) in the right hand column; in some ways this makes it easier to see how the balance is arrived at. However, European Union, Russia, and Australia have moved toward IFRS (International Financial Reporting Standards) which has produced balance sheet with the items in a slightly different order, with the capital or equity shown at the top of the liabilities, rather than at the bottom to balance out total assets with total liabilities. Also some of the terms that appear in the balance sheet and profit and loss account are changing: debtors and creditors, for example, will appear as receivables and payables. The move to IFRS has also highlighted how there were differences in the way certain figures for the balance sheet were calculated in different countries. Because of historical differences in the utility of accounting information, each country attributes varying degrees of importance to each particular financial statement. Between Continental and Anglo-American accounting systems there is a substantially different understanding of the accounting function (Ding, Stolowy, and Tenenhaus, 2003). For example, the Continental view is that the basic function of accounting is to provide evidence that a firm has complied with judicial requirements and satisfied the various demands of tax authorities, macro-administration bodies, investors, creditors, employees, etc. In Anglo-American countries, however, the purpose of accounting function is seen more as the disclosure of economic information concerning an enterprise, where, in most cases, financial ownership and operational management are separate. METHODOLOGY To understand how listed companies are disclosing information on specific issues (in our case, assets, liabilities and equities), we reviewed the publicly available information (annual report) produced by 243 companies of different sectors enlisted with the DSE. The sample includes companies from all of the sectors of DSE: Bank (25), Cement (8), Ceramics (4), Engineering (22), Finance and Investment (4), Food and Allied (38), Fuel & Power (3), ICT (5), Insurance (26), Jute (3), Leasing (5), Leather (6), Miscellaneous (13), Paper & Packaging (8), Pharmaceuticals & Chemicals (27), Services & Real Estate (4), and Textile (42). The number in the parenthesis represents the distribution of companies under each sector. We have excluded some firms due to the unavailability of annual reports. The annual reports for each sample firm were obtained from the DSE. To capture the practices of balance sheet presentation among the sample companies, we have identified some issues, such as balance sheet style, asset marshalling, format of the balance sheet, balance sheet date, Multinational/Local/Govt, Language (Bangla/English/Both). Balance sheet style implies basically the presentation of accounting equation in the balance sheet. For example, a very common way of

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preparing balance sheet in the textbooks is: [CA + NCA = (CL + NCL) + E], where CA stands for current assets; NCA, non-current assets; CL, current liabilities; NCL, non-current liabilities; and E, equity. CL and NCL are put in parenthesis, because these two are disclosed in total. We had identified several styles of balance sheet presentation using variations in accounting equation. These styles are available in Appendix B. This paper explores the various accounting equations in the balance sheets.

Asset marshalling refers to the sequence of listing the assets in the balance sheet. Two very extreme way of asset marshalling is: (a) liquidity approach, where assets are listed as most liquid assets first and the least liquid assets last; and (b) non-current (block) approach, where assets are listed as least liquid asset first and the most liquid asset last. A variation of these two extremes is also available in practice. A list of such possible variation is available in Appendix C. This paper explores the use of such variation in asset marshalling in Bangladesh. There are two very well-known types of formats in balance sheet presentation – report format and account format. This paper explores the use of formats by the Bangladeshi firms. We had considered ownership of the firm as another important factor to understand the reporting of balance sheet. We had categorized the ownership as: multinational, local, and state-owned (or Govt.). Lastly, we focus on the language, which is used to present the balance sheet; and the balance sheet reporting date. Before going into the findings of this study, a discussion about the regulatory environment of financial reporting in Bangladesh, and regulatory framework for balance sheet deemed necessary for a better understanding. REGULATORY ENVIRONMENT OF FINANCIAL REPORTING IN BANGLADESH Financial reporting and disclosure requirements for the registered companies in Bangladesh are governed by the Companies Act, 1994. Banking institutions’ disclosure practices are regulated by the Bank Companies Act 1991, Bangladesh Banks (Nationalization) Order 1972, Bangladesh Bank Order 1972, Bangladesh Shilpa Bank Order 1972, Bangladesh Krishi Bank Order 1972, and Bangladesh Shilpa Rin Sangstha Order 1972. The disclosure practices of the insurance companies are guided by the Insurance Act, 1938 and the Insurance Corporations Act, 1973. Besides statutory regulations, the Securities and Exchange Commission (SEC), the Registrar of Joint Stock Companies, and the Institute of Chartered Accountants of Bangladesh (ICAB) play an important role in shaping the disclosure requirements from time to time. The Companies Act, 1994 provides basic requirements for accounting and reporting applicable to all companies incorporated in Bangladesh. The Act provides the requirements for preparation and publication of financial statements, disclosures, and auditing, among other provisions. However, in most cases, the Act lacks clarity with regard to statutory requirements on disclosures in the financial statements of the incorporated companies. It is silent about either Bangladesh Accounting Standards (BAS) or International Accounting Standards (IAS/IFRS).

