VOL 1 ISSUE 4 JUL/ AUG 2009

CIMA recently issued a series of essential checklists to the SMEs titled ‘Making a success of your business’. It is more challenging for SMEs to focus on strategic direction of the business whilst managing the daily operations. However it is crucial for the long term success of the business, especially when the market and economic conditions in which the business operates changes frequently and rapidly.

These checklists help the entrepreneurs to assess the performance of the business and prioritise organisational needs. It provides guidelines related to a variety of aspects such as financial position, strategic direction, resource management, value chain, value creation, market, governance and regulatory environment etc.

Read more on ‘Making a success of your business’.

My sincere appreciation to contributors of this edition. CIMA members and partners are cordially invited to contribute technical and business articles for future issues of ‘The CIMA Edge’.

Nilushika Gunasekera

Technical Manager, CIMA Sri Lanka Division

News and events Sri Lanka

Upcoming events: - CIMA Business Leader Summit: 'The challenge - now and ahead' 5 and 6 Oct, Cinnamon Grand, Colombo - Convocation: 9 Sep - Membership conversion sessions: 18 and 19 Sep - CIMA business brief: improve processes - improve cash flow on 27 Aug, by Shrihan B Perera, National Finance Director, Unilever Sri Lanka Ltd - CIMA business brief: pick your blind spots - recognising risk; then mitigating on 11 Sep by Chanaka Wickramasuriya, Country Head, Fitch Ratings Lanka Ltd

Past events: - A technical session on Environmental sustainability and management accounting practices by Dr Danture Wickramasinghe, Programme Director, University of Manchester was held on 18 Aug

Pakistan CIMA is offering an exclusive £5 discount on

each module in the CIMA Certificate in Business Accounting until 30 Nov 2009

Maldives - A technical seminar on ‘Islamic finance principles with business context’ was conducted on 18 Aug by Ishrat Rauff, Managing Director, UTO EduConsult (Pvt) Ltd

CONTENTS 1 Leadership styles

2 Impairment

testing

3 ‘Quote: unquote’

4 Management

accounting practices in Sri Lankan…

5 Useful links in

business

6 Key economic and

social statistics of Sri Lanka

Contents: feature articles

Leadership styles

by Anthony Jayaranjan

A leader has to diagnose the development level of his team members and apply the most appropriate leadership style relevant to each member and each situation

Impairment testing by Subramaniam Umasudhan

In theory, an impairment loss should make a share look less attractive in terms of P/BV multiples. At present, however, impairment tests are triggered after the share prices have significantly fallen.

‘Quote: unquote’ ‘Success is not final, failure is not fatal: it is the courage to continue that counts.’ Winston Churchill

Management accounting practices in Sri Lankan business organisations by Janaka Subasinghe Companies must adopt necessary steps to allocate more resources to the MA function and transcend from ‘traditional financial accounting mentality’.

Useful links in business A common platform for finance professionals to connect; share experiences and knowledge; learn and do business http://www.finance30.com

Key economic and social statistics of Sri Lanka Economic growth (2008) 6%

feature article

Leadership styles

by Anthony Jayaranjan

Anthony is a fellow member of CIMA and ICASL. He is currently the Senior Vice President, learning and development at John Keells Holdings PLC. He accounts 34 years of commercial exposure inclusive of board level experience across several industries. He was formally the Group Finance Director of Pership Group of Companies and he was an executive director/ deputy CEO of Shaw Wallace and Hedges ltd. He is an avid writer and his contributions have been published in

ICASL, FCCISL and IPMA USA finance and management journals.

A brief history of leadership studies When we recollect history, we remember the names of the kings, queens and other leaders but hardly anything about the citizens. History acknowledges the importance of leadership. In the corporate world too successes and failures are often attributed to leadership.

Over the years the focus on leadership studies has been on the:

person in terms of his/her traits position held kind of interaction the leader and follower have situation in which the leader performs styles of leadership

- task orientation - relationship orientation.

There has been a shift from studying individual traits to studying the actual behaviour in leadership situations in a group and how people use task or relationship leadership styles in work situations.

Managing versus Leading Management is planning, organising, staffing, directing, integrating and controlling of resources. Of the resources available, only people can be led. Leadership is a unique control behaviour that is directed to the management of human resources for keeping them constantly energised to achieve organisational goals.

A manager who cannot lead his/ her team and a leader who cannot manage his/ her team will both be ineffective in their roles. Management and Leadership are complementary and are not mutually exclusive.

