Monday, 2 December 2019

Some Important Aspect About Supply Chain: Switch Bill of Lading and their types

A complete manual and word of advice as per below details:

What it means?
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A switch Bill of Lading refers to a second set of Bill of Lading issued by the carrier (or its agent) to substitute the original bills of lading issued at the time of shipment.

Even though it technically deals with the same cargo, the information on the switch B/Ls, for various reasons put forth below, is intentionally edited and is not meant to be identical to the original B/L it replaces.
Just like the original, the switch B/L serves as:
  • A receipt for goods (for the destination agent)
  • Evidence of contract of carriage (contract between shipper and the carrier)
  • Document of title to the goods (consignee will need at least one original to receive the goods)
In most cases, a switch B/L is used in order to edit the shipper information, i.e. replacing the actual factory details with the trading agent’s. That said, there may be various other motives for requesting a switch B/L.

Reasons to issue a switch Bill of Lading

Switch B/Ls are only issued against the surrender of the original set and may be required by any of the three parties with direct involvement in the purchase/sale of the cargo: the cargo owner/seller (or an authorized representative), the trading agent, and the end buyer.
The reasons for requiring a switch B/L include:
  • The seller (who could be a trading agent) wants to hide the name of the actual exporter from the consignee to prevent the consignee from striking a deal with the exporter directly.
  • The seller does not want the buyer to know the actual country of origin of the cargo.
  • The original B/L may be held up in the country of shipment, or the ship may arrive at the discharge port prior to the original B/Ls.
  • The trading agent prefers to ease his cash flow by first receiving payment from the end receiver before paying the shipper.
  • Goods may have been resold en route as a high sea sale and the discharge port must now be changed to another port.
  • Customs at destination or consignee request for the cargo description to be edited. Eg. “tools” instead of “gardening tools”.
  • The goods were originally shipped in small parcels on separate B/Ls and the buyer prefers to have only one B/L covering all the parcels to facilitate his on-sale. Or vice versa - one B/L was issued for a bulk shipment which the buyer prefers to split into multiple B/Ls covering smaller parcels.

Switch Bill of Lading procedure

The Switch B/L can only be officially requested by the cargo owner or principal. In other words, since the Bill of Lading represents ownership, only the company holding the full set of documents can request for a switch B/L.
Advice: the request should only be made if the company has all three original B/Ls in hand, except in the case of a Telex Release.
After the request has been made, the switch bill must be approved by the carrier and the freight forwarder, who needs to very meticulously compare the differences between the original B/L and the new and proposed Switch B/L to make sure everything that needs to match, matches.
Note: only the carrier or freight forwarder is allowed to sign a Bill of Lading.
Once the switch B/L has been approved for issuance, the carrier and/or freight forwarder must make sure that the original set of B/Ls is taken out of circulation and cancelled before the switch B/L can be released. This is important as it ensures that there is only one set of documents in force to prevent problems.

Switch Bill of Lading example

When requesting for a switch B/L standard procedure must always be followed to ensure a smooth process. Here’s an example of how a switch B/L may be requested and processed.
Consider these three parties:
  • Party A: factory producing the goods
  • Party B: trading agent selling the goods
  • Party C: final buyer/consignee

The first and original set of B/L will have been issued with A as the shipper and B as the consignee. The cargo owner may later request for a switch B/L listing B as the shipper and C as the consignee.
Other changes to the shipment description may be made, but only under the cargo owner’s written authority and only to certain information such as to the condition of the cargo, payment terms, place and date of loading, Incoterms, etc.
Any inconsistencies on the switch bill will result in the carrier and his agent (if the agent has issued the switch bills) facing risks of claims from parties who have suffered a loss as a result of these misrepresentations.
Switch bills of Lading do not contain any information that indicates that they are not the initial and original B/Ls. However, the consignee or end buyer is at liberty to ask the shipping line whether the bills were switched. Shipping lines are not legally obliged to divulge this information. But it’s common practice for them to do so without disclosing any further details.

Changes must be reflected across other documents

When a switch bill is issued, a new invoice and packing list must also be issued to reflect the new changes accordingly and accurately.
As per our example, this means showing company B as the supplier and company C as the buyer/consignee. This not only avoids exposing the supplier’s identity but also maintains consistency with the new set of Bill of Lading.