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The SEC regulates financial reporting practices of listed companies. Listed companies are required to comply with SEC accounting and disclosure requirements, despite inconsistencies with the requirements of the Companies Act 1994. The SEC, in protecting investor interests, issues various rules that apply to listed companies, including accounting and auditing requirements that, according to SEC Ordinance 1969 (Provision 2CC), supersede requirements set by the Companies Act. The Securities and Exchange Rules, 1987 require compliance with IAS/IFRS as adopted in Bangladesh, known as BAS.

The Bank Companies Act 1991 authorizes the Bangladesh Bank to regulate financial reporting by banks. The Act prescribes the format of balance sheet and income statement, including disclosure requirements that each bank must follow for regulatory reporting to the Banking Inspection Department of the Bangladesh Bank. The same accounting and financial reporting rules are required to be followed by banks in preparing financial statements for external users (World Bank, 2003). The Act mandates reporting formats and disclosures based on BAS 30, which is similar to IAS 30. However, the Act is silent about other BAS, and the result of compliance with BAS by banks is mixed. Financial reporting and disclosure practices of insurance companies are regulated by the Insurance Act 1938. The Act specifies that insurance companies should submit their company’s annual audited financial statements to the Chief Controller of Insurance within six months from the balance sheet date. However, the Act does not mandate compliance with BAS. In practice, insurance companies often do not follow BAS. Income Tax Ordinance of 1984 also significantly influences the financial disclosure and reporting practice of companies in Bangladesh. Many business entities design their accounting system as per the requirements of the income tax law. Although there is no legal requirement on observance of tax accounting rules in external financial reporting, those who prepare and audit financial statements generally ensure that the accounting treatments that are acceptable to the taxation authorities are used not only for tax reporting purposes but also for preparing the general-purpose financial statements. REGULATORY FRAMEWORK FOR BALANCE SHEET REPORTING Bangladesh Accounting Standards (BAS) 1 (ICAB, 2004), which is a localized re-explanation of International Accounting Standard 1, explains the presentation of financial statements in details. As per Para 49, balance sheet should be presented at least annually. Regarding the classification of assets and liabilities, Para 53 of BAS 1 suggests each enterprise to determine, based on the nature of the operations, whether or not to present current and non-current assets and current and non-current liabilities as separate classifications on the face of the balance sheet. Para 55 allows an enterprise to show its net assets. Para 66 provides a list of items, which should be included in the balance sheet as line items. These items are: (a) property, plant and equipment; (b) intangible assets; (c) financial assets (excluding amounts shown under (d), (f) and (g)); (d) investments accounted for using the equity method; (e) inventories; (f) trade

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and other receivables; (g) cash and cash equivalents; (h) trade and other payables; (i) tax liabilities and assets as required by BAS 12 Income Taxes; (j) provisions; (k) non-current interest-bearing liabilities; (l) minority interest, and (m) issued capital and reserves. Para 68 suggests no prescribed order or format in which items are to be presented. The appendix of BAS 1 depicts one illustrative format of balance sheet (Appendix A) which is labeled as Style 2 in this paper. BAS 30 (ICAB, 2004) discusses the disclosures in the financial statements of banks and similar financial institutions. As per Para 19 of BAS 30, the balance sheet should include following assets: (a) cash and balances with the Bangladesh Bank and Sonali Bank; (b) Treasury bills and other bills eligible for rediscounting with the central bank; (c) Government and other securities held for dealing purposes; (d) Placements with, and loans and advances to, other banks; (e) Other money market placements; (f) Loans and advances to customers; and (g) Investments securities; and the following liabilities: (a) Deposits from other banks; (b) Other money market deposits; (c) Amounts owed to other depositors; (d) certificates of deposits; (e) Promissory notes and other liabilities evidenced by paper; (f) Other borrowed funds. FINDINGS We have demonstrated our findings in order of balance sheet reporting date and language, balance sheet presentation style and asset marshalling, and balance sheet format. Date and Language of Balance Sheet Reporting The listed companies in Bangladesh follow a wide range of reporting dates. 31st December is the most widely used (127 companies, 52%) reporting date followed by 30th June (97 companies, 40%). A complete list of number of companies in each sector is in Table 1. The column “modal sector” represents the sector where most of the companies use a certain reporting date. For example, major sectors, which use 30th June as balance sheet reporting date are, Food and Allied, Textiles, Pharma and Chemical, and Engineering. Some non-traditional reporting dates are also in practice like, 31st March, 31st July, 31st August, 30th September, and 31st October. Such non-traditional reporting dates accounts for 19 companies (8%). Table 1: Balance Sheet Reporting Date of the Companies Reporting Date 31-March 30-June

Frequency 4 (2%) 97 (40%)

Sector Textile (2), Engineering (1), Pharma & Chem (1) Cement (2), Ceramics (4), Engineering (11), Finance & Investment (1), Food & Allied (24), Fuel & Power (1), ICT (3), Jute (3), Leather (3), Misc (4), Paper & Pack (5), Pharma & Chem (13), Service & Real Estate (1), Textile (22) Service & Real Estate (1)

31-July

1 (0.41%)

31-August

3 (1%)

Engineering (1), Food & Allied (1), Misc (1)

30-September

10 (4%)

Cement (1), Food & Allied (3), Fuel & Power (1), Leather (1), Textile (4)

