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Volume 14 Number 4 January 2013

INSTITUTE OF BUSINESS MANAGEMENTMANAGEMENT EXCELLENCE CENTRE

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PBRISSN 1561-8706

PAKISTAN BUSINESS REVIEWIndexed and Abstracted by ECONLIT, Journal of Economic Literature

Indexed by EBSCO, USAHEC Approved Journal (Y)

ResearchPrevalence of Risk Factors of Non-Communicable Diseases Amongst Female Prisonersof PakistanAsima Faisal, Salina MukhtarFactors Influencing Capital Structure of Pharmaceutical Companies Listed on TheKarachi Stock ExchangeShashi Raja,Waqar Ahmed Siddiqui, Shazia Farooq,H. Jamal ZubairiAn Empirical Study of Working Capital Policy, Risk and LeverageSumita J. ShroffEmotional Intelligence in Doctors and Nurses of Emergency Medicine Units in TertiaryHospitalsHumeira Jawed, Asima FaisalAFRs for MSEs in Pakistan (2006) Challenged By IFRs For SMEs (2009)Muhammad Aslam DossaPay Satisfaction and Organizational Commitment in University FacultyNadia Ayub Ali, Shagufta Rafif. Shahid IqbalFeasibility of Application of IFRs On Companies Operating in Developing CountriesWith Focus on PakistanMehboob MoosaCase StudyEngro Foods Prized Stallion in The Making!Ahmed Mushtaq, Ali Raza, Roma Ramani, Sana Sheikh, Shazia FarooqDiscussionApproaches in Leadership: Trait, Situational & Path-Goal Theory: A Critical AnalysisAdnan KhanBook ReviewWhat is Global Leadership?Fareeda Ibad


PAKISTAN BUSINESS REVIEW JAN 2013

663

Contents

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744

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Page NoResearch

Prevalence of Risk Factors of Non-Communicable Diseases Amongst FemalePrisoners of PakistanAsima Faisal, Salina MukhtarFactors Influencing Capital Structure of Pharmaceutical Companies Listed onThe Karachi Stock ExchangeShashi Raja,Waqar Ahmed Siddiqui, Shazia Farooq,H. Jamal ZubairiAn Empirical Study of Working Capital Policy, Risk and LeverageSumita J. ShroffEmotional Intelligence in Doctors and Nurses of Emergency Medicine Units inTertiary HospitalsHumeira Jawed, Asima FaisalAFRs for MSEs in Pakistan (2006) Challenged By IFRs For SMEs (2009)Muhammad Aslam DossaPay Satisfaction and Organizational Commitment in University FacultyNadia Ayub Ali, Shagufta Rafif. Shahid IqbalFeasibility of Application of IFRs On Companies Operating in DevelopingCountries With Focus on PakistanMehboob Moosa

Case StudyEngro Foods Prized Stallion in The Making!Ahmed Mushtaq, Ali Raza, Roma Ramani, Sana Sheikh, Shazia Farooq

DiscussionApproaches in Leadership: Trait, Situational & Path-Goal Theory: A CriticalAnalysisAdnan Khan

Book ReviewWhat is Global Leadership?Fareeda Ibad

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Volume 14 Number 4


January 2013

Prof. Izlin Ismail, Faculty of Business andAccountancy, University of Malaya, KualaLumpur.Dr. Teoman Duman, International BuarchUniversity Bosnia and HerzegovinaProf. Angelo Santagostino, University ofBrescia, ItalyMr. Thomsas Winter, University of Rostock,Rostock, GermanyDr. Bettina Robotka, Humboldt University,Berlin, GermanyDr. Geoff Kay, City University, LondonDr. D.M.Semasinghe, University ofKelaniya, Sri Lanka

Editorial Board

Referees

Dr. Ishrat Husain, Institute of Business Administration, KarachiProf. Dr Mehtab Karim, John Hopkins University, USADr. Khalid Nadvi, IDS, University of SussexDr. Peter O’ Brien, SADCC, South AfricaProf. Sarfaraz Qureshi, IslamabadDr. T.M. Roepstorff, UNIDO, ViennaDr. Shahid Hasan Siddiqui, Research Institute for Islamic Banking and FinanceDr. K.M. Larik, Iqra University, KarachiDr. Javed Iqbal, University of Karachi, KarachiProfessor Dr. Rashid A. Naeem, Chairman, Department of Economics and Management Sciences,Allama Iqbal Open University, IslamabadDr. Rizwana Zahid, Government APWA College for Women, KarachiDr. Arshi Ali, Federal Urdu University, KarachiDr. Abdul Wahab Suri, University of Karachi, KarachiProf. Dr. Abdul Waheed, University of Karachi, KarachiDr. Naveed, Institute of Business Administration (IBA), KarachiDr. Moazzam Khan Sherwani, Institute of Environment Studies, University of KarachiDr. Samiuzzaman, Global Environmental Lab (Pvt) Ltd. Korangi, KarachiDr. Anila Ambar Malik, University of Karachi, KarachiDr. Seema Munaf, University of Karachi, KarachiDr. Nabeel A. Zubairi, University of Karachi, Karachi Cont’d.Dr. Zainab F. Zadeh, Bahria University, KarachiDr. Ziasma, University of Karachi, KarachiProf. Asim Jamal Siddiqui, University of Karachi, KarachiProf. Dr. Mudassir-ud-din, University of Karachi, KarachiMs. Yasmin Zafar, Institute of Business Administration (IBA), KarachiDr. Muhammad Zubair, University of Karachi, Karachi

Mr. Javaid Ahmed, Head Department ofMarketingMr. Khalid Amin, Head Department of HR andManagementDr. Nasreen Hussain, Head Department ofEducationMr. Jamal Zubairi, Head Department ofAccounting and FinanceDr. Shahid Amjad, Acting Dean College ofBusiness Management

Chief Editor: Prof. Dr. Shahida WizaratManaging Editor: Sabina Mohsin

Volume 14 Number 4January 2013


Dr. Uzma Parveen, University of Karachi, KarachiMr. Mohsin H. Ahmed, Applied Economics Research Centre, University of Karachi, KarachiProf. Ghulam Hussain, University of Karachi, KarachiMr. Mahboob-ul-Hassan, University of Karachi, KarachiDr. Muhammad Mahmood, Khadim Ali Shah Bukhari Institute of Technology, KarachiDr. Nargis Asad, Aga Khan University Hospital, KarachiDr. Abuzar Wajidi, University of Karachi, KarachiMs. Rubina Feroz, University of Karachi, KarachiProf. Dr. Talat Wizarat, Institute of Business Administration (IBA), KarachiDr. Muhammad Zaki, University of Karachi, KarachiMr. H. Jaleel Zubairi, Allied Bank Ltd. , KarachiDr. Zaira Wahab, Iqra University, KarachiDr. Ismail Saad, Iqra University, KarachiMr. Naim Farooqui, Sindh Bank Ltd, KarachiDr. Sara Azhar, University of Karachi, KarachiProf. Ahmad Farooq Shah, Bahauddin Zakarya University, MultanMr. M. Mazhar Khan, State Bank of Pakistan, KarachiMr. Mohammad Soliman, University of Sciences and Technology Chittagong, BangladeshProf. Abdul Mannan, School of Business, University of Liberal Arts BangladeshDr. Fatima Imam, Federal Urdu University, KarachiProf. G.R. Pasha, Bahauddin Zakariya University, MultanMr. Shameel Ahmad Zubairi, University of Karachi, KarachiMr. Imran Naveed, State Bank of Pakistan, KarachiMr. Qaisar Mufti, Qaisar Mufti Associates, Shahra-e-Iraq Saddar, Karachi.Ms. Afra Sajjad, ACCA Pakistan, LahoreDr. Khan Brohi, nstitute of Environmental Engineering and Management, JamshoroMr. Amir Hussain, WTO Cell, Trade Development Authority of Pakistan, KarachiDr. Tanveer Anjum, Department of Business Communications, Iqra UniversityDr. Arifa Farid, Department of Philosophy Ex-Dean Faculty of Arts, University of KarachiMr. Muhammad Asim, Department of Business Administration, KarachiMr. Muhammad Zubair, Department of Islamic History, University of Karachi, KarachiDr. Aliya Zahid, Anatomy Department, Allama Iqbal Medical College, Lahore.Dr. Qurrat-ul-ain, Sir Ganga Ram Hospital, Lahore.Dr. Atif Mahmood, Shaheed Mohtarma Benazir Bhutto Medical College,Dr. Muhammad Adnan Kanpurwala, Dept. of Physiology, Dow University Karachi.Dr. Uzma Ali, Institute of Clinical Psychology, KarachiDr. Ali Rizvi, Universiti Brunei Darussalam, BruneiDr. Pervez Wasim, Applied Economics Research Centre, KarachiDr. Muhammad Usman Awan, Institute of Quality & Technology Managment, LahoreDr. Amber Gul Rashid, University of Karachi, Karachi

Referees

Production UnitLiterary Editors: Muhammad Asif Khan

Wajdan RazaProduction Associate andEditorial Co-ordinator: Shahzad Ali


Research Prevalence of Risk Factors Of Non-Communicable DiseasesResearch

PREVALENCE OF RISKFACTORS OF NON-

COMMUNICABLE DISEASESAMONGST FEMALE

PRISONERS OF PAKISTANAsima Faisal, Salina Mukhtar

Department Health & Hospital ManagementInstitute of Business Management, (IoBM)

AbstractNon-communicable diseases (NCDs) are a group of

conditions that includes cardiovascular diseases, cancer, mental healthproblems, diabetes mellitus, chronic respiratory diseases andmusculoskeletal conditions. Since NCDs account for a large numberof deaths in Pakistan, the objective of this study was to determinethe prevalence of risk factors for non-communicable diseasesparticularly in female prisoners as this stratum has not been muchstudied. The study also aims to compare the prevalence of risk factorsfor non-communicable diseases in the female prisoners in fourprovinces of Pakistan. For this purpose, a cross sectional researchwas conducted at the female prisons, one in each province. A total of269 female adult prisoners, having age of 16 years and more, belongingto different nationalities, participated in the study. During the survey,data on anthropometrical and vital measurements, smoking habits offemale prisoners were collected and analyzed. Among the femaleprisoners, 71% were of Pakistani origin, while 23% were foreigners.24.9% were smokers. 75.4% prisoners had no access to fruits in theirdiet. 39% and 44.2% female prisoners used vegetable oil and gheerespectively in their meals while 16.3% were unsure about the type of

PAKISTAN BUSINESS REVIEW JAN 2013 664

Prevalence of Risk Factors Of Non-Communicable Diseases Research

oil used in their meals. The statistical analysis showed significantdifference in the type of oil consumed in meals in all the four prisonsvisited (p < 0.001). 55% female prisoners were satisfied with the qualityof prison food. The mean BMI assessed was 36.63 kg/m2, for femalesof mean height of 1.57m and mean weight of 67 kg. 46.5% females werefound to be in the normal BMI range. 26.4% were over-weight, while27.13% were found to be obese.

The prevalence of risk factor of non-communicablediseases including smoking and unhealthy dietary practices in thefemale prisoners of Pakistan was found to be high as compared tonormal female population of Pakistan, elevating the risk of havingnon-communicable diseases.

Keywords: prevalence; non-communicable diseases; risk factors;female prisonersJEL Classification: Z000

Introduction

World Health Organization (WHO, 2012) defines non-communicable diseases as a group of conditions that includescardiovascular diseases, cancer, mental health problems, diabetesmellitus, chronic respiratory diseases and musculoskeletal conditions.Non-communicable diseases account for 46% of all deaths in Pakistan.According to an estimate of 2008, more than 300,000 deaths occurreddue to NCDs, in both males and females in Pakistan (WHO, 2011).NCDs are backed up by many common risk factors. A number ofresearch studies have thrown light on the prevalence of NCDs inPakistan’s population in general but relatively very less attention hasbeen paid to the stratum of prisoners.


Research Prevalence of Risk Factors Of Non-Communicable Diseases

According to Maniyar (2004), and Pakistan Human RightsReport (2004) the number of female prisoners is increasing resultingin over-crowding of female prisons and other detention centres. Poorprison facilities and overcrowding has contributed towardssubstandard conditions of prisons. Inadequate living space, poor ornon-existent ventilation, limited sanitation facilities, low levels ofcleanliness and hygiene and inadequate food and medical suppliesmake female prisons in developing countries, a sub-human entity.Maniyar (2004) stated that while conditions of detention vary greatlyfrom country to country and facility-to-facility, standards in mostcountries are shockingly low.

Women represent a small portion of Pakistan’s prisonpopulation and their particular needs are overlooked. Prison conditionsare extremely poor and life threatening. Overcrowding is observed asa widespread phenomenon. According to Human Rights Commissionof Pakistan (2004), there are 80,000 prisoners in jails that were built tohold a maximum of 35,833 persons. According to The ProgressiveWomen’s Association, there were approximately 2,765 female prisonersin jail nationwide in 2002. Although, special female prisons have beenestablished nationwide, but these prisons receive fewer material andhuman resources than regular prisons. Efforts to raise funds for theseprisons achieved minimal results.

Fernando (1995) pointed out that there is an absolute lack ofadequate programs and services designed for the sentenced women.Such programs may include women-centred programs, programs foraddiction & health, education, vocational training and programs linkedto upgrading the community.

It has been reported that by the dawn of the third millennium,NCDs would sweep the entire globe (Dawn News 7th April 2005). Bydefinition, the non-communicable diseases are those that cannot bespread through contact.



The major concern worldwide is the increasing trend of NCDsin the developing countries where the transition imposes moreconstraints to deal with the double burden of infective & non-infectivediseases in poor environment characterized by inadequate healthsystem. Pakistan Human Rights Report (2004) stated that by 2020, it ispredicted that these diseases will cause 7 out of 10 deaths indeveloping countries.

Increase in the smoking habit is one of the risk factors whichare making NCDs more prevalent. According to the WHO HumanRights Watch World Report (2002), approx.100 million people diedworldwide from tobacco-associated diseases e.g. cancer, chronic lungdisease, diabetes, and cardiovascular disease. Tobacco usually kills4.2 million people every year. This figure has nearly doubled in thelast 10 years and it is estimated to reach 8.4 million by the year 2020 ifno action is taken to curb the tobacco-epidemic. While tobaccoconsumption is falling in most developed countries, it is increasing inthe developing countries by about 3-4% per annum. Today, 80% of 1.2billion smokers in the world live in least developed countries wheresmoking prevalence among men is nearly 50%.

Majority of the risk factors associated with NCDs e.g. bloodpressure, cholesterol, tobacco, alcohol and obesity have always beenassociated with wealthy societies. But, with changing global trends,they now also dominate the developing countries where they createan additional burden on top of infectious diseases that have alwaysafflicted poor countries.

Boutayeb (2005) mentioned in his study regarding burden ofNCDs in developing countries. It was estimated that tobacco increasesthe risk mortality from coronary heart disease and cerebrovasculardiseases by 2-folds. It increases the risk of many other types of cancer.



Methodology

In order to get a uniform sample of female prisoners of Pakistan,the study was conducted from 1st February to 28th June 2011 in femaleprisons of each of the four provinces of Pakistan. The study siteswere:

Location Date

Female Prison, Central Jail of Karachi, Sindh

1s t and 2nd March 2011

Female Prison, Central Jail of Koth Lakh Patt, Punjab

4th and 5th April 2011

Female Prison, Central Jail of Haripur, Khyber PakhtoonKhwah

18th and 19th April 2011

Female Prison, Central Jail of Quetta, Baluchistan

23rd and 24th May 2011

All registered femaleadult prisoners of all nationalities who

consented to participate in the research work were included in thesurvey. Disabled female adult prisoners and female prisoners enrolledin the last 3 months from the date of the survey were excluded fromthe research. The sample for the study included 66% female adultprisoners of each prison visited in each province. The age of thepopulation was 16 years and more. The sample population was takenusing purposive sampling technique. The data was collected byvisiting the four prisons of Pakistan, one of each province. A writtenconsent was read out to each prisoner before the start of the interview.The interview was taken from each prisoner and questions were asked,based on the pre-written and translated WHO STEP wise approach tochronic disease risk factor surveillance questionnaire (STEPS).Blood pressure monitoring and blood sugar levels (fasting) werecollected. ‘STEPS’ is a WHO program for stepwise approach tosurveillance of NCDs. The WHO-based questionnaire was modified



by translating the questionnaire in Urdu for the convenience of thefemale prisoners. During data analysis, the questionnaire wastranslated back to English.

The STEPS questionnaire which was used for this study wasdivided into two steps:

Step 1:

The Step 1 of the questionnaire includes the following mainsections:

a. Demographic Information

This section includes questions related to the core andexpanded demographical information thus helpful in gatheringinformation like age, qualification, ethnic background, work status,etc.

b. Core Behavioural Measures

This section involves questions related to the behaviour andlife-style of the individuals. The section is helpful in gathering thefollowing information:

Tobacco Use (Section S)

Diet (Section D)

Physical Activity (Section P)



This section also includes questions involving history ofhigh blood pressure and diabetes in the individual.

Step 2:

The Step 2 of the questionnaire includes physicalmeasurements. The measurements which were taken during the surveyincluded:

Measurement of height (in centimeters)

Measurement of weight (in kilograms)

Measurement of blood pressure (in mmHg)

Hip circumference (in centimeters)

Heart rate (Pulse per minute)

Research Study Design

The study design used in this study was a cross-sectionalsurvey.

Statistical analysisStatistical Software SPSS Program Version 17 was employed

to perform statistical analysis for Chi Square and ANOVA analysis atp=0.05 level of confidence.

ResultsThis study was conducted with the objectives of identifying

the prevalence of risk factors for NCDs in female prisoners of Pakistan.Data was collected from 269 female inmates of Pakistan and few offoreign origin. Out of 269 inmates, 114 prisoners were from CentralJail, Karachi denoting the province of Sindh, 73 inmates were fromKoth Lakh Path, Lahore, representing the province of Punjab. 66



female prisoners were representing Central Jail, Quetta, depicting theprovince of Baluchistan and 16 prisoners belonged to Haripur Jail,denoting the province of Khyber Pakhtoon Khuwah (KPK). On thewhole, 77% (n=207) of the study subjects had Pakistani nationalitywhile the rest (23%, n= 62) were of foreign origin, out of whom 7%(n=4) of the subjects belonged to Bangladesh, Thailand and Indiaeach. 15% (n=9) were from Guinea while 64% (n=40) were from Nigeria.

Age Status:About 68.40% of the female inmates were between 26 and 45

years (n=184); 20.40% belonged to age ranging from 46 to 60 years(n=55); about 9.30% (n=25) females belonged to the age groupranging from 16 to 25 years while 1.85% (n=5) females belonged toage greater than 60 years. The mean age of our sample (n=269) was35.44 ± 12.23 years. Most of the female inmates (78.4%) belonged toreproductive age group i.e. 16-45 years with the mean age of 32 + 7.0years.

Educational Status:The educational status of the female inmates was also

assessed during the survey. Majority of the respondents (46.4%,n=125) did not have any formal schooling. Approximately 31.6%(n=85) did not complete their primary education. About 7%(n=19)completed their primary education, 11% (n=29)of the femaleinmates were found to have completed their secondary education,while 4% (n=11) had completed their university education (n=11)(Figure 1).



Smoking Habits:

The results analyzed showed that, out of total sample size of269 inmates, 67 were smokers (24.9%) The youngest age at which thesmoking was taken up by the female inmate was 10 years.

Figure 2: Percentage of Smokers with Number of CigarettesSmoked per day by the Female Prisoners of Pakistan

n = 67

Figure 1: Educational Status of Female Prisoners of Pakistan



Amongst the daily smokers, 18% (n=12) of female inmatessmoked 1-4 cigarettes/day; about 49% (n=33) prisoners smoked 5-10cigarettes daily; 12% (n=8) female prisoners smoked 11-15 cigarettesdaily while 16% (n=11) smoked 15-20 cigarettes daily. 5% (n=3)prisoners smoked cigarettes greater than 20 each day (Figure 2). Themaximum number of cigarettes used daily was 40. Out of the totalprisoners who were smokers (n=67), 85% (n=57) were usingmanufactured cigarettes, while the remaining smokers (15%, n=10),smoked handmade cigarettes e.g. Birri and Huqqa.

Amongst those who were current smokers, 30 belonged toSindh; 19 were from Punjab; 18 belonged to Baluchistan while KhyberPakhtoon Khuwah had 5 smokers.

There was no significant difference in the smoking status ineach province (Chi-Square; p-value: 0.977). Amongst the overallpopulation included in the research (n=269), 49 individuals were foundto be taking smokeless tobacco, which included mainly gutka andtobacco taken with pan (Table 1). Amongst those taking smokelesstobacco, 15 female inmates were from Sindh; 18 from Punjab; 12 fromBaluchistan; and 4 from Khyber Pakhtoon Khuwah. The difference inthe intake of smokeless tobacco in between each province was foundto be insignificant (Chi-Square; p-value: 0.214) (Table 2).

Fruit Intake:

Amongst all the female inmates, majority of the females approx.75.4% (n=203), were those who had no access to fruits in a typicalweek; about 17.4% (n=47) had 1-3 servings of fruits a week, while 7.2%(n=19) had fruit servings for 5 and more days a week (Figure 3).



Figure 3: Percentage of female prisoners consuming fruit/week

Most of the inmates who had access to fruits were foreigners.

Type of cooking oil consumed:The consumption of vegetable oil amongst the female inmates

of Pakistan was found to be 39% (n=106); 44.2% were using butter orghee in cooking (n=119), while 16.3% were unaware of the type of oilconsumed for their meal preparation (n=44) (Figure 4). All the femaleprisoners who were consuming ghee in the preparation of meals werecooking their own food, while majority of the inmates had mealsprepared in vegetable oil were consuming the jail food provided bythe Government of Pakistan. 55% (n=148) of the female inmates weresatisfied with the food they were consuming in jail, while the restwere not (n=121). 65.78%, (n=79) of the female inmates who were notsatisfied with their food were consuming the jail food.

Figure 4: Percentage of female prisoners consuming the type ofoil



BMI:

The mean height when measured was found to be 1.57 m (SD+ 0.094 m) while the mean weight was 67 kg (SD+ 14.63 Kg). The meanBMI was 26.63 kg/m2 (SD+ 5.3) (n=269).Minimum BMI measured was17.6 kg/m2 and maximum BMI measured was 43.15 kg/m2. Amongst thefemale inmates, 46.5% females had normal BMI ranging from 19-24.9kg/m2 (n=125); 26.4% were found to be over-weight with a BMI rangingfrom 25-29.9 kg/m2 (n=71) while 27.13% (n=73) were obese having BMImore than or equal to 30kg/m2. None of the female prisoners werefound to be under weight (Figure 5).

Figure 5: BMI range of female prisoners of Pakistan

Vital Measurements:Blood Pressure

Out of all the inmates surveyed during the survey, 25% (n=67)of the sample had high blood pressure according to their doctor sincelast 12 months. The average systolic blood pressure was 124 mmHgand average diastolic blood pressure was 82 mmHg.

According to the blood pressure monitoring done during thesurvey, 21% of the inmates (n=56) were found to have systolic bloodpressure greater than 139 mmHg; while 34.6% female inmates (n=93)



had diastolic blood pressure greater than 89 mmHg. The SystolicBlood Pressure recorded ranged from 95 mmHg to 170 mmHg whilethe diastolic blood pressure ranged from 60 mmHg to 115 mmHg.

Out of the total individuals found to have higher bloodpressure (n=96), 49% was found in Sindh (n=33), 23% (n=30) belongedto Punjab and Baluchistan each, while 5% (n=3) belonged to KPK(Figure 6)

Out of the female inmates who were recorded as those havinghigh blood pressure, 73% were receiving medication (n=49).

Diabetics

Out of the total diabetics found (6.7%, n=18), 40%individuals belonged to Punjab (n=7), about 37.09% belonged toBaluchistan (n=6); 16.66% were from Sindh (n=3), while KhyberPakhtoon Khuwah had 6.25% of the diabetics (n=2) (Figure 6). Alldiabetics were using oral hypoglycaemic agents.

Figure 6: Prevalence of Hypertension and Diabetes in the FemalePrisoners of four Provinces of Pakistan



The following table gives a comprehensive analysis of therisk factors for NCDs prevalent in Pakistani and foreign femaleprisoners of Pakistan and also among prisoners of different provincesof Pakistan.

Out of 269 female inmates who were interviewed during thesurvey, 72 were current smokers while 197 were non-smokers. Majorityof the smokers belonged to Sindh while KPK had the least number ofsmoking prisoners. There was no significant difference in the smokingstatus in each province (Chi-Square; p-value: 0.977) (Table-1).

Amongst the overall population included in the research(n=269), 49 individuals were found to be taking smokeless tobacco,which mainly included gutka and tobacco taken with pan. Punjab hadthe maximum number of female prisoners taking the same whileBaluchistan had the least. The difference in the intake of smokelesstobacco in each province was found to be insignificant. (Chi-Square;p-value: 0.214) (Table-1).

Comparison of usage of ghee and oil among prisons ofdifferent provinces of Pakistan revealed that vegetable oil was mostlyused by prisoners in Sindh while ghee was preferably used by femaleprisoners in Punjab, KPK and Baluchistan. There was a significantdifference observed in the oil consumption of the four provinces(ANOVA; p-value <0.000) (Table-1).

The dietary habits were also assessed amongst the femaleprisoners of Pakistan. Out of the 269 inmates, majority of the inmatesin each province did not consume a single serving of fruit a week.Punjab and Sindh had 21 and 20 female inmates consuming 1-4 servingsof fruit per week respectively. There was no significant differencefound among the four prisons visited. (ANOVA; p-value: 0. 176) (Table-1).



The BMI was also calculated to evaluate the effect of thedietary habits on weight of the female prisoners. Amongst the femaleprisoners (n=269), 125 individuals had a normal BMI, with their valuesranging from 18-24.9 kg/m2; Majority of the inmates from Sindh hadnormal BMI while there were nearly half of the overweight the inmatesin Baluchistan. Punjab and KPK had more number of obese inmates.The BMI status of each prison was significantly different from eachother (ANOVA; p-value < 0.000) (Table-1).

Table 1: Comparative Analysis of various risk factors of Non-Communicable Diseases (NCDs) in female prisoners of the four

Provinces of Pakistan

Variables

Options

Sindh (n=114)

Punjab(n=73)

Khyber Pakhtoonkhwa

(n=66)

Baluchistan(n=16)

p-

Value*

Smokers

Yes 30 19 18 5 Chi

Square No 84 54 48 11

Smokeless Tobacco

Yes 15 18 12 4 Chi

Square 0.214

No 99 55 54 12

Oil Consumption

Ghee 10 59 39 11

ANOVA <0.000*

Vegetable Oil 79 9 16 2 Not Sure 25 5 11 3

Fruit Intake

0 servings/week 89 44 48 9

ANOVA 0.176

1-4 servings/week

20 21 14 4

>5servings/week 5 8 4 3

BMI

Normal 92 18 12 3

ANOVA <0.000*

Overweight 13 23 31 4

Obese 9 32 23 9

*Values less than 0.05 are considered significant



Difference between Pakistani & Foreign Prisoners

During the study, the comparison of the prevalence of riskfactors NCDs amongst the Pakistani prisoners and foreigner prisonersin the Pakistani jails was assessed.

Amongst the 125 and 85 female prisoners who had no formalschooling and did not complete their primary education, majority hadPakistani nationality. There were 19 females who had completed theirprimary education and majority of them were foreigners. Femaleinmates who had their secondary education completed were foundto be of foreign origin. There were 11 prisoners who had completedpost-graduation and all of them were foreigners. There was asignificant difference between the educational status of the Pakistaniprisoners and the foreigners (ANOVA; p < 0.000) (Table-2).

