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Measurement and Analysis of Disclosure Level: The Case of Bangladesh
Introduction
Disclosure refers to revealing facts to others. The concept of disclosure has grown and expanded considerably in diverse ways in response to the evolution of corporate form of business organization, the statutory requirements to prevent fraud and manipulation and to protect the interest of innocent shareholders. Disclosure of financial and non-financial information about the operating performance and the financial position of the companies are universally considered as the prerequisite for efficient functioning and fairness of capital market. Sometimes, in order to be successful in securing capital, a company provides more information in its annual report voluntarily than that required by statutes as mandatory. For making full, fair, and adequate disclosure of information in the annual reports, financial reporting and disclosure are regulated by different authorities and statutes. In Bangladesh, disclosure in company reports are mainly regulated by the Companies Act 1994, the Securities and Exchange Rules 1987, DSE Listing Rules, 2006, Income Tax Ordinance 1984 and BAS and BFRS (IAS and IFRS that are adopted by ICAB) In fact, disclosure of information through annual reports has been an emerging issue in the field of financial accounting and reporting.
According to a dictionary of accounting edited by R.Hussey,1999, disclosure is defined as :
“The provision of financial and non-financial information, on a regular basis, to those interested in the economic activities of an organization. The information is normally given in an annual reports and accounts, which includes financial statements and other financial and non-financial information. The annual report and accounts of a limited company is regulated by company legislation, accounting standards, and, in the case of quoted company, by stock exchange regulations” (page 131,2ed.).
Reporting of information in annual report is practiced in different ways. Style and forms of annual reports varies from country to country and from company to company. It varies due to different reasons. It may be due to the rules and regulation, may be due to the need of “user group” or it may be due to the willingness of the management of the company.
Methodology of the study
Step – 1
Disclosure Checklist is a list of items to be disclosed in the annual reports. Draft disclosure checklist is a disclosure checklist which is prepared by the researcher for the first time in order to conduct the study. Before going to prepare a draft checklist for the study, a researcher studies previous research work done by others, different and relevant rules and regulation such as Company Act, Securities and Exchange Commission Rule, International Accounting Standard, International Financial Reporting Standard etc., and different company annual reports in order to build up a sense or knowledge regarding to the items of disclosure which is used to develop a good design for draft disclosure checklist. In this way, a draft disclosure check list has been prepared.
Step – 2
A questionnaire (containing all the items in the disclosure checklist) is prepared for doing survey in order to make the research indifferent (unbiased). Questionnaire can be prepared in two ways, i.e., Yes/No format or using 5 point likert type scale. Example is shown below:
Yes / No format
Serial No.
Disclosure Items
Y for Yes
N for No
Comments
1
Company Profile
Y
Here, the respondent typed Y; it means that the Company item should be disclosed in the company annual report. Thus, after completing survey, researcher counts Y and N for every item. If total number of Y is more than total number of N then the item is included in the final disclosure checklist against which the annual reports are examined to establish the extent of disclosure by the sample companies. This method was used in the current study.
5 point likert type scale Format
Serial No.
Disclosure items
5
4
3
2
1
1
Company Profile
√
1. = Not at all Important i.e., Should not be disclosed
2. = Not important i.e., Should be disclosed but is of minor importance
3. = Less importance or Unimportant i.e., intermediate importance.
4. = Important i.e., Should be disclosed and item is very important
5. = Very important i.e., it is essential to disclose this item
Here, a respondent ticked in the 5 point box i.e., this item of disclosure is essential to disclose as perceived by the respondent. Thus, after completing the survey researcher analyse the result of survey by using statistical tools i.e. mean score for each item of disclosure. If the mean score is three or more, the item is included in the final disclosure checklist against which the annual reports are examined to establish the extent of disclosure by the sample companies.
Step – 3
Disclosure score of the sample companies is developed on the basis of final disclosure checklist. In this case, dichotomous procedure is followed. According to this approach, if an item appear in the annual reports score ’1′ and ‘0′ for non appearance of the item in annual reports. Thus, total disclosure score is prepare for sample companies.