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Modal Sectors Textile (2) Food & Allied (24), Textile (22), Pharma (13), Engineering (11) Service & Real Estate (1) Engineering (1), Food & Allied (1), Misc (1) Textile (4), Food & Allied (3)

31-October 31-December

1 (0.41%) 127 (52%)

Total

243

Misc (1) Bank (26), Cement (5), Engineering (9), Finance & Investment (3), Food & Allied (10), Fuel & Power (1), ICT (2), Insurance (26), Leasing (5), Leather (2), Misc (7), Paper & Pack (3), Pharma & Chem (13), Service & Real Estate (2), Textile (14)

Misc (1) Bank (26), Insurance (26), Pharma (13), Textile (14)

Source: This study result Most of the listed companies in Bangladesh present their balance sheet in English language (226 companies, 93%) having a large representation from Textile, Food and Allied, Pharma and Chemical, and Bank (Table 2). Ten companies use only Bangla (all local companies) and seven use both the languages including two multinational companies. Table 2: Balance Sheet Language Language Bangla

Frequency 10 (4%)

English

226 (93%)

Both Bangla and English Total

7 (3%)

Sector Bank (4), Insurance (1), Leather (1), Paper & Pack (3), Pharma & Chem (1) Bank (19), Cement (8), Ceramics (4), Engineering (21), Finance & Investment (4), Food & Allied (37), Fuel & Power (1), ICT (5), Insurance (25), Jute (3), Leasing (4), Leather (5), Misc (13), Paper & Pack (5), Pharma & Chem (26), Service & Real Estate (4), Textile (42) Bank (2), Engineering (1), Food & Allied (1), Fuel & Power (2), Leasing (1)

Modal Sector Bank (4) Textile (42)

Bank (2), Fuel & Power (2)

243

Source: This study result Balance Sheet Presentation Style and Asset Marshalling We have identified 12 possible styles of balance sheet presentation in practice, and labeled those from 1 through 12 (Appendix 2). This labeling is according to our judgment. Style 1 is the so called American presentation style, which is widely found in the American text books, widely used by major American companies, and taught in most business schools of Bangladesh. Very surprisingly no listed companies of Bangladesh use this style. Because of strict regulatory framework, all banking companies use Style 10 and insurance companies, Style 11. One important aspect of Style 10 is, off-balance sheet items are integral parts of the balance sheet. Another important financial sector balance sheet style is Style 12, mostly used by leasing and investment companies. Among the non-financial companies, the most widely used style is Style 6 (83 companies, 34%) followed by Style 5 (45 companies, 19%). A significant number of companies (25, 10%) use Style 2 (Table 3). Only few sectors have uniformity in balance sheet reporting style. As mentioned earlier, financial sector companies have most uniformity in this regard (Table 4). Among the significant non-financial sectors, only Cement sector companies have satisfactory uniform balance sheet styles (Style 5 and 6). The other major sectors are in complete free choice of balance sheet style. For example, one very significant sector, Pharmaceuticals and Chemical, follows Style 2, 3, 4, 5, 6, 8, and 9 (Style 6 is followed by the majority companies) (Table 4). Same applies to other major sectors like, Engineering, Service, and Textile. The

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variation in the balance sheet presentation is basically because of rearrangements of the balance sheet elements. Such rearrangements are depicted as balance sheet equations in table 7. From the different rearrangements of balance sheet elements, focus of the balance sheet can be derived. Different balance sheet styles found in this study focus on working capital, residual claim, net asset, long-term investment, etc. either exclusively or in combination (Table 7). We have labeled the asset marshalling in six different types (available in Appendix 3). Type 1 – fixed assets first (with less liquid first and more liquid last) and current asset second (with less liquid first and more liquid last) – is followed by most of the companies (184, 76%). This marshalling style is quite contrary to the common practices by American companies. It should be mention that uniformity within the sector is very high in choosing marshalling types. The pair of marshalling type and balance sheet style is almost uniform in different sectors. For example, when balance sheet Style 2, 3, 4, 6, 7, 8, and 9 are in practice marshalling Type 1 is uniformly used by all the companies (Table 6). Only difference is Style 5 and 12; different marshalling types are used with these balance sheet styles. Table 3: Different Balance Sheet Presentation Styles Used by the Companies Style 1 2

No. of Companies 0 25 (10%)

3

8 (3%)

4

8 (3%)

5

45 (19%)

6

83 (34%)

7 8

1 (0.41%) 15 (6%)

9

1 (0.41%)

10 11 12 Total

25 (10%) 26 (11%) 6 (2%) 243

Sector Ceramics (1), Engineering (3), Food & Allied (4), ICT (1), Leather (1), Paper & Pack (1), Pharma & Chem (3), Service & Real Estate (1), Textile (10) Engineering (2), Food & Allied (3), Pharma & Chem (1), Finance & Investment (1), Service & Real Estate (1) Engineering (1), Food & Allied (1), Misc (1), Pharma & Chem (2), Textile (3) Cement (1), Ceramics (2), Engineering (9), Finance & Investment (2), Food & Allied (6), Fuel & Power (2), Leather (3), Misc (2), Paper & Pack (4), Pharma & Chem (8), Service & Real Estate (1), Textile (6) Cement (7), Ceramics (1), Engineering (6), Food & Allied (18), ICT (4), Jute (3), Leather (2), Misc (8), Paper & Pack (2), Pharma & Chem (10), Service & Real Estate (1), Textile (21) Paper & Pack (1) Ceramics (1), Engineering (1), Food & Allied (6), Fuel & Power (1), Misc (2), Pharma & Chem (2), Textile (2) Pharma & Chem (1) Bank (25) Insurance (26) Finance & Investment (1), Leasing (5)