Nearly 90% of the inmates were non-smokers and belonged toPakistan. Out of those who were smokers, mostly were of foreignorigin. The cross-tabulation between the smoking status of Pakistaniand the foreign prisoners was found to be significant (Chi-square; p<0.000) (Table-2). Out of the 49 female prisoners who were consumingsmokeless tobacco, 85% were Pakistanis. There was no significancedifference in the status of use of smokeless tobacco amongst thePakistani and the foreign prisoners in the Pakistani prisons (Chi-square; p =0.135) (Table-2). There were 79 female prisoners who wereconsuming fruits in jail and majority of them had foreign nationalities.There was a significant difference between the fruit consumption ofPakistani and foreign prisoners of Pakistan (Chi-square; p <0.000)(Table-2). On assessing the BMI status of inmates, 94.4% femaleswho had a normal BMI belonged to Pakistan. Out of 71 and 73prisoners who were found to be over-weight and obese respectively,81.7% and 44% prisoners were Pakistanis. The cross analysis betweenthe BMI status of foreign prisoners with the Pakistani prisoners in



Table 2: Comparative Analysis of various Risk factorsof Non-Communicable diseases (NCDs) in Pakistani

& Foreign Female Prisoners of Pakistan

Variables

Options Pakistani Prisoners (n=208)

%

Foreign Prisoners (n=61)

%

p-value

Educational Status

No formal Schooling (n =125)

123

98.4%

2

1.6%

ANOVA Chi Square< 0.000*

Incomplete Primary Education (n = 85)

78

91.76%

7

8.2%

Primary Education (n=19)

5

26.3%

14

73.7%

Secondary Education (n=29)

2

6.9%

27

93.1%

Post- graduation (n=11)

0

0%

11

100%

Smoking Status

Smokers (n=67)

27

40.3%

40

59.7%

Chi Square< 0.000* Non-Smokers

(n= 202)

181

89.6%

21

10.4%

Smokeless Tobacco Users

Smokeless Tobacco Users (n=49)

42

85.7%

7

14.3%

Chi Square0.135 Smokeless Tobacco Non-Users

(n=220)

166

74.4%

54

24.5%

Fruit Intake

Yes (n =79) 24 30.4% 55 69.6% Chi Square< 0.000*

No (n =190) 184 96.85% 6 3.15%

BMI (Kg/M2)

Normal (n = 25)

118

94.4%

7

5.6%

ANOVA < 0.000*

Over-weight (n=71)

58

81.7%

13

18.3%

Obese (n=73)

32

43.8%

41

56.2%

*Values less than 0.05 are considered significant

the prisons of Pakistan was found to be significant (ANOVA; p<0.000) (Table-2).



Discussion

NCDs have affected the health of inmates besides generalpopulation. With special focus on inmates, our study revealed that25% of the inmates have hypertension. In comparison to our findings,Plugge et al. (2009) found that female prisoners in the U.K. have highrisk of developing CVD.

In our study, we found relatively fewer female prisoners whowere smokers (24.9%) as compared to other international studies doneon the prevalence of smoking amongst female prisoners. The mainreason behind this lesser prevalence of smoking amongst the Pakistanifemale prisoners is because of overall decreased incidence of smokingamongst Pakistani females due to ban on smoking imposed in publicinstitutions.

Smokeless tobacco appears to be an addictive product andcontains the same tumor-initiating properties as cigarettes. Whileevaluating the use of smokeless tobacco consumption in the UnitedStates, it was observed that while the prevalence of cigarette smokinghas been declining, annual consumption of smokeless tobacco hasnearly tripled since the 1970s. In 1997, 121 million pounds of smokelesstobacco (chewing tobacco and snuff) were consumed in the UnitedStates. (US Department of Agriculture 1982-1997).

Maniyar M. (2004) stated that women’s crimes are seen to bepredominantly non-violent & reflect the social and economic standingof women in the society. The needs of women in prison basicallyreflect the same needs of those in the community at large.

Pakistan Human Rights Report (2004) reported that womenin prison have as much need for specialized care as women outsidethe prison, but in most of the cases, women are facing a deprivation ofbasic needs. In the prison, of all the various types of deprivationswhich women are facing, of particular concern is the lack of healthcareservices in female prison.



WHO Global Strategy on Diet, Physical Activity and Healthsuggested that as far as health facilities are concerned, the prisonauthorities in many countries failed to provide basic needs to femaleprisoners. Healthcare in most of the female prisons are poor to non-existent. Even in developed countries, medical services for femaleprisoners are often seriously inadequate.

The fact that women constitute a small portion of thecorrectional population has been used to justify a lack of adequateprogramming and treatment for them (Belknap, 2001). This is especiallytrue with regard to their healthcare. Overall, scholars report thateffective healthcare for inmates is insufficient, particularly inpreventive care.

Richmond et.al. (2009) conducted a focus group study andstudied the role of tobacco use in prison and the possible influencesof the prison environment on smoking among inmates. The studyrevealed that tobacco in prison is exchanged for good, pay debt andfor gambling among prisoners. They also found that smoking helpsprisoners in managing stressful situations, transfer and courtappearances.

Karen C., et al. (2004), surveyed the female prisoners inMississippi. The majority of female inmates 71.5% smoked cigarettes,with a mean of 14.6 cigarettes per day. 73.9% of the inmates weretobacco users.

Tracy and Terry (2004) examined the prevalence of smokingamong female arrestees of New York City. They found that 71% of allwomen and 64% of pregnant women were daily smokers.

In our study, we found a similar association of increasedBMI with increased consumption of ghee in meals in the femaleprisoners of Pakistan. There was a positive correlation with increasedBMI and consumption of ghee specifically in Punjab and KPK where



ghee is consumed more as compared to the province of Sindh wherethere is more vegetable oil consumption resulting in lesser incidenceof obesity and increased BMI.

Plugge et al. (2009) conducted a research study on 505 womenprisoners in England. The study concluded that female prisoners wereat high risk of CVD, 85% smoked cigarettes, 86% did not eat at leastfive portions of fruit and vegetables each day and 30% were overweightor obese. Comparatively, Pakistani prisoners were lacking theavailability of nutritionally balanced meals. Most important reasonbehind this finding can be due to the faltering economy of Pakistan,making it difficult for the government to provide balanced diet to anignored population like the prisoners.

Dr. Herbert et al. found in their research study on theprevalence of risk factors for NCDs in prison populations worldwidethat female prisoners are more likely to be obese than non-imprisonedfemales in the U.S.A. and Australia and their mean energy intake andsodium intake is more than the recommended intake for prisoners.Comparatively, 75% of the Pakistan’s female prisoners fall in thecategory of overweight and obese.

Edward J., et al. (2007), while assessing the diet of prisonersin England, found that with the exception of some nutrients, prisonershave access to and are able to choose a nutritionally balanced diet.All prisons have attempted to make available menus that conform tothe balance of good health model.

Williams, P., et al. (2009), while evaluating the Prisonfoodservice in Australia found that the system of non-selective cyclemenus of 4–6 weeks is common but inmates can supplement meals bypurchase of additional food items. Menus included adequate varietyand met most nutritional standards, with the possible exception offruit.



Conclusion

Lifestyle and living pattern determine an individual’shealth regardless of his/her place of stay. The study concludes thatPakistani females who are imprisoned have chances of developingNCDs in the future because of high blood pressure, sugar levels, lessfruit intake, lack of physical activity and increased BMI. Theprevalence of risk factors of NCDs in the female prisoners of Pakistanwas found to be high. There was a higher incidence of smokingamongst the female prisoners than the normal female population ofPakistan. This research is expected to provide valuable insight intohealth policy planning for prisoners and designing health programsto promote healthy living in prisons as well.

Recomendations

Routine health check-ups should be conducted to ensure aregular health assessment in prisons to encourage a healthyenvironment. Expertise from local primary health care centersshould be utilized.

Campaigns should be carried out at government as well asnon-government level to bring awareness amongst the femaleprisoners about the hazards of smoking and smokeless tobacco.Cessation programs can be carried out to help the currentsmokers and tobacco users quit these habits.

The research findings recommend an inclusion of a proper dietprogram for the female prisoners.

The food provided by the government must contain a balancedrange of all the necessary nutrients especially a balancedquantity of fruits. Use of vegetables oil should be emphasizedby the prison.



Regular visits by the dietician or nutrition expert is recommendedto manage the diets of the prisoners especially for diabetics.

It is recommended that proper recording of this data should bedone in the prisons with regular evaluation and properintegration with the health policy and the strategic planning forthe improvement of health and quality of life of the prisonersthere.

Medical staff as well as the prison staff should participate intraining of the prisoners and play a role in bringing awarenessof the risk factors associated with NCDs and how they willimpact negatively on their health.

Female prisoners should be motivated to be involved inproductive activities which help to promote their health. Theyshould be trained to become health advocates to provideawareness and information to other jail inmates.



References

Belknap, J. (2001). The invisible woman: Gender, crime, and justice(2nd ed.). Belmont, CA:Wadsworth.

Boutayeb: 2005 The burden of non-communicable diseases indeveloping countries. Int. J. Equity Health. 4:2.

Country Report on Human Rights, Feb 25, 2004 (cited: www.who.org)

Cropseya K., Gloria D.,Ladnerc T. Smoking among female prisoners:An ignored public health epidemic. Addictive Behaviors, 2004 Feb;29 (2):425-431.

Dawn Newspaper (April 7th 2005)

Fernando S. Antezana: Epidemiological Aspect of Hypertension inWorld. BMJ 1995; 120:960-61Herbert K, Plugge E, Foster C, Doll H. Prevalence of risk factors fornon-communicable diseases in prison populations worldwide: asystematic review. Lancet. 2012 May 26;379(9830):1975-82. Epub 2012Apr 20. Review. PMID: 22521520 [PubMed - indexed for MEDLINE]

Human Rights Watch-World Report-2002 (cited: www.who.org)

Edwards, J., Hartwell, H., Reeve, W. G. and Schafheitle, J. M., 2007.The Diet of Prisoners in England. British Food Journal, 109 (3), pp.216-232.

Kaufman. M. R.: Smoking and Tobacco in Ohio Prisons. Addiction.2009; 70 (11), 2579 – 2585

Mackay J, Eriksen M.: The tobacco Atlas. Geneva, Switzerland: WorldHealth Organization, 2002.



Maniyar M 2004. Women Criminals and their Life-Style, Kaveri Books,New Delhi

Office of the Inspector General: Spit Tobacco and Youth. Washington,DC, Department of Health and Human Services, OEI 06-92-00500, 1992

Pakistan Human Rights Report, 2004

Plugge, E.H., Foster, C.E., Yudkin, P.L. and Douglas, N. (2009)Cardiovascular disease risk factors and women prisoners in the UK:The impact of imprisonment. Health Promotion International 24(4):334–343.

Richmond, R ; Butler, T ; Wilhelm, K ; Wodak, A ; Cunningham, M &Anderson, I (2009), Tobacco in prisons: a focus group study, TobaccoControl, Vol. 18, pp. 176-182.

Robertson P.B, Walsh M.M, Greene J.C. Oral effects of smokelesstobacco use, Advances in Dental Research 1997, 11(3): 307 - 312.

STEPwise approach to chronic disease risk factor surveillance (STEPS);http://www.who.int/chp/steps/en/

Tracy L. Durraha, Terry J. Rosenberg: Smoking among female arrestees:Prevalence of daily smoking and smoking cessation efforts. Addiction,2004 Jul; 29 (5): 1015-1019

US Department of Agriculture: US consumption of chewing tobaccoand snuff, 1982-1997WHO Global Strategy On Diet, Physical Activity & Health (cited:www.who.org)

World Health Organization - NCD Country Profiles , 2011. http://www.who.int/nmh/countries/pak_en.pdf



World Health Organization 2012-Regional Office for Europe http://www.euro.who.int/en/what-we-do/health-topics/noncommunicable-diseases/ncd-background-information

Williams, P., Walton, K.,Hannan-Jones, M.: Prison foodservice inAustralia – systems, menus and inmate attitudes. Journal ofFoodservice, (2009); 20:167–180.

Wray A, McGuirt WF: Smokeless tobacco usage associated with oralcarcinoma. incidence, treatment, outcome. Arch Otolaryngol HeadNeck Surg 1993; 119:929-933



Annexure 1: Body Mass Index (BMI) Chart for Adult Males andFemales

(Source: Adapted from Clinical Guidelines on the Identification,Evaluation, and Treatment of Overweight and Obesity in Adults:The Evidence Report)


Factors Influencing Capital Structure of PharmaceuticalResearchResearch

FACTORS INFLUENCINGCAPITAL STRUCTURE OF

PHARMACEUTICALCOMPANIES LISTED ON THE

KARACHI STOCK EXCHANGEShashi Raja, Waqar Ahmed Siddiqui, Shazia Farooq,

H. Jamal ZubairiDepartment of Accounting and Finance

Institute of Business Management (IoBM), Karachi

Abstract

This study focuses on investigating the factors influencingthe capital structure of seven companies listed in the pharma andbiotech sector of the Karachi Stock Exchange. Leverage has beendesignated as a representative of capital structure. Seven variables(all financial) are assumed independent and leverage has been takenas the dependent variable forming the basis for our pooled regressionmodel. At an assumed 5% level of significance, three null hypothesesare rejected. Reliability tests namely Cronbach’s Alpha measure isrun in order to verify that the model is stable over time. The results ofthis test suggest inconsistency in the case of the entire range of thedata but if considered individually the consistency, 5 out of 7 variableshave positive alphas. However, the conclusions drawn from the modelare tentative.

Keywords: Capital structure, leverage, pharmaceutical sector, PakistanJEL Classification: G100


Factors Influencing Capital Structure of Pharmaceutical Research

The Theory and Literature Review:

Several research studies have been conducted on the issueof capital structure in view of its importance in determining shareholderreturns. The real debate on the capital structure was triggered by thepublication of the paper by Modigliani and Miller. The Modigliani–Miller (MM) theory of capital structure, devised by Franco Modiglianiand Merton Miller in 1958, served as the foundation for variousschools of thought on capital structure and corporate finance.

MM grouped every firm to a certain risk class which isdescribed as an array of firms each of which has a matching pattern ofearnings payoffs. MM proposition I states that, in a perfect capitalmarket, value of any firm is independent of its capital structure and isgiven by capitalizing its expected return at the rate appropriate to itsclass. According to the theory, average cost of capital to any firm iscompletely independent of its capital structure and is equal to thecapitalization rate of a pure equity.

MM proposition-2 states that a firm’s cost of equity is alinear function of the firm’s debt to equity ratio. A higher debt-to-equity ratio leads to a higher required return on equity, because of thehigher risk involved for equity-holders in a company with debt. Thisproposition also holds under the assumption of perfect market.

MM proposition-3 focuses on dividend payments and thevalue of firm. It states that under certain conditions, the value of afirm is independent of its dividend policy. In other words, two identicalfirms that belong to the same risk class will have equal market valueeven if they have different dividend policies.

A number of principles underlie the theory, which holds underthe assumption of both taxation and no taxation. The two mostimportant principles are that, first, if there are no taxes, increasingleverage brings no benefits in terms of value creation, and second,that where there are taxes, such benefits, by way of an interest taxshield, accrue when leverage is introduced and/or increased.


Factors Influencing Capital Structure of PharmaceuticalResearch

Myers and Brealey (2003) explain that the Proposition 1 is anextremely general result. It applies not just to the debt-equity trade-off but to any choice of financing instruments. For example, MMwould say that the choice between long term and short term debt hasno effect on firm value. They further elaborate that MM’s opponents,the ‘tradionalists” argue that market imperfections make personalborrowing more expensive, risky and inconvenient for some investors.This creates a natural clientele willing to pay a premium for shares oflevered firms. The tradionalists say that firms should borrow to realizethe premium.

According to Myers and Brealey (2003), this argument isincomplete. There may be a clientele for levered equity, but that is notenough; the clientele has to be unsatisfied. They doubt satisfactionof clients with a number of levered firms available in the market.Furthermore, MM theory is violated if finance managers find anuntapped demand and satisfy it by issuing something new anddifferent. They tend to lean towards MM Theory since findingunsatisfied clienteles and designing exotic securities to meet theirneeds is a game that in their words is fun to play but hard to win.

These results might seem irrelevant since none of theconditions are met in the real world, but the theorem is part of corporatefinance curriculum because it establishes the importance of capitalstructure. It points out determinants of optimal capital structure andhow these affect optimal capital structure. Given the crucial role ofcapital structure in determining the cost of capital and the possibilityof one or more assumptions of MM Theory being violated, severalstudies have been conducted to determine the factors influencingthe debt and equity mix of a firm.

The trade-off theory of capital structure tends to offset thetax benefit of borrowing with the cost of financial distress. Theclassical version of the hypothesis goes back to Kraus andLitzenberger (1973) who presented the bankruptcy model of capitalstructure in which they discussed the significance of tax shelter. Firm’soptimal debt ratio is one where the tax advantage of borrowing isequal to the expected cost of bankruptcy. Under this theory, highprofitability should mean high debt capacity and a strong corporate



tax incentive to use that capacity. The cost of financial distress is alsodetermined by the type of assets on the firm’s balance sheet. Accordingto Myers and Brealey (2003), the theory successfully explains manydifferences in capital structure, but it is unable to explain why some ofthe most successful firms thrive with little debt.

According to Grossman and Hart (1982) use of debt, reducesthe conflict between managers and shareholders. Their modelspotlights the bankruptcy cost in debt scenario and shows thatmanagers can prefer investing in lucrative projects to consuming perksthat benefit them only. The likelihood of bankruptcy increases as themanager use more perks. It seems bankruptcy is costly to managersbecause they lose benefits, so debt can create an enticement for themto make better investment decisions and cut down on perks.

A competing theory, Pecking Order Theory, was describedby Myers (1984) and revisited later in several studies including theones conducted by Sunder & Myers (1999), Fama& French (2002) andFrank & Goyal (2003). Donaldson (1961) proposed that managementfavors internally generated funds over external funds in his study ofcapital structures in large corporations. These findings by Donaldsongave a hint of a pecking order before the theory was presented byMyers. The Pecking Order Theory states that firms use internalfinancing when available and prefer debt to equity when additionalfinancing is required. This explains why less profitable firms are moreleveraged; not because they have higher target debt ratios but becausethey require more external financing and since debt is next on thepecking order when internal funds have been deployed.

Bradley, Jarrell and Kim (1984) found that earning volatility,investment in R&D and advertising have a negative as well as asignificant relationship with leverage. They also found that the non-debt tax shield is positively related with leverage. The study alsoconcluded that industry classification is also relevant in capitalstructure decisions.

Rajan and Zingles (1995) studied the impact of fourindependent variables including tangibility, sales, market to book ratio,and profitability on capital structure. The relationship with all variableswas found to be significant. They found tangibility and sales to be



positively related and market to book ratio and profitability to benegatively correlated with debt.

Booth et al. (2001) analyzed data from ten underdevelopedcountries including Pakistan to assess whether capital structure theorywas transferable across countries with different institutionalstructures. The study empirically proved that these decisions wereaffected by the same variables as in developed countries.However, there were persistent differences across various countries,indicating that country specific factors such as GDP growth rates,inflation and development of capital markets do work. The findings ofthe study supported Pecking Order Theory since it was observedthat more profitable the firm was the lower was its debt ratio regardlessof how the latter was defined.

Fama and French (2002) note that debt ratios tend to adjustslowly to specific target levels. This means that firms appear to take along time to return their leverage to its long-run mean or, in otherwords, to optimal level.

A study by Shah and Hijazi (2004) conducted on listed non-financial companies in Pakistan showed that the size measured bytaking log of sales was positively correlated with leverage, indicatingthat large firms tend to employ more debt. Growth measured by theannual percentage change in total assets was negatively correlatedwith leverage. Strong relationship was also found between profitabilityand leverage. Profitability as measured by net profit before taxesdivided by total assets was negatively correlated with leverage thatsupports the pecking order theory.

Leary and Roberts (2005) state that firms respond to equityissuances and equity price shocks by rebalancing the actual leveragetowards the target level within two to four years. Furthermore, theystate that persistent effects of shocks on leverage are due to optimizingstrategies as opposed to indifference regarding their capital structure.

Qureshi and Azid (2006) identified that the public sector inPakistan preferred debt financing due to low corporate governance,favorable terms and conditions of commercial banks and lesseraccountability than private sector.



Chen and Zhao (2006) showed that the relationship betweenleverage and the market-to-book ratio (as a measure of growthopportunities) is negative for firms with high market-to-book ratiosand is positive for firms with low to medium values of the market-to-book ratio. Hence, while the market to book ratio is a widely acceptedproxy for the firm’s growth opportunities, in standard leverageregressions, it is difficult to make inferences about the impact of growthopportunities on leverage when using this measure.

Kanwar (2007) studied the capital structure in sugar industryof Pakistan and concluded that it has a significant relationship withreturn on assets, asset tangibility, market to book ratio and size, excepttax rate. The developed provinces of Pakistan showed higher debtratios.

Shah and Khan (2007) examined the explanatory power oftangibility, size, growth, profitability, non-debt tax shield and earningsvolatility in determining capital structure of listed non-financial firmsin Pakistan for the period 1994-2002. The results of the study, basedon pooled regression, supported the trade-off theory with referenceto tangibility. However, findings for earning volatility and depreciationvariables failed to confirm the trade-off theory. The results for growthconfirmed the agency theory whereas that of profitability supportedthe pecking order theory. The relationship between size and leveragewas found to be insignificant.

Rafiqet. al. (2008) examined the chemical industry of Pakistanregarding capital structure choice and suggested that chemical sectorpreferred more equity financing than the debt financing.

Industry Profile

Tenth largest in the Asia Pacific region and worth $1.63bn inFY 2007, the pharmaceutical market of Pakistan is very lucrative withabout 400 units being operated including nationals and multinationals.Approx Twenty five multinationals are operating in this sector inPakistan and the market is still expanding. The products in this segmentinclude painkillers and antibiotic drugs with oncology and biotechpills (IMS Health Asia) (PPMA, 2008) (BMI).



Some statistics of the pharmaceutical market reveal thatspending on drugs is very low. Hardly 1% of Pakistan’s gross domesticproduct originates in the drugs and pharmaceutical sector. Annualexports approximate $100 million, according to 2007 figures. New globalopportunities are likely to raise exports to about $500 million by 2013(BMI).

Good manufacturing practices are being followed as perinternational and national standards. Certain products are beingimported, including immunological, anti-cancer drugs, certain anti-diabetics, antidotes, and products manufactured from biotechnology.The market is not only fulfilling the country’s demand for drugs but ithas considerable export potential.

The prices are rather low and the health ministry has thisauthority to raise the prices of the medicines which remained constantfor a long period.

The market share of multinationals to locals is 45 to 55percent of sales. Growth rate is around 11% per annum with marketvolume being $1.5 billion. From among 400 units competing, 80%market share is with top 50 manufacturers and 90% market share isthat of top 100 players in the sector (OESC) (BMI, 2008).

Despite growth, the pharmaceutical sector also faces certainproblems due to a rise in inflation and a fall in purchasing power andreal incomes. Due to the currency devaluation, the cost of raw materialshas increased the cost of production. Consequently, drugs areavailable illegally at certain stores with high price tags.

As mentioned above, the control over price is in the handsof the Ministry of Health, therefore price adjustments are rare whichmakes certain drugs unprofitable to manufacture. Raw materials areimported from foreign markets, and increasing inflation anddevaluation has an impact on profits. Province-wise break-up ofpharmaceutical companies registered with Ministry of Health is asfollows:



Table1: Province-wise break-up of Pharmaceutical co mpanies registered with Ministry of Health

Province National M ultinationa l Total

Punjab 204 05 209 Sindh 92 23 115

Khyber-Paktunkhwa

50 - 50

Baluchistan 07 02 09 Azad

Jammu&Kashmir 03 - 03

Total 356 30 386

Source: Ministry of Health (2008) ,OSEC (2008)

Province-wise break-up of licenses issued to pharmaceuticalcompanies by the Ministry of Health (2008) are given in Table-2.

Table 2: Province-wise break-up of licenses issued

Province Licenses categories Total licenses issued Formulation Basic

manufacturing/Semi basic

manufacturing

Repacking

Punjab 191 13 2 206 Sindh 109 16 0 125 NWFP 45 0 0 45

Baluchistan 6 1 0 7 Azad

Jammu&Kashmir 3 0 0 3

Total 354 3 0 2 386 Source: Ministry of Health (2008),OSEC (2008 )

Pakistan produces about 80% of its pharmaceutical products demandthrough local manufacturing. Products being currently outsourced orimported in finished form comprise of immunological, antidotes, anti-cancer, certain anti-diabetics, and products and drugs produced frombiotechnologies etc.



All major pharmaceutical dosage forms are beingmanufactured in Pakistani pharmaceutical companies; some of themare listed in the following exhibit:

Exhibit 1: Pharmaceutical Dosage Forms Tablets Liquid injections

Capsules Powder injections Syrups Semi solid/Cream Drops Inhalers Gels Effervescent

Ointments Disposable enemas Ophthalmic/Optic drops Modified release

forms Vaccines

Source: Ministry of Health (2008), OSEC (2008)

Some key statistics of the pharmaceutical industry in Pakistan arepresented in Table-3:

Table 3: Some key statistics of the Industry 2007

Nu mber o f emplo yees Over 100,000 R&D E xp enditure 1% of profit (by each

co mpany) goes to R& D Fund of the Ministry of H ea lth.

Registered drugs 47,000 Registered Mo lecules (Ac tive ingredients)

1,100

Controlled price drugs Almost all Market size US$ 1.5 Billion approx. Average growth rate 11% Market Share of Multinationa l 45% Market Share of Loca l companies

55%

Market leade r GlaxoSmithK line (Pak) Ltd. Quality requir ement High – Tech

Source: M inistry of H ealth (2008), OSEC (2008)

The top ten pharmaceutical companies in Pakistan according to marketshare in 2008 in terms of sales are listed in Table-4:



Table 4: Top ten companies in Pakistan Pharmaceutical Market (2008)

S. No. Name of Company Share % Growth %

1 GSK (Glaxo Smith Kline) 11.59 8.9 2 Sanofi Aventis 4.15 7.4 3 Getz Pharma 3.76 26.7 4 Abbott Lab 3.69 4.7 5 Roche 3.13 14.4 6 Merck (Pvt.) Ltd. 2.89 16.6 7 Parke Davis 2.86 3 8 Sami 2.79 28 9 Novartis Pharma Specialty 2.26 11.6 10 Novartis Consumer Health 1.71 12.1

Source: Ministry of Health (2008), OSEC (2008) The year-wise inflows of foreign direct investment (FDI) in Pakistan

pertaining to the pharmaceutical and Over The Counter (OTC) productssector are given in Table-5:

Table 5: Year-wise Foreign Direct Investment (FDI) in Pharmaceutical& OTC* Products sector

Year (July - June) Foreign Direct Investment (FDI) (In Million USD)

2003-04 13.2 2004-05 38.0 2005-06 34.5 2006-07 38.4 2007-08 45.6 Source: State Bank of Pakistan (SBP) *OTC: Over

the counter There is scarcity of production of basic raw materials used

for the manufacturing of finished form medicines in Pakistan. Thecountry imports almost 95% of the basic raw materials usage from anumber of countries including China, Japan, India, the UnitedKingdom, Germany, and the Netherlands (OSEC, 2008). However, afew firms, almost half a dozen, are now involved in producing thefollowing raw materials domestically:



Exhibit 2: Domestic Raw Material Amoxacilin Ciprofloxacin Parabinez Ampicillin Cloxacillin Piperazine Aspirin Ephedrine Pseudoephedrine Cefixime Ephedrine Sulphate Pyrazinamide Cefadroxil Flucloxacillin Santonin

Cephlexin Paracetamol Source: Ministry of Health, OSEC (2008)

The domestic production of raw materials in Pakistan doesnot cover the need of the pharmaceutical industry and a majorproportion of special quality grades are still imported.

Currently, the pharmaceutical products manufactured inPakistan are being exported to Africa, the Middle East, Asia, and CIS(Commonwealth of Independent States) markets. The year 2009-10proved to be good for the pharmaceutical industry of Pakistan asexports in this year increased by around 44.74% to reach $168.31million (Table-6).

Table 6: Pharmaceutical Exports from Pakistan (All Amounts in Thousands of US $)

Description July – June

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Pharmaceutical products

69,215 64,923 67,943 78,952 86,508 116,286 168,308

Source: State Bank of Pakistan (SBP), Trade Development Authority of Pakistan (TDAP) Although the Ministry of Health discourages imports of

pharmaceutical products into Pakistan except those at the high endof the market, foreign pharmaceutical products enjoy considerableaccess to Pakistan’s market. However, these can only be importedinto the country with prior mandatory registration of companies’products.

High end or high tech products being imported into Pakistanare comprised of vaccines, therapies for HIV, oncology, hepatitis,dialysis, and surgical instruments. The imports of pharmaceuticalproducts surged up to $354 million in 2007, increasing by 23.22% in 5years from 2003 to 2007 (Table-7):



Table 7: Pharmaceutical Imports into Pa kistan (All A mounts in Thousands of US $)

Description

2003-04 2004 -05 2005-06 2006-07 2007-08

Pharmaceutical products

287,478 276,210 329,36 6 342,234 354,235

Source: State Bank of P akistan (SBP)

In Pakistan, a majority of the population has no access toadequate drinkable water and many experience a dearth of toilets andsufficient sanitation systems. This produces serious threats to health.Besides this, the varying and harsh climate induces major viral diseasesthroughout the year.

A high burden of diseases exists in Pakistan as shown by thefollowing facts:

The current tuberculosis occurrence rate is 0.17% Incidence of Hepatitis C in general population is 5.3% High blood pressure is found in more than 24.3% of the

population over the age of 18 years 10% of the adult portion of people is diabetic 1% of the population is blind Depressive disarrays are found in 34% in the total population

in Pakistan (OSEC, 2008)

Water-related diseases contribute nearly 12.5% of the diseaseburden in Pakistan. This is because of a dearth of sanitation facilitiesand safe sources of drinkable water.