Making sense out of chaos One way of making sense of the various studies, is to fit the information that we have gathered to-date into a framework and see the emerging patterns. When such information was studied, leadership behaviour had a very strong correlation to the followers and the situation.

The two dimensions of leadership behaviour Behaviours exhibited by leaders in the process of leading others could be measured on the dimensions of task and relationship.

Task behaviour concentrates primarily on how the team

members have to execute their tasks. Persons who exhibit task behaviour tell others what to do, how to do, when to do, and closely supervise the work entrusted to others. They believe in structure, control and supervision. A leader with a dominant style of task behaviour when working with his team:

identifies problems defines goals and roles controls decision making gives specific instructions engages in mostly one way communication closely supervises work.

Relationship behaviour involves the leader supporting and encouraging the team members, facilitating involvement in problem solving and decision making. Leaders with a relationship dominant style listen to their team members, praise them when members perform well and facilitate all the team processes. These leaders:

engage in lot of two way communication provide support and encouragement facilitate interaction encourage follower involvement build personal relationships with followers.

A simple model of leadership styles If we map the two behavioural dimensions, task and relationship on the vertical axis and horizontal axis respectively, we will have four styles of leadership.

Low

Low

TASK

High

High

RELA

TIO

NS

HIP

High - Task

Low - Relationship

High - Task

High - Relationship

Low - Task

Low - Relationship

Low - Task

High - Relationship

Influence - a leadership style that display high focus on both task and relationship. Delegation - a leadership style that display minimal focus on task or relationship. Collaboration - a leadership style that display low focus on task and high focus on relationship. Direction - a leadership style that display high focus on task and low focus on relationship.

Late President Premadasa was seen to be task oriented in his leadership style by the bureaucrats who worked with him. Late Dudley Senanayake a former Prime Minister was known by the people for his relationship oriented leadership style.

Application of leadership styles The leadership style adopted should suit the development level of the team members, and the situation. An effective leader should be aware of his predominant style and have the flexibility to adopt his style that is appropriate to his people and the context. A meaningful impact can only be created when the leader adopts the most appropriate style of leadership after assessing the developmental level of his team members and the situation.

1. Team member development level The development level of the team members is a reflection of their willingness and ability. We could map the developmental level of the team members on the dimensions of their willingness and ability.

feature article

High

WILLINGNESS

AB

ILITY

Low

Low

High

High - Willingness

High - Ability

High - Willingness

Low - Ability

Low - Willingness

Low - Ability

Low - Willingness

High - Ability

Willingness is dependent on a person’s motivation and confidence. Ability is dependent on a person’s knowledge and skill. The development level of an individual is role specific. When a person is transferred to a new job that requires new knowledge and skills, his ability will be at a lower level than what he would have exhibited on his previous role. Lack of experience also may affect his confidence, resulting in low willingness. Motivation on the same role could also vary when a person undergoes personal difficulties. Therefore varying developmental levels could exist for even a person in the same role.

Each individual in the team will also be at different levels of development due to their ability and willingness. Diagnosing the development levels bearing in mind that the same individual on different roles will be at different development levels, even on the same role an individual could be at different development levels at different times and that different members of the team will be at different development levels is an awareness that an able leader therefore should have.

Matching of leadership styles with team member development levels

’Different strokes, for different people.’

A leader cannot change the development level of the team members in the short term. Therefore, he has to diagnose the development level of his team members and apply the most appropriate leadership style relevant to members and the situation.

Member development dimensions

Leadership dimensions

Leadership styles

Low – Willingness Low – Ability

High – Relationship High – Task

INFLUENCE

Low – Willingness High – Ability

High – Relationship Low – Task

COLLABORATION

High – Willingness Low – Ability

Low – Relationship High – Task

DIRECTION

High – Willingness High – Ability

Low – Relationship Low – Task

DELEGATION

If a person’s ability is low then it is necessary for the leader to address this gap by providing specific instructions on how the task has to be performed, coupled with constant monitoring and supervision. For a person with high ability, further inputs on how the task has to be performed will not only be superfluous but may also be counter- productive. From the table the correlation between the team member development level and the leadership styles could be seen.

Matching of leadership styles with different situations In an emergency where immediate response is required, the only style a leader could use is Direction. However, in a different situation where creativity and innovation are required on a long term project, then the adopted style should be high on relationship. Thus a collaborative style - high on relationship and low on task is more appropriate.