Step-4
Disclosure Index is an index which is developed on the basis of disclosure score calculated above. Dichotomous approach and PC approach are usually used to calculate the disclosure index. This index can be weighted or unweighted. Under weighted approach, every item of disclosure carries some value or weight which is assigned by the researcher. On the other hand, all item of disclosure considers equally important under unweighted approach. Most of the researcher used unweighted approach in developing disclosure index in their study to establish an unbiased research.
Dichotomous Unweighted Approach
∑dmi
i = 1
i = 1
=
∑dni
ODI
Where, d = 1 if a disclosable item is disclosed, 0 if that item is not disclosed;
m = number of item disclosed
n = maximum number of disclosure items possible
Partial Compliance Unweighted Approach
PCj
=
∑Xi
Rj
Where PCj = Total compliance score for each company and 0 ≤ PCj ≤ 1.
Xi = the level of compliance with each section of disclosure requirements.
i = 1
Rj = total number of relevant / applicable disclosure section for each company j
This means that, initially, using the ‘dichotomous’ approach, the researcher calculates the compliance with each section of disclosure separately. Subsequently, the sum of these compliance scores (X) is divided by the total number of relevant / applicable disclosure section for each company j i.e., Rj.
Step –
Different Statistical Tools and Technique
Usually, Mean or Average, Standard Deviation and Co-efficient of variation are used in
the current study for measuring, comparing and evaluating the performance of disclosure level of either each section of disclosure or as a whole of sample companies.
Result and Discussion on the current study
Draft and final disclosure checklist:
Summary of Draft and Final Disclosure Checklist
Parts
Total Items (Draft)
Items accepted (Final)
Percentage of items accepted
Number
%
Number
%
General Disclosure
25
11
20
10
80
Company Profile Disclosure
25
11
15
8
60
Directors Report Disclosure
30
14
28
14
93
Financial Highlight Disclosure
30
14
27
14
90
Accounting Polices Disclosure
26
12
26
13
100
Income Statement
14
6
14
7
100
Balance Sheet
48
22
48
24
100
Cash Flow Statement
22
10
22
11
100
Overall Disclosure
220
100%
200
100%
91%
Table shows that the respondents cancelled 9 percent of the items from general, company profile, director’s report and financial highlight section and no item were cancelled from accounting polices, income statement, balance sheet, cash flow statement disclosure section. Therefore, 91 percent items of draft disclosure check list were finalized for the current study.
Annual Reports of sample companies
The following companies’ annual reports were collected from various sources for the current study:
Food and Allied
Textile
Pharmaceutical
Cement
Apex Foods Ltd
HR Textile Mills Limited
The Ibn Sina Pharmaceutical Industry Ltd.
Heidelberg cement Bangladesh Ltd.
Fu-Wang Foods Ltd
BEXTEX Limited
Libra Infusions Ltd.
Meghna Cements Mills Ltd.
Gulf Foods Ltd
Apex Weaving and Finishing Ltd
Square Pharmaceuticals ltd.
Aramit Cement Ltd.
Fine Foods Ltd
Saiham Textile Mills Ltd.
Beximco Pharnaceuticals Ltd.
Confidence Cement Ltd.
Rahima Foods Corporation Ltd
Alltex Industries Ltd.
Orion Infusion Ltd.
Lafrage Surma Cement Ltd.
Scoring of the sample companies against
Each annual report was examined in support of the final disclosure checklist by following dichotomous procedure. MS Excel software was used extensively.
Development of Disclosure Index
Disclosure Index was developed by following Pertial Compliance unweighted approach due to its superiority over the dichotomous approach. Example-
Suppose three are section of disclosure A, B and C. Required for disclosure 3 items in A, 5 items in B and 9 items in C.