Health expenditures of Pakistan increased by more than 140%(from Rs.25 billion to Rs.60 billion) from 2001-02 to 2007-08 (OSEC,2008). However, health expenditure as a proportion of GDP is only 6%during the entire reported period.

Methodology and Sample

This study seeks to identify the determinants of the capitalstructure or leverage of seven KSE listed pharmaceutical companies.



The terms capital structure and leverage are used interchangeably inthis paper. The objective of this paper is to determine the influence ofthe following factors on the capital structure of these companies:

1. Profitability2. Size of firm3. Growth4. Liquidity (Quick Ratio)5. Tangibility of assets6. Non-debt tax shield

For profitability, two separate measures were used: Returnon Assets (ROA) and Return on Equity (ROE). Therefore, the totalnumber of independent variables used in this research report is seven.

We ran panel regression to test the hypotheses. Panel dataanalysis facilitates amalgam of cross-sectional and time series data.The pooled regression, also called the Constant Coefficients Model,is one where both intercepts and slopes are assumed constant. Thecross-section company data and time series data are pooled togetherin a single column assuming that there is no significant cross sectionor inter-temporal effects. Specifically, the econometric model is definedas follows:

CS = β0 + β1 TG + β2 SZ + β3 GT + β4 ROA + β5 ROE + β6 QR + β7 NDTS+ ε

Where,

CS = Capital Structure (Leverage has been taken as itsrepresentative: Long Term Debt as a percentage of Total Assets),TG= Tangibility of Assets (Fixed Assets as a percentage of TotalAssets)SZ = Firm Size (Natural log or in of Sales)GT = Growth (As a percentage of increase in total assets over theperiod of years)ROA = Return on Assets (Net Profit before Tax as a percentage ofTotal Assets)ROE = Return on Equity (Net Profit before Tax as a percentage ofTotal Shareholders’ Equity)



QR = Quick Ratio, representative of liquidity [(Current Assets –Inventory) / Current Liabilities)NDTS = Non-debt tax shield (Annual Depreciation Charges as apercentage of Total Assets)

Seven companies from the Pharma & biotech sector in KSE-100 havebeen studied from which six are listed. This makes a significant coverageof more than 85% of the sector.

These companies are named as follows:

1. Abbott Laboratories2. Ferozons Laboratories3. Glaxo Smith Kline4. Highnoon Laboratories5. IBL Health Care Limited6. Searle Pakistan7. Sanofi – Aventis

Financial statements of the seven companies (annual,semiannual, as well as quarterly) were sources of data for all financialmeasures. Financial statements used were mainly balance sheet, profitand loss account and cash flow statements. Moreover, in case ofabsence of data in financial statements, Yahoo Finance and BloombergBusinessWeek were also consulted.

We included ten quarters starting from July 2008 (3rd quarter,2008) till December 2010 (4th quarter, 2010). In cases of non-availabilityof a particular quarter data for a variable, we calculated and used theCAGR (Cumulative Annual Growth Rate) to estimate a value.

The following hypotheses were tested:

Hypothesis0 (H0): Capital Structure (Leverage) is not influenced bythe Tangibility of Assets (TG) in PakistanHypothesis0 (H0): Size of Firm (SZ) is not associated with the CapitalStructure (Leverage).



Hypothesis0 (H0): Capital structure (Leverage) is not influencedpositively by Growth (GT)Hypothesis0 (H0): Return on Assets (ROA) and Leverage areunrelatedHypothesis0 (H0): Return on Equity (ROE) does not have a significantimpact on LeverageHypothesis0 (H0): Quick Ratio (QR) does not affect LeverageHypothesis0 (H0): Leverage is unaffected by Non – Debt Tax Shield

( NDTS )

To find the degree of consistency of the entire range of data,Cronbach’s Alpha measure of reliability was carried out. It measures“internal consistency of items in a scale. Alpha measures true varianceover total variance.

According to Nunnally (1978), the alpha of a scale should be greaterthan 0.70 for items to be used together as a scale. Hence, if there arevalues above 0.70 and less than 1.0, the entire range of data has ahigh degree of consistency.

Empirical Results

Using the technique of pooled regression, we ran theregression of Leverage on Tangibility of Assets, Size of Firm, Growth,Return on Assets, Return on Equity, Quick Ratio, and Non – Debt TaxShield with the aim to investigate whether any or all these factorsmay be regarded as significant determinants of capital structure.



Table 8(A): Regressive Results Model Summary Model

R R Square Adjusted R Square

Std. Error of the Estimate

1 .587a .345 .271 .0358050 a. Predictors: (Constant), Non - Debt Tax Shield, Firm Size, Return on Equity, Tangibility of Assets, Growth, Quick Ratio, Return on Assets

Table 8(B): Regressive Results Coefficientsa

Model Unstandardized Coefficients Standardized Coefficients

t Sig.

B Std. Error Beta 1 (Constant) -.095 .041 -2.344 .022

Tangibility of Assets

.037 .040 .124 .912 .365

Firm Size .005 .002 .355 2.933 .005 Growth -.115 .078 -.271 -1.471 .146 Return on Assets

-.956 .315 -.833 -3.039 .003

Return on Equity

.685 .206 .694 3.329 .001

Quick Ratio .009 .013 .120 .685 .496 Non - Debt Tax Shield

1.801 1.595 .219 1.129 .263

a. Dependent Variable: Leverage (Capital Structure)

It can be observed from the tables above that estimated valueof the coefficient of determination is approximately 0.345. It impliesthat only about a third of the variation in leverage of the companies isjointly explained by the above mentioned seven variables. The valueof F-statistic (4.656) indicates that the overall model is acceptable.

In the case of the first variable tested, Tangibility of Assets,the empirical results show that the companies’ leverage is notsignificantly associated with it. This implies that the null hypothesisthat leverage is not influenced by the tangibility of assets is acceptedat 5 percent level of significance.

The estimated model shows that there is statisticallysignificant association between leverage and the Firm Size. The Sig.value is 0.005 which implies that we reject our null hypothesis i.e. Sizeof Firm is not associated with Leverage at a 5% level of significance.



In the case of Growth, the empirical results reveal that theleverage is not influenced positively by growth. This implies that thenull hypothesis that leverage is not positively influenced by growthis accepted at 5 percent (0.05) level of significance.

The estimated model shows that there is statisticallysignificant association between the leverage and the Return on Assets(ROA). The significant value is 0.003 which implies that we reject ournull hypothesis i.e. Return on Assets and Leverage are unrelated at a5% level of significance.

The estimated model shows that there is a statisticallysignificant association between the Leverage and the Return on Equity(ROE). The p value is 0.001 which implies that we reject our nullhypothesis i.e. Return on Equity at a 5% level of significance.

In the case of Quick Ratio, the empirical results reveal thatthe leverage is unaffected by liquidity. This implies that the nullhypothesis that quick ratio (liquidity) does not affect leverage isaccepted at a 5 percent (0.05) level of significance.

For Non – Debt Tax Shield, the empirical results reveal thatthe leverage is unaffected by this variable. This implies that the nullhypothesis that Leverage is unaffected by Non – Debt Tax Shield isaccepted at a 5 percent (0.05) level of significance.

Since the significant value of three factors out of seven is less than0.05, we conclude that there are associations between Leverage and:

Firm Size (SZ) – positive association with LeverageReturn on Assets (ROA) – negative association with LeverageReturn on Equity (ROE) – positive association

The remaining four factors have no association with leverage.

Firm size being positively associated with leverage is quiteunderstandable as the more a firm grows, the more external financingit will need. This means that the capital structure will incline moretowards debt if the firm size of pharma sector companies in Pakistanincreases.



Considering the return on assets variable, an increase,according to this research, will lead to a decrease in the leverage. Theresult seems rational as higher the internal generation of cash, thelesser the reliance on debt as explained by the Pecking Order Theory.

In the case of return on equity, a positive relationship withleverage or capital structure seems to be unacceptable, against thebackdrop of Pecking Order Theory. The reason behind a negativeassociation could be the low to moderate consistency of data whichhas affected the findings adversely.

For reliability test to determine the degree of consistency ofthe entire range of data, we have used Cronbach’s Alpha measure ofreliability. The results are as follows:

Table 9: Reliability Test Reliability Statistics

Cronbach'sAlphaa N of Items -.194 8 a. The value is negative due to a negative average covariance among items. This violates reliability model assumptions. You may want to check item codings.

As we mentioned above, we had to merge all the 70observations (10 of each of the 7 companies) together includingdifferent types of details such as assets and depreciation chargesmerged together to be able to be tested on SPSS. This decreaseddrastically the consistency of the entire range of data at one time. (Apositive value refers to an average consistency level of data whereasa good one is above 0.7). On the other hand, when we tested thereliability of one variable at a time, we found that only ROA and QuickRatio had a negative Cronbach’s Alpha. Results are given below.



1. Cronbach’s Alpha test applied on Capital Structure (CS)and Tangibility of Assets (TG)

Reliability Statistics Cronbach's Alpha N of Items .309 2

The above results signify a positive Alpha value and as the value isless than 0.7, which is denoted as a good level for reliability, a moderateconsistency in item data coding is seen between capital structure andtangibility of assets. A positive correlation between these twovariables indicates a positive and moderate reliability.

2. Capital Structure (CS) and Firm Size (SZ)Reliability Statistics Cronbach's Alpha N of Items .025 2

The Cronbach’s alpha in the case of firm size and capital structurecomes out to be only 0.025 which is nearer to zero and signifies poorreliability and consistency in data coding.

3. Capital Structure (CS) and Growth (GT)


The reliability between the coding of growth and capital structurehas a non-significant value of 0.064.Hence, the reliability is very poor.

4. Capital Structure (CS) and Return on Equity (ROE) Reliability Statistics Cronbach's Alpha N of Items .344 2



Moderate reliability can be seen between return on equityand capital structure. This value is the highest compared with allvariables and the consistency in data coding is favorable. A positivecorrelation between these two supports the reliability test result.

5. Capital Structure (CS) and Non-Debt Tax Shield (NDTS)


An alpha result of only 0.058 depicts that there is poor or almost noconsistency in the data coding of non-debt tax shield. This is supportedby the fact there is very low correlation between the two factors (0.124).

Conclusion

The study uses a sample of seven listed pharmaceuticalcompanies in Pakistan. The data covered the quarterly period fromJuly 2008 – December 2010. Pooled regressions were run betweenleverage and independent variables. Low R- square of regressionsimply that only about a third of the variation in leverage of thecompanies is jointly explained by the above mentioned seven variables.Furthermore, the results regarding the significance of individualvariables are summarized below:

Tangibility of assets is not significantly correlated withleverage.

Size of the firm as measured using log of sales has a positiveand significant effect on leverage.

Growth as measured by change in total assets has a negativeand insignificant impact on leverage.

The relationship between profitability based on ROA andleverage is negative and significant. However, this relationshipbecomes positively correlated but significant if ROE is usedas a proxy for profitability.

Liquidity and leverage were found to be unaffected with eachother.

Leverage is unaffected by Non-debt Tax Shield.



However, the consistency of the findings of the entire range of data,were tested by applying the Cronbach’s Alpha measure of reliabilityto estimate the true variance over total variance. We found that thereliability between leverage and the above mentioned variables waspositive with each variable, except for ROA and Quick Ratio.

Further research is recommended as an extension to this research,with an increased sample size and time horizon. The hurdle of datacollection discrepancies and improper infrastructure for the samecannot be eliminated but can be mitigated with the help of usingappropriate measures such as Composite Annual Growth Rate (CAGR).

It could be concluded from the findings of the study that thePharmaceutical firms in Pakistan tend to borrow more in a boomingeconomic scenario when they are more optimistic of the businessprospects. Furthermore, leverage increases with the tangibility ofassets and size of the firm since larger firms are more confident oftheir repayment capability and are likely to borrow more. Growth inprofitability reduces the reliance on debt due to higher internal cashgeneration which is given priority in meeting funding requirement.



References

A.A. Kanwar (2007), Booth Revisited: Identifying the DeterminantsOf Capital Structure in the Sugar Sector, Market Forces, Vol. 3 No.2Booth, L., Aivazian, V., Demirguc-Kunt, A.E. and Maksimovic, V. (2001),“Capital Structures in Developing Countries,” Journal of Finance, Vol.56, PP. 87-130.Bradley, Michael., Jarrell, Gregg A. and Kim, E. Han (1984), On theExistence of an Optimal Capital Structure: Theory and Evidence, TheJournal of Finance, Vol. 39, No. 3, Jul., 1984, pp: 857-878Chen, J. (2004), Determinants of Capital Structure of Chinese-listedCompanies, Journal of Business Research, 57, pp.1341-1351Donaldson, G. (1961). Corporate Debt Capacity: A Study of CorporateDebt Policy and the Determinants of the Corporate Debt Capacity,Boston: Division of Research, Harvard Graduate School of BusinessAdministrationFama, Eugene F., and Kenneth R. French (2002), Testing tradeoff andpecking order predictions about dividends and debt, The Review ofFinancial Studies 15, 1–33Financial information retrieved on 04 24, 2011, from www.abbott.com.pk,www.ferozsons-labs.com, www.gsk.com.pk, www.highnoon-labs.com,www.sanofi-aventis.com.pk, www.searlepak.com, andwww.ppma.org.pk.Kraus and R.H. Litzenberger (1973), “A State-Preference Model ofOptimal Financial Leverage”, Journal of Finance, September 1973, pp.911-922Leary, Mark T. and Roberts, Michael R. (2005), Do Firms RebalanceTheir Capital Structures? The Journal Of Finance, Vol. Lx, No. 6Mahmud, Muhammad; Herani, Gobind M.; Rajar, A.W. and Farooqi,Wahid (2009), Economic Factors Influencing Corporate CapitalStructure in Three Asian Countries: Evidence from Japan, Malaysiaand Pakistan, Indus Journal of Management & Social SciencesModigliani; Franco and Miller, Merton H. (1958), The Cost of Capital,Corporation Finance and the Theory of Investment, The AmericanEconomic Review, Vol. 48, No. 3. (Jun., 1958), pp. 261-297.Myers, Stewart C. and Brealey, Richard A. (2003), Principles ofCorporate Finance, 7th Ed, pp. 482Pakistan Pharmaceutical Sector. (2008), OSEC Business NetworkSwitzerland.



Qureshi and Azid (2006), Did They Do It Differently? Capital StructureChoices of Public and Private Sectors in Pakistan, The PakistanDevelopment Review, PP. 701-709Rafiq, Iqbal and Atiq (2008), “The Determinants of Capital Structureof the Chemical Industry in Pakistan, The Lahore Journal of Economics,PP. 139-158.Rajan, Raghuram G. and Zingales, Luigi (1995), What Do We Knowabout Capital Structure? Some Evidence from International Data, TheJournal of Finance, Vol. 50, No. 5, Dec., 1995, pp: 1421-1460Shah, Attaullah and Hijazi, Tahir (2004), The Determinants of CapitalStructure of Stock Exchange-listed Non-financial Firms in Pakistan,The Pakistan Development Review 43 : 4 Part II (Winter 2004) pp.605–618Shah, Attaullah and Khan, Saifullah, Determinants of Capital Structure:Evidence from Pakistani Panel Data. International Review of BusinessResearch Papers Vol. 3, No. 4, pp. 265-282, October 2007 .


Research An Empirical Study Of Working CapitalResearch

AN EMPIRICAL STUDY OFWORKING CAPITAL POLICY,

RISK AND LEVERAGESumita J. Shroff

Department of Accounting and Financial Management,The Maharaja Sayajirao University of Baroda, Vadodara, India

Abstract

The current study examined the structure of current assets,efficiency of current asset management, the nature of current assetinvestment – financing policy and the overall working capital policyand working capital leverage of ITC Limited belonging to IndianFood and Beverages Industry over a period of 11 years from 2000-01to 2010-11. It was found that the inventory management hasdeteriorated whereas debtors management has improved over thestudy period. Further, the relationship between working capitalleverage and profitability as well as between working capital policyrisk and profitability was examined to understand the impact workingcapital policies on the profitability of the Indian food and beveragesindustry. The results indicated that ROTA was not very sensitive tochange in current asset investment policy. Also it was observed thataggressive working capital financing and investing policy hadnegative impact on the profitability of ITC Limited. However, theresults were observed to be insignificant due to which it could not beapplicable to the entire industry.

Keywords: Working Capital Policy, Working Capital Leverage,Working Capital Risk, Net Working Capital, Current AssetManagementJEL Classification: G31, G32

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An Empirical Study Of Working Capital Research

IntroductionThe corporate finance literature has traditionally focused on

the study of long term financial decisions. However, the short termfinancial decisions are equally tactical and important for any enterprisein order to carry on its business operations productively, consistentlyand efficiently. Working capital management involves managing ofthe dynamic relationship between current assets (CA) and currentliabilities (CL) which are ever changing and volatile. The high risk –high return working capital investment and financing strategies arereferred as aggressive whereas lower risk and return strategies arecalled moderate or matching and still lower risk and return is calledconservative working capital policy (Moyer, Mcguigan and Kretlow1,Pinches2, Gitman3). A firm may adopt an aggressive working capitalmanagement policy with a low level of current assets as percentage oftotal assets or high level of current liabilities as percentage of totalliabilities. However, excessive levels of current assets may have anegative effect on the firm’s profitability whereas a low level of currentassets may lead to lower level of liquidity and stock-outs resulting indifficulties in maintaining smooth operations (Van Horne andWachowicz4). Similarly, use of current liabilities to finance the currentassets as well as portion of fixed assets is risky to the company as thecurrent obligations are to be honoured every 12 months. The higherthe use of current funds to total assets, higher is the risk but such apolicy gives higher return in the context that it saves the cost of longterm funds used (since the cost of long term funds are presumed to bemore than the short term funds). However, if more of long term fundsare used to finance current assets, the risk is less but the returns arealso less. Thus, every management strives hard to adopt such workingcapital policy which ensures risk – return tradeoffs.

Risk in working capital management is therefore an outcomeof aggressive working capital investment and financing policy. Networking capital (NWC) position represents the excess of CA over CLand is a measure of risk of working capital financing policy. This is

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Research An Empirical Study Of Working Capital

because, higher the NWC, greater is the cushion available to shortterm creditors which lowers the risk of technical insolvency alsoknown as conservative financing policy. Similarly, current ratio (CR)is yet another measure of a firm’s ability to meet financial obligationsas they become due. The aggressive policy would yield the lowestCR, higher risk, higher profitability and lower liquidity whereas aconservative policy would yield the highest CR with higher liquidity,lower risk and lower profitability. Thus, both NWC and CR measurerisk of working capital financing policy.

Risk in working capital management can also be measuredby the equation used by Luther5, Mandal6 & Saini and Saini7 in theirempirical works, which is, Risk Factor = Shareholders Funds + LongTerm Debt – Long term Assets ÷ Current Assets.

Thus, before deciding on an appropriate level of workingcapital investment, the management has to evaluate the trade-offbetween expected profitability and the risk of being unable to meet itscurrent obligations. Profitability is measured in terms of return ontotal assets (ROTA), i.e., EBIT / Total Assets (TA) which reflectsoperational efficiency.

According to E. W. Walker8, risk means risk of notmaintaining sufficient investment in current assets to meet thematuring financial obligations to support a given sales level and gavethe concept of WCL which analyzes the impact of a firms’ currentasset investment policy on ROTA. Thus, WCL is the measure ofsensitivity of returns due to change in the level of current assetinvestment.

WCL = Change in ROTA ÷ Change in Current Asset (CA) = CA ÷ Total Asset (TA) ±CA

In the said context, the present study is organized as follows:Section-1 presents a review of previous studies on working capital

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policies. Section -2 states the objectives of the study; Section -3presents the methodology; Data analysis and interpretations arediscussed in Section -4 and Section -5 concludes the results.

1. Literature Review

Review of Previous Studies

Many studies have been carried out for analysis of workingcapital management (WCM) out which few studies have concentratedon the working capital policies and working capital leverage.

Gardner, Mills and Pope (1986)9 explored the relationshipbetween hedging behaviour and operating risk of 139 firms for theperiod 1980 to 1984. They found that more aggressive working capitalpolicies were associated with higher return and higher risk whileconservative working capital policies were concerned with the lowerrisk and return.

Jose, Lancaster and Stevens (1996)10 examined therelationship between aggressive WCM and profitability of US firmsusing Cash Conversion Cycle (CCC) and they found a significantnegative relationship between the length of CCC and profitabilityindicating that aggressive WCM is associated with higher profitability.

Weinraub and Visscher (1998)11 examined the relativerelationship between the aggressive/conservative working capitalpolicies of 206 US firms belonging to ten diverse industry groups,using quarterly data for the period 1984 -1993. Their study concludedthat the industries had distinctive and significantly differentaggressive current asset management policies which exhibitedremarkable stability over the study period. They also found thatrelatively aggressive working capital asset policies when followedwere balanced by relatively conservative working capital financialpolicies. Similar results were produced by Salawu (2006)12, whoinvestigated 42 firms in fifteen diverse industrial groups to establishthe relationship between aggressive and conservative working capitalpractices during the period 1993 – 2004.

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Hyderabad (1999)13 elucidated the concept of WCL with thehelp of case studies of three private sector enterprises, taking datafor one year. The analysis revealed that, a) firms having a low ratio offixed assets to working capital are more responsive to WCL thanthose having a high ratio of fixed assets to working capital; b) firmswith higher fixed assets to working capital ratio suffer more thanthose with lower ratio due to WCL.

Mallick and Sur (1999)14 examined the liquidity position aswell as the impact of WCM on profitability with the help of WCLanalysis taking data of ten years from 1987 to 1996 of HindustanLever Limited. They found that the company followed a conservativeworking capital policy and working capital of the company was foundto be significantly related to sales. WCL analysis revealed that changein ROI was less than proportionate to change in gross working capitalinvestment.

Afza and Nazir (2007)15 investigated the relationship betweenthe aggressive and conservative working capital policies for 17industrial groups of 263 public limited listed companies using cross-sectional data for the period 1998-2003. The study found significantdifferences in working capital investment and financing policies acrossdifferent industries which were remarkably stable over the studyperiod and that industries which pursued aggressive investmentworking capital policies also followed aggressive working capitalfinancing policies. Finally, a negative relationship was found betweenthe profitability measures of firms and the degree of aggressivenessof working capital investment and financing policies indicating thataggressive working capital policies yielded negative returns. Similarresults were found by the study of Afza and Nazir (2009)16.

Luther (2007)5 evaluated the liquidity, profitability and risktrade-off of Madras Cements Limited (MCL) for a period of nine years,i.e. 1997-98 to 2005-06 which was further divided into two parts withthis first period covering first four years and the second periodcovering the last 5 years of the time frame selected. It was found thatMCL had adopted a conservative policy in financing working capital

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for the initial four years and an aggressive policy in the last five yearsresulting in negative working capital which had a negative impact onthe profitability. However, the positive association between risk andprofitability was substantiated in the first period.

Mandal (2010)6 assessed the impact of working capitalmanagement on liquidity, profitability and non-insurable risk of ONGCover a nine-year period from 1998-99 to 2006-07 and the analysisrevealed a statistically significant positive relationship betweenliquidity and profitability as well as risk and profitability.

Saini and Saini (2010)7 assessed the efficiency of liquiditymanagement as also the association between liquidity – profitabilityand the trade-off between profitability and risk of Infosys TechnologiesLimited for a period of ten years, i.e. 1999-2000 to 2008-09. The analysisrevealed that the investment of sample firm in current assets in relationto total assets was very high and was consistently maintained. Theyfound a mildly positive association between risk and profitabilityindicating that high degree of conservative policy adopted by thecompany has made a negative impact on its profitability.

Thus, studies of Gardner9, Jose et al10, Mandal6 and Sainiand Saini7 substantiated direct relationship between risk andprofitability, whereas, Afza and Nazir (2007)15 and (2009)16 foundnegative relationship between risk and profitability thereby challengingthe conventional theories.

2. Objectives of the Study

In the light of literature reviewed, the present study is undertakenwith the following objectives:

a. To examine the structure of current assets and theefficiency of current asset management.

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b. To study the current asset investment policy; measure theworking capital leverage and examine the relationshipbetween working capital leverage and profitability.

c. To examine the working capital financing policy, measurethe risk and scrutinize the relationship betweenprofitability and the risk in working capital policies.

3. Methodology of the Study

1. Time Frame: An eleven-year period from 2000-01 to 2010-11 isselected for the study.

2. Data: Financial data was collected from Centre for MonitoringEconomy (CMIE) Database.

3. Sample Selection: The Indian food and beverages industry is anevergreen sector with consistent growth. The private finalexpenditure on food, beverages and tobacco has remained highestsince 2004-05 to till date (Refer Table -1). And thus, the saidindustry was selected for the purpose of inquiry with respect toworking capital management. There are 1763 listed and unlistedcompanies in this sector of which 497 are listed. Of these 497companies, 351 are listed on Bombay Stock Exchange (BSE). TheBSE listed A Group companies for which data for the entire studyperiod of 2000-01 to 2010-11 is available were selected for thestudy. The final screening gave 3 companies of which ITC Ltdhad the highest sales turnover in the industry. So, ITC Limitedwas considered as the representative sample for the study.

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719



4. Ratios Used: The following ratios are used to fulfil theobjectives of the study:

a. Structural Ratios: Inventory to CA Ratio (ITCAR); Debtors toCA Ratio (DTCAR); Cash & Bank Balances to CA Ratio(CBBTCAR); Prepaid Expenses to CA Ratio (PETCAR); Loansand Advance to CA Ratio (LATCAR).

b. Efficiency Ratios: Inventory Turnover Ratio (ITR); Debtors’Turnover Ratio (DTR); Average Collection Period (ACP);Inventory Holding Period (IHP); Current Asset Turnover Ratio(CATR)

c. Working Capital Policy Ratios: Current Asset to Total AssetRatio (CATAR); Current Assets to Sales Ratio (CASR), CurrentLiability to Total Assets Ratio (CLTAR); Current Liabilities toCurrent Assets Ratio (CL/CA); WCL; CR; NWC; Risk Factor.

5. Statistical Tools Used: Arithmetic Mean; Median; StandardDeviation; Coefficient of variation; Simple and Rank Correlation;Simple & Multiple Regression, F-test and t-test.

6. Specification of Model: The regression model is y = a + bx+ ut.Taking the same, the model adopted to examine if ROTA isbeing affected by WCL is:ROTA = α + β WCL+ ut . . . . . . . . . . . . . (1)

The relationship between working capital policy risk andprofitability is examined byROTA = α + β1CATAR+ β2 CLTAR + ut . . . . . . . . . . . . . (2)

7. Hypotheses of the Study:

Null Hypothesis (H01): Return on Total Assets is notsensitive to the degree of working capital leverage.

Null Hypothesis (H02): Return on Total Assets is not sensitive to the degree of working capital leverage.

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4. Data Analysis and Interpretation

A. Current Asset Structure Analysis

The descriptive statistics and yearly ratios of current assetstructure are presented in Table 2.

TABLE 2 Current Asset Structure Ratios

Year CA (Amt in ` Crores)

ITCAR (In %)

DTCAR (In %)

CBBTCAR (In %)

PETCAR (In %)

LATCAR (In %)

2000-01 2872.70 39.85 39.52 1.23 0 19.4 2001-02 2956.20 39.93 45.31 1.50 0 13.26 2002-03 3390.01 36.93 41.08 11.18 0 10.81 2003-04 3647.66 42.06 37.88 9.33 0 10.73 2004-05 3465.67 57.80 32.97 1.60 0 7.63 2005-06 5016.39 52.55 24.82 17.06 0 5.57 2006-07 6037.08 55.58 23.95 14.91 0.36 5.20 2007-08 7031.30 57.61 27.9 8.11 1.08 5.30 2008-09 8171.61 56.29 21.9 12.62 3.37 5.82 2009-10 7878.51 57.74 22.83 14.30 2.91 2.22 2010-11 9863.58 53.40 20.10 22.74 1.64 2.12

Median 53.40 27.90 11.18 0.00 5.82 Mean 49.98 30.75 10.42 0.85 8.00

Standard Deviation 8.40 8.92 6.96 1.26 5.17

The analysis of Table – 2 reveals the following: The share of inventory in the total current assets has increased

throughout the study period excepting years 2002-03 and 2010-11;the share of debtors has shown a declining trend whereas cashbalance has fluctuated with highest being 22.74 percent in 2010-11reflecting idle cash and slack control of cash balance.

The loans and advances have been reduced to a considerableextent reflecting efficient management of funds and measures takenby the management for its improvement in order to improve theliquidity and efficient utilization of funds.

The share of prepaid expenses which was nil became existentfrom 2006-07 onwards and rose to as high as 3.37 percent whichhad declined progressively there after indicating a possibility ofconscious steps taken by management to improve liquidity andcash flows.