Sir Winston Churchill a very successful Prime Minister of Great

Britain during the Second World War was not elected for a second term at the next elections which coincided a time of peace. This illustrates that the expectations of the people regards the required leadership style changed/ varied from the time of war to the time where the nation needed to be rebuilt post war.

In the history of corporations, at different stages of the evolution of these organisations, different leadership styles were required. We could see the same leader exhibiting different styles as appropriate, or there were changes in leadership positions. Perhaps we might see some changes in organisations that were affected by the recent financial melt- down.

Like charity, leadership too begins at home Parents’ disagreements with children increase as they grow older. It peaks during their teenage years. Past experiences of others indicate that parents should realise that the children are now older. Yet many parents continue to treat them the same way they were treated when they were younger. The real issue is that the children have grown-up but unfortunately the parents have not, in changing the dimensions of task and relationship behaviours.

The importance of applying the appropriate task and relationship (leadership) styles in parenting, relative to the development level of the children, are as important to adopting the appropriate styles in places of work.

Bibliography: Managers & Leaders are they different? Abraham Zalesnik, Harvard Business Review Mar – Apr 1992. What Leaders Really Do? John P Kotter, Harvard Business Review May – Jun 1990. Management of Organizational Behaviour by Paul H Hersey, Kenneth H Blanchard, and Dewey E Johnson 2007 ISBN 0130175986.

feature article

Impairment testing by Subramaniam Umasudhan

Subramaniam is an equity research analyst at Amba Research. He is an associate member of CIMA, ACCA,

and CMA – Sri Lanka. He has been lecturing for CIMA since 2004.

Impairment tests There is empirical evidence that many companies are currently trading at historical lows, well below their book values. Nevertheless, even at such deep discounts to book value multiples, there is limited support for share prices. Subramaniam Umasudhan (Sudhan) feels that this has something to do with impairment tests. Specifically, impairment will wipe out a significant portion of a company’s book value, and as accounting standard setters have failed to ensure consistency between companies in impairment testing, this has led to a valuation mismatch between companies. In this article, Sudhan will examine the basis of impairment

testing and how impairments have impacted both US and European companies. Why P/BV multiples? Extremely weak earnings visibility has made earnings multiples very difficult to interpret. Hence, the focus is currently on the price/book value (P/BV), which is less vulnerable to the subdued earnings conditions. Even though most companies were hit hard during the latter part of 2008, their book values remain relatively unchanged despite years of impairment testing. Hence, equity analysts regard P/BV in cyclical industries as a better measure of a company’s underlying value in times of a prolonged recession compared with earnings multiples. P/BV multiples are widely used by equity analysts to value cyclical industries. Analysts find it easy to justify their investment case based on a forward P/BV multiple, as forward earnings multiples such as P/E and EV/EBITDA remain unattractive at low earnings levels. When using a forward P/BV as a primary method to arrive at a price target, however, analysts should be aware of the following:

1. Historical P/BV multiples cannot be used to assess a firm’s share price at present, as fair P/BVs of companies have dramatically changed with widening risk premiums. Hence, analysts need to revise their fair P/BV assumptions downwards due to macroeconomic uncertainty and turbulent financial markets.

2. The likelihood of future impairments and their subsequent negative impact on book values needs to be considered before estimating P/BV multiples. A stock’s forward P/BV may look highly attractive at current levels; however, with further impairment, book values could drop significantly, thereby making the stock unattractive in terms of P/BV.

What is an impairment test? According to IAS 36, impairment losses will occur when an asset’s carrying values are no longer recoverable. An asset’s carrying value is the amount at which an asset is stated in the balance sheet (generally historical cost of an asset less accumulated depreciation). The recoverable amount is the maximum amount an entity can generate by selling the assets (net realizable value – NRV) or using them on a going concern basis (value in use – VIU). IAS 36 states that the recoverable

amount should be higher than NRV and VIU.

NRV is the level at which an asset could be sold in an arm’s length transaction after deducting selling costs. VIU is the present value of the future cash inflows that could be generated by using the assets.

Impairment losses will be identified and recorded in the income statement when the recoverable amount of an asset falls below the carrying value in the balance sheet. Impairment losses of previously revalued assets, however, need to be charged against revaluation reserves. Nevertheless, impairment losses will reduce the equity value of a company, thus negatively affecting book value per share.

