The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is being urged to “move Business Licence accounting into the 21st century” by amending the Act so that key terms conform with international standards.

Gowon Bowe, co-chair of the Bahamas Institute of Chartered Accountants (BICA) technical committee, told Tribune Business that several definitions within the Act, which are critical to determining a company’s turnover, do not meet International Financial Reporting Standards (IFRS).

BICA, in its newly-released ‘guidance note’ on certifying turnover information contained in companies’ Business Licence applications, identified the use of ‘money or money’s worth’ as a key issue that needs amending.

The ‘guidance note’, which has been seen by Tribune Business, also notes that the Business Licence Act 2010’s definition of ‘consolidation’ - in reference to a group of companies owned by the same parent - is inconsistent with IFRS standards.

Mr Bowe explained that the ‘guidance note’, which had been agreed with the Ministry of Finance and its Department of Inland Revenue, was a first step towards amending the Act to ensure the Bahamas met international accounting standards.

He added that BICA’s long-term recommendation was for the Government to amend the Business Licence Act to deal with the problems identified, thereby giving the current ‘guidance notes’ the full weight of statute law.

“If we are moving the Business Licence Act into the 21st century, it really has to have firm definitions of what are revenue and turnover in relation to accounting principles,” Mr Bowe told Tribune Business.

“It cannot be based on definitions of money and money’s worth. It leaves it open to interpretation.”

He explained further: “Currently, as it stands, the Business Licence defines turnover as money or money’s worth for business activities within the Bahamas or in the Bahamas.

“The difficulty is, when you say money and money’s worth, is how do you determine that from an accounting perspective when talking about the wider issue, which is revenue/turnover.”

Business Licence fees are calculated annually as a percentage of turnover, with the Government having agreed to push the filing and payment deadline back two months to end-March 2016 from its previously ambitious January 31.

Mr Bowe explained that ‘money or money’s worth’ became problematic in the case of volume-based discounts offered by suppliers to their larger clients.

In the case of a 10 per cent discount, the current Act left it open to interpretation as to whether fees should be levied on 90 per cent or 100 per cent of the transaction’s revenue.

Mr Bowe said a similar situation arose with the sub-contracting of construction contracts. If a contractor took on a $10 million contract, and then sub-contracted $8 million to another company, questions arose as to whether the Business Licence fee should be calculated based on the $10 million or the $2 million that was retained.

Given that the sub-contractor would pay also pay a Business Licence fee based on the $8 million, Mr Bowe explained that basing the first contractor’s fee on the $10 million would essentially be a “double counting”.

The Business Licence Act’s turnover definition is further complicated by the inclusion of the term ‘credit sales’.

BICA’s ‘guidance note’ says: “The Act does not provide sufficient details to be considered a comprehensive basis of accounting, as required by professional standards when performing any level of assurance.

“The terms ‘money’ and ‘money’s worth’ can be interpreted as a cash basis of accounting, whereas ‘credit sales’ can be interpreted as an accrual basis of accounting.........

“The long-term recommendation to the Ministry of Finance is to amend the Act to either adopt IFRS as the basis upon which turnover/revenue is to be recognised and reported, or to expand its details on the requirements for recognition of turnover/revenue.”

In the near-term, BICA has recommended that to certify/attest to the accuracy of a company’s Business Licence filing, its members document their client’s accounting policies on “revenue recognition and accounts receivable, and provisions for doubtful accounts”.

This information is to be attached to the Business Licence filing, enabling the Department of Inland Revenue to know the accounting policies employed, and determine if they are appropriate for Business Licence purposes.

“While accounting principles will not answer all questions relating to the Act, they will form the basis for how the reporting entity recognises revenue,” Mr Bowe told Tribune Business.

“We will have the accounting policies disclosed, and it will become very clear what the standard requires and how the company has applied the standard.”

He added: “What this allows is that the Ministry of Finance has the information to determine whether or not they will accept the accounting policies....

“In reality, it puts the onus back on the Department of Inland Revenue and Ministry of Finance to accept it. It becomes very transparent, the basis on which you have accounted for revenue for the purposes of the Business Licence filing.”

Mr Bowe said similar issues existed when it came to ‘consolidating’ the financials of a group of companies owned by the same parent.

He explained that a ‘guidance note’ issued on the subject some 18 months ago by the Ministry of Finance was inconsistent with IFRS. While the latter enables entities to be ‘consolidated’ if they are owned by the same parent, the ‘guidance note’ defines companies as being part of the same group if they merely share resources and office space.

“The Act requires a business to pay Business Licence fees at a rate determined by reference to the consolidated turnover of a group of businesses designated by the Department of Inland Revenue as having a parent/subsidiary relationship,” the BICA ‘guidance note’ said.

“The definition in the Act does not provide sufficient details to be considered a comprehensive basis of accounting for determining consolidation.

“The long-term recommendation to the Ministry of Finance is to amend the Act to either adopt IFRS as the basis upon which consolidation is to be required, or to expand its details on the requirements for consolidation.”

Mr Bowe said that while it was “fair criticism” for the Ministry of Finance to complain that BICA had failed to provide timely feedback in the past, the Government should not be issuing accounting guidance notes or interpretations without reference to the Institute.

Emphasising that BICA’s ‘guidance note’ was designed to remove all “ambiguity”, Mr Bowe added that the Institute’s “long-term objective” was to have its recommendations “embedded in legislation” via reforms to the Business Licence Act.

“That provides it with the force of law,” he told Tribune Business. “From that perspective, we believe if we embed this in the legislation, it will strengthen the quality of the legislation and its ability to reflect the rule of law.

“There will be less ambiguity. There will be areas open to interpretation, and it is no different from VAT, where there are rulings as we go through the process. If we can embed principles not in the present legislation, we can strengthen the regime and avoid ambiguity.”

Mr Bowe said the ‘guidance note’ would enable BICA to meet its international obligations as a member of the International Federation of Accountants (IFAC).

“It’s not the sexiest of stuff, but it’s very important if we want to maintain the integrity of the system,” Mr Bowe told Tribune Business.