In today’s business environment and with the global nature of supply chains, newer and creative fraud schemes are emerging each day. The perpetrators not only target organisations but also individuals. According to the KPMG India Fraud Survey Report 2012, cyber crime and intellectual property fraud, including counterfeiting and piracy, are the emerging fraud concerns.
In cyber crime, either the tool or the target is a computer or computer network. The report shows that cyber crime is fast becoming a popular means of defrauding individuals and entities. Perpetrators typically attempt to steal either money or, more seriously, sensitive data. Cyber attackers also aim at disrupting vital operations and functions, leading to loss of not just financial resources but also customer confidence and market reputation.
The report also suggests that intellectual property fraud, counterfeiting and piracy are rampant and increasing, because of the enormous profits in return for a small investment and little business risk.
Moreover, the low levels of penalty and prosecution for intellectual property fraud provide little or no deterrence against further infringements. While companies seem to be aware of piracy and counterfeiting, there is little understanding of how such practices can affect business.
Companies should therefore identify their sensitive data, classify them appropriately based on vulnerability, and put in place necessary protection measures to prevent frauds.
Fresh lease of life for lease accounting
A significant global development in accounting is a recent exposure draft from the International Financial Reporting Standards which will fundamentally change the way leases are reported. Proposing Type A and Type B leases, it does away with the concept of operating and finance leases. The classification would be based on the nature of the underlying asset and the extent to which it is consumed over the lease term. This is different from the risk and rewards approach currently followed. If the underlying asset is not property, it is a Type A lease, unless the lease term is an insignificant part of the total economic life of the asset or the current value of the lease payments is insignificant relative to the fair value of the asset. If the underlying asset is property, it is a Type B lease, unless the lease term extends over the major part of the remaining economic life of the asset or the current value of the lease payments accounts for substantially all the fair value of the underlying asset.
In a Type A lease, the lessee would recognise a lease liability, initially measured at the current value of future lease payments, as also a right of use (ROU) asset measured at cost. Subsequently, the lessee would measure the lease liability at amortised cost and the ROU asset at cost less accumulated amortisation — generally on a straight-line basis. The lessee would present amortisation of the ROU asset and interest on the lease liability as separate expenses. In a Type B lease, the lessee would follow the approach for Type A leases, except for calculating amortisation of the ROU asset as a balancing figure, such that the total lease cost would be recognised on a straight-line basis over the lease term and present the total lease cost (amortisation plus interest expense) as a single-line item.
The impact of the exposure draft would be felt across sectors. Companies that have significant assets on lease — such as airlines, retail companies and banks — would see a considerable increase in reported liabilities.
While the exposure draft seeks to increase visibility by bringing all leases on the balance sheet, it poses challenges that could force companies to rethink their leasing strategies.