IAS 36 states that goodwill should be checked for impairment annually, and other intangible assets, which have an indefinite life, also need to be checked for impairment at each balance sheet date. Nevertheless, if there is an indication of impairment, an impairment test needs to be carried out immediately.

A weakening economic environment, slow demand, intense competition and, in particular, a reduction in the market capitalization of a company, are a few indications of impairment. If an indication of an impairment loss is present, an entity should conduct an impairment review on each asset separately. If this is not possible, assets can be grouped together to perform the impairment test. Yet, if a company does not have a basis for valuing their separate assets, an impairment test should be carried out on individual cash-generating units of a company.

If an impairment loss is evident in a cash-generating unit instead of a specific asset, it has to first be charged against goodwill. If the goodwill is insufficient, then other intangible assets need to be written down, and finally tangible assets on a pro-rata basis.

How does impairment testing work? Estimating the fair value of an asset in an active financial market is straightforward. On the other hand, given the difficult market conditions at present, estimating the fair value of an asset is extremely challenging. Hence, NRV will not be a good indicator of an asset’s recoverable amount in a down-cycle. Therefore, the only plausible way to identify the recoverable amount of an asset is using VIU. The use of VIU for the process of impairment testing could, however, be misleading since many companies are aggressive in their VIU calculations, thus reducing the likelihood of a write-down.

The VIU calculation will be highly sensitive to management’s forecasts of future cash flows of an asset, discount rates, and the long-term growth rate used in estimating the present value. In order to improve liquidity and investments, many economies have reduced their interest rates. This does not mean that a lower discount rate can be used in the VIU calculation, as many other factors need to be assessed before determining an appropriate discount rate. It should be noted that a severe recession and increased risk premiums in the capital markets will lead to an upward shift in the discount rate.

External auditors play a vital role in verifying the reasonableness of the assumptions made in the VIU calculation. Nevertheless, not all the auditors are equipped with the necessary resources to verify impairment calculations.

Furthermore, IAS 36 lacks specifics in outlining how a VIU calculation needs to be performed. This has led to the use of many different calculation methods to derive VIU, thus affecting the comparability of impairment between companies.

feature article

Companies do not always follow the disclosure requirements of IAS 36. During certain instances, the non-disclosure of the basis of impairment is a deliberate move to mislead investors.

Therefore, financial reporting review panels in the US and Europe should conduct reviews on companies to ensure that disclosure requirements on impairment reviews are met on all occasions with no exceptions.

2009 is off to an inauspicious start. Demand for many sectors have declined by double digits in percentage terms in both the US and Europe. In addition, the earnings outlook has weakened due to slow demand. This should, in theory, have significant negative effects on an assets’ income-generating ability, thus reducing VIU and leading to an impairment loss.

Only few companies, however, have written down their value of assets. In addition, very few companies within the same industry have recorded impairment losses, whereas others have simply stated that no evidence is present for impairment.

Ideally, companies in the same industry with similar fundamentals should record impairment. The VIU calculation of companies should also be consistent with the internal forecasts prepared by a company for strategic planning.

A sharp fall in the share price of a company is an impairment trigger. In that case, the recoverable amount of an asset needs to be revised to see if impairment is evident. If VIU calculations are higher than the market capitalization of companies, then the VIU calculation needs to be more conservative. If an impairment loss is still not evident, then the company’s cash flow projections are much higher than that factored into the share prices. The reasons for this have to be determined and disclosed. Analysts should be extremely cautious in valuing stocks based on book values, especially in industries that are in a structural decline. Future impairments are likely to occur and the estimated book values would be much higher than the actual figures after a post-impairment review.

The UK’s financial reporting review panel is currently considering the review of impairment disclosures of listed companies. This could make impairment tests and disclosure requirements more stringent than ever before, possibly triggering substantial impairment losses and lower book values.

This could make an investment case very difficult to justify based solely on book value multiples.

In theory, an impairment loss should make a share look less attractive in terms of P/BV multiples. At present, however, impairment tests are triggered after the share prices have significantly fallen. This will lead to incorrect valuation judgments based on P/BV multiples.

On a final note, the International Accounting Standard Board should re-visit IAS 36 and introduce more specific disclosure requirements and calculation methods. Furthermore, regulators should ensure that all the disclosure requirements of IAS 36 are adhered to by the companies.