Possible risks for a shipping agent or freight forwarder

In recent years, there’ve been multiple cases of fraud under switch bills, which have caught the attention of shipping lines. This highlights increased risks for cargo agents such as:
  • A letter of indemnity (written authorization) issued by the requestor could potentially be legally unenforceable.
  • Differences in the description of the cargo may cause conflict as to the validity of the Bills of Lading as receipts of the cargo shipped
  • One set of Bill of Ladings might incorporate a different voyage charter with a different jurisdiction clause.
  • The original set of Bill of Ladings may have been marked freight payable only for the switch bills to be marked as freight prepaid, thereby affecting owners’ right to lien.
  • Inaccurate statements such as the shipment date, shipper or consignee name, quantity/condition of cargo, etc constitute misrepresentations.
  • Sometimes a different charter party with different freight/demurrage rates is incorporated, which defrauds the receiver.
  • Switch Bills of Lading may be used to draw fraudulently on a letter of credit or to defraud a seller/buyer.
  • In the event several versions of the Bills of Lading are circulating at the same time, the carrier risks delivery to the wrong party and then having to compensate the holders of the true ‘original’ bills.
For further reference, there are various case studies available online showing how different courts arrive at different verdicts based on the misinterpretations and misuse of the Switch Bill of Lading.

Tips on how to deal with a switch Bill of Lading

  1. Freight forwarders should verify the reliability of the principal party authorizing the issuance of the second set. Obtain their authority in writing and a signed letter of indemnity (and countersigned by a bank if deemed necessary by the agent) indemnifying the cargo agent for all consequences of issuing the second set of Bills of Lading.
  2. Freight forwarders should also consider whether it is also necessary to obtain written authority from the other parties who may be affected by his action (eg. the ship owner or the shipper or a bank). If a freight forwarder is authorized by a charterer to issue a switch Bill of Lading on behalf of the carrier, written authority by the ship owner must be obtained. Failure to do so will result in the ship owner having a valid claim against the agent for losses resulting from the issuance of the second set without authority.
  3. If the agent has been asked by the principal party to issue the switch bill based on an indemnity from the customer, the agent should get the proper wording from the principal and get the completed indemnity approved by the principal party before issuing it.
  4. It is also advisable to ensure that the cargo agent is covered by their own insurance for the issuance of switch bills. They should provide their insurance company with the exact reason for the issuance of the switch bill of lading.
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VAT(Identification of Designated Zones)

VAT treatment of Free Zones

VAT is a general consumption tax imposed on most supplies of goods and services in the UAE. By default, it is chargeable on supplies of goods and services throughout the territorial area of the UAE. This territorial area will also include those areas currently defined as both fenced and non-fenced Free Zones. For VAT purposes, both fenced and unfenced Free Zones are considered to be within the territorial scope of the UAE – and therefore subject to the normal UAE VAT rules – unless they fulfil the criteria to be treated as a Designated Zone as defined by the Federal Decree-Law on VAT1 and Executive Regulations2. Those Free Zones which are Designated Zones are treated as being outside of the territory of the UAE for VAT purposes for specific supplies of goods. In addition, there are special VAT rules in respect of VAT treatment of certain supplies made within Designated Zones. The effect of these rules is that certain supplies of goods made within Designated Zones are not be subject to UAE VAT. In contrast, supplies of services made within Designated Zones are treated in the same way as supplies of services in the rest of the UAE. Important: Free Zones meeting the criteria have been specifically identified by way of a Cabinet Decision as Designated Zones. Where a Free Zone is not a Designated Zone, it is treated like any other part of the UAE.

Identification of a Designated Zone A Designated Zone is an area specified by a Cabinet Decision as being a “Designated Zone” 3. Free Zones listed by the Cabinet Decision as being a Designated Zone can be found under the Legislation tab on the FTA website ( Although an area might be identified as a Designated Zone, it is not automatically treated as being outside the UAE for VAT purposes. There are several main criteria4

which must be met in order for a Designated Zone to be treated as outside the UAE for VAT purposes. These are as follows: 1. The Designated Zone must be a specific fenced geographic area. 2. The Designated Zone must have security measures and Customs controls in place to monitor the entry and exit of individuals and movement of goods to and from the Designated Zone. 3. The Designated Zone must have internal procedures regarding the method of keeping, storing and processing of goods within the Designated Zone. 4. The operator of the Designated Zone must comply with the procedures set out by the FTA. This means that where a Designated Zone has areas that meet the above requirements, and areas that do not meet the requirements, it will be treated as being outside the UAE only to the extent that the requirements are met. In addition, should a Designated Zone change the manner of its operation or no longer meet any of the conditions imposed on it which led to it being specified as a Designated Zone by way of the Cabinet Decision, it shall be treated as though it is located within the territory of the UAE5. Important: Only where a Designated Zone meets all the above tests it can be treated as outside the UAE for VAT purposes.

Entities within a Designated Zone Those businesses which are established, registered or which have a place of residence within the Designated Zone are deemed to have a place of residence in the UAE for VAT purposes6. The effect of this is that where a business is operating in a Designated Zone, it itself will be onshore for VAT purposes, even though some of its supplies of goods may be outside the scope of UAE VAT.