If a Company discloses 1 item from A, 2 items from B and 7 items from C
Under Dichotomous Approach,
ODI = 10/17 = 0.59 or 59%
Under PC Approach,
ODI = (1/3 + 2/5 + 7/9) /3 = 0.50 or 50%
On the other hand, if the Company discloses 3 item from A, 4 item from B and 3 item from C
Under Dichotomous Approach
ODI = 10 / 17 = 0.59 or 59%
Under PC Approach
ODI = (3/3+4/5+3/9)/3 = 0.74 or 74%
From the above example it is clear that PC Approach provides more accurate result than Dichotomous approach. Hence, in developing the disclosure index, PC approach was used to get the clearer picture of the sample companies.
Segment Wise Disclosure Level
The following table shows that the highest ODI 72 percent in the pharmaceuticals segment and the lowest ODI 63 percent in the textile segment. The overall disclosure index among the business segment is 67 percent. Again, the highest overall disclosure index 80 percent in the income statement section and the lowest is 55 percent in the cash flow statement disclosure section
Summary of Disclosure Index
Serial No.
Section of Disclosure
Business Segment
ODI
(Section wise)
Textile
Pharma
Food and Allied
Cement
1
General Disclosure Items
0.81
0.82
0.75
0.76
0.79
2
Company Profile Items
0.61
0.78
0.72
0.61
0.68
3
Dirtectors Report Items
0.64
0.81
0.64
0.76
0.71
4
Financial Highlight Items
0.63
0.49
0.45
0.52
0.52
5
Accounting Policies Items
0.61
0.70
0.63
0.58
0.63
6
Income Statement Items
0.74
0.86
0.81
0.81
0.80
7
Balance Sheet Items
0.59
0.69
0.69
0.72
0.67
8
Cash Flow Statement Items
0.45
0.59
0.61
0.57
0.55
ODI (Sector wise)
0.63
0.72
0.66
0.67
0.67
The table also shows that the pharmaceutical companies are disclosing more information in the general disclosure section, company profile section, director’s report section, accounting policies section and income statement section among sample companies. Textile companies are disclosing more information in the financial highlight section, cement companies are disclosing more information in the balance sheet section and food companies are disclosing more information in cash flow statement section among sample companies. Therefore, it can be said that pharmaceutical companies are in a better position in disclosure level.
Analysis of Disclosure Level
The following table provides us information about weak disclosure area, strong disclosure area, ODI and CV of each company as well as sector wise and overall disclosure index of sample companies.
Summary of Disclosure
Companies’ Disclosure Position
Serial No.
Company Name
Descriptive Statistics
Range
Company wise
ODI
SD
CV
Sector wise ODI
Overall Disclosure Index
Min
Max
Value
Section
Value
Section
Textile Sector
0.67
1
HR Textile Mills Limited
0.19
API
0.90
GDI
0.56
0.26
0.46
0.63
2
BEXTEX Limited
0.55
CFI
0.93
CPI
0.76
0.14
0.19
3
Apex Weaving and Finishing Ltd
0.40
CFI
0.79
ISI
0.66
0.14
0.22
4
Saiham Textile Mills Ltd.
0.23
FHI
0.70
GDI
0.49
0.16
0.33
5
Alltex Industries Ltd.
0.35
API
0.82
DRI
0.69
0.15
0.22
Pharmaceuticals Sector
6
The Ibn Sina Pharmaceutical Industry Ltd.
0.48
CFI
0.90
GDI
0.74
0.16
0.21
0.72
7
Libra Infusions Ltd.
0.54
CFI
0.86
ISI
0.73
0.13
0.17
8
Square Pharmaceuticals ltd.
0.54
FHI
1.00
CPI
0.80
0.14
0.18
9
Beximco Pharnaceuticals Ltd.
0.39
FHI
0.93
ISI
0.71
0.18
0.26
10
Orion Infusion Ltd.
0.36
FHI
0.80
GDI
0.62
0.16
0.26
Cement Sector
11
Heidelberg cement Bangladesh Ltd.
0.71
CFI
1.00
DRI
0.81
0.10
0.12
0.67
12
Meghna Cements Mills Ltd.
O.33
CPI
0.93
ISI
0.62
0.20
0.33
13
Aramit Cement Ltd.
0.38
FHI
0.79
ISI
0.62
0.15
0.24
14
Confidence Cement Ltd.