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B. Current Asset Management Efficiency Analysis

The analysis of Table – 3 reveals the following:

From the perusal of Table 3, it can be observed that ITR rangedbetween 5.05 and 8.81; DTR has ranged between 7.35 and 15.45whereas CATR has ranged between 3.03 and 3.86. A decliningtrend can be observed for DTR and ACP whereas a rising trendcan be observed for ITR and IHP.

It is interesting to note that over the study period the efficiency ofinventory management has deteriorated with inventory holdingperiod increasing from 48 days to 63 days whereas the efficiencyof receivables management has improved with reduced collectionperiod of 24 days. The combined effect of which has offset anychange in the overall management of current assets as reflectedby the median value of 3.24.

Mean CATR of 3.23 reflects that the current assets get convertedinto sales 3 times a year and that the investment in current assetsis blocked for 111 days (Operating Cycle).

TABLE 3 Current Asset Management Ratios

Year ITR

(Times) IHP

(In days) DTR

(Times) ACP

(In days) CATR

(Times) 2000-01 7.60 48 7.66 48 3.03 2001-02 8.34 44 7.35 50 3.33 2002-03 8.81 41 7.92 46 3.25 2003-04 7.70 47 8.56 43 3.24 2004-05 6.67 55 11.69 31 3.86 2005-06 6.16 59 13.04 28 3.24 2006-07 5.82 63 13.49 27 3.23 2007-08 5.29 69 10.94 33 3.05 2008-09 5.05 72 12.99 28 2.85 2009-10 5.80 63 14.68 25 3.35 2010-11 5.82 63 15.45 24 3.11

Mean 6.64 57 11.25 35 3.23 Median 6.16 59 11.69 31 3.24

SD 1.28 10 2.96 9.91 0.26 722



C. Analysis of Working Capital Leverage and Current AssetInvestment and Financing Policy

The descriptive statistics and yearly ratios for Current AssetInvestment policy and WCL are presented in Table 4.

The analysis of the Table 4 reveals that the firm on an averagemaintains 37% of the total assets as current assets and 31% currentassets against total sales of the company. From this, it can beinferred that the management is following an aggressive currentasset investment policy whereby sales are supported by lesserinvestment in current assets. Also, the proportion of current assetsto total assets is less than 50% which is indicative of an aggressiveworking capital investment policy.

WCL is observed to be below 1 in all the years for the study periodwhich indicates that the change in ROTA was less thanproportionate to change in investment in current assets whichconfirms the findings of Hyderabad13 that firms having a low ratioof current assets to fixed assets are less responsive to WCL.

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TABLE 4 Current Asset Investment Policy and Working Capital Leverage

Year TCA Total Assets CATAR ∆ in

CA TA-∆CA WCL CASR (In %)

2000-01 2872.70 5997.84 0.46 ----- ----- ----- 33.02

2001-02 2956.20 7257.77 0.39 83.50 7341.27 0.403 30.02

2002-03 3390.01 8681.34 0.40 433.81 9115.15 0.372 30.74

2003-04 3647.66 10689.76 0.32 257.65 10947.41 0.333 30.86

2004-05 3465.67 11758.15 0.30 -181.99 11576.16 0.299 25.94

2005-06 5016.39 13318.26 0.37 1550.72 14868.98 0.337 30.90

2006-07 6037.08 15235.23 0.37 1020.69 16255.92 0.371 30.95

2007-08 7031.30 17549.22 0.38 994.22 18543.44 0.379 32.75

2008-09 8171.61 19785.21 0.39 1140.31 20925.52 0.391 35.15

2009-10 7878.51 23357.69 0.32 -293.10 23064.59 0.342 29.84

2010-11 9863.58 25844.21 0.36 1985.07 27829.28 0.354 32.20

Mean 0.37 Mean 0.36 31.12 Median 0.37 Median 0.36 30.90

SD 0.04 SD 0.03 2.32



As already discussed that WCL measures the sensitivity of ROTAto change in current asset investment policy and so the associationbetween WCL and ROTA was examined to confirm the findings ofdescriptive statistics by applying rank correlation. Further to checkthe significance of the correlation coefficient, t-test was applied. Thecalculated value was less than the critical value at 5% level ofsignificance with 9 degrees of freedom. Ranks were assigned indescending order in both the cases, i.e., highest value had beenassigned 1st rank and so on and the results are presented in Table 5.

From the perusal of Table 5, it can be observed that, the correlationcoefficient of +0.35 signifies a moderate degree of positivecorrelation between ROTA and WCL which means an increase inROTA is moderately and positively affected by WCL whichfurther confirms the analysis that change in ROTA is less thanproportionate to change in CA. However, the correlationcoefficient was statistically insignificant meaning thereby thatthese results cannot be generalized to the whole of food andbeverages industry.

Further simple regression equation was applied taking ROTA asdependent variable y and WCL as independent variable x. Thenull hypothesis 1 was tested at 5% level of significance with 9degrees of freedom. The results are summarized in Table 6.

The beta coefficient is found to be statistically insignificant at5% level of significance which suggests acceptance of the nullhypothesis. Thus, in the food and beverages industry, ROTA isnot sensitive to the degree of WCL which suggests non- linearityof relationship. The possible reason could be the asset structureas quoted by Hyderabad13, “The asset structure is the basicdeterminant of WCL”.

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TABLE 5 Rank Correlation between WCL and ROTA

Year WCL Rank1 ROTA Rank2 Difference in Ranks (D)

D2

2000-01 0.428 1 31.79 1 0 0 2001-02 0.403 2 28.11 5 -3 9 2002-03 0.372 5 26.47 8 -3 9 2003-04 0.333 10 25.56 11 -1 1 2004-05 0.299 11 28.06 6 5 25 2005-06 0.337 9 26.15 9 0 0 2006-07 0.371 6 27.82 7 -1 1 2007-08 0.379 4 28.17 4 0 0 2008-09 0.391 3 26.04 10 -7 49 2009-10 0.342 8 28.28 3 5 25 2010-11 0.354 7 29.81 2 5 25

TOTAL 0 144 r = +0.35 Calculated t = 1.12087

Critical t = 2.262 at 5% level of significance

TABLE 6 Results of Simple Linear Regression of WCL on ROTA

Variable Intercept R2 Slope ß1 t statistic p value

WCL 19.99 0.183 21.54 1.4189 0.190 Table Value of t = 2.262 at 5% level of significance

The descriptive statistics and yearly ratios for Current AssetFinancing policy is presented in Table 7.

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TABLE 7 Working Capital Financing Policy Ratios

Year Total CA Total CL NWC CL/CA CR CLTAR 2000-01 2872.70 1604.39 1268.31 0.56 1.79 0.27 2001-02 2956.20 2559.25 396.95 0.87 1.16 0.35 2002-03 3390.01 3198.74 191.27 0.94 1.06 0.37 2003-04 3647.66 4158.85 -511.19 1.14 0.88 0.39 2004-05 3465.67 3617.18 -151.51 1.04 0.96 0.31 2005-06 5016.39 4137.05 879.34 0.82 1.21 0.31 2006-07 6037.08 4597.27 1439.81 0.76 1.31 0.30 2007-08 7031.30 5277.12 1754.18 0.75 1.33 0.30 2008-09 8171.61 5872.58 2299.03 0.72 1.39 0.30 2009-10 7878.51 9185.60 -1307.09 1.17 0.86 0.39 2010-11 9863.58 9791.74 71.84 0.99 1.01 0.38

Mean 0.89 1.18 0.33 Median 0.87 1.16 0.31

SD 0.19 0.27 0.04 CV 21.35 22.88 12.12

From the perusal of Table 7, it can be observed thatNWC was negative in 3 of the 11-year period which hasstrained the CR and it has remained below 1 for 3 yearsand below 1.50 for the rest of years with a mean of 1.18 andmedian of 1.16. Mean CL/CA is 0.89 and Mean CLTAR is0.33.

On an average 89% of the firm’s current assets werefinanced by the CL. CR below 2 coupled with higher CL/CA reflects an aggressive working capital financing policybeing pursued by the sample firm.

Thus, this firm follows an aggressive investment as wellas financing approach which is a highly risky preposition.

Further, all the measures of risk viz, NWC, Risk Factor, CLTARand CR were ranked to find out whether all of these measure the riskin the same way or vice versa.

The rankings were given in the ascending order, i.e., from lowestvalue to highest value for NWC, CR and Risk Factor whereas forCLTAR ranking was done from highest to lowest. This is becauselower the NWC, lower is the CR and so is the Risk Factor, however,higher is the risk and vice versa whereas higher the CLTAR, greaterthe use of CL to finance TA, higher is the risk and vice versa. Theresults of ranks assigned are presented in Table 8.

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TABLE 8 Rankings of Measures of Risk of overall working capital policy

Year NWC Rank Risk Factor Rank CLTAR Rank CR Rank

2000-01 1268.31 11 0.44 11 0 .27 11 1.79 11 2001-02 396.95 6 0.13 6 0 .35 5 1.16 6 2002-03 191.27 5 0.06 5 0 .37 4 1.06 5 2003-04 -511.19 2 -0.14 2 0 .39 2 0.88 2 2004-05 -151.51 3 -0.04 3 0 .31 6 0.96 3 2005-06 879.34 7 0.18 7 0 .31 7 1.21 7 2006-07 1439.81 8 0.24 8 0 .30 8 1.31 8 2007-08 1754.18 9 0.25 9 0 .30 9 1.33 9 2008-09 2299.03 10 0.28 10 0 .30 10 1.39 10 2009-10 -1307.09 1 -0.17 1 0 .39 1 0.86 1 2010-11 71.84 4 0.01 4 0 .38 3 1.01 4

From the analysis of Table -7, it can be observed that CR,NWC and Risk Factor measure risk in the same way as the rankings foreach of them is same. CLTAR gives similar ranking except for 4 years.

Further, Pearson’s Correlation Matrix is constructed aspresented in Table 9, to examine the correlation amongst the variablesmeasuring working capital policy risk. This is done to select the variablerepresenting working capital investment as well as financing policyrisk.

.TABLE 9 Pearson’s Correlation Matrix

CATAR CLTAR CR NWC Risk

Factor CL/CA CATAR 1

CLTAR -0.48568 1 CR 0.870808 -0.83634 1

NWC 0.646913 -0.80003 0.794794 1 Risk

Factor 0.849182 -0.85856 0 .96897 0.892648 1 CL/CA -0.84918 0.858562 -0.96897 -0.89265 -1 1

In order to examine the relationship between working capitalpolicy risk and profitability, CATAR is considered as a measure of riskin investment policy whereas CLTAR is considered as a measure ofrisk in financing policy and ROTA as a measure of profitability. CLTARas a measure of risk in working capital financing policy is selected for2 reasons, viz, (a) CATAR and CLTAR have common denominator sois a more appropriate measure as compared to its counterparts and (b)

727



CLTAR has the least value of correlation with CATAR as compared toother variables as evident from Pearson’s correlation matrix. Thus,CATAR is ß1 whereas CLTAR is ß2.

The results of multiple regression examining impact of working capitalpolicy risk on profitability are presented in Table 10.

TABLE 10 Results of Multiple Regression on ROTA

R2 Intercept Slope ß1

Slope ß2

t statistic ß1

t statistic ß2

F Statistic

0.204 23 .39 14.931 -3.822 1.111 (0.300)

1.4189 (0.808)

1.0273

t = 2.262 at 5% significance F = 5.32 at 5% significance

The positive β coefficient of CATAR indicates that as currentassets share in total assets increases, risk decreases andprofitability as measured by ROTA increases thereby indicatinga negative relationship between the degree of aggressiveness ofinvestment policy and profitability. The negative value of βcoefficient for CLTAR also points out the same negativerelationship between the aggressiveness of working capitalfinancing policy and profitability which agrees with the resultsof Afza and Nazir (2007)15 & (2009)16.

However, the relationship was found to be statisticallyinsignificant indicating that the differences in results can existwhen the study is conducted taking all the units of the entireindustry. Also, the value of R2 is observed to be very low.

5. Conclusions and Recommendations

In ITC Limited, inventories formed major share in currentasset followed by debtors, cash and loans and advances andprepaid expenses.

The inventory and cash management of ITC Limited hasdeteriorated over the study period which should be improved.

Receivables management including loans and advanceshave improved over the study period and have been very wellmanaged.

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The firm followed an aggressive current asset investment andfinancing policy which is a risky proposition.

WCL of ITC Limited was found to be less than unity for theentire study period indicating less than proportionate changein ROTA to change in current asset structure.

ROTA was not sensitive to WCL for the food and beveragesindustry which suggests that the change in current assetstructure does not affect the profitability of the industry. Theprofitability may be affected by the efficiency of operations orother factors which needs to be discovered.

A negative relationship was found between risk and profitabilityfor ITC Limited which indicates that the higher is the risk taken,the lesser is the profitability and the firms should take measuresto reduce the aggressiveness of its working capital financingand investing policy. However, the relationship was statisticallyinsignificant so this finding cannot be applied to the entirefood and beverages industry.

Limitations of the Study

There are so many factors that affect the profitability. However,in this study, the objective was examining the impact of workingcapital policy risk on profitability only the other factors wereeliminated which is a major limitation of this study. Also, theanalysis is based on one company of Food and Beverages Industrydue to which the results are observed to be insignificant.

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References

1 Moyer R.C., Mcguigan J. R. and Kretlow W. J. (2005). ContemporaryFinancial Management. 10th Edition. New York:South WesternCollege Publishing.

2 Pinches G. E. (1992). Essentials of Financial Management. 4th Edition.New York: Harper Collins College.

3 Gitman L. A. (2005). Principles of Managerial Finance. 11th Edition.New York: Addison Wesley Publishers.

4 Van-Horne J. C. and Wachowicz J. M. (2004). Fundamentals ofFinancial Management. 12thEdition. New York: Prentice HallPublishers.

5 Luther C T Sam (2007), Madras Cements Limited-Working CapitalPolicies. Icfai Reader. April 2007, pp. 55-67.

6 Mandal N (2010). Impact of Working Capital Management onLiquidity, Profitability and Non Insurable Risk and UncertaintyBearing: A Case Study of Oil and Natural Gas Commission (ONGC).Great Lakes Herald, Vol.4 No.2, September 2010, pp. 21-42.

7 Saini A and Saini R D (2010). Analysis of liquidity management andtrade-Off between liquidity, risk and profitability: An empirical study.Journal of Accounting and Finance. Vol 24 (2). April – September2010, pp. 29-42.

8 Walker, E. W. (1964), Towards a Theory of Working Capital,Engineering Economist, Jan – Feb, 1964, pp. 21-35.

9 Gardner M. J., Mills D. L. and Pope R. A. (1986). Working CapitalPolicy and Operating Risk: An Empirical Analysis. The FinancialReview 21(3): 31-31.

10 Jose M. L., Lancaster C. and Stevens J. L. (1996). Corporate Returnsand Cash Conversion Cycle. Journal of Economics and Finance.Vol 20(1), pp. 33-46.

11 Weinraub H. J. and S Visscher (1998), Industry Practice RelatingTo Aggressive Conservative Working Capital Policies, Journal ofFinancial and Strategic Decision, Vol 11(2), Fall-1998, pp. 11-18.

12 Salawu R. O. (2006). Industry Practice and AggressiveConservative Working Capital Policies in Nigeria. European Journalof Scientific Research. March 2006. Vol. 13, No. 3, pp. 294-304.

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13 Hyderabad R. L. (1999). Working Capital Leverage Management:Case Analysis. Journal of Accounting and Finance. Vol 13 (1).March 1999 - pp. 96-104.

14 Mallick A. K. and Sur D (1999). Working Capital Management: ACase Study of Hindustan Lever Ltd. Finance India. Vol XIII (3).September 1999, pp. 857-871.

15 Afza T. and Nazir M. S. (2007). Working Capital Management Policiesof Firms: Empirical Evidence from Pakistan. Presented at 9th SouthAsian Management Forum (SAMF) on February 24-25 2007, NorthSouth University, Dhaka, Bangladesh.

16 Afza T and Nazir M S (2009), Impact of Aggressive Working CapitalManagement Policy on Firms’ Profitability, The IUP Journal ofApplied Finance, Vol-15 (8), August 2009, pp 19-30.

731


Research Emotional Intelligence in Doctors and NursesResearch

EMOTIONAL INTELLIGENCE INDOCTORS AND NURSES OF

EMERGENCY MEDICINE UNITS INTERTIARY HOSPITALS

Humeira Jawed, Asima FaisalDepartment of Health and Hospital Management

Institute of Business Management, (IoBM), Karachi

Abstract

Emergency medicine staff of Karachi has the emotionalcompetency to manage patient care. Emotional Intelligence Score ofnurses was comparatively higher than doctors (p< 0.01). There wasno significant difference between the scores of males and femaleswhen dealing with medical emergencies (p = 0.057). Emotionalintelligence increases with years of clinical experience (p<0.01). Scoreof doctors and nurses in the public sector was higher as compared tohospitals in the private sector (p=0.002). Workload was rated as themost common factor for affecting their emotional strength andrecommendations were provided. This is a preliminary study to assessEmotional Intelligence in order to identify the levels of emotionalintelligence in health care practitioners of an emergency unit. Theresults will assist the management to identify areas of improvementto develop effective performance and good communication withpatients, while the hospital can design strategies for the right careerplacement for its personnel and provide training to emergencymedicine staff to facilitate quick decision making skills.

Keywords: emotional intelligence, emergency medicine, SEIS, workperformance, emotional competencyJEL Classification: Z000

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Emotional Intelligence in Doctors and Nurses Research

IntroductionEmotional Intelligence (EI) is the understanding, managing

and controlling our own emotions and recognizing the emotions ofothers. Asan (2003) has described the importance of emotionalintelligence in identifying an individual’s success in work, family, andsocial life and an individual’s ability to manage his/her relationsefficiently with the environment. This includes the awareness andjudgment of the knowledge related to the emotion, and operating onthe emotional knowledge as a part of problem solving in daily life.

According to Goleman (1996), EI is defined as “the capacityfor recognizing our own feelings and those of others, for motivatingourselves, and for managing emotions well in ourselves and in ourrelationships”. In everyday language, EI is what typically referred toas “street smartness” or “common sense.”

Wagner et al. (2002) published the first study that focusedon a state of a physician’s emotional strength and the relationshipbetween physician and the patient. They found that only one sub-scale of emotional intelligence (i.e., happiness) was related to higherpatient satisfaction; the other sub-scales (i.e., interpersonal skills,adaptability, stress, and mood) were unrelated. Stratton et al. (2005)conducted a study on medical students and found that attention tofeelings, empathic concern, and perspective were positively correlatedwith communication skills, while emphatic concern did not have apositive correlation with physical examination skills.

Salovey and Mayer (1990) state that EI has been describedas social intelligence which is the ability to monitor one’s own andother’s emotions, segregating emotions and using the informationgenerated to guide one’s thinking and actions. A person who isemotional intelligent is skilled in identifying, using, understanding,and regulating his emotions. According to Goleman (1996), selfawareness, management of emotions, motivating oneself, identifying

733


Research Emotional Intelligence in Doctors and Nurses

emotions in others and handling relationships are component ofemotional intelligence.

Success is positively related to the level of strength of EIwhich helps a person become a better parent, employee or a manager.Ngah (2009) explains that regulation of one’s own emotion and moodscan result in positive and negative affective states and affect workbehaviors. This is the requirement of the changing paradigms of theworld. Viriyavidhayavongs (2001) mentioned that it is important forthe business environment and organizations to hire leaders withenriched leadership effectiveness requiring strong managerial skillsand emotional intelligence. Goleman (1996) also stated EI can be aspowerful as Intelligence Quotient (IQ) and sometimes even more so.Today when an individual is expected to be rated as having a good IQscore for success in career, companies are looking for managers tohave a high EQ score as well. Geiser (2001) said that IQ remainsstagnant after teen years; however, EI can be learned continuously.People with high EI are more likely to succeed in personal andprofessional pursuits than those with low EI regardless of their levelof IQ.

Birks (2009) describes that EI has a significant role in thefield of medicine, nursing, and other healthcare disciplines, both forpersonal and professional practice. Medical fields deal with humanlives and therefore it is important to hire medical personnel with theaptitude for emotional competence. Pau (2003) studied the level ofstress amongst medical students and found out that level of EI andstress was different amongst different disciplines of healthcareprofession including dental, nursing and mental health workers. Razzaket.al (2008) mentioned that emergency medical care is a significantcomponent of healthcare system. In low income countries, it is anignored though. His study was on the availability and quality offacility-based emergency medical care in the government healthcaresystem at district level in a low income country like Pakistan and was

734



analyzed that 40 out of 44 healthcare providers (98%) were of theopinion that their medical facilities were inadequately equipped totreat emergencies. 31 out of 42 (74%) state that no budget had beenallocated for emergency care. Many critical supplies like medicationsand equipment facilities needed in an emergency were not found inthese facilities. This resulted in low satisfaction with workplace.

The purpose of choosing the emergency medicine staff forthis study mainly served the purpose of analyzing the dynamics anddiverse working schedules of the staff. EI and competencies are highlyrequired for doctors and personnel attending the acute patient caredelivery. Workload, personal stress and work environment arecontributing factors to yield in mood fluctuations causing emotionalvariations which affect work performance. Behaviors and attitudes incritical situations for maximal performance and higher productivitywhich will leverage a patient focused image of the institution managedby an emotionally competent staff. Sovie and Jawad (2001) found thatthe relationships between nursing staff from different units was astrong predictor of patient satisfaction and hard evidence also existsfor the value of relationships in the delivery of patient care.

The objective of the study was to assess the emotionalquotient of doctors and nurses of emergency medicine wards of tertiaryhospitals of Karachi.

Methodology

The study is based on analytical cross sectional surveyconducted on 2 private and 2 public tertiary care hospitals in Karachifrom April 2010 to June 2010. A sample of 100 was drawn at a confidencelevel of 95%. Considering the availability of emergency medicine nursesand doctors due to varied shifts convenient sampling was used withinclusion criteria of clinical experience in the emergency ward of not

735



less than six months during the study period. Out of 150 respondents,120 gave consent to the study. A sample of 100 gave completeresponse. Nurses also included paramedics operating in the wardswhile doctors included house officers and post graduates levelattending the ward at the time of data collection.

Data collection tool was in form of a questionnaire with ofthe Schutte’s Emotional Intelligence Scale. According to Jonker andVosloo (2008), the scale is a 33-item self-report questionnaire with thehighest EI score of 165 and lowest score of 33. The scores weretotaled of each respondent. Demographics were extracted after a focusbased interview with two doctors and two nurses from emergencymedicine set up. An interview based questionnaire was developedwith an attached disclaimer and consent form. Data collection wasmainly done in the low traffic morning hours, the time where thefrequencies of casualties are low. Data was tabulated on SPSS 17 andanalyzed and results summarized. P value was used to find outrelationship between demographics and EI scores were analyzed usingindependent t test while p value of workplace variables was calculatedusing Fisher Exact test.

Results

There were 55 female and 45 males respondents. Majority ofthe respondents belonged to age group 25-40 years. From privatehospitals, there were 43 respondents and 57 from public hospitals. 30respondents had a clinical experience of 1-5 years. Around 34respondents were attending more than 20 emergency cases per day.(Table 1)

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Parameters Frequency (n)

Gender Male 55

Female 45

Age (years)

<25 23 25-30 24 31-40 25 41-50 14 >50 14

Hospitals Private 43 Public 57

Staff Nurses 59 Doctors 41

Clinical Experience (years)

<1 19 1-5 30 6-10 26 >10 25

No. of casualties seen per day

<10 cases 3 10-15 33 16-20 28 >20 34

Table 1: Demographics of the study participants (N=100)

A significant difference was found in gender. EI score ofprivate and public hospitals was significant. Score between nursesand doctors was significant along with clinical experience of less thanand greater than 10 years.

Table 2: Emotional Quotient (EQ) among study subjects (N=100)

Mean ± SD P value*

Gender Male 127.25 ± 19.93 0.057 Female 120.04 ± 16.88

Hospitals Private 117.44 ± 20.38 0.002 Public 128.96 ± 16.13

Staff Nurses 135.63 ± 10.57 <0.01* Doctors 107.29 ± 15.30 Clinical

experience (years)

< 10 years 109.44 ± 13.52 <0.01* >10 years 137.41 ± 11.89

* Independent sample t test. Values less that 0.05 are considered tobe significant

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The emotional strength analysis using chi square (Table 3)shows that 21 nurses (35.6%) and 31 doctors (75.6%) say that theiremotional strength is affected by workload. 15 nurses (25.4%) and 6doctors (14.6%) say that their emotional strength is affected bypersonal strength. 10 nurses (16.9%) and 2 doctors (4.9%) say thattheir emotional strength is affected by colleagues at work. 9 nurses(15.3%) and 2 doctors (4.9%) say that their emotional strength isaffected by recognition from seniors. 4 nurses (6.8%) state thatmonetary incentives from pay affect their emotional strength.

Table 3: Comparison between Staff members on reasons behinddisturbances in their emotional strength

DiscussionThe duty of emergency medicine staff is to stabilize patients

who have a life-threatening injury or illness. In contrast to medicineor primary care, emergency medical care focuses on the provision ofimmediate or urgent medical interventions. Emergency medicine staffneeds to work like critical managers practicing medical decision-making and executing the actions necessary to prevent life risk ordisability because of time-critical health problems whatever the age,gender or demographics of the patient may be.

EI is recognized as an important personal attribute involvedin nurturing the patient – physician relationship and is thusincreasingly included in the medical education curriculum. Medical

738

P value*

WorkloadPersonal

stressColleagues

at work

Recognition from seniors

Monetary incentives

from hospital

NursesFrequency

(n) 21 15 10 9 4Percentage

(%) 35.60% 25.40% 16.90% 15.30% 6.80%

DoctorsFrequency

(n) 31 6 2 2 0Percentage

(%) 75.60% 14.60% 4.90% 4.90% 0.00%

Emotional strength most affected by

0.002

* Fisher Exact



education should include practical work related to self-awareness aboutemotional management. Doctors need to think and work like managersas well and patient management is the prime nature of their jobs. Guthrie(1999) describes that lack of self management and emotionalcompetence may yield in barriers to effective communication betweenphysicians and executives. This will result in difference of opinionsregarding the importance and a direct conflict between reasonableobjectives of a hospital or health system and the success of physicians’work. Physicians and healthcare executives often view the same issuethrough different views and, as a result, arrive at different reasons andseek different alternatives.

Goleman (1996) pointed out that at a time of heightenedcompetition for patient loyalty, those physicians who are more awareof their patient’s emotions are more successful in treating them thantheir less perceptive colleagues.

The highest factor which affects emotional strength wasworkload which is evident from the fact that due to inadequate staffingand resources, work is shared by an average of 5-6 doctors per call.This is an area of improvement mandatory for hospitals to considerimproving their level of staffing to decrease the burden on staff duringheavy traffic hours. Personal stress was higher in nurses as comparedto doctors. Colleagues at work might be a positive or negativeimplication. Most respondents when interviewed stated goodcolleagues to have a very significant impact on their workingenvironment. Recognition from seniors was an explanatory requirementfrom nurses which affects their emotional strength. It is interesting tonote that there were hardly any substantial responses of monetaryincentives from the hospital. Behaviors and attitudes in criticalsituations for maximal performance and higher productivity willleverage a patient focused image of the institution managed by anemotionally competent staff.

739



According to Razzak (2002) training of healthcareprofessional is important to help them handle their critical situationbetter and for this the training requires a critical mass of physicians,nurses and other paramedical staff who are deep rooted with theprinciples of emergency care and should exert pressure for such atraining needs inclusion in the curricula of their respective fields.Weng and Chen (2008) say that an underlying capacity for EI isnecessary for a successful physician to manifest a competency in themedical profession.

Perez (2009) analyzed the relevance of EI in managerial andnon managerial staff of the pharmaceutical and medical devicesindustry in Puerto Rico found that younger employees and thosewith lower educational level tend to have lower EQ scores. Pau (2003)studied EI has a significant role in medicine, nursing, and otherhealthcare disciplines, both for personal health and professionalpractice. There was no significant difference between males andfemales between professional groups for the EI measure.

Shih and Hsu (2007) conducted a study in Taiwan betweenphysicians and nurses in a study population. Physicians wereevaluated to have lower scores of EI opposed to nurses. Our studyshows that nurses had higher scores than doctors. Nurses had betterability in self-emotion appraisal than physicians which may be due togender difference that females were more sensitive to emotionalperception than males. There is a significant difference in theperception of EI with respect to male and female supporting staff. Ourstudy does not show a significant difference between scores of malesand females and the nature of work attitude is the same for both menand women.