VAT registration Any person carrying on a business activity in the UAE and making taxable supplies in excess of the mandatory VAT registration threshold (i.e. a taxable person) must apply to be registered for VAT purposes.

Any other person that is making taxable supplies or incurring expenses (which are subject to VAT), in excess of the voluntary VAT registration threshold may apply to register for VAT purposes. Important: Designated Zone businesses are considered to be established ‘onshore’ in the UAE for VAT purposes. This means that they have the same obligations as non-Designated Zone businesses and have to register, report and account for VAT under the normal rules. It also means they can join a tax group (VAT group) provided they meet the required conditions.

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1 Federal Decree-Law No. (8) of 2017 on Value Added Tax, hereafter ‘the Law’. 2 Cabinet Decision No. (52) on the Executive Regulations of Federal Decree-Law No.(8) of 2017 on Value Added Tax, hereafter the ‘Executive Regulations’. 3 Article 1, Executive Regulations: any area specified by a decision of the Cabinet upon the recommendation of the Minister, as a Designated Zone for the purpose of the Decree-Law. 4 Article 51(1), Executive Regulation.


Tuesday, 18 July 2017

SFAS 78 With Summary

This Statement amends ARB No. 43, Chapter 3A, "Current Assets and Current Liabilities," to specify the balance sheet classification of obligations that, by their terms, are or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date. It also specifies the classification of long-term obligations that are or will be callable by the creditor either because the debtor's violation of a provision of the debt agreement at the balance sheet date makes the obligation callable or because the violation, if not cured within a specified grace period, will make the obligation callable. Such callable obligations are to be classified as current liabilities unless one of the following conditions is met:
The creditor has waived or subsequently lost the right to demand repayment for more than one year (or operating cycle, if longer) from the balance sheet date.
For long-term obligations containing a grace period within which the debtor may cure the violation, it is probable that the violation will be cured within that period, thus preventing the obligation from becoming callable.
Short-term obligations expected to be refinanced on a long-term basis, including those callable obligations discussed herein, continue to be classified in accordance with FASB Statement No. 6, Classification of Short-Term Obligations Expected to Be Refinanced. This Statement is effective for financial statements for fiscal years beginning after December 15, 1983 and for interim periods within those fiscal years.

Source: FASB

How does a magnetic stripe on the back of a credit card work?

The ­stripe on the back of a credit card is a magnetic stripe, often called a mags-tripe. The mags-tripe is made up of tiny iron-based magnetic particles in a plastic-like film. Each particle is really a very tiny bar magnet about 20 millionths of an inch long.
Your card also has a mags-tripe on the back and a place for your all-important signature.
The mags-tripe can be "written" because the tiny bar magnets can be magnetized in either a north or south pole direction. The mags-tripe on the back of the card is very similar to a piece of cassette tape fastened to the back of a card.
Instead of motors moving the tape so it can be read, your hand provides the motion as you "swipe" a credit card through a reader or insert it in a reader at the gas station pump.
On the next page, see how information is stored in the mag stripe and read by different types of machines.(Source -how stuff works)

Transfer Pricing

What is Transfer Pricing?
Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods paid by the parent to the subsidiary is the transfer price.
 How transfer pricing playing role in tax planning?
Transfer pricing is in the cross hairs of tax policy as it relates to the competing objectives of three parties: the revenue-maximizing objective of the domestic tax authority, the revenue-maximizing objective of the foreign tax authority, and the tax-minimizing objective of the taxpayer. Because of the inherent differences in judgment and interpretation of facts when analyzing a company’s transfer pricing, together with the clashing revenue objectives of multiple tax authorities and taxpayers, the risk of adjustments to taxable income, double taxation, and potential for penalties is nontrivial, even for multinationals that make good-faith efforts to comply with Sec. 482.
Disputes between tax authorities and taxpayers may arise in many areas, including:
  • Tax authorities may question the choice of the economic method.
  • Tax authorities may disagree with the taxpayer’s characterization of the value chain within the group.
 Example - As an example of the last type of dispute, in 2006 the IRS and GlaxoSmithKline Holdings (Americas) Inc. (GSK U.S.) settled a transfer-pricing dispute covering 1989 through 2005 for $3.4 billion, the largest settlement ever obtained by the IRS. At issue was the price charged GSK U.S. by its U.K.-based parent, GlaxoSmithKline PLC, through its worldwide operating group (Glaxo Group) for cost of goods sold, royalties, and other expenses, related in part to manufacturing and distributing Zantac and other prescription drugs. The position of GSK U.S. was that the drugs were developed outside the United States, as was the marketing strategy it used to sell them. As such, GSK U.S. was performing routine distribution and was charged prices and royalties based on the “resale price method,” which determines the appropriate arm’s-length range by the markups received by comparable distributors in uncontrolled, arm’s-length transactions. Based on the same facts, however, the IRS considered the marketing functions performed by GSK U.S. to have had a substantial role in creating demand for the drugs, and therefore, GSK U.S. deserved a much higher gross profit margin. The IRS applied the residual-profit-split method, which allocated Glaxo Group profit first between “routine” functions performed by GSK U.S. and GSK Group, then split the remaining profit according to where the largest part of the value was created.

