'Legal loopholes' in financial reporting
Some companies in Bangladesh are exploiting a lack of guidance in the country's accounting laws by showing unrealised gains or losses as 'other income' in their financial reports, affecting the determination of net profit or loss.
This practice is inconsistent across companies, leading to potential misrepresentation of financial health and earnings per share (EPS).
Certain companies include unrealised gains or losses in their financial statements to conveniently prepare accounts, often excluding losses to inflate net profits. This practice allows for an artificial increase in EPS, giving a misleading impression of the company's financial performance.
Accountants emphasise that, according to International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS), it is mandatory to show unrealised gains or losses as profit or loss. However, IFRS is not fully adopted in Bangladesh, and there is no specific guidance on whether unrealised gains or losses should be included in determining net profit or loss.
Due to this gap, companies determine their net profit or loss as per their convenience. Accountants suggest that the Financial Reporting Council (FRC) should issue specific guidelines to close this loophole and ensure uniformity in financial reporting.
A review of the latest financial reports of Fortune Shoes and Sonali Paper, both known as 'gambling shares' in the stock market, highlights this issue. Sonali Paper includes both realised and unrealised gains and losses from share trading in its net profit or loss calculations, resulting in significant profits. For instance, in the three months from July to September 2023, Sonali Paper reported a net profit of Tk 18.36 crore, with Tk 13.96 crore coming from share trading profits.
When contacted, Sonali Paper's company secretary, Rasedul Hossain, stated, "We go through audit every year. The auditors did not raise any objection in this regard. We follow their guidelines."
In contrast, Fortune Shoes excludes unrealised gains or losses from its net profit or loss calculations. The company reports these as 'other comprehensive income,' which affects the EPS calculation. For example, in their financial report for the nine months from July 2023 to March this year, Fortune Shoes reported a net profit of Tk 20.39 crore. However, if the unrealised loss of Tk 18.12 crore from share trading was included, the net profit would only be Tk 2.27 crore, significantly reducing the EPS from Tk 1.20 to just Tk 0.13.
Fortune Shoes' company secretary, Riazuddin Bhuiyan, explained, "Earlier we used to show netting about the share business. But auditors and the Bangladesh Securities and Exchange Commission (BSEC) objected. That is why we’ve not shown knitting for two years. I could not show a profit not realised. So, how can I show the loss that I’ve not realised? Still, if there is a systematic error, we will correct it."
Monowar Hossain, an accountant with FCA, FCMA, CISA, FCS, and CIPFA (UK) degrees, said, "There is no specific guideline in our country on whether unrealised profit or loss should be included in the calculation of EPS. That's why each company shows different accounts. But I think there should be one rule for everyone. In this case, the FRC can make a guideline, which everyone will follow."
ABM Lutful Hadi, Vice-President of the Institute of Chartered Accountants of Bangladesh (ICAB), stated, "According to IFRS, it is mandatory to include unrealised gain or loss as 'other income' in the profit and loss account. But IFRS is not fully accepted in our country. It is better to include it under the name of 'other income.' Even if it doesn't show, there is no problem. So there is no offense if one does not include it."
When contacted, FRC Acting Chairman Mohammad Manzarul Mannan said, "I'm not a professional accountant. But as you say, we will look into it. If we do not have this in law, we will provide guidelines as necessary. But it cannot be calculated at will.”