Gadot and Galit (2010) showed that the levels of EI in privatesectors are higher as compared to those in public sectors, andtherefore, empowers positive attitudes towards the workplace and

740



decreases negative behavior. Our study illustrates that EI of publichospitals staff was higher owing to more exposure of critical emergencycases reported to public hospitals than private.Conclusion

This was just a preliminary study to assess EQ in order toidentify the levels of EI in healthcare practitioners of an emergencyunit. The results will help the staff to identify areas of improvement todevelop effective performance and good communication with patients.The hospital can design strategies for the right career placement forits personnel and provide training to emergency medicine staff toimprove quick decision making skills. Behaviors and attitudes in criticalsituations can be developed for maximal performance and higherproductivity which will create a patient focused image of the institutionmanaged by an emotionally competent staff. The results of this studywill build a pilot platform for other such studies and assessment infast paced competent fields other than healthcare in Pakistan.

This survey can extend its analysis to assess the reliabilityof EI in hospital staff and evaluate patient outcome and servicesatisfaction. Emergency medicine is the hub of acute clinicalprocedures and a lot of multitasking is involved due to low humanresource. More staff in case of doctors and nurses should be hiredand rotated into emergency medicine units to help reduce workload inthe emergency units.

Working hours vary from 8 – 12 hrs for emergency medicinestaff. Most of the staff stated that their timings are not fixed and oftenwork overtime without any remuneration or recognition of theadditional hours spent. This causes distraction of the work life. Exertionlevels are very high due to working overtime. The working hours shouldbe followed with timely management. Young staff needs to be trainedto manage their emotional strength in times of emergencies. EI shouldbe educated and built into the recruitment and training facilities ofnurses and doctors. This way the hospital workforce will develop itsemotional competencies to perform efficiently and can deliver qualitycare in highly demanding emergency medicine units.

741



References

Asan, Ö. & Özyer, K., (2003). To identify demographic factors thatinfluence emotional intelligence an empirical study. H. Ü. Journal ofEconomics and Administrative Sciences, 21,1, 151-167.

Birks Y, Mc Kendree J, Watt I: (2009) Emotional intelligence andperceived stress in healthcare students: a multi-institutional, multi-professional survey, BMC Medical Education, 9:61

Geiser J, (2001) An Analysis of Emotional Intelligence with relation toSales Professionals, Unpublished Honors, Ohio University

Goleman D, Emotional Intelligence, (1998); Why It Can Matter MoreThan IQ, Bantam Books. ISBN 978-0-553-38371-3

Guthrie, M.B. (1999). Challenges in developing physician leadership.Frontiers in Health Services Management, 15: 3-28.

Jonker, C.S.& Vosloo, C. (2008) The psychometric properties of theSchutte emotional intelligence scale. SA journal of industrialpsychology, 34(2):21-30.

Meisler G., Gadot EV., (2010) Emotional intelligence empowers positiveattitudes in private sector; not in public sector.”PHYSorg.com. Lastretrieved: www.phys.org/pdf212328722

Ngah R, Jusoff K,(2009) Emotional Intelligence of Malaysian Academiatowards Work Performance, International Education Studies, 2, 2

Pau AKH, Croucher R: (2003) Emotional intelligence and perceivedstress in dental undergraduates. J Dental Education , 67(9):1023-28.

Pérez ZA; (2009) Evaluating Emotional Intelligence in the Workplace:A selected sample, University of Puerto Rico, ISBN 11093048039781109304800

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Razzak J, & Arthur L. Kellermann; (2002) Emergency medical care indeveloping countries: is it worthwhile?, Bull World Health Organ, 80,11

Salovey, P., & Mayer, J. D. (1990) Emotional Intelligence. Imagination,Cognition and Personality, 9(3): 185-211

Shih CP & Hsu KH. (2007) The construct validity of emotionalintelligence (EI) measurement among medical staffs of an emergencyroom in Taiwan. The XVII ACME international conference on pacificrim management, Las Vegas, USA. July 12-14.

Stratton, T. D., Elam, C. L., Murphy-Spencer, A. E., & Quinlivan, S. L.(2005). Emotional intelligence and clinical skills: preliminary resultsfrom a comprehensive clinical performance examination. AcademicMedicine, 80 (10): S34-S37.

Sovie, M.D. & Jawad, A.F. (2001). Hospital restructuring and its impacton outcomes: Nursing staff regulations are premature. Journal ofNursing Administration, 31(12), 588-600.

Viriyavidhayavongs V, Jiamsuchon S; (2001); The Relationshipbetween Emotional Quotient (EQ) and Leadership Effectiveness inLife Insurance Business Organizations, ABAC Journal, 2, 1-12

Weng HC, Chen CH MD, MS, Han-Jung Chen, MD, PhD, Shu-ChingChi, RN, MS, (2008); Emotional Intelligence competencies in PhysicianLeaders: An exploratory Study, Taiwan, Department of HealthManagement, I-Shou University; Medical Education, 42: 703–711

743


Research AFRs FOR MSEs in Pakistan Challenged By IFRs for SMEsResearch

AFRs FOR MSEs IN PAKISTAN(2006) CHALLENGED BY IFRs

FOR SMEs (2009)

Muhammad Aslam DossaDepartment of Commercial and Professional StudiesInstitute of Business Management,(IoBM), Karachi

Abstract

This research paper shows that the AFRS for SMEs, introducedby The institute of Chartered Accountants of Pakistan (ICAP) in 2006,served a very useful purpose by providing a framework, which was lessonerous than the International Accounting Standards (IAS) to comply with,but at the same time included the key elements required to provide clarity,transparency and comparability of the financial statements, to investorsand other users. However, with the release of IFRS for SMEs, by theInternational Accounting Standards Board (IASB) in 2009, the earlierintroduced AFRS for SME’s have become albeit redundant.

Key words: Accounting Financial Reporting Standards (AFRS) for MediumSized Entities (MSEs) and Small Sized Entities (SSEs), International FinancialReporting Standards (IFRS) for Small and Medium Sized Entities (SMEs),International Accounting Standard Board (IASB), The Institute of CharteredAccountants of Pakistan (ICAP)JEL Classification: M410

744


AFRs FOR MSEs in Pakistan Challenged By IFRs for SMEs Research

IntroductionAFRS for Medium Sized Entities (MSEs) and Small Sized

Entities (SSEs) were approved, by the Council of ICAP on July 28,2006, and is applicable on or after July 1, 2006. As stated in thepreamble “This Framework sets out the conceptual basis for thepreparation of general purpose financial statements of Medium-SizedEntities (MSEs)”. The said Standards have been notified by theSecurities and Exchange Commission of Pakistan (SECP), andcompliance is mandatory, for qualifying companies registered underthe Companies Ordinance 1984.

The Standards are in two parts, one for MSEs and the otherfor SSEs. The Standard for MSEs has 17 sections spread over 104pages (refer Annexure 1) whereas the Standard for SSEs has 50 clausesand are spread over just 5 pages. Clause 14 of the Framework, thatprecedes the Standard for MSEs, suggests that where a transactionfalls outside this Standard, guidance be obtained from InternationalAccounting Standards (IAS) and International Financial ReportingStandards (IFRS) and related documents. Clause 22 of the Standardsfor SSEs suggests that where transactions and events fall outsidethis Standard guidance be obtained from the Standard for MSE. Forthe purposes of this paper and for comparisons with IFRS for SMEs,only the Standards for MSEs, which are more comprehensive, havebeen used.

As per Clause 1 of the preamble to AFRS for MSEs headed‘Qualifying Entities’ (QE) compliance with MSE Framework andStandard is necessary in order to give a ‘true and fair view’ . As perClause 2 of the QE: A Medium-Sized Entity (MSE) is an entity that:

(a) is not a company that is listed on the Stock Exchange, or asubsidiary of such company;

(b) has not registered, or is not in the process of registering, itsfinancial statements with the Securities and Exchange

Commission of Pakistan (SECP) or other regulatory body, for

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Research AFRs FOR MSEs in Pakistan Challenged By IFRs for SMEs

the purpose of issuing any class of security in a public market;(c) does not hold assets in trust, for an external group, financial

institution, securities broker/dealer, pension fund, mutualfund or similar organization;

(d) is not a utility company or similar enterprise that providesan essential service to the public;

(e) is not economically significant on the basis of criteria asdefined in the Standard; and

(f) is not an SSE as defined below.

As per Clause 3 of the QE: An entity is considered to be economicallysignificant if it has:

(i) sales in excess of Rs. 1 billion excluding other income;(ii) more than 750 employees ;(iii) aggregate borrowings (excluding creditors and accruals) of morethan Rs. 500 million.

In order to be treated as economically significant any two of thecriterion mentioned in (i), (ii) and (iii) above have to be met. Thecriteria followed will be based on the previous year’s audited financialstatements. Entities can be delisted from this category where they donot fall under the aforementioned criteria for two successive years.

As per clause 4 of the QE: an SSE is an entity that:(i) has paid up total equity of not more than Rs. 25 million and(ii) has sales not exceeding Rs. 200 million per annum, excluding otherincome.In order to be considered as an SSE, both of the above conditionsmust be fulfilled.

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Problem Statement

Pakistan has been committed to implementing IAS since themid 1970s, and had adopted most of the 48 IAS’s and IFRS released bythe IASB up to the mid 2000s. However, ICAP realized that the IASsand IFRSs adopted in Pakistan were generally much too complex andcumbersome to implement by the MSEs and the SSEs. Thus ICAPtook the initiative to develop the AFRS for MSEs and SSEs whichwere released by ICAP in July 2006 and notified by the SECP.

The IASB, also realized the need for having separate IFRSfor SMEs, and in July 2009 released the IFRS for SMEs. The latter isdesigned for SMEs to meet the needs of the investors, creditors andother users, for information about cash flows, liquidity and solvency.It takes into account the costs, and the resources of SMEs to preparefinancial information. As per the Guide to the IFRS for SMEs issued inMarch 2012, in comparison to the full IFRS there are considerablefewer disclosures required (estimated 90% elimination), and thestandard has been written to enable easy comprehension. and facilitatetranslation for various countries . To additionally lighten the burdenfor SMEs, amendments to the IFRS for SMEs would be made onlyonce every three years.

The IFRS for SMEs were released by the IASB in July 2009.As the name indicates these are meant for use by smaller enterprises,and have 35 sections and a glossary of terms spread over 231 pages(refer Annexure II).

As per Section 1 of the IFRS for SMEs, this standard isapplicable to organizations that (i) do not have public accountability*,and (ii) publish financial statements for general use.

The basis to qualify as an SME thus depends on the natureof the entity, and not on how big the entity is projected.

* An entity has public accountability if:

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(a) it’s debt or equity securities are traded in a stock exchange or itis in the process of issuing such securities for trading in public ,

local or overseas markets or an over-the-counter transactions,or

(b) it holds assets in a trust for an external group as one of its mainoperations. This is generally done by financial institutions, stockbrokers/dealers, and mutual funds.

The AFRS for MSEs and SSEs were issued in July 2006, whereasthe IFRS for SMEs were released in July 2009; over the three yearsconsiderable changes in accounting standards have been introduced;consequently the latter is likely to be more up to date. FurthermoreIASB plans to carry out the required amendments to the IFRS forSMEs every three years or so, but no such commitment has beenexpressed by ICAP. Thus it is inferred that the IFRS for SME’s wouldbe more current and reliable and also be acceptable internationally.

Literature Review

ICAP Technical Director’s presentation on IFRS (2010)indicates that certain well established international accounting bodies,including the Institute of Chartered Accountants in England andWales (ICAEW), American Institute of Certified Public Accountants(AICIA) and the Canadian Institute of Chartered Accountants (CICA)met in 1966. These accounting bodies decided to establish anInternational Study Group (AISG) which was founded in 1967, andinitiated the publication of papers on important accounting relatedtopics. His presentation on IFRs (2010) further states that in June1973 it was agreed by the AISG members to establish an InternationalAccounting Standards Committee (IASC) to develop and release theaccounting standards capable of rapid acceptance and implementationworldwide. During the period 1973 to 2001 the latter released a numberof International Accounting Standards. In April 2001 the IASC wasrenamed as the International Accounting Standards Board (IASB),which commenced to release International Financial Reporting

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Standards (IFRS) in addition to the IASs already released, whichcontinued to be applicable, with necessary changes notified from timeto time.

Schutte and Buys (2010) in the Abstract of their paper statethat the IFRS for SMEs was meant to assist, SMEs all over the world,but may not necessarily have an international focus. Furthermore,SMEs from various parts of the world face different conditions andenvironments. Although the IFRS for SMEs was not developed for aspecific user group, it would appear that responses to the ExposureDraft on IFRS for SMEs were from Europe and other developedcountries, whilst only few people from Africa and developing countriesappeared interested. In conclusion they state that the main usergroups, for their research included public or tax offices; creditors(including financial institutions); investors; and managers.

Deloitte (2010) in their publication’s Forward has advisedthat the newly formed IASB in its transition report of December 2000to the outgoing Board of the International Accounting StandardsCommittee, said that worldwide requirement was expressed, for a lesscomplicated version of International Accounting Standards for smallenterprises. The IFRS for SMEs, issued by the IASB in July 2009,responds to this demand. It is self-sufficient, designed for the needsand resources of smaller businesses and is understandable to all.Compared with full IFRSs (and a number of local GAAPs), the IFRSfor SMEs is written in clear, easy to comprehend and translatable indifferent languages and is less complicated in many ways, includingthe restricted accounting policy choices, eliminating topics that arenot required by SMEs, making the principles for recognition andmeasurement easier, and making less mandatory disclosures.

Pascu and Vasiliu (2011) state with reference to the globaleconomic crisis, that smaller enterprises are most affected. That is thereason that more uniformity of national legislation with the Europeanlegislation is required. The need to implement only specifically requiredstandards for SMEs appeared in order to provide them a beneficial

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framework for better economic and financial market positioning. Inthis context, the IASB issued in 2009 IFRS for SMEs, which attemptsat simplification of accounting procedures, reconciliation and increaseof confidence of potential investors (stakeholders). The researchersquery compatibility of these standards with the European AccountingDirectives in situations where they may choose to use IFRS for SMEs.

Ionesco and Ilincuta (2011) conclude that InternationalFinancial Reporting Standards for SMEs have initiated one of thesteps of the accounting harmonization in the international accountingsystem. The development of IFRS for SMEs takes into considerationthe needs and abilities of the small and medium enterprises, which areestimated to constitute over 99% of all worldwide companies. IFRSfor SMEs were approved and released by IASB, in order to improvethe accounting regulations all over the world. In Europe, most of thebusinesses are SMEs, and IFRSs for SMEs are simplified toaccommodate the SMEs that qualify to use these standards.

Stephen Coetzee (2007) concludes “ Of particular interest toIFAC is less developed economies in which low literacy levels, lack ofaccounting education and absence of computerized accountingsystems, amongst other things, may be impairing the ability of suchentities to produce fairly presented financial information in accordancewith IFRS.”

Review of the field testing results carried out by ACCA inUK in early 2008 indicated the following implications:

Overall the field tests of the 25 UK entities indicated thatconversion from UK GAAP to IFSME could be accomplished quiteeasily, as there were very few variations in the accounting systemsAs the field tests did not include many of the well-recognized areasof complexity in accounting (hedging, derivatives, share-basedpayments, defined benefit pension obligations etc.) this may havebeen underestimated; however, these tests suffice to indicate that for

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the majority of smaller companies the overall conclusion is notseriously erroneous.

In terms of presentational changes the requirement for a cashflow statement for small companies will be a change, but not one thatproved noticeably onerous.

The changes in format, layout and nomenclature may be ratherless significant when example accounts are prepared based on theexisting UK practice and utilizing the flexibility in the IFSME.

There will be a new or amended disclosure requirements inareas such as lease and related party transactions, and again thesemay have been understated in these results. These do not howeverappear to be on such a scale with this sample that would provide amajor obstacle to the adoption of IFSME in the UK.

Framework and Research Methodology

Develop a Research Question which is - Should AFRS forMSEs in Pakistan (2006) be replaced with InternationalFinancial Reporting Standards (IFRS) for SMEs (2009).

Develop a Problem Statement. Search for related literature. Evaluate documentation on AFRS for MSEs and IFRS for

SMEs. Select 5 important Sections of AFRS for MSEs in Pakistan,

and consider how these differ from IFRS for SMEs to assessthe effect on Financial Statements of MSEs with respect to(a) producing harmonious financial statements (b) providinginvestors and other users adequate information for takingeffective financial decisions.

Analyze each of the selected 5 Sections of AFRS for MSEs,in comparison with appropriate section of the IFRS for SMEs;and draw a conclusion on each Section, whether the IFRS forSMEs have an advantage over the former in meeting theobjective, as stated above, of using the Standards.

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Prepare Appendices of Financial Statements prepared using(a) AFRS for MSEs and IFRS for SMEs to exhibit thedifferences in the two sets of Financial Statements.

Give an overall conclusion on which of the two Standards isthe preferred one and make a submission whether Pakistanshould continue with the AFRS for MSEs and SSEs or shouldreplace the same with IFRS for SMEs.

Analyses of important Sections of AFRS for MSEs in comparisonwith IFRS for SMEs

Some of the important sections of AFRS for MSEs in Pakistan and theIFRS for SMEs are discussed and compared below:

Presentation of Financial Statements

Section 1 of the AFRS for MSEs in Pakistan is devoted toPresentation of Financial Statements Presentation”. Clause 1.1 of thissection requires inclusion of the five main statements including (a)balance sheet; (b) income stament; (c) statement showing either (i) allchanges in equity; or (ii) changes in equity other than those existingfrom capital transactions with owners and distributions to owners (d)a cash flow statement; and (e) accounting policies and explanatorynotes.It may be approved that above financial statements have notbeen referred to by their correct revised names.

There are 11 ‘overall considerations’ listed for the financialstatements, which are the regular requirements;

The Standard includes the structure and contents of thefinancial statements, which are very similar to IAS/ IFRS. There areminor differences like reduction in number of line items on the face ofthe balance sheet and income statement. However, an importantomission is that there is no mention of the requirement for a Statementof Comprehensive Income; neither is there a mention of disclosingprofit or loss/ comprehensive income attributable to non-controllinginterests and owners of parent. These items were not required at the

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time of release of the AFRS for SMEs, in July 2006, and reflects thatthe latter is no longer current.

Section 3 of the IFRS for SMEs deals with FinancialStatement Presentation, and requires that the financial statementspresent fairly the financial position, financial performance and cashflows of an entity. The standard further elaborates that these includethe five main financial statements, by their revised names, includingthe Notes comprising of a summary of accounting policies andexplanations to the financial figures in the statements; there is alsomention of requirement of the statement of comprehensive income.

Section 3 of the IFRS for SMEs includes requirements forgoing concern (clauses 3.8, 3.9), frequency of reporting (clause 3.10),consistency of presentation (clauses 3.11, 3.12, 3.13), comparativeinformation (clause 3.14), materiality and aggregation (clauses 3.16).However, the IFRS for SMEs does not address presentation of segmentinformation, earnings per share, or interim financial reports (clause3.25); an entity making such disclosures shall describe the basis forpreparing and presenting such information (clause 3.25).

It would appear that the IFRS for SMEs is more current andmore comprehensive than the AFRS for MSEs in Pakistan. It specifies(clause 3.17) the concept of comprehensive income and other essentialreporting features such as (clause 3.14) requirement for previouscomparative results, and (clause 3.25) specific omission of certaindisclosures.

Cash Flow StatementSection 2 of the AFRS for MSEs in Pakistan deals with the

cash flow statement, and summarizes the main features of IAS 7 in 2pages. The AFRS mentions the three classifications of cash flow i.e.Operating, Investing and Financing Activities, and briefly describesin general what is to be included in these classifications. The AFRS

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(clause 2.5) also indicates that the cash flow from operating activitiesis to be reflected either by the direct method or indirect method, anddescribes the same.

The AFRS (clause 2.15) requires that an enterprise shall givea Note indicating the amount of cash and cash equivalent that cannotbe used by the enterprise. However, there is no mention of what is tobe specifically disclosed in each of the three classifications of thecash flow statement.

Section 7 of the IFRS for SMEs describes the requirementsfor the statement of cash flows. It details the scope of this section,description of cash equivalents, information to be presented in thecash flows under its three activities. The IFRS (clauses 7.7, 7.8, 7.9)also indicates that operating activities may be presented using eitherthe direct method or the indirect method, and specifies details ofthese two methods.

The IFRS states (clause 7.10) that total cash flows arisingfrom acquisition and disposal of subsidiaries or other business unitsbe presented separately and classified as investing activities (as peramendment to IAS 7 effective April 2009).

The IFRS also describes the treatment of foreign currencycash flows, as well as specifies alternatives allowed for reflectinginterest and dividends.

Upon reviewing the above two standards, it is observedthat both the AFRS for MSEs in Pakistan and the IFRS for SMEs havelargely adopted IAS 7 as their standard, and there is no change forthe users of the respective users of these standards. However, theIFRS for SMEs has been presented in a more comprehensive manner,and is more current with recent changes.

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Property, Plant and Equipment

Section 3 of AFRS for MSEs in Pakistan deals with property,plant and equipment, and includes requirements on recognition;measurement at initial recognition, measurement subsequent to initialrecognition using the cost model and the revaluation model;depreciation (including methods to be used); impairment; de-recognition; and disclosure (including that related to revaluation).The standard is substantially similar to IAS 16 with some differences,where the standard specifies that methods of depreciation to be usedshould be straight-line or the diminishing balance or sum of the units,whereas the IAS 16 indicates that “the depreciation method usedshould reflect the pattern in which the economic benefits of the assetsare consumed by the entity”. Furthermore IAS 16 in relation torevaluation requires information to be provided on (a) how the revaluedhas been arrived at, and (b) the comparative cost of the items beforerevaluation.

Section 17 of the IFRS for SMEs specifies the accountingrequirement for property, plant and equipment. This section is dividedunder the following headings: scope, recognition, measurement ofcost, exchanges of assets, measurements after initial recognition,amount and depreciable period, depreciation method (in principle),recognition and measurement of impairment; compensation forimpairment; property plant and equipment held for sale; de-recognition;and disclosures. This standard covers in general the requirements ofIAS 16, except that the disclosure requirement for revalued propertyhas been left out.

Both the AFRS for MSEs in Pakistan and the IFRS for SMEsinclude the general provisions of IAS 16. However the latter appearsto have covered it in a more concise manner important topics, such asscope, exchanges of assets, amount and depreciable period,compensation for impairment, property plant and equipment held forsale.

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AFRS for MSEs in Pakistan specifically allows three methodsfor depreciation, regardless of whether the selected method isappropriate or not. This may result in erroneous calculation ofdepreciation.

The IFRS for SMEs has deleted the IAS 16 requirements ofdisclosures on revaluation, which are fairly onerous to comply with,and should be acceptable; the SMEs do not have public accountabilityand their accounts are published only for limited external use bystakeholders who can generally obtain additional information ifrequired. Thus omitting disclosures on revaluation, should beacceptable.

Intangible Assets

Section 5 in AFRS for MSEs deals with intangible assets.This section gives guidance and requirements for recognition andinitial measurement; including, internally generated intangible assetincluding the research and development phases; recognition of anintangible item as an expense, measurement after recognition usingthe cost model and revaluation model; amortization – intangible assetswith finite useful lives; residual value, review of amortization periodand amortization method; intangible assets with indefinite useful life,review of useful life assessment; review of carrying amount:impairment losses, retirements and disposals; and disclosures.

Section 18 in the IFRS for SMEs deals with Intangible Assetsother than Goodwill, and covers topics including scope; recognition– (i) general principles and (ii) acquisition as part of a businesscombination; initial measurement – including (i) separate acquisition,(ii) acquisition as part of a business combination and (iii) acquisitionby way of a government grant; exchange of assets; internallygenerated intangible assets; past expenses not to be recognized asan asset; measurement after recognition; internally generatedintangible assets; past expenses to be recognized as an asset;

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measurement after recognition; amortization over useful life;amortization period and amortization method; Residual value; reviewof amortization period and amortization method; recoverability ofcarrying amount – impairment losses; retirement and disposals; anddisclosures.

AFRS for MSEs in Pakistan, as well as the IFRS for SMEscover most of the requirements for Intangible assets, included in IAS38. However, it would appear that Section 5 of the AFRS for MSEs inPakistan includes ‘goodwill’, whereas ‘goodwill’ is specificallyexcluded from Section 18 of IFRS for SMEs and IAS 38, and dealtwith separately.

Clause 5.6 of AFRS for MSEs in Pakistan recognizes anintangible asset arising from the development (or from the developmentphase of an internal project) upon fulfillment of certain conditions;whereas clause 18.14 of IFRS for SMEs clearly states that allexpenditure internally incurred on research and development activitiesbe treated as an expense unless it forms part of the cost of anotherasset that meets the recognition criteria. This conflict in criteria canresult in material difference in financial results, particularly so as thereis a very fine line of distinction between research and developmentexpenditure. IAS 38 permits the capitalization of development costsunder some very stringent conditions.

Inventories

Section 6 in the AFRS for MSEs deals with inventories andincludes matters relating to measurement of inventories, includingcost formulas; recognition as an expense; and disclosures.

Section 13 in IFRS for SMEs on inventories includes scope;measurement of inventories; costs of purchase; costs of conversion;allocation of production overheads; joint products and by-products;other costs included in inventories; costs excluded from inventories;costs of inventories of a service provider; cost of agricultural produce

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harvested from biological assets; techniques for measuring cost, suchas standard costing, retail method and most recent purchase price;cost formulas; impairment of inventories; recognition as an expense;and disclosures.

Both the standards cover the essential provisions of IAS 2.However, it would appear that the AFRS for MSEs in Pakistan hasmade the standard very brief and missed out certain important areaswhich needed elaboration, as apparent from the above comparison.Disclosure requirements are the same as required by IAS2 in both theStandards.

Overall Conclusion

AFRS for MSEs in Pakistan were approved by the ICAPCouncil in 2006, and since then there have been considerable changesand development in the accounting field. However, no attempt hasbeen made to update this document, and neither is there a specificcommitment to periodically do so.

The ICAP decided to have two separate documents, one setof standards for Medium-sized Entities (MSEs) and another documentfor Small-sized Entities (SSEs). Usually Small and Medium-sizedEntities are grouped together. Having separate Standards makescompliance more cumbersome, particularly so as those qualifying forcompliance with standards for SSEs are required to refer, for guidance,to AFRS for MSEs in the event that a transaction falls outside thescope of the Standards for SSEs.

The AFRS for SMEs reduce the requirement for disclosureson the financial statements, and this makes the preparation of theseless onerous. However, this may result in some important disclosurebeing omitted, which may be required by users for a business decision.

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The AFRS for MSEs suggest that where a transaction fallsoutside these Standards guidance be obtained from InternationalAccounting Standards (IAS), International Financial ReportingStandards (IFRS) and related documents. This provision indicatesthat the Standards are not self contained, and to an extent defeats thepurpose of making it less onerous.

The qualifying criteria for the use of AFRS for SMEs arebased on both the nature and size of the entity, and thereby makingthe use of the same more restrictive. There is a qualifying requirementthat not only should a company not be listed on the stock exchange,but it should also not be an economically significant company.

Each individual section of the AFRS for SMEs does notprovide the scope of the standard, and thus at times make it difficultfor the user to comprehend whether accounting requirement for aparticular transaction or event has been intentionally omitted, and theuser is expected to refer to the IAS / IFRS for guidance. An example ofthis is that Section 5 of AFRS for MSEs deals with Intangible Assets,but the Section does not indicate whether or not the accountingstandard specified is to be used for goodwill or financial assets ormineral rights.

The AFRS for SMEs has only 17 sections, and at times theseare not very comprehensive. Important sections have been omitted.These include those for statement of financial position; statement ofcomprehensive income and income statement; statement of changesin equity and statement of income and retained earnings; notes to thefinancial statements; consolidated and separate financial statements;basic financial instruments; other financial instruments issues;liabilities and equity; share-based payments; impairment of assets;and specialized activities.

The financial statements and ratios derived as a result ofcompliance with AFRS for MSEs, would be comparable only withprior year statements of the same entity. Comparisons may not bepossible with international data as IFRS for SMEs are not used, andFinancial Statements of local MSEs are not generally available, forcomparison purposes.

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IFRS for SME’s released by the IASB in 2009, and are selfcontained and fairly comprehensive. This makes it user friendly.

IFRS for SMEs are designed for use by entities that do nothave public accountability, with no limitation on size of the entity.Thus, the standards can be used by a larger and less restrictive group.

IASB is committed to regularly update the standards, andhas the resources to do so. We understand that over 80 countrieshave adopted the IFRS for SMEs or proposed to do so. These includedNepal and Sri Lanka in South Asia. The IFRS Foundation and IASBare providing implementation support including formal training, andpublishing a monthly newsletter, “IFRS for SMEs Update”.

A large number of entities would be using these standardsand thus comparative financial statements and related ratios andstatistics may be available for comparison. The international ratiosand statistics that would be available could be used as a benchmark,after necessary adjustments, if required, for comparison.