Source: This study result

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Modal Sector Textile (10)

Food & Allied (3)

Textile (3) Engineering (9)

Textile (21)

Paper & Pack (1) Food & Allied (6)

Pharma & Chem (1) Pharma Bank (25) Insurance (26) Leasing (5)

ACI

Table 4: Sector-wise Balance Sheet Reporting Style Industry

Total Companies under Study

Bank Cement Ceramics Engineering Finance & Investment Food & Allied Fuel & Power ICT Insurance Jute Leasing Leather Misc Paper & Pack Pharma & Chemical Service & Real Estate Textile Total

25 8 4 22 4 38 3 5 26 3 5 6 13 8 27 4 42 243

Modal Balance Sheet Style 10 6 5 5 6 5 6 11 6 12 5 6 5 6 6

Frequency of Modal Style

Alternative Styles in Use

25 7 9 2 18 2 4 26 3 5 3 8 4 10 21

5 2,5, 6, 8 2, 3, 4, 5, 6, 8 3, 12 2, 3, 4, 5, 8 8 2 2, 6 4, 5, 8 2, 6, 7 2, 3, 4, 5, 8, 9 2, 3, 5, 6 2, 4, 5, 8

Source: This study result Table 5: Asset Marshalling Practices Marshalling Practices 1

Frequency 184 (76%)

2 3 4 5 6

6 (2%) 1 (0.41%) 25 (10%) 26 (11%) 1 (0.41%)

Total

243

Sector Cement (8), Ceramics (4), Engineering (22), Finance & Investment (3), Food & Allied (38), Fuel & Power (3), ICT (5), Jute (3), Leasing (1), Leather (5), Misc (13), Paper & Pack (7), Pharma & Chem (26), Service & Real Estate (4), Textile (42) Leasing (4), Leather (1), Pharma & Chem (1) Paper & Pack (1) Bank (25) Insurance (26) Finance & Investment (1)

Modal Sector Textile (42)

Leasing (4) Paper & Pack (1) Bank (25) Insurance (26) Finance & Investment (1)

Source: This study result Table 6: Balance Sheet Presentation Styles with Asset Marshalling Practices Balance Sheet Presentation Styles 2

Asset Marshalling Practices

Frequency of Combination

Sector

1

25

3

1

8

4

1

8

5

1

Ceramics (1), Engineering (3), Food & Allied (4), ICT (1), Leather (1), Paper & Pack (1), Pharma & Chem (3), Service & Real Estate (1), Textile (10) Engineering (2), Finance & Investment (1), Food & Allied (3), Pharma & Chem (1), Service & Real Estate (1) Engineering (1), Food & Allied (1), Misc (1), Pharma & Chem (2), Textile (3) Cement (1), Ceramics (1), Engineering (9), Finance & Investment (1), Food & Allied (6), Fuel & Power (2), Leather (2),

10

Modal Sector

Textile (10)

Food & Allied (3)

Textile (3) Engineering (9)

6

2 6 1

7 8

3 1

9 10 11 12

1 4 5 1 2

Misc (2), Paper & Pack (4), Pharma & Chem (7), Service & Real Estate (1), Textile (6) Leather (1), Pharma & Chem (1) Finance & Investment (1) Cement (7), Ceramics (1), Engineering (6), Food & Allied (18), ICT (4), Jute (3), Leather (2), Misc (8), Paper & Pack (2), Pharma & Chem (10), Service & Real Estate (1), Textile (21) Paper & Pack (1) Ceramics (1), Engineering (1), Food & Allied (6), Fuel & Power (1), Misc (2), Pharma & Chem (2), Textile (2) Pharma & Chem (1) Bank (25) Insurance (26) Finance & Investment (1), Leasing (1) Leasing (4)

Textile (21)

Food & Allied (6)

Bank (25) Insurance (26) Leasing (4)

Source: This study result Table 7: Balance Sheet Equation Sl. 1

Balance Sheet Style 1

Equation

Comments

(CA + NCA) = (CL + NCL) + E

Total investing and total financing focus. Investing at top; residual claim at bottom. Total investing and total financing focus. Investing at top.

2

2

NCA + CA = E + NCL + CL

3

3 and 11

E + NCL + CL = NCA + CA

4

4

NCA + (CA – CL) = NCL + E

5

5 and 12

E + NCL = NCA + (CA – CL)

6

6

NCA + (CA – CL) = E + NCL

7

7

(CA – CL) + NCA = E + NCL

Total investing and total financing focus. Residual claim at top. Working capital, and long-term financing focus; residual claim at bottom. Long-term financing, and working capital focus. Residual claim at top. Working capital, and long-term financing focus. Longterm investing at top. Working capital, and long-term financing focus.