US GAAP needs to be aligned with the IAS to facilitate a valid comparison between US and European companies on impairment testing. Currently, a reversal of impairment is not permitted under US GAAP, but is allowed under IAS 36. Until such differences are eliminated, IAS 36 cannot be considered truly international.

Equity analysts need to determine the future impairment implications in estimating forward book values to make the

multiples meaningful.

Reference International Accounting Standard 36 (IAS 36) issued by the International Accounting Standard Committee (IASC)

‘Quote: unquote’ ‘Try not to be a man of success, but rather to be a man of value.’ Albert Einstein ‘You don’t have to see the whole staircase, just take the first step.’ Martin Luther King, Jr. ‘Only a man who knows what it is like to be defeated can reach down to the bottom of his soul and come up with extra ounce of power it takes to win when the match is even.’ Muhammad Ali ‘Success is not final, failure is not fatal: it is the courage to continue that counts.’ Winston Churchill ‘Individuals play the game, but teams beat the

odds.’ SEAL Team saying ‘Use what talents you possess; the woods would be very silent if no birds sang there except those that sang best.’ Henry Van Dyke ‘Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination are omnipotent.’ Calvin Coolidge ‘Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbour. Catch the trade winds in your sails. Explore. Dream. Discover.’ Mark Twain ‘Obstacles don’t have to stop you. If you run into a wall, don’t turn around and give up. Figure out how to climb it, go through it, or work around it.’ Michael Jordan It is not the critic who counts, not the man who points out how the strong man stumbled, or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes short again and again, who knows the great enthusiasms, the great devotions, and spends himself in a worthy cause, who at best knows achievement and who at the worst if he fails at least fails while daring greatly so that his place shall never be with those cold and timid souls who know neither victory nor defeat. Theodore Roosevelt

feature article

Management accounting practices in Sri Lankan

business organisations by Janaka Subasinghe

Introduction Management accounting (MA) practices have changed in scope during the past ten years and could change further. However, the objective remains unchanged, to provide management information for decision making. The objective specifies that the purpose of MA is to protect, preserve and increase value to stakeholders. MA techniques have undergone several developments from preparing cost-volume-profit analysis to

latest techniques like economic value addition, activity based management, target costing, Kaizen etc. The expectation of a management accountant changes consistently with the advancement of technology and new challenges in the business environment. Traditionally, management accountants were loaded with the supply of information. Will this role continue? It is important to assess the nature, extent of use, and the effectiveness of the MA practices in Sri Lankan organisations to assess the situation.

Sri Lankan context of MA is still in the very basic level and struggle with the traditional financial information. Financial accounting and statutory compliance requirements are given higher priority by companies and MA is subordinate to financial accounting in most instances. The preliminary study done with regard to few companies, reveal that MA in Sri Lankan business sector is at very low level, without the use of MA

proactively. This can be further highlighted by comparing MA practices between local and multinational companies. Most multinational companies are using variety of MA techniques and the management accountant plays a critical role.

The origin of today’s MA can be traced back to the industrial revolution of the nineteenth century. According to Johnson and Kaplan (1987), most of the MA practices that were in use in the mid-1980s had been developed by 1925, and for the next 60 years there was a slow-down, or even a halt, in MA innovation. Since the mid-1980s MA practitioners and academics have sought to modify and implement new techniques that are relevant to today’s environment and that will ensure that MA regains its relevance. It is interesting to see some international view points about MA. For example Barbara, 2004 describes the future role of the Australian management accountant to be setting strategic direction, resource management, organisational control, decision support, organisational change management and information management. Further Thomas, 2004 emphasises that the British accountancy professions could split up into the ‘pure’ accountants dealing with audit and tax, being separated from the MA technicians at one level and the financial managers at a

higher level.

Low adoption of MA practices in Sri Lankan companies The study findings of the gap between the theory and practice of MA in quoted public companies in Sri Lanka by Fonseka, Manawaduge, and Senaratne (2005), reveal that usage of certain MA practices in the corporate sector is still relatively at a low level. They studied 36 MA practices and they have found that usage rate of 24 MA practices out of 36 is below 30%. The findings also indicate that planning and control were the most popular MA practices used. Utilisation of MA practices for strategy formulation, decision making, resource usage, performance improvement and value enhancement were on quite a low scale. Further the degree of usage varied considerably within different industry sectors. In this study the following issues were identified as the causes for low adoption of MA practices:

1. Low level of awareness among top management of the relevance and usefulness of MA.

2. Subordinate to financial accounting practices: the MA function has not developed sufficiently over the years, and remains an arm of the finance function.