SubmissionThe AFRS for MSEs and SSEs were approved by the ICAP

Council in July 2006, at which time the IFRS for SMES were notavailable. However, six years have elapsed since the issue of thisStandard, which is now no longer current, and has outlived itsusefulness. It is suggested that consideration be given to replacingthis with IFRS for SMEs issued by IASB, with any modifications ifrequired. This would give additional credibility to financial statementsissued in Pakistan as well as enhance international credibility of theaccountancy profession in Pakistan. Now that the IASB has issuedthe IFRS for SMEs and have the resources to keep these current,Pakistan should adopt the same. The financial statements producedin compliance with IFRS for SMEs would produce more reliablefinancial statements that would be acceptable internationally, andwould not be more onerous to prepare. These would be comparableto international financial statements, and better serve the usersincluding present and potential investors, management, lenders, andothers.

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References

Coetze Stephen, 2009 “IFRS for SMEs IS small, small ENOUGH?”

Accountancy SA; Accounting & Tax Periodicals pg. 32.

Deloitte – UK GAAP, 2010 IFRS for SMEs in your pocket – UK edition.

Deloitte, 2011 onwards, Summaries of IAS and IFRS.

International Accounting Standards Board (IASB), Illustrative FinancialStatements and Presentation and Disclosure Checklist accompany theInternational Financial Reporting Standard for Small and Medium-sizedEntities.

IASB, 2012, A Guide to the IFRS for SMEs IASB

IFRS Foundation; issues for January, February and March 2012 –IFRS for SMEs update.

International Accounting Standards Board (IASB), 2009 InternationalFinancial Reporting Standard (IFRS) for Small and Medium-sizedEntities (SMEs).

Ionescu, Cicilia, 2011, “International Financial Reporting StandardsFor SMES”, Professor PhDFaculty of Financial-Accounting andManagement Bucharest Spiru Haret University Lucian DorelILINCUŢĂ, Lecturer PhD. Faculty of Financial-Accounting andManagement Bucharest Spiru Haret University.

Pascu, Ana-Maria, 2011 “International Financial Reporting StandardFor Small And Medium-Sized Entities- A New Challenge For TheEuropean Union” Alexandru Ioan Cuza University of Iaşi CES WorkingPapers, III, (1).

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, Danie and Buys, Pieter, 2011, “A Critical Analysis Of TheContents Of The IFRs For SMEs -A South African Perspective” Schoolof Accounting Sciences, North-West University Accepted October2010. South African Journal Economic and Management Sciences, Vol14, No. 2.

The Institute of Chartered Accountants of Pakistan, July 2006,Accounting and Financial Reporting Standards for Medium - SizedEntities (MSEs) and Small - Sized Entities (SSEs).

The Institute of Chartered Accountants of Pakistan, 2009, FinancialStatements Disclosure Check List for Medium – Sized Entities.

Zindagi Trust – Annual Report for 2008-09, including FinancialStatements prepared in accordance with AFRS for MSEs, and auditedby A.F. Ferguson & Co.

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ANNEXURE I

CONTENTSAccounting and Financial Reporting Standard for Medium-Sized

Entities (MSEs)

Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... . . . . 1Qualifying Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..7Sections1. Presentation of Financial Statements . . . . . . . . . . . . . ... ….. . . . . . 92. Cash Flow Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . …... . . . . 193. Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . ……. . . . .214. Leases . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . ….. . . . . 295. Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ….. . . . .336. Inventories . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . …... . . . . 417. Accounting for Government Grants and Disclosure ofGovernment Assistance . . . . . . . . . . . . . . . .. . . . . . . . ……. . . . . . . . . 438. Provisions, Contingent Liabilities and Contingent Assets . . . . . 459. Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... ... . . . . . 5110. Borrowing Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...... . . . . 5511. Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. … . . . . . .5712. Accounting Policies, Changes in Accounting Estimatesand Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6113. The Effects of Changes in Foreign Exchange Rates . . . . . .. . . . 6514. Events after the Balance Sheet Date . . . . . . . . . . . . . . . . . . .. . . . 6715. Related Party Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7116. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ….. . . . . 7517. Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ….. . . . . 81Annexures1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ……. . . . . .852 . Examples . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . …... . . .... . . . .97

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ANNEXURE IIIFRS FOR SMES – JULY 2009

CONTENTSINTRODUCTION

INTERNATIONAL FINANCIAL REPORTING STANDARDFOR SMALL AND MEDIUM-SIZED ENTITIES (IFRS for SMEs)

PREFACE ………………………………………………………………..6Sections1 Small And Medium-Sized Entities …………………………………102 Concepts And Pervasive Principles …………………………...…..123 Financial Statement Presentation …………………………………..224 Statement Of Financial Position ……………………………………275 Statement Of Comprehensive Income And Income Statement ....316 Statement Of Changes In Equity And Statement Of IncomeAnd Retained Earnings ………………………………………………347 Statement Of Cash Flows …………………………………………..368 Notes To The Financial Statements ……………………………….419 Consolidated And Separate Financial Statements ……………….4310 Accounting Policies, Estimates And Errors ……………………..4911 Basic Financial Instruments ……………………………………….5412 Other Financial Instruments Issues ………………………………6913 Inventories ……………………………………………………….....7614 Investments InAssociates………………………………………………........................8115 Investments In Joint Ventures ………………………………....8516 Investment Property …………………………………………….....8917 Property, Plant And Equipment …………………………………...9218 Intangible Assets Other Than Goodwill …………………………9819 Business Combinations And Goodwill …………………………10420 Leases ……………………………………………………....……. 11021 Provisions And Contingencies ………………………………118

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Research Pay Satisfaction And Organizational CommitmentResearch

PAY SATISFACTION ANDORGANIZATIONAL

COMMITMENT IN UNIVERSITYFACULTY

Nadia Ayub (Dept of Psychology), Shagufta Rafif (Dept of Management),Institute of Business Management, (IoBM), Karachi Pakistan

Shahid IqbalDept of Psychology, Federal Urdu University

Karachi, Pakistan

Abstract

This study highlights the role of pay satisfaction andorganizational commitment in faculty of different private businessuniversities located in Karachi, Pakistan. Based on previous literature,it was assumed that pay satisfaction will predict organizationalcommitment. A survey of 80 faculty members (47 males and 33 females)of different private business universities was conducted. To assesspay satisfaction, Pay Satisfaction Questionnaire (PSQ; Heneman, &Schwab, 1985) was used. The Organizational CommitmentQuestionnaire (OCQ; Mowday, Steers, & Porter, 1979) was employedto assess organizational commitment. Linear regression analysissuggests that pay satisfaction influences organizational commitmentamong business university faculty.

Keywords: Pay satisfaction, Organizational Commitment, PrivateSector UniversityJEL Classification: Z000

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Pay Satisfaction And Organizational Commitment Research

Introduction

Private sector universities are facing challenges in retainingthe faculty and research findings also highlighted this view. Sumita(2004) emphasizes that to maintain workforce has remained a problemfor the human resource management specialists. According to Lavy(2007), Variety exists in terms of working conditions, pay packages,recognition, fringe benefits, and incentives. The influence of thesevariables on organizational commitment is significant to investigatein educational organizations, particularly universities which areresponsible for educating the intellect of the countries. Faculty is anessential part in educational structure which holds a variety ofresponsibilities. In particular, performance of universities is based ontheir teachers and their level of commitment. This commitment can beinfluenced by different variables and pay satisfaction is one of theimperative variables. Therefore, understanding the relationship amongfaculty pay satisfaction and commitment require more considerationin higher education institutions. This research was an attempt toexplore the role of pay satisfaction on organizational commitmentamong private business universities faculty of Karachi.

Pay or salary is a periodic reimbursement from an employerto its employees, which is clearly stated in workers agreement. Pay isbelieved to be single most imperative organizational compensations(Heneman & Judge, 2000). It is evaluated with portion of pay, whereevery work, time of job or other piece of work is compensated on aperiodic basis. Pay is conceivably prominent element to the majorityof individuals as it proposes them a corresponding level of purchasingpower. Wage, salary or pay is considered a significant reward tomotivate the workers and their behavior towards the goals of employer(Oshagbemi, 2000). Pay dissatisfaction can lead to job dissatisfaction,turnover, less interest in their work, more absenteeism, decreasedmotivation and low commitment level with organization. It is alsoextensively studied that pay satisfaction positively influences overall

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Research Pay Satisfaction And Organizational Commitment

organizational contentment, motivation and performance which leadsto less absenteeism and turnover behaviors of employee (Judge,Cable, & Higgins, 2000).

In modern times, it is growing and in development processfor private and public organizations to apply further innovative andenthusiastic course of actions of pay incentive. In Pakistan, publicsector university faculties have been paid on a grade based scales ortenure track system. Whereas, private sector university faculties havebeen paid on some predetermined standards set by the institutesindependently. Performance based salary also increases paysatisfaction. According to Clark and Oswald (2002), the receiving ofperformance-based rewards include pay increases, bonuses,absolutely affected pay-system responses. So, they recommendedthat founding a pay-for-performance salary scheme may be the mostactive way to encourage pay satisfaction.

Organizational commitment has emerged as a promising areaof research within the study of industrial/organizational psychologyin recent time (Adebayo, 2006; Meyer & Allen, 1997; Morrow, 1993).It is an employee’s level of identification and involvement in theorganization (Mullins, 1999). A three dimensional construct ofcommitment was proposed by Meyer & Allen (1991) which wascomprised of normative commitment, affective commitment, andcontinuance commitment. In affective commitment, workers work withgreat dedication on voluntary basis. Meyer & Allen (1997) suggestthat employees with high affective commitment have the high emotionalattachment, involvement and identification with the organization, andtherefore are not likely to leave. Continuance commitment makes surethat workers maintain their organizational association; nevertheless,those who are normally committed generally experience commitmenton their part to remain in the organization. Each of these threecommitments are independent types of commitment experienced atdifferent levels by all individuals of an organization.

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Teaching is the vocation that is shaping learning and molding thetalents of the potential workers and place for the groundwork for high-quality. Teaching is a profession which requires determination anddedication. In this framework, university teacher organizationalcommitment can be analyzed as: (1) His or her firm confidence in andapproval of the university values and goals; (2) Readiness to applydedicated efforts for the university; and (3) Strong aspiration to sustainhis or her university membership.

Teaching requires a great deal of commitment and carefulness,thus in teaching it is more important to have loyalty and mentalcommitment than physical appearance. Teacher commitment has beenacknowledged as one of the most significant features for the futureaccomplishment of learning. It emerges that a professional requirementfor teachers to be emotionally committed to their work, becausewithout this emotional relation, teachers will experience the constantrisk of burnout in an increasingly intensified works condition. Inacademics, high levels of dissatisfaction exist due to compensationrelated factors of the job (for example, pay, fringe benefits, andperformance standard). Moreover, the pay level of public and privatesector employees in Pakistan is one of the sources of less commitmentwith their jobs. Previous literature also suggests positive associationbetween pay satisfaction, commitment, motivation and performance.Employees who get performance based salaries experience morecommitment, satisfaction in their work, esteem, and feeling ofbelongingness.

High level of commitment will consequently lead to lowerabsenteeism, less intention to leave the workplace. In turn, theemployees will be able to make more positive contributions towardsorganizational effectiveness (Chen & Chen, 2008; Liu, Fellows, & Chiu,2006). It is considered that faculties who are committed are those whodedicate themselves completely to the teaching profession and to theeducational organization. They exert effort to the optimum level.Organizationally-committed teachers are satisfied teachers who display

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regularity and truthfulness. They have a good record of attendanceand are willing to adhere to university policies.

On the basis of some related literature review followinghypothesis was formulated that pay satisfaction will predictorganizational commitment among faculty in private sector businessuniversities.

Methods

SampleThis study took a sample of 80 faculty members (47 males &

33 females) of different private business universities of Karachi,Pakistan. Fifty seven percent of the participants were married, 34.4%were single, and 8% were divorced. They were from 22 to 77 years old,with an average age of 39 years. The participants were divided intofollowing academic positions: lecturers (35.75%), senior lecturers(19.4%), assistant professors (8.75%), associate professors (13.2%),professors (8.8%), and senior fellows (15%). Academic qualificationsof the participants were as follows: Masters (70.4%), MS/M.Phil(21.6%), and PhD (8%). The average income of the faculty memberswas more than Rs 60,000, within a range from Rs 20,000 to 60,000.Thelength of service ranged from less than one year to more than fiveyears, with an average of more than five years of service

MeasureA demographic form was developed that includes information

about age, gender, income level, length of service, and marital status.Pay Satisfaction Questionnaire (PSQ; Heneman & Schwab, 1985)consists of 18 items relating to the compensation was used to assespay satisfaction faculty. Participant rated their responses on a 5-point rating scale (very dissatisfied=1, to very satisfied=5). Overall,coefficient alpha reliability was 0.89.

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Organizational Commitment was assessed by using, “TheOrganizational Commitment Questionnaire (OCQ; Mowday, Steers,& Porter, 1979)”. It is a 7-point Likert scale ranging from stronglydisagree (1) to strongly agree (7). The OCQ measures individuals feelingabout their organization. In this sample the reliability coefficient was0.77.

Procedure

All participants were given a brief introduction about thestudy and a written consent was taken. Then questionnaires weredistributed to faculty members from various reputed private businessuniversities of Karachi who completed them manually. The data wascollected individually. Participation was voluntary and the responseswere anonymous. All study participants were informed that theirinformation would be kept confidential. All respondents were requiredto fill in a demographic form which includes information on age, gender,income level, length of service, and marital status. The researchergave guidelines for the Pay Satisfaction Scale (PSQ; Heneman &Schwab, 1985) and Organizational Commitment Questionnaire (OCQ;Mowday, Steers, & Porter, 1979).

Statistical Analysis

Descriptive statistics was applied for all demographicinformation. Linear Regression Analysis was employed to testhypothesis that “Pay satisfaction will predict organizationalcommitment among faculty in private sector business universities”.The finding indicate pay satisfaction as a statistically significantpredictor of organizational commitment [(R² =.103, F (1, 78) = 8.930, p<.05)] in faculty of private sector business universities. In addition,linear regression analysis was also applied on three elements oforganizational commitment (i.e., affective, continuance, normative).Among three elements of organizational commitment, the statisticalanalysis suggests that affective commitment significantly predicts

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pay satisfaction [(R² =.113, F (1, 78, 79) = 9.905, p <.05)], whilecontinuance commitment [(R² =.010, F (1, 78, 79) = .790, p e”.05)] andnormative commitment [(R² =.016, F (1, 78, 79) =1.261, p e”.05)] revealinsignificant prediction with pay satisfaction.

Results

Table 1 Demographic Information of respondents

Demographic Variables

Percentage %

Demographic Variables Percentage %

Qualification Masters

MS/M.Phil PhD

70.4% 21.6%

8%

Length of Service

Less than One year 1-2 Years 2-3 years 3-4 Years

More than 5 years

19.6% 12.8% 24.4% 16%

27.2% Gender Female

Male 58.75% 41.25%

Marital Status

Married Single

Divorced

57.6% 34.4%

8% Income Level 20,000 -30,000 Rs

31,000-40,000 Rs 41,000-50,000 Rs 51,000-60,000 Rs

61,000 Rs or above

20.6% 32% 18% 12%

17.4%

Designations Lecturer Senior Lecturer

Assistant Professor Associate Professor

Professor Senior Fellows

35.75% 19.4% 8.75% 13.2% 8.8% 15%

Note. Demographic information of participants in percentage.

Table 2 Summary of Linear Regression with Pay Satisfaction aspredictor of Organizational Commitment among private sectorbusiness universities faculties

Dependable Variable R R2 Adj R²

Organizational Commitment .321 .103 .091

df= 78

a. Predictors: (Constant), Pay Satisfaction b. Dependent Variable: organizational Commitment

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Table 3 Analysis of Variance for Linear Regression with Pay satisfactionas predictor of Organizational Commitment among private sectorbusiness universities faculties

Model SS df MS F Sig Organizational Commitment

Regression Residual

Total

588.528 5140.672 5729.200

1 78 79

588.528 65.906

8.930 .004

a. Predictors: (Constant), Pay Satisfaction b. Dependent Variable: organizational Commitment

Table 4 Coefficients for Linear Regression with Pay Satisfaction aspredictor of Organizational Commitment among private sector businessuniversities faculties

Model Un-standardized Coefficient

Standardize Coefficient

t Sig

Organizational Commitment

Constant

Pay Satisfaction

B

19.166

.207

SE

3.608

.069

B

.3 21

5.3 12

2.9 88

.000

.004

a. Dependent Variable: organizational Commitment

Table 5 Summary of Linear Regression with Pay Satisfaction aspredictor of Organizational Commitment (Affective, Continuance,Normative) among private sector business universities faculties

Dependable Variable R R2 Adj R²

Affective Commitment .336 .113 .101

Continuance Commitment .100 .010 -.003

Normative Commitment .126 .016 .003

df= 78

a. Predictors: (Constant), Affective Commitment, Continuance Commitment, Normative Commitment

b. Dependent Variable: Pay Satisfaction

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Table 6 Analysis of Variance for Linear Regression with Paysatisfaction as predictor of Organizational Commitment (Affective,Continuance, Normative) among private sector business universitiesfaculties

Model SS df MS F Sig Affective

Commitment Regression

Residual Total

1538.188 12112.800 13650.988

1 78 79

1538.188 155.2992

9.905 .002

Continuance Commitment

Regression Residual

Total

136.810 13514.177

13650.0988

1 78 79

136.810 173.259

.790 .377

Normative Commitment

Regression Residual

Total

217.113 13433.874 13650.988

1 78 79

217.113 172.229

1.261 .265

a. Predictors: (Constant), Affective Commitment, Continuance Commitment, Normative Commitment

b. Dependent Variable: Pay Satisfaction

Table 7 Coefficients for Linear Regression with Pay Satisfaction aspredictor of Organizational Commitment (Affective, Continuance,Normative) among private sector business universities faculties

Model Un-standardized Coefficient

Standardize Coefficient

t Sig

Pay Satisfact ion

Constant

Affective

B

35.275

.518

SE

5.069

.165

B

.336

6.960

3.147

.000

.002

Pay Satisfact ion

Constant

Continuance

45.991

.154

5.405

.173

.100

8.509

.889

.000

.377

Pay Satisfact ion

Constant

Normative

43.015

.224

6.924

.200

.126

6.213

1.123

.000

.265 a. Dependent Variable: Pay Satisfaction

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Discussion

The main hypothesis of this study was to explore that whetherpay satisfaction would predict organizational commitment amongfaculty in private sector business universities of Karachi. The statisticalanalysis [(R² =.103, F (1, 78) = 8.930, p <.05)] of current study revealedthat pay satisfaction emerges as one of the significant variables whichappreciably contribute in organizational commitment of facultymembers. The result are in line with numerous preceding findingswhich suggest that pay satisfaction has a positive influence onorganizational commitment (Heneman & Judge, 2000; Lee & Martin,1996; Shapiro & Wahba, 1978). Furthermore, this contention has beensupported in a meta-analysis (Mathieu & Zajac, 1990) and variousempirical studies (Huber, Seybolt, & Veneman, 1992). In other words,people with a high level of pay satisfaction are highly committed tothe organization, (Cohen-Charash & Spector, 2001; Hom & Griffeth,1995).

The rationale of the current finding is that the mean age ofthe sample group (i.e. 39 years) highlights that young university facultyhas a higher organizational commitment when pay satisfaction is alsohigh. This postulates that the young faculty does not regard teachingas a rewarding profession in terms of salary and remuneration. Therecent rise in pay scale of university faculty in Pakistan has given aboost to faculty’s higher satisfaction with remuneration. This higherlevel of monetary satisfaction with the job resulted in higherorganizational commitment. Academically inclined, the young facultyrelates prestige, monetary rewards and prospects of professionalgrowth to university teaching. They feel that they are well-placed insociety as teachers of universities. Moreover, once committed touniversity teaching, they show commitment to their chosen university.

Additionally, regression analysis was performed to explorewhich of the three dimensions of organizational commitment (affective,continuance, normative) signified pay satisfaction. Results suggestthat only affective commitment is a proven statistically significantpredictor of pay satisfaction. The possible reasons of this findings isthat affective commitment will be associated to the affective part ofpay satisfaction because affective commitment assesses an employee’sattachment to the organization apart from its instrumental or economic

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worth (Buchanan, 1974). An individual is not attached to theorganization due to what the organization gives the employee inexchange for work, but because of their identification and involvementin the organization (Porter, Steers, Mowday, & Boulian, 1974). Thisinvolvement and identification in the organization may be related toemployee satisfaction with the methods used to determine pay. Incontrast, continuance commitment is based on an individual’sperception that he or she has “sunk costs” in the organization thatcannot be recovered if he or she leaves the organization (Allen &Meyer, 1990). Similarly to turnover intentions, an employee willevaluate his / her present condition in the organization. If thisestimation proposes that the existing state is the greatest, an employeeexperiences superior intensity of continuance commitment. If otheralternatives are more attractive, continuance commitment will drop.Part of this purpose will relate to satisfaction with procedures used todetermine pay in the organization.

There are some limitations like other researches. The datawas collected only from private sector business universities facultiesof Karachi. Although these private sector business universities werediverse with respect to demographic information, qualifications, payscale, designation, age, and length of service, it is still one sector.Therefore, the findings cannot be generalizable to public sectoruniversity faculties. Future studies should investigate the paysatisfaction and organizational commitment of public sector universityfaculties. Since self-report questionnaires were used in the studythere was a possibility of business in them. For future research otherscientific method may be used to reduce risk of business.

The implications of the finding suggest that if universitymanagement is concerned in retaining faculty members, it is importantto focus on increasing pay satisfaction. In today’s highly competitiveenvironment, performance based pay is very important in enhancingfaculty’s job commitment level. Gerhart & Milkovich (1992) suggestthat satisfaction with pay has significant effect on group andorganizational outcomes and individual. The management shoulddesign training programmes for young faculty in which experiencedfaculty should mentor them to increase organizational commitment.In particular, university management should provide essential facilitiesand encouraging work environment. They should take actions for thewell-being of the faculties and organizational commitment. In addition,

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the results can be used in designing polices for improvingorganizational commitment.

Conclusion

In summary, the aim of the research was to analyze the role ofpay satisfaction on organizational commitment. The findings of thestudy support this view that the pay satisfaction predictsorganizational commitment. The results further support that affectivecommitment is significantly associated with organizational commitment.Thus, the effort into the development of pay satisfaction consequencesamong university faculty will encourage other investigators toconstruct on its groundwork sequentially to expand a better perceptiveof pay satisfaction on organizational commitment.

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Allen, N. J., & Meyer, J. P. (1990). The measurement and antecedentsof affective, continuance, and normative commitment to theorganization. Journal of Occupational Psychology, 63, 1–18.

Buchanan, B. (1974). Building organizational commitment: Thesocialization of managers in work organizations. AdministrativeScience Quarterly, 19: 533-546.

Chen, H., & Chen, Y. (2008). The impact of work redesign andpsychological empowerment on organizational commitment in achanging environment: An example from Taiwan’s state-ownedenterprises. Public Personnel Management, 37(3), 279-302.

Clark, A., & Oswald, A. (2002). A simple statistical method formeasuring how life events affect happiness. International Journalof Epidemiology, 31(6), 1139-1148.

Cohen-Charash, Y. & Spector, P. (2001). The Role of Justice inOrganizations: A Meta-Analysis. Organizational Behavior andHuman Decision Processes, 86(2), 278–321.

Gerhart, B., & Milkovich, G. T. (1990). Organizational differences inmanagerial compensation and financial performance. Academy ofManagement Journal, 8, 663-691.

Heneman, H. G. III, & Judge, T. A. (2000). Compensation attitudes. InS. L. Rynes & B. Gerhart (Eds.) Compensation in Organizations:Current Research and Practice, 61-103. San Francisco, CA: Jossey-Bass.Heneman, H. G., III, & Schwab, D. P. (1985). Pay satisfaction: Itsmultidimensional nature and measurement. International Journal ofPsychology, 20, 129-142.

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Hom, P., & Griffeth, R. (1995). Employee Turnover, South-WesternCollege Publishing, Cincinnati, OH

Huber, V., Seybolt, P., & Veneman, K. (1992). The relationship betweenindividual inputs, perceptions, and multidimensional pay satisfaction.Journal of Applied Social Psychology, 22, 1356-1373.

Judge, T., Cable, D., & Higgins, C. (2000). The employment interview:A review of recent research and recommendations for future research.Human Resource Management Review, 10(4), 383-406.

Lavy, V. (2007). Using performance based pay to improve the qualityof teachers, The Future of Children, 17(1), 87-109.

Lee, R. T., & Martin, J. E. (1996). When a gain comes at a price: Payattitudes after changing tier status. Industrial Relations, 35, 218-226.

Liu, A., Fellows, R., & Chiu, W. (2006). Work empowerment as anantecedent to organizational commitment in the Hong Kong quantitysurveying profession. Surveying and Built Environment. 17(2), 63-72.

Mathieu, J. E., & Zajac, D. M. (1990). A review and meta-analysis ofthe antecedents, correlates, and consequences of organizationalcommitment. Psychological Bulletin, 108, 171- 194.

Meyer, J., & Allen, N. (1997). Commitment in the Workplace – Theory,Research and Application, Sage Publications, Thousand Oaks, CA.

Meyer, J., & Allen, N. (1991). A three-component conceptualization oforganizational commitment. Human Resource Management Review,1, 61-89.

Morrow, P. (1993). The Theory and Measurement of Work Commitment.CT: JAL, Greenwich.

Mowday, R., Steers, R. & Porter, L. (1982). Employee-OrganizationalLinkages: The Psychology of Commitment, Turnover, andAbsenteeism, New York: Academic Press.

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Mowday, R., Steers, R. & Porter, L, (1979). The measurement oforganizational commitment, Journal of Vocational Behavior, 14, 224-247

Mullins, L. (1999). Management and Organizational Behavior, 5th

edition, Financial Times Management, London

Oshagbemi, T. (2000). Correlates of pay satisfaction in highereducation. International Journal of Educational Management, 14(1),31-39.

Porter, L. W., Steers, R. M., Mowday, R. T., & Boulian, P. V. (1974).Organizational commitment, job satisfaction, and turnover amongpsychiatric technicians. Journal of Applied Psychology, 59, 603-609.

Rai, S. (2004). Motivational Theories and Incentives Approaches.Indian Institute of Management Bangalore Management Review, 16(4)

Shapiro, H. J., & Wahba, M. A. (1978). Pay satisfaction: An empiricaltest of a discrepancy model. Management Science, 24, 612-622.

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Research Feasibility Of Application of IFRS On CompaniesResearch

FEASIBILITY OF APPLICATIONOF IFRS ON COMPANIES

OPERATING IN DEVELOPINGCOUNTRIES WITH FOCUS ON

PAKISTANMehboob Moosa

Department of Accounting & FinanceInstitute of Business Management, (IoBM), Karachi

AbstractThis study examines the feasibility of application of

International Financial Reporting Standards (IFRS) on companiesoperating in developing countries with focus on Pakistan. It hasbeen a challenge to present financial information in a mannerunderstandable globally to the users of financial statements. In thisrespect, IFRS has become the only globally accepted source of uniformunderstanding to follow in the presentation of financial information.This study strongly recommends application of IFRS which is noteasy for a swift process because of the current non-availability ofhuman capital trained to apply IFRS in required volume. ImplementingIFRS will need revision in presentation of accounts, revision indifferent accounting policies and disclosure requirements. A verycrucial aspect of the application of IFRS is that it brings moretransparency to the presentation of financial information whichnecessitates greater measure of integrity of the accountants andauditors.

Keywords: IFRS, IAS, IASC, IASB, ICAP, ICMAP.JEL Classification: G000

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Feasibility Of Application of IFRS On Companies Research

Introduction

The present study examines the feasibility of application ofInternational Financial Reporting Standards (IFRS) with the objectiveof studying the challenges and risks specific to companies operatingin developing countries with focus on Pakistan in implementing IFRS.

IFRS is considered a “principles based” set of standards inthat it establishes broad rules and specific treatments for differentissues in accounting.

International Financial Reporting Standards comprise:

International Accounting Standards (IAS) issued before theyear 2001

International Financial Reporting Standards (IFRS) issuedafter the year 2001

Interpretations given on different issues by StandingInterpretations Committee (SIC) issued before 2001

Interpretations originated from the International FinancialReporting Interpretations Committee (IFRIC) issued after theyear 2001

Framework for the Preparation and Presentation of FinancialStatements

II Literature review

In this part of the paper, we shall study the results ofapplication of IFRS in developing countries. Nobes (1998) identifiedvarious points about the appropriateness of IFRS for developingcountries. He was of the opinion that implementing IFRS in developingcountries may not be appropriate, specially IASs 22 to 38 may beirrelevant, as far as presenting the financial information for taxation

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Research Feasibility Of Application of IFRS On Companies

purposes is concerned. He stated that due to under-developedaccounting profession in developing countries, the judgmental andinterpretation aspects of IFRS may not be appropriately dealt with.

