Monday, December 20, 2010

WHOSE costs and WHOSE benefits_cost benefit analysis in IFRS

Whether it be Microeconomics, Financial Management or Cost Management, the uniform message drilled into the student is 'Take the decision if relevant benefits> relevant costs'. It is phrased as per the subject
  • In Economics, we want MR>=MC
  • In Financial management, we want NPV>=0
  • And in cost management, the tool used is Contribution
Of course, the caveat explained in all subjects is 'qualitative factors'. This would typically include political scenario(does your boss support it/ effect on your bonus etc). The issue here is the classical economic problem if externalities as social costs and benefits are not captured in the conventional analysis from the firm's view point. This is solved partly by taxes, permits, licenses which impose some costs to solve these issues.

The IFRS framework contains a cost benefit analysis for applying IFRS. It states that if the benefits to users does not exceed the cost to preparers, the entity need not use IFRS. The issue here is that the preparer will tend to understate the user's benefits. That is why the independent auditor generally takes the last call on 'such materiality issues'.

Wednesday, July 28, 2010

Not in my backyard

This phrase means usually that a person who supports a cause purportedly in public interest backs out when it affects him. This is also hypocracy. We have many examples to support the same.

Take the issue of stray dogs. This is a suburban problem but which is rare in the City. Hence we have a lot of South Mumbai animal lovers and NGO's campaigning and even filing writ petitions in the High Court(s) to protect animal rights. From an ethical stance(that all life is entitled to exist/ slippery slope arguement that will we stop at dogs or go to humans etc), they are probably correct. What fails me however, is that in SoBo(South Mumbai), there are virtually no stray dogs.Once people listen to the melody of the barks and fights, they may soon change their minds.

Another is patriotic causes like fighting corruption, standing up for the weak or joining the army/low paying Civil Service jobs. We pay lipservice but how many of us really would like a hazardous low paying army job even for prestige?

I can go on and on but the point is clear. Unless we think in the larger good atleast sometimes, nothing will happen.

Wednesday, July 7, 2010

THEN(Is it so)-NOW(What is the probability it is so)

The above line; in the preface to "A First Course in probability"-6th edn by Sheldon Ross; got me thinking. When even light has dual nature(particle/wave), where we are not certain about the exact location of sub atomic particles(Heinsenburg's uncertainity principle), then how can we be certain about much less exact things?

Schools, Colleges and some extent work teach us that there is only 1 right thing. But where even "established theories" in any area(economics, finance, law, astronomy) get refuted, should we be so blaise about insisting on only 1 thing?

This no doubt helps standardization but does it really serve the objective? Instead of having 1 number, we should take a probability weighted number for that or better still, present the distribution instead of the number.

Back after a 3 yr hiatus

It feels good to be writing again on virtually anything under the sun. But that is what "Musings are for". I resolve to:-
(i)Post atleast once a week
(ii)Revise posts in case of new data/errors