8

8

[NCA + (CA – CL)] – NCL = E

Net assets, and residual equity focus

9

9

E = NCA + (CA – CL) – NCL

Residual equity, and net asset focus

10

10

CA + NCA = CL + NCL + E

For banking companies. Off-balance sheet reporting included.

Where, CA = Current assets; NCA = Non-current assets; CL = Current liabilities; NCL = Non-current liabilities; E = Equity

Source: This study result Balance Sheet Format Under standard accounting conventions balance sheet may be presented in two formats: the report form (vertical presentation) and the account form (horizontal presentation). We have labeled the former as Format 1 and the latter as Format 2. The balance sheet is most often presented in report form, with assets listed above liabilities and owners’ equity. In the account form of balance sheet the assets section is placed on the left and the liabilities and owners’ equity sections on the right. In some countries, the UK and Ireland for example, a ‘multiple-step’ format is used, with a list of subsets of the three main categories of assets, liabilities and shareholders’ equity and identification of managerially useful subtotals 11

by subtracting other relevant subcategories of assets and liabilities (Ding, Stolowy, and Tenenhaus, 2003). Nobes and Parker (2002) found that vertical format is used in the United Kingdom whereas horizontal format is dominant in France and Spain. This study found 203 companies (84%) use report format; remaining 40 companies (15%) use account format (Table 8). Only the insurance sector companies are the majority users of account format. No multinational company uses the account format. Table 9 lists the combination of balance sheet style and the balance sheet format. Style 6 and format 1 makes the highest number. Table 8: Presentation Format Format Report Format (1)

Account Format (2) Total

Frequency 203 (84%)

40 (16%) 243

Sector Bank (18), Cement (8), Ceramics (4), Engineering (19), Finance & Investment (4), Food & Allied (35), Fuel & Power (3), ICT (5), Insurance (1), Jute (3), Leasing (5), Leather (6), Misc (13), Paper & Pack (7), Pharma & Chem (26), Service & Real Estate (4), Textile (42) Bank (7), Engineering (3), Food & Allied (3), Insurance (25), Paper & Pack (1), Pharma & Chem (1)

Modal Sector Textile (42)

Insurance (25)

Source: This study result Table 9: Balance Sheet Presentation Styles with Presentation Formats Balance Sheet Presentation Styles

Presentation Formats [(1) Report Format, (2) Account Format] 1

Frequency of Combination

Sector

23

2 1

2 3

2

5

4

1

8

5

1

45

1

82

2

1

Ceramics (1), Engineering (2), Food & Allied (4), ICT (1), Leather (1), Pharma & Chem (3), Service & Real Estate (1), Textile (10) Engineering (1), Paper & Pack (1) Finance & Investment (1), Food & Allied (1), Service & Real Estate (1) Engineering (2), Food & Allied (2), Pharma & Chem (1) Engineering (1), Food & Allied (1), Misc (1), Pharma & Chem (2), Textile (3) Cement (1), Ceramics (1), Engineering (9), Finance & Investment (2), Food & Allied (6), Fuel & Power (2), Leather (3), Misc (2), Paper & Pack (4), Pharma & Chem (8), Service & Real Estate (1), Textile (6) Cement (7), Ceramics (1), Engineering (6), Food & Allied (17), ICT (4), Jute (3), Leather (2), Misc (8), Paper & Pack (2), Pharma & Chem (10), Service & Real Estate (1), Textile (21) Food & Allied (1)

2

3

6

12

Modal Sector

Textile (10)

Textile (3)

Engineering (9)

Textile (21)

7 8

1 1

1 15

9 10

1 1 2 1 2 1

1 18 7 1 25 6

11 12

Paper & Pack (1) Ceramics (1), Engineering (1), Food & Allied (6), Fuel & Power (1), Misc (2), Pharma & Chem (2), Textile (2) Pharma & Chem (1) Bank (18) Bank (7) Insurance (1) Insurance (25) Finance & Investment (1), Leasing (5)

Food & Allied (6)

Leasing (5)

Source: This study result CONCLUSIONS This study found that 31st December (52%) is the most used balance sheet reporting date. English language is the main language (93%) to report the balance sheet, which greatly removes the chance of information asymmetry due to language. Another common feature is the balance sheet format. Most of the companies (84%) follow report format of balance sheet. Regarding the balance sheet presentation style, the average practice is Style 6 (34%), which focuses on working capital, and long-term financing keeping long-term investing at top. The wide free choice of balance sheet styles by different sectors make the information cost higher. Due to the strict regulation, financial sectors in Bangladesh follow uniform balance sheet styles. Regarding the marshalling of assets, most of the companies (76%) follow fixed assets first with least liquid first and more liquid last, then current assets second with less liquid first and most liquid last. The findings certainly disclose one issue that the wide variety of choices adopted by the companies hampers the comparability characteristic of financial reporting. For example, reporting date of December 31, and June 30 by the textile sector companies surely create problem for textile sector analysts. This kind of wide variety of presentation choice may create information risk for the economic decision makers, and may lead to agency problem. It can be a great concern to implement or improve corporate governance quality. It is essential to increase investor confidence as the private sector moves from family firms to more broadly owned companies that mobilize funds from the public. Further uniformity will ensure information asymmetry for the investors and the capital market will be more efficient. Corporate governance would be much improved with uniform balance sheet reporting. Un-uniform balance sheet reporting creates cost to the investors to make it asymmetric. The findings of this paper may help the policy makers of the trade association also to set a common reporting outline for better comparability. It can be used in broader perspective like in discussion of regional or international harmonization. This paper focused on recent balance sheet reporting practices in Bangladesh. Future research can be on convergence of financial reporting within the industry over several time periods.