In their study of 1996, Garrod and McLeay explained howthe states have implemented the accounting systems to meet thedemands of corporate sector as well as governments’ demands for taxcollection. They also explained the way governments have obtainedthe objectives of financial reporting which are not in conformity withthe presentation requirement of IFRS. They explained the problemsof maintaining the appropriate balance between state and professionin the regulation of accounting systems and policies and the reportingformats required by IFRS.

In 1997 in Kenya, the Council of the Institute of CertifiedPublic Accountants decided to implement IASs (now IFRSs) for allthe accounting periods commencing on or after 1st January’1999 butpotential problem arose due to lack of developed accountingprofession to interpret and apply the more judgmental aspects ofIFRS. When an entity has to prepare its financial statements inaccordance with IFRS, it must ensure that the financial statements arein accordance with all the applicable IFRSs.

Many developments have been made in Kyrgyzstanpertaining to its statutory framework for reporting financial informationto the users of financial statements. They made changes in the Lawsof Accounting (2002) which required the companies to prepare theirfinancial statements on the basis of IFRS. The also issued the decreeof Government on IFRS which required the companies to implementthe IFRS gradually in preparing the fianancial statements, but theylack in adopting the IFRS when the IFRS as and when they arerevised.

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In this study in 2009, Mustafayev stated that due to lack ofdesired level of development of accounting profession in developingcountries, the problem of implementing IFRs will continue in future.He suggested that those interested in implementing the IFRS inreporting format of financial information must bring in the solutionacceptable to the users of financial statements. He suggested thatthose interested in implementing IFRS must get an inside access tothe standard-setting process to achieve this aim, because there arepossible advantages of adopting IFRS from the perspectives ofinvestors and adopters. These advantages have been summarized inan attached Annexure ‘A’.

Research Limitations – The above literature review limitsthe research on implementation of IFRS on companies operating indeveloping countries to the documentary analysis and therefore issubject to the known limitations of published project documentationin accounting standard-setting.

In this part of the literature review, we shall study the effectsof introducing IFRS on different areas of financial statements.

In a study by Cifuentes in 2006, he showed that about 70%companies who have adopted IFRS for implementation usually buyback their preference shares or change the category of preferenceshares in such a way that the classification of preference shares asequity is maintained. He concludes that IFRS did not only lead to adecrease in the use of financial instruments that otherwise wouldhave added to the capital structure diversity but also changes firm’sreal capital structure.

In their study in 2008, Daske and Hail argued that the reportingrequirement of IFRS with reference to capital structure will change thecurrent format of reporting thereby resulting in the increase of marketliquidity of a company. A company’s decrease in cost of capital and

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increase in the valuation of equity based capital structure will beseen on implementation of IFRS based reporting of financialinformation.

In 2008, Carmona and Trombetta after studying andassessing the application of IFRS on the principles based system andsuggested that a principles bases approach to the IFRS and its innerflexibility would enable the application of IFRS in developing countrieswith different accounting assumptions and varied conditions of thecompanies applying IFRS for their corporate reporting. They alsoargued that the above mentioned approach changes the exposure ofprofessional accountants and their academic education and extendedtraining in the professional audit companies.

In 2009, Ramanna and Sletten studied over hundred countriesin order to verify whether they are IFRS compliant or not and foundthat the developed countries are less willing to adopt IFRS becausein this case they have to surrender their own standard settingauthority to an international standard setting body i.e. InternationalAccounting Standard Board (IASB). Moreover, they found that thecompanies of a country, which is located in a geographical regionwhere other countries are IFRS compliant, are more willing to implementIFRS requirements in their corporate reporting.

In 2009, Lantto and Sahlstrom studied that which accountingratios are affected if the financial statements are presented with thereporting requirements of IFRS. They found that application of IFRSis corporate reporting that increases the operating ratios and decreasesthe turnover ratios. They concluded that the implementation of IFRSchanges the key accounting ratios of the companies.

III Challenges faced by Pakistan in the application of IFRS

Pakistan has the same challenges to face as are faced by otherdeveloping countries in the implementation of IFRS. All the

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companies that are required to implement IFRS in their financialreporting do not have the professionally qualified people who mayappropriately comprehend and interpret the true requirement of theIFRS due to lack of desired level of judgmental aspects needed toapply IFRS.

Even after the introduction of IFRS, the accountants andauditors will continue to face the challenges in the application of IFRS.As a result of this application, the users will need to understand thefar wider financial reporting issues and it will extend to varioussignificant business and regulatory matters like training of employees,tax planning, and modification of IT system and so on.

In Pakistan, the local laws are inspired by IFRS, therefore only fewdifferences exist between Pakistan’s local laws and the requirementsof IFRS for financial reporting. However, the serious efforts are neededto bring the local laws in line with the requirements of IFRS. AttachedAnnexure ‘B’ details the differences between the requirements of locallaws and IFRS along with the comments of ICAP on this. (PakistanAccountant: July-Sept’2009)

The accounting professionals feel that the biggest risk in convergingPakistan’s local laws with the IFRS is the underestimation by theaccountants of the complexities involved in the application of IFRS.Although implementation of IFRS by companies operating in Pakistanwill create some teething problems, for example, the introduction ofconcepts such as present value and fair value. There will be differencesin the interpretation of IFRS with reference to the measurement andrecognition of certain financial statement items. Moreover, theadjustments that are made through court schemes are not recognizedby the IFRS, therefore these adjustments would be required to bemade through income statements. The reporting requirements of IFRSalso differ in treating the premium expense paid on redeeming thedebentures, discount expense and underwriting commission expensepaid on issuing the debentures.

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The application of IFRS will also change the definition andconcept of equity which will result in treating the interest received onhybrid capital as dividend. Therefore, it will be challenging for thecompanies intending to implement IFRS in their corporate reportingto keep the proper pace with the application of IFRS.

VI. Successful implementation

In order to bring harmony in accounting policies anddisclosure requirements in line with the global standards, thecompanies operating in Pakistan must implement the IFRS. They mustrealize that Pakistan is a part of global economy and it has witnesseda good growth with the globalization and this growth has helped thecompanies operating in Pakistan to raise funds from internationalcapital market. Therefore, the accounting professionals emphasizeon facing the challenges that may be faced by the Pakistani companiesin applying IFRS for their financial reporting.

The government should also play a vital role in getting thecompanies operating in Pakistan implement the IFRS by explainingthe effects of IFRS compliant financial reporting on direct and indirecttaxes. It must provide appropriate guidance to companies from the taxperspective.

The accountancy professional institutions like ICAP andICMAP must make special efforts to train and upgrade their membersto be able to appropriately apply IFRS in their companies financialreporting. ICAP has taken initiative in this regard by giving awards tocompanies converging into IFRS compliant reporting of their financialstatements. The list of companies awarded by ICAP for their bestcredit rating has been attached as Annexure ‘C’.

Successful implementation of IFRS would require companiesto fully use IFRS as their basis of daily primary financial reporting as

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well as for performance tracking in the form of budgets, forecast andmanagement accounts. IFRS requires industry specialization. But dueto lack of industry specific guidance in IFRS and general reliance onPakistan’s local laws, there are no industry specific themes in IFRS.Implementation in other countries has not revealed any visible patternin industry wise adoption of these standards. There is need to improveupon the disclosures which may help to view financial statements notonly from compliance perspective but also as a way of communicatingand explaining performance.

At a later stage, it should be made compulsory for the companiesto prepare IFRS compliant statements along with Pakistan’s local lawscompliant statements so that the likely problems can be traced inadvance and corrected as far as possible. In this connection, reviewof differences made by ICAP between Pakistan’s local laws and IFRSis vital. (Refer Annexure ‘C’) (Pakistan Accountant:July-Sept’2009)

V Suggestions

In order to bring the harmonization in the financial reporting by allthe companies operating in Pakistan, the accounting professionalshave given certain suggestions as follows:

1. International Accounting Standards Board (IASB)responsible for the finalization and issuance of IFRS mustnot accept the political pressures by different interest groupslike private sector and government agencies.

2. IASB should arrange to publicize the accounting standardsdeveloped and should get the support from the accountingprofessionals, member countries of IFAC and corporatemanagement all over the globe.

3. IASB must encourage the application of IFRS to the memberbodies of IFAC and convince them to formulate andreformulate their local laws in line with the requirements ofIFRS for uniform financial reporting globally.

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4. The local regulatory authority should also be empowered toissue timely directives for making changes in the reportingformats of financial statements in order to comply with theamendments made in IFRS by IASB

5. The stock exchanges should be given authority to checkthe application of IFRS by the companies in reporting theirfinancial information and take appropriate actions againstcompanies who do not comply with the directives issued bythe regulatory authority.

6. The concerned regulatory authorities of the developingcountries should make the application of IFRS mandatoryfor reporting financial information to the users of financialstatements.

Conclusion

In the light of global development of accounting profession,it is strongly recommended that not only Pakistan but the entiredeveloping countries must implement the requirements of IFRS forfinancial reporting. Although this implementation will not be a swiftand painless process, it will bring in conformity with the globalstandards of reportig financial information to the users of financialstatements. For example, application of IFRS will require change inaccounting formats, change in different accounting policies as wellas change in disclosure requirement. Therefore, those responsiblefor financial reporting - e.g. directors of companies, Securities andExchange Commission of Pakistan, members, specially practicingmembers of ICAP and ICMAP must contribute towards globalharmonization of financial reporting and convergence of local lawswith IFRS. They must also ensure that the subsequent amendmentsin IFRS are also incorporated in the application of IFRS for financialreporting of future periods.

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Callao, S., Jarne, J., & Lainez, J., (2007). ‘Adoption of IFRS in Spain:

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Daske, H., Gebhardt, G., (2006). ‘International Financial Reporting

Standards and experts’ perceptions of disclosure quality’, Abacus,

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Daske, H., Hail, L., Leuz, C., & Verdi, R., (2008). ‘Mandatory IFRS

reporting around the world: early evidence on the economic

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1085-1142.

Giner, B., Rees, W., (2005). ‘Introduction to special section on IFRS

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Goodwin, J., Ahmed, K., (2006). ‘The impact of international financial

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Journal, Vol. 21 No. 5, pp. 460-475.http://www.icap.org.pk – BCR awards 2010Pakistan Accountant: July-Sept’2009Lopes, P.T., Viana, R.C., (2008). ‘The transition to IFRS: disclosuresby Portuguese listed companies’, Working Paper no 285,University of Porto, (Previous version presented at the EuropeanAccounting Association’s conference,Lisbon, Portugal, May 2007:1-21.)

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Spathis, C., Georgakopoulou, E., (2007). ‘The adoption of IFRS in South

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Tricks, H.; ‘Impact on sectors shows plenty of differences’, FinancialTimes, Jan 04, 2005.

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ANNEXURE ‘A’ Advantages of IFRS adoption relating to the investors and adopters respectively.

Investor Perspective Adopter Perspective Financial statements prepared based on IFRS promise more accurate, comprehensive and timely financial information. Financial statements p repared based on IFRS reduce international differences in accounting standards and increases the comparability of financial statements. Financial statements prepared based on IFRS reduces the work of an investor. An investor willing to invest in the entity has to evaluate an entity for decision making purposes. Thus he has to understand the accounting policies and procedures that are used in the preparation of financial statements. This procedure increases costs for the investor. On the other hand, preparation of financial statements based on IFRS eliminates extra effort and costs associated with the decision making process. Financial statements p repared based on IFRS reduce investor risks, and information risks.

Increase in transparency. The application of IFRS/IAS promotes transparency in financial reporting. Accounting policies applied, and financial statements prepared and presented according to IFRS/IAS is advantageous over accounting policies applied, and financial statements prepared and presented according to national accounting regulation and practices. Increase in quality of financial reports. Application of IFRS/IAS provides decision makers with more qualitative financial information. Since IFRS/IAS has been engineered for the needs of an entity operating in the market economy, the adoption of these standards is mandatory in order to achieve a high quality financial reporting. Facilitates the quotation of entity shares on foreign stock exchanges. Introduction of fair and relevant financial statements. Entity which prepares its financial statements based on IFRS presents more fair and relevant financial information. One of the characteristics of a relevant financial statement is the consideration of present economic environment in the financial information. IFRS achieves this through the application of fair value accounting. Benchmark with international competitors. Availability of internal comparison. In addition to the benefits of international comparison, an entity operating in different countries (owning subsidiaries, joint-ventures) might use IFRS/IAS for internal comparison.

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ANNEXURE ‘B’LIST OF BCR 2010 WINNERS RANK SECTOR / COMPANY Overall 1st Position Fauji Fertilizer Company Limited Chemical and Fertilizer 1 Fauji Fertilizer Company Limited 2 Engro Polymer & Chemicals Limited 3 Sanofi-aventis Pakistan Limited 4 Abbot Laboratories (Pakistan) Limited 5 ICI Pakistan Limited Fuel and Energy 1 Pakistan Petroleum Limited 2 Pakistan State Oil Company Limited 3 Oil & Gas Development Company Limited 4 Sui Northern Gas Pipelines Limited 5 Pakistan Oilfields Limited Miscellaneous 1 Security Papers Limited 2 Rafhan Maize Products Limited 3 Packages Limited 4 Pakistan Tobacco Company Limited 5 Century Paper & Board Mills Limited Textile 1 Gul Ahmed Textile Mills Limited 2 Kohinoor Textile Mills Limited Bank 1 MCB Bank Limited 2 Askari Bank Limited 3 Allied Bank Limited 4 Faysal Bank Limited 5 United Bank Limited NBFIs 1 New Jubilee Insurance Company Limited 2 Arif Habib Securities Limited 3 First Habib Modaraba 4 IGI Insurance Company Limited 5 Atlas Insurance Company Limited

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COMPARISION BETWEEN 4TH SCHEDULE OF COMPANIES’ORDINANCE & IFRS/IAS

Annexure C

Fourth Schedule of Companies’ Ordina nce IFRSs/ IASs Additional Disclosures ICAP Comments

RESERVES:

(A) "revenue reserve" means reserve that is normally regarded as available for distribution through the profit and loss account, including general reserves and other specific reserves created out of profit and un-appropriated profit i.e. , credit balance of profit and loss account after appropriations for the period to the date of balance sheet;

Para 79(b) of IAS 1 is reproduced below: 'a description of the nature and purpose of each reserve within equity'. IAS 1 does not restrict the classification of the reserve into revenue and capital reserve but allow showing as many types of reserves.

Definition of 'Revenue reserve' is not given in IAS 1 but Para 65 and 66 of Framework says that reserve is a part of retained earnings: Para 65 ....... ...For example, in a corporate entity, funds contributed by shareholders, retained earnings, reserves representing appropriations of retained earnings and reserves representing capital maintenance adjustments may be shown separately. Such classifications can be relevant to the decision-making needs of the users of financial statements when they indicate legal or other restrictions on the ability of the entity to distribute or otherwise apply its equity....... ....

(i) the name of each borrower together with the amount of loans and advances, the terms of loan and advance and the particulars of collateral secur ity held, if any; and

IFRS 7.14 for Collateral is reproduced below:

An entity shall disclose: (a) the carrying amount of financial assets it has pledged as collateral for liabilities or contingent liabilities, including amounts that have been reclassified in accordance with paragraph 37(a) of IAS 39; and

(C) There shall be disclo sed separately in respect of sub-head 3(A) (i) the maximum aggregate amount of loans and advances outstanding at any time since the date of incorporation or since the date of the previous balance-sheet, whichever is later. Such maximum amounts shall be calculated by reference to month-end balance.

Refer IAS 24.17 for disclosure of the nature and amount of related party

Not required by IFRS.

It may be retained in revised Fourth Schedule or covered in the Illustrative Financial Statements

(D) Provision, if any, made for bad or doubtful loans and advances shall be shown as a deduction under each clause of sub-head 3(A).

Refer IFRS 7.20(e) for impairment loss in Financial assets: An entity shall disclose the following items of income, expense, gains or losses either in the statement of comprehensive income or in the notes: (e) the amou nt of any impairment loss for each class of financial asset.

Refer IFRS 7.37(b) for impairment in Financial assets and IAS 36.126 for Disclosure of impairment.

IFRS provides fo r a separate allowance account for this purpose but encourages to apply impairment test.

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NON CURRENT LIABILITIES

Non-current liabilities shall b e classified under appropriate sub-heads, duly itemized such as: (i) long term f inancing; (ii) debentures; (iii) liabilities against assets subject to finance lease; (iv) long term Murabaha; (v) long term deposits; and (vi) deferred liabilities.

IAS 1.54(m-p) relating to non-current liabilities is reproduced as follows: As a minimum, the statement of financial position shall include line items that present the following amounts: (m) financial liabilities (excluding amounts shown under (k) and (l);

(n) liabilities and assets for current tax, as defined in IAS 12 Income Taxes;

(o) deferred tax liabilities and deferred tax assets, as defined in IAS 12;

(p) liabilities included in disposal groups classif ied as held for sale in accordance with IFRS 5.

Refer IAS 1.55 for presentation as additional line items. Refer IFRS 7.14 for Collateral, IFRS 7.25 for Fair value and IFRS 7.31 for Nature and extent of risk arising from Financial Statement Refer IAS 17.31 for Disclosure of Finance Lease. Refer 12.81(g)(i) for Disclosure of Deferred tax liability and 19 .120-120A for Disclosure of Defined benefits plan

The terminologies of 'debenture', 'long term deposits' and 'long term Murabaha' are not covered in 1.54 but 1.55 allows to present additional line items or headings.

These terminologies may be retained in revised Fourth Schedule or covered in the Illustrative Financial Statements.

(ii) loans from related parties; and (iii) other loans.

Refer IAS 24.17(b) for disclosure of o utstanding balances with related parties

Disclosure of IAS 24 is more comprehensive than the existing 4th Schedule

Long-term deposits shall be classified according to their nature.

Refer IAS 1.54(m) for presentation of finance liabilities as above

IAS 7.24 for Disclosure and IG 31 of IFRS 7

The term 'Deposits' not specifically covered, may be included in Illustrative Financial Statements.

CURRENT LIABILITIES

Current liabilities and provisions shall, so far as they are appropriate to the company's business, be classified under the following sub-heads, namely:__

(i) Trade and other payables, which shall be classified as:

(a) creditors;

(b) Murabaha;

(c ) accrued liabilities;

(d) advance payments;

(e) payable to employee retirement benefit funds;

(f) unpaid and unclaimed dividend; and

(g) others ( to be specified, if material) ;

Refer IAS 1.60 for Current /Non-current Distinction as defined above

IAS 1.54(k-m) relating to non-current liabilities is reproduced as follows:

(k) trade and other payables;

(l) provisions; (m) financial liabilities

(excluding amounts shown under (k) and (l);

Requirement to disclose Murabaha, accrued liabilities, advance payment and unpaid dividend are not specifically co vered but Para 55 of IAS 1 allows companies to present additional line items or headings. Para 71 of IAS 1 specifies some examples of Current liabilities and it is reproduced as follows:

"Other current liabilities are not settled as part of the normal operating cycle, but are due for settlement within twelve months after the reporting period or held primarily for the purpose of trading. Examples are financial liabilities classified as held for trading in accordance with IAS 39, bank overdrafts, and the current portion of non-current financial liabilities, dividends payable, income taxes and other non-trade payables. Financial liabilities that provide financing on a long-term basis (i.e. are not part of the working capital used in the entity’s normal operating cycle) and are not due for settlement within twelve months af ter the reporting period are non-current liabilities,”.

(ii) where practicable the aggregate amount or estimated amount, if it is material, of contracts for capital expenditure, so far as not provided for or a statement that such an estimate can not

be made; and

(iii) any other commitment, if the amount is material, indicating the general nature of the commitment.

Para 86 of IAS 37 is reproduced as follows:

Unless the possibility of any outflow in settlement is remote, an entity shall disclose for each class of contingent liability at the end of the reporting period a brief description of the nature of the contingent liability and, where practicable:

Refer IAS 16.74 (c) for Disclosure of commitment for acquisition of PPE, IAS 38.122(e) for Disclosure of commitment for acquisition of intangible assets and IAS 17.35(a) for Disclosure of Operating Lease.

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Case Study Engro Foods Prized Stallion In The MakingCase Study

ENGRO FOODS PRIZEDSTALLION IN THE MAKING

Ticker: EFOODS Recommendation: BUY Price: PKR 23.22 as of 20 Dec, 2011 Price Target: PKR 30.05

Forecast Summary

2010A 2011F 2012F 2013F 2014F

Net Revenue (PKR Mn) 20,945 30,195 38,025 46,295 69,054

EBITDA (PKR Mn) 1,761 2,917 4,321 5,362 6,564

Source: Company’s Financials, IoBM EstimatesHighlights• Initiate with Buy; 29.41% upside to target price of PKR 30.05:We rate Engro Foods Ltd (EFoods) Buy and set 12-month targetprice of PKR 30.05 based on DCF (Discounted Cash Flow). EFoods isPakistan’s largest UHT player with strong growth prospect in dairyand other segments. We believe EFoods has a convincing investmentcase premised on (1) strong industry backdrop, (2) EFoods’ marketleadership position while competing with likes of Nestle and ULever,(3) impressive sales and earnings growth outlook, (4) SkilledManagement and (5) Trading on cheaper regional PEG multiples(EFoods PEG 0.26 vs. average regional PEG 0.47)

Pakistan dairy potential to propel growth: With only 7% penetrationof processed milk, world’s 3rd largest milk producer and 4th largestmilk consumer, dairy segment of Pakistan offers huge untapped growthpotential in a strong population of 180mn believed to have one of thehighest per capita milk consumption. Ambient UHT segment hasundergone 5-year CAGR of 14% with industry growth momentumlikely to continue.

Ahmed Mushtaq, Ali Raza, Roma Ramani, Sana Sheikh,Shazia Farooq

Department of Accounting and FinanceInstitute of Business Management, (IoBM), Karachi

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Engro Foods Prized Stallion In The Making Case Study

Market Profile 12M High/Low (PKR) 25.97/21.8 Avg Daily Volume (‘000) 208 Market Cap (US$ Mn) 191 Market Cap (PKR Mn) 17,129 Shares Outstanding (Mn) 748 Main Shareholders: Engro Corp 89.97% Private Placement 6.42% General Public 3.61% Free Float (Mn/%) 27/4 Exchange KSE Reuters Code EFOODS.KA Bloomberg Code EFOODS.PA Source: Bloomberg, KSE

• Market leadership position: Within 5 years of operations, EFoodshas secured a commanding position with 44% market share in theAmbient UHT segment (89% of topline). Growing trend ofurbanization, focus on hygiene and non-cyclicality of the industrybacked by company efforts for product innovation should enableEFoods to consolidate its position while expanding the industry pie.EFoods’ foray into Ice cream segment has paid huge dividend withmarket share of 23% within 3 years, only behind Unilever’s Walls.

• Impressive growth in sales and earnings growth: EFoods sits onsweet spot to leverage its future earnings following heavy investmentin marketing and supply chain. We conservatively estimate CAGR of60.39% outpacing sales CAGR of 22.8% over CY11-14. EFoods entryin Halal food market in North America, new product launch in dairy(powder, chilled dairy) and Juices remains the key upside.

• Key risks to our investment case: are (1) Differing tax treatmentfor loose and UHT milk, (2) Increase in level of competition, (3) failure

Key Financial Ratios Return on Assets (ROA) 5.48%

Return on Equity (ROE) 14.85%

12M Forward ratios:

P/E (x) 17.13

P/B (x) 2.4

PEG (x) 0.26

EV/EBITDA (x) 7.3 Source: Bloomberg, KSE

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Case Study Engro Foods Prized Stallion In The Making

EFoods vs. KSE

Source: Bloomberg, KSE

Business Description:

Engro Foods Limited (EFoods), initially founded as a wholly ownedsubsidiary of Engro Corporation in 2005, started commercial operationsin 2006. It was listed in August 2011 through an offer for sale ofshares by shareholders of Engro Corporation. The company is listedon Karachi, Lahore and Islamabad stock exchanges. It is well knownin Pakistan for its various brands including Olpers, Tarang, Omoreand Olfrute.

EFoods operates on its strengths of skilled management, strong brandequity, diversified product portfolio, state-of-art production facilities,specialized supply chain management and an international presence.It is currently the market leader in the packaged milk industry with ashare of 44%, beating giants like Nestle and Haleeb which respectivelyaccounted for 35% and 13% of the market as of November 2011.

EFoods also emerged as the 2nd biggest player in the ice cream industryin just three years of operations, with its brand Omore gaining 23%market share as of November 2011. The company posted CAGR of93% in topline revenue during CY06-10; its peer Nestle registered aCAGR of mere 24% during the same period.

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The following are the details of various business units of EFoods:

Ambient UHTThis segment is the highest contributor towards revenue with a shareof 89% in total sales for 9M2011. EFoods leads the UHT milk market inPakistan with 44% market share. The company produces a wide varietyof ambient UHT products including “Olpers” (full cream milk) theflagship brand of the company, Olwell (low fat milk), Tarang (LiquidTea creamer), “Owsum” (flavored milk) and “Dairy Omung” (the budgetmilk brand).

Powder Milk

EFoods entered in the powder segment in May 2010 and has so farcaptured 1% share of the market. Currently this segment consists ofpowder tea creamer which has only 0.5% contribution in sales.

Milk Procurement – EFoods mainly procures milk through its MilkCollection Centers (MCCs) and its own dairy farm. Currently thecompany has over 900 MCCs which it plans to increase by 200 MCCsper annum. MCCs are equipped with milk chillers, generators andinsulator tanks for safe transportation to the plant facility. Due to theparent company’s long term relationship with farmers, EFoods has acompetitive advantage in milk collection through self-reliance ratherthan dependence on external contractors.

Dairy Farm – The dairy farm was established in 2008 and it is one ofthe largest in Pakistan with imported breeds totaling 2,591 animals todate. The farm produces 20,000 liters per day (LPD) which is sold toEFoods for use in production of ambient and powder dairy products.

Going forward, the management believes that the dairy farm will be asignificant contributor in production of infant nutrition products anddairy exports.

Juices, Nectars and Value Added Still Drinks (VASD)

Efoods controls 3% of this market segment which accounts for about0.5% of sales revenue.

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Ice-creamIce-cream segment ranks second in terms of contribution towardssales, 10% in 2011. Ice cream is marketed under the brand name ‘Omore’which was launched in March 2009. The company has managed tobecome the 2nd largest player in the industry attaining market share of23% to date.

Global Business Unit (GBU)GBU was formed in 2009 in line with the company’s vision to expandinto global markets. As the first venture, ECorp acquired Al-Safa, theoldest Halal meat brand in North America, at a total cost of US$6.3million. The business is currently owned by ECorp for regulatoryreasons, but under management of EFoods, and as soon as Efoodsobtains approval from State Bank of Pakistan, it will purchase Al-Safa at cost from the parent company. This step towards internationaldiversification has made EFoods the first Pakistani company to targetHalal meat market to cater to Muslim minorities in the West.

T able 1: B ran d Cat egory UH T W h ole M ilk O lp ers H i- Cal L ow Fat (“H CL F”) O lwell

Flavore d Milk O wsum Cre am O lp ers Cr ea m Juic es O lf ru te G he e T arr ka Sk imme d M ilk p owde r G lo rious Liq uid T ea W hit en er T ar ang Te a W h ite nin g Pow de r T ar ang P owde r Ice Cr eam O mor e Source : Com pan y Pro spe ctus

Table 2: EFood s C apacity 20 09 2010 EFoods Am bi ent UHT (Million Lite r)

368 401

EFoods Powder (Tons/y ear) 0 8,760

EFoods Ice Cr eam (Million Lite r) 10.29 19.03

Source: Com pany Prospec tus Table 3: Production Centers UHT Milk Plants 1.4 Mn Liters/ Day Dairy Fa rm 0.2 Mn Liters/ Day Ice Cream Plant 0.06 Mn Liters/D ay Powder Plant 24 T onnes / Day Source: Com pany Prospectus

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Strong Industry Backdrop

Growing population and Per Capita IncomeGrowing population will continue to expand consumer base while risingincomes will strengthen buying power. According to Pakistan EconomicSurvey (PES), total population is expected to grow at a CAGR of 2.1%from 2011-15. Per capita income has been increasing at a higher ratethan population growth in Pakistan. According to PES, per capita incomeincreased at a CAGR of 6.86% while total population increased at aCAGR of 2.8% during the period CY06 – 10.

Rapid Urbanization TrendIncreasing trend in urbanization serves as the major growth driver forFMCGs. According to Tetra Pak Dairy Index (Issue 3 dated July 2010),urban population increased at a CAGR of 5.3% during the last fiveyears and will further stage growth of 3.10% during CY11-15. Thestatistics reveal that as people have moved further from the rural areaswhere most of the dairy farms are found, their access to good qualityloose milk has been restricted due to lack of a cold supply chain. Thishas provided packaged milk manufacturers with an opportunity tooffer an alternative in the form of good quality, safe milk. The Urban torural ratio will grow to 67% in CY15 as compared to 62% in CY10.

