Accounting Standards in Thailand

Accounting standard pronouncements are issued by the Institute of Certified Accountants and Auditors of Thailand (ICAAT). These pronouncements must be followed in the preparation of the financial statements and actually correlate very closely to International Accounting Standards and the United States Generally Accepted Accounting Principles (GAAP). The IACCT has released about 16 accounting pronouncements in areas of accounting policies, accounting changes, earnings per share, and income recognition. The Board of Supervision of Auditing Practice acts as the control body to which auditing standards and professional ethics are proposed here.

Thailand's has close ties to the United States and has been influenced by western values. Thailand's accounting policies does follow U.S. standards. However, Thailand is considered a less-developed county and as such, would be "most influenced by the accounting values of statutory control, uniformity, conservatism, and secrecy". Thailand would likely reflect the values of its fellow Asian neighbors.

Linking these accounting values through the societal values that influenced them, Thailand appears to possess the following strong values: collectivism, large power distance, strong uncertainty avoidance, and "femininity". And often too modest and over conservative forecasting to the point of over prudence.

Collectivism requires people to care for their relatives with unquestioning loyalty. This is opposed to western individualism, in which a loosely knit social framework exists where people take care of themselves and their immediate family members. Historically bills get paid and IOU's get settled.

Large power distance implies that people accept a hierarchical order without any further justification. This is opposed to small power distance, in which people in the community are striving for power equalization and demand justification for power inequalities. Strong uncertainty avoidance societies maintain rigid codes of belief and behavior and does not tolerant deviant behavior. This is opposed to weak uncertainty avoidance in that the society maintains a more relaxed atmosphere.

And finally, femininity prefers relationships, modesty caring for the weak, and the quality of life. This is opposed to masculinity where the society is concerned with achievement, heroism, assertiveness, and material success. A fifth dimension, Confucian Dynamism, refers to a short-term or long-term orientation. Thailand would probably reflect more of a long-term orientation, in which people are more, concerned with virtue than with satisfying material needs.

Thailand appears to be ripe for international growth and will most likely continue to follow International and United States accounting standards. Because of this, the International Standards Committee and the United States will probably provide an even greater source of influence in this area.

Accounting and Auditing Standards in Thailand. Two organizations set the standard. The first is the "Institute of Certified Accountants" and the second is the "Auditors in Thailand". This organization is comprised of registered and approved auditors and professional accountants, and its function is to establish new accounting standards, disseminate new professional information to its members, and to propose new auditing standards.

The Board of Supervision of Auditing Practice passes the auditing standards in Thailand, which is an arm of the Ministry of Finance. The Board has the authority to grant auditing licenses and is fully responsible for the regulation of auditors. In Thailand, each and every company must be audited annually, regardless of size, so there is a need for a large force of auditors. The auditing standards in Thailand have recently come under some bad publicity for being at times too loose:

"I believe that if our auditing standards are acceptable only domestically, it would be hard for foreign investors to invest in Thailand. Therefore, we have to accelerate the upgrading of our auditing standards overall, including those that apply to new businesses such as securitization."

So said Nontaphon Nomsomboon, deputy auditor-general and president of the Accounting and Auditors' Association.

Key Accounting and Disclosure Practices. In general, companies must use the accrual method of accounting and historical-cost convention for preparing financial statements. Fundamental concepts of Thai accounting include consistency, prudence, matching and going concern. Any departure from these fundamental concepts must be disclosed in clearly written footnotes.

The following are the significant accounting principles and practices in Thailand.

Inventory:Inventory is valued at lower of cost or market. Although the last-in, first-out (LIFO) method is allowed, first-in, first-out or average cost method are more commonly used by businesses to determine inventory cost.

Fixed Assets:Fixed assets are generally carried at historically cost less accumulated depreciation. As an alternative to the above method, value determined by an independent appraiser is also allowed providing that the basis of valuation is fully disclosed in the accounts.

Interest Capitalization:Interest on borrowings for the acquisition of assets is capitalized as part of the cost of the related assets. However, only interest incurred before the assets are substantially completed is capitalized.

Improvements:Assets improvement cost is generally capitalized.

Depreciation:Allowed fixed assets depreciation methods include straight-line, sum-of-the-years'-digits, declining-balance, or unit-of-production. Straight-line method is most widely used.

Long-term Investments in Securities:Long-term investments in marketable securities must be stated at the lower of cost or market. Long-term investments in other securities are stated at cost. However, a provision must be made for any permanent decline in value of an investment.

Accounting for Income Taxes:In generally, income tax payable is expensed in the same year liabilities incur. Deferred tax accounting is used primarily by listed companies.

Leases:Both operating lease method and finance lease method is used for accounting purposes. However, all leases are treated as operating leases for tax purposes. In general, income derived from hire-purchase sales is recognized in the year the sale is made. But the interest element of the income is deferred and amortized to income when installments are due.

Consolidation:Only companies listed on the SET prepare consolidated financial statements. Accounts of reporting company and its subsidiary companies (reporting companies hold an equity interest of 50% or more) are consolidated.

Foreign-Currency Translation:Foreign-currency transactions are translated into Thai Baht at the rates on the transaction dates. Foreign-currency assets and liabilities at year-end are translated at year-end rates. Foreign-exchange gains and losses are included on income Statements.

Land: of course this is not depreciated.

Certification of AccountantsThere are two professional accounting and auditing bodies in Thailand: 1. The Institute of Certified Accountants and Auditors of Thailand and 2. the Board of Supervision of Auditing Practice.

Accountants and certified auditors are members of the Institute of Certified Accountants and Auditors of Thailand.