References: Briston, R. J. 1978. The Evolution of Accounting in Developing Countries. International Journal of Accounting 13(1): 105-120

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Canning, J. B. 1929. The Economics of Accountancy: New York: The Ronald Press Choi, F. D. S., and Levich, R. M. 1990. The Capital Market Effects of International Accounting Diversity. Homewood, Illinois: Dow Jones-Irwin Choi, F. D. S., and Levich, R. M. 1991. International Accounting Diversity: Does It Affect Market Participants? Financial Analysts Journal 47(4): 73-82 Claire, R. S. 1945. Evolution of Corporate Reports: Observations on the annual reports of the United States Steel Corporation. The Journal of Accountancy January: 39-51 Dicksee, Lawrence R. 1909. Auditing 2nd American ed.: R. H. Montgomery Ding, Yuan., Stolowy, Herve., and Tenenhaus, Michel. 2003. ‘Shopping Around’ for Accounting Practices: The Financial Statement Presentation of French Groups. Abacus 39(1): 42-65 Fleming, P. D. 1991. The Growing Importance of International Accounting Standards. Journal of Accountancy September: 100-106 Foulke, R. A. 1945. Practical Financial Statement Analysis. New York: McGraw-Hill Book Company, Inc. Foulke, R. A. 1968. Practical Financial Statement Analysis 6th ed. New York: McGraw-Hill Goeltz, R. K. 1991. International Accounting Harmonization: The Impossible (and unnecessary) Dream. Accounting Horizons 5(1): 85-88 Hoarau, C. 1995. International Accounting Harmonization: American Hegemony or Mutual Recognition with Benchmarks. European Accounting Review 4(2): 217-234 Hove, M. R. 1986. Accounting Practices in Developing Countries: Colonialism’s Legacy of Inappropriate Technologies. International Journal of Accounting 21(1): 81-100 Hove, M. R. 1989. The Inappropriate Uses of International Accounting Standards in Less Developed Countries: The Case of International Accounting Standards No. 24 – Related Party Disclosures Concerning Transfer Prices. International Journal of Accounting 24(2): 165-179 ICAB 2004. Bangladesh Accounting Standards. Volume I and II. Dhaka: Institute of Chartered Accountants of Bangladesh Ndubizu, G. A. 1984. Accounting Standards and Economic Development: The Third World in Perspective. International Journal of Accounting 19(2): 181-196 Nelson, Edward G. 1947. A Brief Study of Balance Sheets. The Accounting Review XXII(4): 341-352 Nobes, C., and R. Parker. 2002. Comparative International Accounting 7th edition New Jersey: Pearson Education Normand, Carol. and C. W. Wootton. 2001. The Recognition and Valuation of Current Assets on the Balance Sheet in the United States, 1865-1840. Accounting Historians Journal (December): 63-108 Parker, R H. 2002. Comparative international Accounting New York: Prentice Hall Reed, S. A. 1989. A Historical Analysis of Depreciation Accounting – The United States Experience. The Accounting Historians Journal 16(December): 119-153 Rivera, J. M. 1989. The Internationalization of Accounting Standards: Past Problems and Current Prospects. The International Journal of Accounting 24:320-341 Samuels, J. M., and Oliga, J. C. 1982. Accounting Standards in Developing Countries. International Journal of Accounting, 17(1): 69-88

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Schiff, A. 1978. Annual reports in the United States: A Historical Perspective. Accounting and Business Research Autumn: 279-284 Sprague, Charles E. 1913. The Philosophy of Accounts 4th ed. New York: The Ronald Press Company Taylor, S. L. 1987. International Accounting Standards: An Alternative Rationale. Abacus 23(2): 157-171 Vangermeersch, R. 1970. A Study of Institutional Forces Concerned with Financial Accounting in the United States, Utilizing the Annual Reports of the United States Steel Corporation as Reference Points. Ann Arbor, Michigan: University Microfilms Vangermeersch, R. 1971/72. A Historical Overview of Depreciation: U. S. Steel, 1902-1970. Mississippi Valley Journal of Business and Economics Winter: 56-74 Vangermeersch, R. 1979. Financial Reporting Techniques in 20 Industrial Companies since 1861. Gainesville, Fla: University Presses of Florida Vangermeersch, R. (ed.). 1986. Financial Accounting Milestones in the Annual Reports of United States Steel Corporation - The First Seven Decades New York: Garland Publishing, Inc. Voon, Jen Shek. Undated. The Importance of International Accounting Standards in Promoting Regional Business Growth. Feature Service articles, retrieved from www.cipe.org/pdf/publications/fs/article6258.pdf on May 10, 2008 World Bank, 2003. Report on the Observance of Standards and Codes (ROSC) Bangladesh. Washington DC: World Bank