Brief Overview of IFRS & How it’s different from US GAAP

“What’s the fuss over IFRS?” providing a brief overview of the transition to adoption of IFRS and convergence with US GAAP. While we realize that IFRS will become a future reality, the question lingered regarding the differences between the two accounting standards. I thought it would be useful to assess the areas of major differences. In this short blog post, it will not be impossible to address all the components of IFRS but we’ll try and capture primary differences.                   
IFRS standards are broader and more principles-based than U.S. GAAP. This represents a hurdle for many U.S. CPA's because we have been used to narrow “bright line” rules and guidelines on how to apply GAAP. IFRS tends to leave implementation of the principles up to preparation of financial statements and auditors. The regulatory and legal environment in the United States has been primarily responsible for narrower prescriptive interpretation of accounting rules. Adoption of IFRS will require a paradigm shift by accountants in the United States.
Financial statement presentation represents an area where differences exist. For example International Accounting Standards does not provide a standard layout as prescribed by the SEC. One of the big differences is that IFRS requires debt associated with a covenant violation to be presented as a current liability unless there a lender agreement was reached prior to the balance sheet date. US GAAP allows the debt to be presented as non-current if an agreement was reached prior to issuing the financial statements. Another difference in financial statement presentation deals with income statement classification of expenses. The SEC requires presentation of expenses based on function whereas IFRS allows expenses to be presented by either function or nature of expenses. Additional differences exist with presentation of significant items. Variations emerge with disclosure of performance measures such as operating profit. IFRS does not define such items so there can be significant diversity in the items, headlines, and subtotals of the income statement between US GAAP and IFRS.
A big area of divergence is with negative goodwill and research and development. IFRS requires that a reassessment of purchase price allocation be recognized as income while US GAAP allows negative goodwill to be allocated on a pro rata basis and can recognize the excess of the carrying amount of certain assets as an extraordinary gain. US GAAP requires research and development to be expensed immediately in contrast to IFRS which allows it to be capitalized as a finite-lived intangible asset. IFRS allows revaluation to the fair value of intangible assets other than goodwill whereas US GAAP does not permit revaluation.
There are both similarities and differences in the treatment of inventory. US GAAP allows LIFO as an acceptable costing method in contrast to IFRS which prohibits the use of LIFO. There are also some differences in measurement of inventory value. US GAAP states that inventory should be carried at the lower of cost or market. Market is defined as current replacement cost as long as market does not exceed net realizable value. IFRS allows inventory to be carried at the lower of cost or net realizable value which is the best estimate of the amounts which inventories are expected to realize and may or may not be equal to fair value.
While there are differences, the two standards boards are working to bring the two standards closer together. This should make the shift to IFRS easier when it comes time to change. One of the most significant areas where differences are being converged is revenue recognition. Currently US GAAP is more prescriptive than IFRS, especially for application to specific industry situations such as the sale of software and real estate. It will take time and effort to bring the two standards on to the same page. I looked at the two standards with the objective of understanding the key differences. The journey to convergence and adoption of IFRS will be interesting, challenging, and educational to say the least.
The IFRS: History and Purpose
The IFRS is designed as a common global language for business affairs so that company accounts are understandable and comparable across international boundaries. They are a consequence of growing international shareholding and trade. The IFRS is particularly important for companies that have dealings in several countries. They are progressively replacing the many different national accounting standards.
The IFRS began as an attempt to harmonize accounting across the European Union, but the value of harmonization quickly made the concept attractive around the world. They are occasionally called by the original name of International Accounting Standards (IAS). The IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over the responsibility for setting International Accounting Standards from the IASC. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards (SICs). The IASB has continued to develop standards calling the new standards the IFRS.
The Conceptual Framework for Financial Reporting states the basic principles for IFRS. The IASB and FASB frameworks are in the process of being updated and converged. The Joint Conceptual Framework project intends to update and refine the existing concepts to reflect the changes in markets and business practices. The project also intends consider the changes in the economic environment that have occurred in the two or more decades since the concepts were first developed.
IFRS Defined Objective of Financial Statements
A financial statement should reflect true and fair view of the business affairs of the organization. As these statements are used by various constituents of the society/regulators, they need to reflect an accurate view of the financial position of the organization. It is very helpful to check the financial position of the business for a specific period.