0.49
CFI
0.75
DRI
0.63
0.09
0.14
15
Lafrage Surma Cement Ltd.
0.42
API
0.80
CPI
0.65
0.15
0.24
Food and Allied Sector
16
Apex Foods Ltd
0.61
CFI
0.93
ISI
0.74
0.10
0.14
0.66
17
Fu-Wang Foods Ltd
0.33
FHI
0.8
GDI
0.66
0.15
0.22
18
Gulf Foods Ltd
0.42
FHI
0.79
ISI
0.65
0.13
0.20
19
Fine Foods Ltd
0.39
FHI
0.79
ISI
0.61
0.15
0.24
20
Rahima Foods Corporation Ltd
0.29
FHI
0.86
ISI
0.65
0.21
0.33
Overall Disclosure Index as a whole.
Consistency level in disclosing information (company wise)
Overall Disclosure Index (company wise).
Strong area of disclosure of each company.
Weak area of disclosure of each company.
Overall Disclosure Index (sector wise).
Ranking of sample companies
Ranking of the sample companies were made on the basis of their consistency level in disclosing information in their annual reports. The results are as follows.
Disclosure Position
SN
Company Name
CV
Rank
Comments
1
Heidelberg Cement Bangladesh Ltd.
0.12
1
More
consistent Companies
2
Confidence Cement Ltd.
0.14
2
3
Apex Foods Ltd.
4
Libra Infusions Ltd.
0.17
3
5
Square Pharmaceuticals ltd.
0.18
4
6
BEXTEX Limited.
0.19
5
7
Gulf Foods Ltd.
0.20
6
8
The Ibn Sina Pharmaceutical Industry Ltd.
0.21
7
Less
consistent Companies
9
Fu-Wang Foods Ltd.
0.22
8
10
Apex Weaving and Finishing Ltd.
11
Alltex Industries Ltd.
12
Aramit cement limited .
0.24
9
13
Lafrage Surma Cement Ltd.
14
Fine Foods Ltd.
15
Beximco Pharnaceuticals Ltd.
0.26
10
16
Orion Infusion Ltd.
17
Saiham Textile Mills Ltd.
0.33
11
18
Meghna Cement Mills Ltd.
19
Rahima Foods Corporation Ltd.
20
H.R. Textile Mills Ltd.
0.46
12
Intention of the sample companies
The following table was drawn and filled with relevant data in order to develop a picture of intention of sample companies so that researcher could develop a conclusion on the basis of data analysis at the end.
Disclosure Position
SN
Disclosure Section
CV
Rank
Comments
1
General Disclosure
0.18
1
More Consistent Disclosure Section
2
Balance Sheet
3
Income Statement Disclosure
0.19
2
4
Cash Flow Statement
0.20
3
5
Company Profile Disclosure
0.22
4
Less Consistent Disclosure Section
6
Accounting Policies Disclosure
0.23
5
7
Directors report Disclosure
0.25
6
8
Financial Highlight Disclosure
0.37
7
From the above table it is clear that sample companies are disclosing information in their annual reports is mandatory pattern which is regulated by the regulating authority. Whereas, voluntary disclosure is very much important to assess the past performance and future trends of the organization. There is no other single source of information for shareholders except annual reports. It is the ethical duty of management to secure the investment of the shareholders by covey all kind of information to them. That’s why all kind of information either mandatory or voluntary is equally important to the shareholders. Part of information can not provide a concrete picture of a company. In order to protect the interest of shareholders management should provide all kind of information ethically as they (shareholders) are original owner of the company. They have every right to have all kind of information. In Bangladesh shareholders do not rely on annual reports and hence this report rarely used in the capital markets.
The End
REFERENCES
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About the Author
Mr.Md Shamimul Hasan
PhD Research Fellow
Department of Accounting and Information Systems
Rajshahi University
Rajshahi
Bangladesh
e-mail: hasandtcb@yahoo.com
Note: The researcher is currently working on ‘ Disclosure of Financial Reporting and Users’ Perception in Bangladesh’.
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