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Appendix A: Balance Sheet Pro forma as per BAS 1 Assets Non-Current Assets Property, Plant and Equipment Goodwill Manufacturing licences Investment in associates Other financial assets

1

2

Current Assets: Inventories Trade and other receivables Prepayments Cash and cash equivalents Total assets/Total Application of Funds

3= (1)+(2)

Equity and Liabilities Capital and Reserves Issued capital Reserves Accumulated profits/ (losses)

4

Minority interest Non-Current Liabilities Interest bearing borrowings Deferred tax Retirement benefit obligation

5

Current Liabilities Trade and other payables Short term borrowings Current portion of interest bearing borrowing Warranty provisions

6

Total Equity and Liabilities

7=4+5+6

16

Appendix B: Different Balance Sheet Styles Being Practiced in Bangladesh Appendix B: Style 2

Appendix B: Style 1 Assets Current Assets: Inventories Accounts receivable Advances, deposits, and prepayments Investment in marketable securities Short term loans Cash and bank balances Non-Current Assets: Property, Plant and Equipment Investment - Long term (at cost) Total assets Equity and Liabilities Current Liabilities Short term bank loans Long term loan - Current portion Trade creditors Liabilities for expense Liabilities for other finance Non-Current Liabilities: Long term loan –Secured Capital and Reserves: Issued capital Retained earnings Total Liabilities and Shareholders' Equity

1

2

3= (1)+(2) 4

5 6

7=4+5+6

Assets/Application of Funds Non-Current Assets/Fixed Assets: Property, Plant and Equipment Investment - Long term (at cost) Current Assets: Inventories Accounts receivable Advances, deposits, and prepayments Investment in marketable securities Short term loans Cash and bank balances Total assets/Total Application of Funds Equity and Liabilities/Sources of Funds Capital and Reserves/Shareholders Fund: Issued capital Retained earnings Non-Current Liabilities/Long-Term Liabilities: Long term loan –Secured Current Liabilities Short term bank loans Long term loan - Current portion Trade creditors Liabilities for expense Liabilities for other finance Total Liabilities and Shareholders' Equity/Total Sources of Funds

17

1

2

3= (1)+(2) 4

5 6

7=4+5+6

Appendix B: Different Balance Sheet Styles (Continued) Appendix B: Style 4

Appendix B: Style 3 Equity and Liabilities/Sources of Funds Capital and Reserves/Shareholders Fund: Issued capital Retained earnings Non-Current Liabilities/Long-Term Liabilities: Long term loan –Secured Current Liabilities Short term bank loans Long term loan - Current portion Trade creditors Liabilities for expense Liabilities for other finance Total Liabilities and Shareholders' Equity/Total Sources of Funds Assets/Application of Funds Non-Current Assets/Fixed Assets: Property, Plant and Equipment Investment - Long term (at cost) Current Assets: Inventories Accounts receivable Advances, deposits, and prepayments Investment in marketable securities Short term loans Cash and bank balances Total assets/Total Application of Funds

Net Assets: Fixed assets - At cost less depreciation Capital work-in-progress Investment - Long term (at cost) Current Assets: Stocks Trade debtors Advances, deposits, and prepayments Investment in marketable securities Short term loans Cash and bank balances Less: Current liabilities Short term bank loans Long term loan - Current portion Trade creditors Liabilities for expense Liabilities for other finance Net current assets

1

2 3

4=1+2+3 5

6 Financed by: Long term loan -Secured Shareholders equity: Share capital Share premium General reserve Retained earnings

7= (5)+(6)

1 2 3 4

5

6 =(4) - (5) 7=1+2+3+6 8 9

10 = (8)+(9)

18

Appendix B: Different Balance Sheet Styles (Continued) Appendix B: Style 6

Appendix B: Style 5 SOURCES OF FUNDS Shareholders' Funds Share capital Share premium General reserve Retained earnings Long Term Liabilities Long term loan -Secured Total APPLICATION OF FUNDS Fixed Assets Fixed assets - At cost less depreciation Capital work-in-progress Investment - Long term (at cost) Current Assets: Stocks Trade debtors Advances, deposits, and prepayments Investment in marketable securities Short term loans Cash and bank balances Less: Current liabilities Short term bank loans Long term loan - Current portion Trade creditors Liabilities for expense Liabilities for other finance Net current assets Preliminary expenses

APPLICATION OF FUNDS Fixed Assets Fixed assets - At cost less depreciation Capital work-in-progress Investment - Long term (at cost) Current Assets: Stocks Trade debtors Advances, deposits, and prepayments Investment in marketable securities Short term loans Cash and bank balances Less: Current liabilities Short term bank loans Long term loan - Current portion Trade creditors Liabilities for expense Liabilities for other finance Net current assets/Net Working Capital Net Assets/ Capital Employed SOURCES OF FUNDS/ FINANCED BY Shareholders' Funds Share capital Share premium General reserve Retained earnings Long Term Liabilities Long term loan -Secured Total sources of funds

1

2 3 = (1) + (2)