3. Inherent bias towards traditional modes of planning and control: it is evident that there is a dearth of MA practices aimed at formulation of strategy, efficient resource use, performance improvement and value enhancement. But the Sri Lankan context is very low in adoption of MA

practices in these areas. 4. Sri Lankan companies lack an environment that promotes

innovation, learning, and sharing of knowledge and skills. In contrast, multinational companies seem to be rich in these aspects.

5. Most of the MA practices can be adopted based on a set of assumptions and do not apply to Sri Lankan market which is highly distorted (volatile market conditions).

Current research findings Developing on the research conducted by Fonseka, Manawaduge, and Senaratne (2005), a further study was

conducted to identify the correlation between each independent variable outlined above and the dependent variable ‘adoption of MA practices’.

Independent variable

Dependent variable

Correlation (r)

Coefficient of determination

(r2)

Top management

awareness (H1)

Adoption of

MA practices

.737 54%

Subordinate to

financial accounting

(H2)

Adoption of

MA practices

-.579 33%

Mode of planning and

control (H3)

Adoption of

MA practices

.727 53%

Supportive

organisational culture

(H4)

Adoption of

MA practices

.664 44%

Market volatility (H5) Adoption of

MA practices

.251 6%

Table 1: Correlation analysis Source: Survey data (This study was based on 22 registered companies in Sri Lanka and level of adoption of 19 MA practices).

According to the above the first four hypotheses (H1, H2, H3 and H4) were accepted while the last hypothesis (H5) was not supported. Findings from interviews and focus group discussions

1. It is very important to have a separate MA function for the

company to actively use MA for decision making. 2. Analysing the competitive market position using various MA

practices will help to be more competitive.

3. Collaboration with finance is critical in business decisions making.

4. There is a misconception that MA practices are less critical to the

service sector compared to manufacturing and trading.

5. In most cases high adoption indicated appreciation of its value to

business.

6. Multinationals were more prone for adoption.

7. It is important to understand the distinction between roles of

management accountant in contrast to financial accountant. 8. Awareness of top management and executives regards relevance

to business and usefulness of MA practices is critical for adoption.

9. Having a strategic direction with proper planning will place the

management accountant at a higher level as a facilitator for

business decisions.

10. Close relationship with other departments will help to give more

insight to strategic and operational decisions.

11. Management accountant should have necessary skills to counsel

business and marketing in generating valuable ideas.

feature article

Companies with traditional modes of planning and control do not generate information effectively for business decisions. Their focus is day-to-day operations. There’s no proactive analysis with regard to customers, markets, competition and resource usage. Thus traditional planning modes entail a minimal adoption level of MA practices.

Manufacturing companies have critical operations with several processes. Thus there is a dire need and focus for planning and control. In contrast, focus on planning in trading and service companies were relatively low.

In multinational companies the planning and control is a key area. Almost all the multinationals in the sample have a planning focus of three to five years.

Openness, transparency in activities, respects for others are some good signs for a supportive culture. In this frame work employees are in a position to share knowledge and openly discuss various business matters. MA can be practiced very proactively when the culture supports positive relationships within the organisation.

It is interesting to see that the MA function in multinational companies have a very close relationship with other departments. MA function acts as ’finance counsel’ or ’financial analysis and planning’. The objective is to maintain a close relationship with other departments, especially with sales and marketing to counsel them in terms of various business decisions.

Companies whose market volatility score was high have adopted most of the MA practices. It can also be noted that companies whose scoring is low on this aspect have adopted MA practices relatively at low levels. So, the hypothesis 5 (H5) is not accepted, but, findings were identified as with high market volatility the adoption of MA practices is also higher.

Conclusion Research findings were that the adoption levels of MA practices have: (1) strong positive correlation with top management awareness of the relevance and usefulness of MA practices, (2) moderate negative correlation with subordinate to financial accounting, (3) strong positive correlation with mode of planning and control, and (4) moderate positive correlation with supportive organisational culture. A fifth hypothesis which was to test the relationship between market volatility and low adoption of MA practices was not supported. The implications of the study emphasise that the level of adoption of MA practices can be improved by building right awareness among the relevant stakeholders in particular the top management who heavily rely on MA information. Additionally, companies must adopt necessary steps to allocate more resources to the MA function and transcend from ‘traditional financial accounting mentality’, when there is an urgent need for sound management decisions to be made. References Fonseka, K.B.M., Manawaduge, A.S.P.G., Senaratne, D.S.N.P. (2005). Management accounting practices in quoted public companies in Sri Lanka. Colombo: CIMA Sri Lanka division. Financial and Management Accounting Committee (FMAC), International Federation of Accountants. (2004). a view of tomorrow, management accountancy.