This institute establishes accounting and auditing standards and in that capacity also disseminates accounting knowledge and information. As of November 1995, 29 accounting standards and 41 auditing standards had been established (Ernst & Young--1996). This institute also proposes various ethical standards for the profession.

The Board of Supervision of Auditing Practice is a government agency attached to the Ministry of Commerce.

This board grants practicing licenses to qualified auditors, revokes and suspends auditors if their work is found to be deficient, and gives advice to educational institutions concerning the auditing profession. Below are the minimum requirements to qualify as certified public accountant in Thailand:

• Be a Thai national or national of a country that allows Thai nationals to practice auditing.
• A bachelor's degree in accounting or related field,
• Practice the auditing profession for at least two years,
• Pass the written examination organized by the Board,

ReferencesDoing Business in Thailand, Ernst & Young's International Business Series, Ernst & Young International Ltd, 1989Doing Business in Thailand, Ernst & Young's International Business Series, Ernst & Young International Ltd, 1996. Nuntawan Polkwamdee, "Auditing Standards Again in Question: 'Improper Transfers' at Alphatec Highlight Problems" Bangkok Post, August 11, 1997. Business Section, pg. 1. Radebaugh, Lee H. and Sidney J. Gray. International Accounting and Multinational Enterprises, Fourth Edition. Copyright 1997 by John Wiley & Sons, Inc.1997.

The 1999 annual reports.Thaistocks.com is now receiving many annual reports and will keep posting and reviewing these over the next few months. We will also tell you which companies do not respond. Still, not all SET companies have published the '98 report yet. And some are only in Thai language. In general of the companies I follow, we have been impressed to date at their seeming comprehensiveness and professional preparation. All of them have a statement on 2YK.

And speaking of the 2YK issue….

SET to conduct test next month THE Stock Exchange of Thailand will conduct an industry-wide test on all related internal and external stock-trading computer systems with brokers and financial institutions on May 22. Lets' hope the press will inform us soon after how this went.

The test is to simulate the real situation of stock trading in Thailand, testing computer systems between SET and broker companies which claim to be Y2K-ready, making sure that all those systems will work properly without errors when 2000 rolls in.

This test is similar to the industry-wide test that was conducted in the banking sector last February. SET says every broker and financial institution will have to finish their Y2K remediation and internal testing process before the industry-wide test is scheduled. SET's senior vice president, Somkid Jiranuntarat, said after the test SET would also evaluate the result of the testing process as well as make a report on the Y2K readiness of stock trading in Thailand. In June SET also plans to announce a blacklist of stock companies which are not ready to tackle the Y2K problem.

This is to help protect investors who are making decisions about dealing with broker companies for investments. Somkid said SET was now encouraging all local brokers to remedy Y2K problems in their computer systems. It has determined that every month broker companies have to report the progress of their Y2K redemption process to SET, allowing it to evaluate the overall status of Y2K problems in stock trading.

Meanwhile it is also encouraging listed companies to deal with the problem. All listed companies have to disclose their Y2K redemption process in reports to SET. The Y2K information will be a major aspect, helping investors to make decisions about investing in those companies.

According to Somkid, SET has asked listed companies to send their Y2K reports to SET every quarter since last year. The Y2K progress will also be included in the annual report of each company.

"We also have measures for some listed companies which cannot prepare for the millennium bug before mid-year. We will put them on a blacklist to be announced to the public," he said.

SET plans to publicly announce a blacklist of unprepared listed companies in June. It will also temporarily halt trading in listed companies which have not provided Y2K redemption information to SET.

SET plans to allow investors to transfer their investment from some listed companies, which cannot tackle the Y2K problem on time to other listed companies who are ready. This is another measure to help protect stock investors in Thailand.

"With these measures, we hope that there will not be any problems with stock trading in Thailand in 2000," he affirmed.

Even though SET is confident about its Y2K preparation, it is still framing a contingency plan as a back up for any unexpected problems that may occur.

Somkid said SET's contingency plan would cover two major areas. The first, called Plan A, is to prepare telecommunications and computer-system back-ups if there are any errors in SET's main infrastructure and computer systems. The second plan, Plan B, is related to computer programs in the SET system. If there are some errors, SET will adjust dates and times backward to let trading operations continue.

Somkid said SET itself had finished more than 90 per cent of its Y2K redemption process. It began testing key internal applications in November, hoping that all new Y2K-ready systems would be set for practical use by the middle of this year.

BAT-3KThis stock has reacted with some weakness in the last few weeks. The company is about to announce its long awaited loan restructuring program and their new lead smelting plant is about to come on stream. (Lead and Plastic (pp) are the main raw materials for this firm). No doubt the market is awaiting these announcements and any weakness is a buying opportunity. Unless there is something else which I am not aware of?

But, I note in their annual report (an 80 page well done and comphrensive document), that Miss Veerawan Korphaibool, the daughter of the president and the "Overseas Sales manager", increased her holdings in Bat-3k by 121,000 shares in 1998. I note that last year was an extremely "money tight" year for all in Thailand, hence this may be of some significance. As Bat-3k is focussing more and more on export markets. Does she know something we don't? A weaker Baht would definitely be more positive for Bat-3K.

The quote of the week has to go to:Camille Ma Bulakul, a vice president for Morgan Stanley Asia Ltd. in Bangkok. Who wrote on April 19th '99:

"The problem with the Thai stock market is there's nothing to buy. Bank stocks are considered proxies for the market. They have already risen to certain levels and they aren't likely to outperform the market from here."

Where has she been? Now you my dear subscribers know this is simply not true! Yet this is an all too typical comment of an analyst who can only consider millions of shares instead of millions of Thai Baht for investment.

Do we all have these restrictions!

Best Personal Regards to all valuable subscribers,

Paul A. Renaud.Thaistocks@aol.com