4

5

6

7 =(5) - (6) 8 10 = (4)+(7)+(8)

19

1

2

3

4 =(2) - (3) 5 = (1)+(4) 6

7 8 = (6)+(7)

Appendix B: Different Balance Sheet Styles (Continued) Appendix B: Style 8

Appendix B: Style 7 Current Assets: Stocks Trade debtors Advances, deposits, and prepayments Investment in marketable securities Short term loans Cash and bank balances Less: Current liabilities Short term bank loans Long term loan - Current portion Trade creditors Liabilities for expense Liabilities for other finance Net current assets/Net Working Capital Fixed Assets Fixed assets - At cost less depreciation Capital work-in-progress Investment - Long term (at cost) Net Assets SOURCES OF FUNDS Shareholders' Funds Share capital Share premium General reserve Retained earnings Long Term Liabilities Long term loan -Secured Total sources of funds

1

Net Assets: Fixed assets - At cost less depreciation Capital work-in-progress Investment - Long term (at cost) Current Assets: Stocks Trade debtors Advances, deposits, and prepayments Investment in marketable securities Short term loans Cash and bank balances Less: Current liabilities Short term bank loans Long term loan - Current portion Trade creditors Liabilities for expense Liabilities for other finance Net current assets Long term loan - Secured Net Assets Financed by: Shareholders equity: Share capital Share premium General reserve Retained earnings

2

3 = (1) - (2) 4

5 = (3)+(4)

6

1 2 3 4

5

6 =(4) - (5) 7 8=1+2+ 3+ 6- 7 9

10 = (9) = 8 7 8 = (6)+(7)

20

Appendix B: Different Balance Sheet Styles (Continued) Appendix B: Style 10

Appendix B: Style 9 SOURCES OF FUNDS Shareholders' Funds Share capital Share premium General reserve Retained earnings Total APPLICATION OF FUNDS Fixed Assets Fixed assets - At cost less depreciation Capital work-in-progress Investment - Long term (at cost) Investment Current Assets: Stocks Trade debtors Advances, deposits, and prepayments Investment in marketable securities Short term loans Cash and bank balances Less: Current liabilities Short term bank loans Long term loan - Current portion Trade creditors Liabilities for expense Liabilities for other finance Net current assets Preliminary expenses Less: Long term liabilities

Properties and Assets Cash Balance with other banks & financial institutions Money at call and short notice Investments (shares and bonds) Investments (general) Fixed assets Other assets Non-banking assets Total assets Liabilities and Capital Liabilities Borrowing from other banks Deposits and other accounts Other liabilities Capital/ Shareholders' equity Paid up capital Share premium Statutory reserve Retained earnings Total Liabilities and Shareholders' Equity

1

2 = (1)

3

4 5

1

(2) = 1 3

4

(5) = 3+4

6 Off Balance Sheet Items Contingent Liabilities Acceptance and endorsements: Letter of guarantee Irrevocable letter of credit Bills for collection Other Commitments Total off balance sheet items

7 =(5) - (6) 8 9 10 = (3)+ (4)+(7)+(8) -(9)

21

6

7 (8) = 6+7

Appendix B: Different Balance Sheet Styles (Continued) Appendix B: Style 12

Appendix B: Style 11 Capital and Liabilities Share capital Share premium Reserve and contingency account: Reserve for exceptional losses Profit & loss appropriation Total shareholders' equity Balance of funds & accounts Fire insurance business Marine insurance business Misc. insurance business Premium deposit Liabilities & provision Sundry creditors

Property and Assets Investment Agents balances Outstanding premium Sundry debtors Cash and bank balances Other accounts: Fixed assets Stock of stationery and stamps Preliminary expenses Share issue expenses

1

SOURCES OF FUNDS Shareholders' Funds Share capital Share premium General reserve Retained earnings Long Term Liabilities Long term loan - Secured Total

2

(3) = 1+2 4

APPLICATION OF FUNDS Leased Assets Investment and Advances Net investment in lease finance Investment in shares Provision for future losses on lease accounts Provision for future losses on loan accounts Fixed Assets Intangible Assets Current Assets: Cash and bank balances Trade debtors Advances, deposits, and prepayments Net Investment in lease finance - current maturity Short term loans Less: Current liabilities Payables & accrued expenses Short term loans Lease advance - current maturity Term loan - current maturity Provision for tax Net current assets

5 6 7 (8)= 3+4+5+6+7 9

10

(11)= 9+10

22

1

2 3 = (1) + (2)

4 5

6 7 8

9

10 =(8) - (9) 11 = (4)+(5)+(6)+(7)+(10)

Appendix C: Marshalling of Assets Type 1 Fixed asset first Less liquid first More liquid last Current asset second Less liquid first More liquid last

Type 4 Current asset first More liquid first Less liquid last Fixed asset second

Type 2 Fixed asset first More liquid first Less liquid last Current asset second More liquid first Less liquid last

Type 5 Non-current asset first Current asset second Non-current asset third

Type 3 Current asset first Less liquid first More liquid last Fixed asset second

Type 6 Fixed Asset First Less liquid first More liquid last Current Asset Second More liquid first Less liquid last

23