This article is based on the research conducted by the author on topic ‘Factors affecting the low adoption of MA practices in Sri Lankan business organisations’ in partial fulfilment of the Master degree in Business Administration at the Post Graduate Institute of Management. Janaka is an associate member of CIMA. Presently he is the deputy finance manager at the 3M Lanka (Pvt) Ltd. He has over 11 years experience in financial and management accounting, business finance and IT in various industries.

Further insight to key findings The overall analysis indicates that Sri Lankan businesses

are not using MA practices proactively. Most of the companies who have adopted MA practices,

focused on traditional practices. Certain MA practices were more popular for adoption

compared to others.

Multinational companies which have local operations in Sri

Lanka were identified to have the optimal level of adoption. Two multinational companies in the study sample practiced

almost all 19 MA practices to a high degree and these companies used most of the functions of MA.

The adoption level of MA practices especially in the trading and service sectors, were relatively lower.

The top management or senior managers in the manufacturing sector were well informed about MA practices. High number of respondents answered to the usage of MA practices as ‘always’ and given the priority as ’most important’ for most of the MA functions.

This situation was relatively low for both trading and service sectors. But, there were few top executives in the service and trading sectors who were well informed and as a result the adoption level was considerably high in these organisations.

59% of the sample relied on financial accountant to

present management accounting reports and MA function was a subordinate to financial accounting. The obvious outcome was low priority for MA practices due to higher pressure for mandatory statutory requirements.

Most popular MA practices Budgeting Variance analysis Cash flow forecasting Ratio analysis Product costing Performance evaluation

Least popular MA practices Balanced scorecard Strategic management accounting Value chain analysis Just-in-time systems Activity based management

Information

Useful links in business

Appreciating the wealth of knowledge in world wide web! General An interactive website that provide a common platform for finance professionals from all sectors to connect; share experiences and knowledge; learn and do business http://www.finance30.com Provides intra-daily news analyses; political and economic risk assessments; strategic views on currency and debt developments; systematic macroeconomic forecasts over a ten year horizon; country-comparative risk ratings, and rigorous benchmarking of the business environment – fees apply http://www.businessmonitor.com Facts, analyses and reports on world economy, country economic profiles, international trade, industries and investments http://www.economywatch.com An international job site http://myjobs.cimaglobal.com/ The global organisation for the accountancy profession www.ifac.org For market data, analytics, and political and financial news of the world www.bloomberg.com Provides free information and advises to Small Businesses (start-ups & established firms) www.is4profit.com Provides reference sources for Small Business entrepreneurs, biographies of industry leaders, sample business plans etc http://www.referenceforbusiness.com/ Banking news across the world www.banking.einnews.com

The Harvard Business Review hbr.harvardbusiness.org/ Provides insight and opinion on international news, world politics, business, finance, science and technology, and cultural trends www.economist.com Multiple-media publisher of scientific, technical and health information http://www.elsevierdirect.com/index.jsp Sri Lanka The apex institution in the financial sector in Sri Lanka www.cbsl.gov.lk Department of Inland Revenue www.inlandrevenue.gov.lk Statistical information about socio - economic activities of Sri Lanka http://www.statistics.gov.lk/

Description of indicator (Year)

Unit of measure

Value of indicator

GDP at current market prices (2008)

Rs. bn 4,411

Real economic growth (2008)

% 6%

National saving as % of GDP (2008)

% 18.2%

Exports (2008) US $ mn 8,137

Imports (2008) US $ mn 14,008

Mid year Population (2008)

persons 20.2mn

Age distribution (2008)

0 to 14 years

15 to 64 years

65 years and above

persons

5.4mn

13.5mn

1.3mn

Per capita GDP at market prices (2008)

Rs. US $

218,161 2,014

Labour force (2008) persons 7.6mn

Labour force participation rate (2008)

% 50.2%

Unemployment rate (2008)

% of labour force

5.2%

Average literacy (2006) % 90.8%

Reference: Annual Report 2008, Central Bank of Sri Lanka

Key economic and social statistics of

Sri Lanka