Changing demographics bring new opportunitiesAccording to PES, 30% of Pakistan’s population is currently under 9years of age while 47.2% fall under 19 years. Producers are nowpromoting their dairy products to young consumers by introducing

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different flavors of milk and ice cream. The demographic profile alsoprovides business opportunity to FMCGs to penetrate further intoinfant and nutritional market segment.

More educated, sophisticated consumersAs people are becoming more aware, they value safety, hygiene andconvenience resulting in increasing dissatisfaction with unpackagedmilk. Consumers now appreciate the fact that packaged milk does notneed to be boiled before use, which is the case for loose milk. Inaddition, packaged milk can be stored for up to three months beforeopening.

Rural consumption of packaged food to accelerateDemand for packaged food is on the rise, even in rural areas wheremothers want to ensure that their children receive a balanced diet.According to PES 2011, 49% of total average monthly per capitaexpenditure is spent on food. Of this total expenditure, ruralpopulation spending constitutes around 55% while that of urban isabout 41%. Higher expenditure on food by rural population augurswell for FMCGs as majority of the population belongs to his group.With Pakistan average monthly income increasing to PKR 21,785 fromPKR 14,456 during CY08-11and rural income increasing to PKR 18,712as compared to PKR 12,625 during the same period registering CAGRof 13.8%, exhibiting a rise in their purchasing power. This growth inrural income further enhances FMCG opportunity to expand into theseareas.

Non-Cyclical IndustryThe food industry is relatively insensitive to economic conditionsand the consumers keep on spending on premium products despiteslowing economy. This can be witnessed from the fact that averagemonthly income grew at a CAGR of 14.65% where as per capitaexpenditure on food, milk & dairy products and package milk grew ata CAGR of 20.08%, 18.22% and 27.07%.

Liquid Dairy Products (LDP) ConsumptionAccording to Tetra Pak dairy Index, LDP consumption increased atCAGR of 2.8% in Pakistan through CY09-12 which is higher thanmany other countries as can be seen in Figure 3. The packaged LDPconsumption grew at a CAGR of 8.4% during CY06-09 and is expected

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to grow at 10.4% during CY09-12 due to changing demographic drivers.

Penetration of organized supermarketsOrganized supermarkets are increasing which allow consumers topurchase branded packaged food from one place. The large Europeanfood retail giants such as Makro, Metro, and Hyper star have all openedstores in Pakistan’s major metropolitan cities (Karachi, Lahore,Faisalabad, and Islamabad) in the past 6 years. These large retail storeshave been able to tap into the changes in consumer lifestyles(convenience and hygiene) and higher disposable income.

Figure 1: Population & Per Capita Income Growth

Source: Pakistan Economic Survey, 2011

Figure 2: Urban & Rural Population

Source: Government Publications

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Figure 3: Global Dairy Consumption

Source: Tetra Pak Dairy Index – Issue 3 2010

Industry StructureCurrently, EFoods has presence in the following segments withinthe food industry:

• Ambient UHT

• Ice cream

• Powder

• Juices Nectars and VASD

Industry structure of each segment is explained below:

Ambient UHTThis industry is currently worth about PKR 46 billion with a volumeof 838 million liters. The segment consists of milk (whole fat, diet andflavored milk), cream and tea whiteners. The industry has grown at aCAGR of 14% from CY06-10 and is expected to show a CAGR of 10%from CY2011-14. (Refer to Figure 4 for Industry Players)

Ice creamIce cream industry is fragmented into branded and unbrandedsegments. Branded ice cream segment accounts for 78% of the totalmarket which was valued at PKR 8.7 billion in 2010. Branded ice creamsegment is mainly dominated by established brands which targetupper and middle class. Unbranded segment includes local ice cream

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parlors, shops and carts. Unilever’s Walls controls 75% of the marketfollowed by EFoods at 23% while the rest 2% belongs to the unbrandedsegment and small brands (Hico, Igloo etc). The target market of icecream industry is a wide consumer segment encompassing kids, teens,and families.

PowderThis industry, with a total worth of PKR 26 billion, is divided into threemain segments including Growing up and all purpose (27%), InfantNutrition (55%) and Tea Whitening (18%). EFoods is currently presentin only tea whitening segment with a market share of 1%, with Nestlecontrolling 98% of the total market.

Juices, Nectars and Value Added Still DrinksThis market is divided into Juice and Nectar (JN), Still Drinks (SD) andValue added Still Drinks (VASD). These products vary in fruit contentwith that of juices at 100%, nectars at 25-99% and SD at 0-24%. VASDis SD with value addition such as innovative packaging or addition ofpulp. The total JNSD market stands at 507 million liters out of whichEFoods focuses on JN and VASD at a market size of PKR 11.4 billionwith total volume of 114 million liters. Nestle is the market leader with66% share, Shezan at 19% and Engro foods at 3% in 2011 whileremaining 12% belongs to the unbranded fresh juice market.

(Please see Appendix for Snapshot of Key Dairy Producers)

Investment SummaryEFoods is the fastest growing FMCG in Pakistan in the last 5 yearsand one of the leading players in the food industry. It has successfullyfended off competition from market giant Nestle and Unilever to becomemarket leader in Ambient UHT industry and 2nd biggest player in theice cream industry. EFoods with its skilled management, powerfulbusiness model, diversified product portfolio and specialized supplychain should maintain its competitive position. The company has thecapacity to face current and future industry competition and it willremain a premier growth company in the food industry, in our view.Increasing urbanization, changing life styles and a large untappedbranded food segment bode well for industry demand. We rate EFoodsa Buy and set DCF based target price of PKR 30.05 for 31st December2012. Our Buy rating is premised on;

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Figure 4: Current UHT Industry Players

Source: IoBM Research

Figure 5: Current Juice Industry Players


Figure 6: EFoods Sales & EBITDA Margin

Source: IoBM Research, Company Accounts

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Pakistan dairy potential to propel growthWith only 7% penetration in the world’s 3rd largest milk producer and4th largest milk consumer, dairy segment offers huge untapped growthpotential in a strong population of 180mn believed to have one of thehighest per capita milk consumption. Ambient UHT segment hasundergone 5-year CAGR of 14% with industry growth momentum likelyto continue. EFoods other operating segment i.e. Ice Cream and Juiceare equally attractive supported by rapid urbanization, large youngpopulation and rapidly changing life styles.

Market leadership positionWithin five years of operations, EFoods has secured a commandingposition in the Ambient UHT segment with 44% market share (89% ofE Foods’ topline). Growing trend of urbanization, focus on hygieneand non-cyclicality of the industry backed by company efforts forproduct innovation should enable EFoods to consolidate its positionwhile expanding the industry pie. E Foods’ foray into Ice cream segmenthas paid huge dividend with market share of 23% within 3 years, onlybehind Unilever’s Walls.

E Foods has so far launched only seven flavors in 23 cities in juices,nectars and VASD segment which are less than Nestlé’s offering. Themanagement plans to increase the number of flavors and geographicalpenetration to match that of Nestle. The company has launched itsbudget milk ‘Dairy Omung’ which is priced lower than fresh milk and isgoing to target the unprocessed part of milk industry which is hefty93%, Tarang liquid and powder are only present in 8 and 6 citiesrespectively. We expect the geographical coverage of this segment toexpand further into provinces of Sindh, Punjab further strengtheningits UHT leadership.

Omore ice-cream, which is currently present in only 1 city of Sindh, isexpected to expand into other major cities of Sindh and KhyberPakhtunkhuwa in the coming years. In order to support this expansion,EFoods has currently increased UHT and ice cream plant capacity by27% and 15% respectively. To further strengthen market status ofOmore, management plans to aggressively improve the ice creamsupply chain through increase in cold-chain deployment, partneringand acquiring local distributors and a possibility of acquisition of ice-cream production facility near Karachi.

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Impressive sales and earnings growthEFoods sits on sweet spot to leverage its future earnings followingheavy investment in marketing and supply chain. We conservativelyestimate CAGR of 60.39% outpacing sales CAGR of 22.8% over CY11-14 on the back strong sales growth CAGR of UHT and Ice Creamsegment. EFoods entry in Halal food market in North America, newproduct launch in dairy (powder, chilled dairy) and Juices remains thekey upside.

We estimate net margins for E Foods to expand to 4.54% in CY14 from0.84% in CY10, on the back of increasing cost efficiency, businesssynergies, sales and decreasing financial charges. EBITDA marginsare expected to increase by 370bps by CY14. ROE as result of increasingnet margins are expected to expand to 24.49% in CY14 as compared toonly 4% in CY10. ROA is expected to increase to 11.27% in CY14 ascompared to only 1.64% in CY10. OCF will grow at CAGR of 68%during CY11-14 with OCF to sales ratio reaching 5.89% in CY14 against1.38 in CY11.

Growth strategy of EFoods is to acquire and build new/innovativebrands with a global perspective. In this pursuit, EFoods targets theNorth American Halal food market through an acquisition of a Halalmeat company, Al Safa in Canada. The company will be acquired fromECorp after regulatory approvals. Using a conservative approach, wehave not incorporated revenues from Al-Safa in our projections sinceno time frame for acquisition has been specified by the managementand no business plan has been presented to the investors.

Skilled ManagementEFoods is being led by Mr. Afnan Ahsan who has 20 years’ experiencewith multinationals like Pepsi, Coca Cola and Nestle. The seniormanagement brings vast experience in FMCG companies in marketing,human resource and supply chain. The board of directors consists of10 directors out of which 4 are independent with members comprisingof Ex CEOs of Gillette, Unilever China and Kraft. The managementwith its skill set has made EFoods the market leader in UHT segmentand second biggest player in ice-cream industry.

(Please see Appendix for snapshot of management profile)

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Figure 7: EFoods Milk Share Trend


Figure 8: Milk Composition

Source: Industry Sources

Figure 9: Net Profits & Net Margin


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Valuation

EFoods’ attractive investment story comes at an undemandingvaluation, suggesting market is yet to fully appreciate company’sgrowth potential. We have set target price of PKR 30.05/share for 31December 2012 based on DCF method. Our target price offers anupside potential of 29.41% over its 20 December 2011 price of PKR23.22.

MethodologyGiven EFoods’ dynamics (growing company with limited price andfinancial history); we believe DCF is the most suitable method tovalue the company. For FCFF valuation, we have discounted theprojected free cash flows using the weighted average cost of capitalof 13.47%. The cost of debt represents average interest costs on alllong-term and short-term loans taken by the company based on currentrates.

We have used required rate of equity return of 20.40%, derivedthrough Capital Asset Pricing Model. The risk free rate in the model isthe prevailing discount rate in the country i.e., 12%. Recently, theState Bank of Pakistan (SBP) slashed the discount rate by 150bps inthe monetary policy announced on 08 October 2011. In the lastmonetary policy announcement on 30 November 2011, the rateremained unchanged. Going forward, we believe that SBP will keepthe discount rate at current levels.

EFoods has recently turned public (Offer for sale on July 5-7, 2011)and does not have much of a trading history so beta calculationwould not be reflected in our view. Hence, we assumed a beta 1.2x asthe company is moderately leveraged that exposes it to interest raterisk, and is still in its infancy stage, promising high growth.

Moreover, we have taken a conservative approach and have assumedthat Employee Stock Ownership Scheme (ESOS) will be exercisedfully by December 2011. The impact of this dilution is incorporated inour Target Price.Risk to Target PriceA50bps increase in the Cost of Capital will still give an upside of 15%.(Please see Appendix for a Detailed Sensitivity Analysis)

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Relative Valuation

Local PeersLack of investable stocks in the local market limits the comparisonwith domestic peers. Nestle and Unilever are two big names, however,liquidity in both the stocks is low. Following should serve only as areference point for EFoods. It is currently trading at 51% and 25%discount to Nestle and Unilever EV/EBITDA multiples respectively.

On a similar note, EFoods is also trading 77% and 69% cheaper to theP/S multiple of Nestle and Unilever respectively.

Regional PeersEV/EBITDA and PEG multiples of EFoods is lower than most of theregional companies in comparison, trading at 7% and 45% discount to12 months forward respective average regional multiples. All of thesecompanies are engaged in dairy business and are big market players intheir local markets.

(Please see Appendix for Detailed Table of Regional Analysis)

Table 4: Assumptions CAPM Calculation Risk Free Rate (SBP DR) 12.00% Risk Premium 7.00% Beta 1.2 Required Rate of Return 20.40%

WACC Calculation Cost of Debt 13.26% Cost of Equity 20.40% Weight of Debt 0.59 Weight of Equity 0.41 Tax rate 35% WACC 13.47% Source: IoBM Research, Co mpany Accounts

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Table 5: DCF Valuation Summary* Discounted FCFF PKR -2,118

Enterprise Value PKR 30,678

PV Debt PKR 7,550

Equity Value PKR 23,128

Shares Outstanding (Mn.) 769

Target Price Per Share PKR 30.05 Source: Io BM Research *See Appendix for Detailed Table

Table 6: Domestic Multiples (CY 11) EV/EBITDA P/S

NESTLE 19.26 2.56

ULEVER 12.64 1.88

EFOODS 9.5 0.59 Source: IoBM Research Table 8: Regional Multiples (12M Forward)

PEG EV/EBITDA

China Mengniu 0.59 10

Almarai 0.48 10.7 Juhayna Food Industries 0.2 4.4

Modern Dairy 0.17 12.2

Saudi Dairy 1.21 7.2

China Mizhong Food 0.15 2.6

Industry Average 0.47 7.83

EFoods 0.26 7.32

Source: Bloomberg, IoBM Research

Investment Risks

Likely imposition of GST on processed milkFood segment is not affected by government regulations but it islikely that the Government of Pakistan may impose General Sales Taxon processed milk in order to generate taxes at time when thegovernment is faced with tight fiscal position. This can potentiallycreate divergence on tax treatment for fresh and processed milk prices

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and may threaten the gross margins in case GST is not fully passed onto end consumers. We believe EFoods and other players enjoy pricingpower and should be able to pass through any new tax. We havecalculated the impact of 1% change in gross margin and estimatebottom-line impact of average PKR 0.30/share from every 1% move ingross margin on our future estimates.

Intensifying competitionCurrent and future competition in the foods industry among key majorplayers may negatively affect EFoods margins as each will be competingto attain highest market share, which will lead to higher product pricepressures leading to lower margins. For now, we see low risk of increasein competition as existing players are focused on increasing overallindustry sales due to low penetration. Secondly, heavy investmentrequirement also creates an effective barrier for the new entrant.

Failure of acceptance of new productsEFoods intends to launch new products in various food segments,making it vulnerable to risk of failure of new offerings. So far, thecompany has launched 10 brands which have enabled EFoods to gaina strong position in the market. We see low risk of the same happening.

Raw material cost hikeRising energy and input costs can increase cost of production leadingto lower gross profit margins. EFoods is investing heavily in dairysupply chain in the form of Milk Collection Center. Furthermore, thecompany operates a dairy farm to partially meet its fresh milk demand.We believe EFoods will remain exposed to the risk as the company isunlikely to increase own milk production.

Interest rate riskAll of the debt financing is based on floating rate loans and currentlythe company is highly leveraged so any hike in interest rate will squeezenet margins. However, the impact on bottom line of any increase ininterest rate should remain limited, in our view. We estimate downsideto our estimate of PKR 3.4 from 50bps increase in interest rate.

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Financial Analysis

Sales growth driven by product line and market share expansion

Ambient UHT – UHT sales grew at a CAGR of 89% during CY06-10,with the most significant contribution to total revenue. Going forwardwe expect sales growth of this segment to ease down as thecompetition from peer companies including, Nestle and Haleeb,stiffens. UHT sales volume is expected to reach 490 million liters byCY14, contributing 85% share in total revenue. Steady growth inmarket share is expected to be fuelled by budget milk brand “DairyOmung” which is priced at 7.5% discount to fresh milk and will targetthe unprocessed segment of milk industry i.e.93%.

Powder Milk – Powder milk business, commenced in the year 2010,has a market share of a mere 1% and contributes only 0.50% to revenue.However, it is expected that the contribution will increase to 2.93% byCY14. Currently, the business has presence in only six cities. Followingexpansion, sales of this segment are projected to grow at a CAGR of80% during CY11-14 reaching PKR1.6 billion while volumes areprojected to show a CAGR of 62% increasing to more than 2500 tonsduring the same period.

Juices & Nectars – Initiated in 2010, this business segment has beensuccessful in gaining a 3% market share with a presence in 23 cities.Sales are expected to grow at 74% CAGR during CY11-14 reachingPKR 1.78 billion in CY14 following the introduction of new brands/flavors and geographical regions.

Ice Cream – EFoods is the 2nd largest player in the ice cream market.Sales are expected to grow at a CAGR of 23.7% during CY14 and willreach PKR 4.8bn by the end of CY14. Ice cream revenue will beprimarily driven by a thrust on kids and teen segment since significantpercentage of population is under 15 years of age. Sales volume ofthis segment is expected to grow at a CAGR of 12.50% reaching 24.8million liters by CY14. The management plans aggressive expenditureto improve supply chain of ice cream business which also includesgeographical expansion plan. Ice cream segment is expected to breakeven by end of CY12.

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Net Margins- Net profit is expected to grow at a CAGR of 60.39%during CY11-14 as net margins expand to 4.54% in CY14 from 0.84% inCY10 due to the following factors:Robust sales Growth - Sales are expected to grow at a CAGR of 22.85%during CY11-14 as result of growth in market share of Ambient UHT,powder milk, juices & nectars, and ice cream as detailed above.Efficiency Improvements – The management aims to increase efficiencyto improve the profitability of its existing and new segments, withspecial consideration towards juices and ice cream. EBITDA marginsare expected to improve by 370bps from 8% in CY10 to 11.7% in CY14.Capacity and product line expansions – The company plans totalcapital expenditure of PKR 4.6 billion, which includes capacityexpansion for dairy, juices, ice cream and dairy farm to enhance marketshare. UHT plant capacity will be increased to 1.4 million liters perannum by end of CY11 and further increase to 1.9 million liter perannum next year, at a total cost of more than PKR 4 billion. The icecream shortage that occurred in Ramadan CY11 due to supply chaininefficiency is being countered with aggressive capacity and supplychain expansion at expenditure of PKR 1.091 billion during CY11. Theexpansions will be financed by internal cash generation (PKR 1.4 billion),private placement proceeds (PKR 1.2 billion) and debt (PKR 1.925billion).

Strong Cash flows – Sales and margin growth will increase cash flowsfrom operations. According to our estimates, the company will generatePKR 2.04 billion of operating cash flows on average for the next threeyears. The operating cash flow to sales ratio is expected to reach5.89% by CY14 as compared to 1.38% in CY10. The company does notplan to give dividends in the foreseeable future.

Solvency

The debt to equity ratio will remain above 1 due to heavy expenditureson capacity and sales infrastructure development. The CY10 debt toequity ratio of 1.43x is expected to decline to 0.97x in CY14 when thecompany starts to moderate its expenditure. This decrease in debt toequity ratio will decrease financial charges thus improving solvencyof the company which is witnessed by an increase in solvency ratio to0.34 in CY14 as compared to 0.12 in CY10 and the interest coverageratio improving to (0.44x in CY10) to 3.41x by CY14.

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Figure 10: Revenue Breakup


Figure 11: Segment Contribution in Sales in CY10

Source: Annual Accounts 2010

Figure 12: ROA and ROE

Source: IoBM Research, Annual Accounts

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APPENDIX

DCF Valuation (PKR/Million) Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Cash Flow from Operations 1,693.52 2,476.87 3,316.89 4,210.38 5,153.90

Less: Other Income on Cash (139.17) (50.55) (67.53) (75.87) (89.97)

Capital expenditure (4,883.79) (784.69) (765.34) (3,781.32) (406.10)

Add: After Tax Interest Expense 933.64 792.50 633.06 624.70 419.90

FCFF (2,395.80) 2,434.12 3,117.08 977.89 5,077.73 Discounted FCFF (2,118) 1,896 2,140 592 2,707 Enterprise Value 30 ,677.83 PV Debt 7,550.00 Equity Value 23 ,127.83 No of Shares Outstanding (Mn.) 769.00

Target Price Per Share 30.05


DCF Sensitivity Analysis (WACC ? Terminal Growth ? ) TP 4% 5% 6% 7% 8%

10.47% 44.67 54.29 68.24 90.26 130.15 11.47% 34.93 41.54 50.58 63.68 84.34 12.47% 27.68 32.42 38.63 47.12 59.42 13.47% 22.10 25.61 30.05 35.90 43.88 13.97% 19.78 22.83 26.65 31.57 38.15 14.97% 15.85 18.19 21.06 24.65 29.28 15.97% 12.67 14.50 16.70 19.40 22.78


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Snapshot of Key Dairy Producers Nestle

Pakistan Haleeb Foods

Shakarganj Foods

Engro Foods

Sponsors Nestle SA/ Packages

group

Chaudhry Illyas

Cresent group

Engro/ Dawood group

Sponsor key business

Processed Foods;

Consumer packaging

Nil Sugar & Allied

Fertilizers, Energy

Flagship Brand MilkPak Haleeb Good Milk Olpers

Plant Location

Kabirwala & Sheikupura (Punjab)

Rahimyar Khan &

Bhai Peru (Punjab)

Faisalabad (Punjab)

Sukkur (Sindh) & Sahiwal (Punjab)

Year of Launch 1981 1986 March-06 March-06

Current Market Share 36-35% 30-35% 5% 44-45%

Milk Procurement

Method (Main)

Self Co llection

3rd Party Contractors

Self Collection

Self Collection

Bottom-line Positive Positive Positive Positive

Other segments

Beverages, Infant food,

Confectionary Juices Juices

Juices, Powder, Ice-

cream

Expansions in pipeline 3x

Expansion in

powdered milk

3x 3x

Expected Size (on

completion) ltrs/day

3,000,000 - 300,000 850,000

Key Dairy Brands MilkPak Haleeb

Milk Good Milk Olpers Milk

Nesvita Haleeb Butter

Good Milk Cream Olwell Milk

Nido Haleeb Cream Ghee Olpers

Cream

Milk Pak Cream

Candia Milk Tarang

Nestle Yogurt

Dairy Queen Milk

Everyday tea

whitener Labban Lassi

Nestle Butter Haleeb Ghee

Nestle Raita Chedder Cheese

Nestle Fruit Yogurt Skimz

Source: Company Publications, IoBM Research

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Management ProfileName Designation Experience Affiliated Companies Qualification

Mr. Asad Umer Chairman 25 years Engro corp., Dawood Corporation, Dawood Hercules, Engro fertilizers MBA

Mr. Afnan Ahsan CEO 20 years Nestle, Pepsi and Coca Cola MBA

Mr. Imran Anwer CFO 20 years PWC, Deloitte, Touche CA Mr. Faud Chund rigar

Vice president Marketing 19 years Unilever, Danone MBA

Mr. Babur Sultan Vice President sales 25 years GSK, Reckitt & Benckiser, Haleeb

Foods MSC

Mr Ahmed Sheikh Vice President Supply chain 20 years Engro Corp MBA, MS

engineering Source: Comp any’s Website and Publications

SWOT Analysis

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Strengths:

Strong Sponsor ProfileEngro Foods operates under the parent company Engro Corporation.Hence, when Engro launched Efoods, people instantaneouslyassociated it with well-established and successful brand ‘Engro’operating in the fertilizer, IT and infrastructure sector. Strong brandequity allows Engro Corporation to easily attract investments, as seenin the case of “Engro Rupiya Certificate”. The offering receivedoverwhelming response from public, resulting in exercise of greenshoe option. A consistent funding stream and strong distributionnetwork in the agriculture sector are two key strengths of the parentcompany that Efoods can capitalize upon.

ManagementThe company is being led by Mr. M.Afnan Ahsan who has 20 years’experience with multinationals including Pepsi, Coca Cola and Nestle.The senior management brings vast experience in blue chip FMCGcompanies in marketing, human resource and supply chain. The boardof directors consists of 10 directors out of which 4 are independentwith members comprising of Ex CEOs of Gillette, Unilever China andKraft.

Market Awareness due to Intensive Consumer ResearchEngro conducted thorough consumer & product research before andafter entering the FMCG sector through well reputed global researchpartners like AC Nielsen, Mindshare, JWT Asiatic and MARSmarketing and advertising agencies. Market research paved the wayfor Efoods success in the business, making it a formidable player inthe FMCG sector previously dominated by with decades of operatinghistory. In its first year, EFoods crossed 1.4 billion in sales figurereflecting customers’ satisfaction with its products.

Well established Linkages with Farmers and Dairy DealersEFoods has been doing business with the farmers in the fertilizer sectorwith a good reputation in the market. Strong long term relationshipwith the farmers has facilitated consistent supply of milk to thecompany.

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Dairy FarmDairy farm was established in 2008 and has more than 2500 animals.This move is to help EFoods vision of future milk exports andproduction of high quality infant and growing up milk powder.

Weaknesses:

PackagingEfoods depends on Tetra pack for packing in case of milk and cream.Since Tetra Pack has a monopoly in the market, the company isvulnerable to high packaging costs resulting in a decline in margins.

Opportunities:

Enhanced Awareness about Consumption of Processed MilkWith the passage of time people have realized that loose milk termedas “khulla doodh” in Urdu may not be as nutritious as it may sound.Some decades ago processed milk was not considered good for healthdue to the misconception that “all of the nutrition is sucked out of themilk by passing it through machines operated by electricity”. Thismindset is changing now since consumers are more educated andopen to new ideas such as a separate milk brand especially for tea.

Pakistan, the third largest producer of milkPakistan ranks among the largest producers of milk in the world, witha total production of 33.25 billion liters of milk per annum. Processedmilk is only 7% of total production which if enhanced can enable thecountry to expand export volume of dairy products.

Threats:

CompetitionEfoods has been successful in combating intense competition fromexperienced players of the industry such as Nestle and Haleeb. Oldbrands have been in the industry for quite some time with anestablished clientele. EFoods will need to consistently come up withinnovative ways for dealing with competition from existing as well asnew players. With Nestle planning to double their milk output withinthree years, EFoods is in for a market share war, the company’sintroduction of low budget milk will help their cause.

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PricingPrice differentials pose a threat for the company. It is of vital importancethat Engro fulfills their customer’s expectations in terms of offeringquality products at competitive pricing. Since the company targetsmiddle class and the lower middle class, pricing will be a significantfactor to capture market share as these two income segments areextremely price sensitive. In order to effectively capture these pricesensitive segments, the company has launched its low budget milkwhich is priced even lower than fresh milk.

Outbreak of diseases in dairy animalsAlmost a decade or two ago, the dairy dealers and farmers would nothave to worry about any outbreak of lethal and dangerous diseases inthe animal, but as the world turns into a huge global village, thediseases have also found roads to travel and reach far and wide.Various diseases in livestock such as the foot and mouth disease thataffect the productivity of farm animal are common these days. EFoodshaving a commercial farm with more than 2500 animals is subject torisk of diseases which can hamper farm productivity. In order toeffectively deal with this issue Engro foods has vaccination programsto stop outbreak of livestock diseases.

Critical Success Factors for Dairy Business

1. Independence in Milk Supply Chain

With rising pressure on supply management with everyone eyeingthe same farmers in Punjab (key milk producing area along the Raviriver belt), the importance of an independent supply network isbecoming crucial. Greater reliance on third party contractors(compared to a self-collection system) increases contractors’bargaining power to manipulate supply, erodes margins due tohigh cost, deteriorates quality (mixing of water content and longerdelivery time) and weakens direct relationship with the farmer.EFoods is rightly focused in this area and has adopted the followingmeasure to strengthen the supply chain.

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a) Achieving maximum level of self-reliance

Efoods is emphasizing a self-collection system. It has morethan 900 milk collection centers with a goal to achievecomplete self-reliance on milk procurement. Self-collectionmilk centers are equipped with milk chillers and generatorsas well as insulated tanks for safe transportation to the plant.The company has direct presence in 700 villages with stateof the art chilling equipment and is procuring milk throughover 50,000 farmers. It is also educating farmers in animaland fodder management employing an Agri-Services teamof veterinary doctors in 144 villages. It has created directemployment opportunities for over 1,500 individuals acrossPakistan.

b) Building long-term relationships with farmers

Long-term relationship with farmers is another key area inthe entire strong supply chain which comes along with aself-collection system. This is one of the key elements ofNestlé’s success story in Pakistan. With the ‘Engro’ brandalready having a strong presence within the farmercommunity through its fertilizer business over the last 40years (especially in the Sindh province), the task of buildingrelationships and procuring milk from Sindh became a loteasier for EFoods compared to other new entrants. This hasstrengthened further with the parent company turningaggressive in agri-services. The farmer-company relationshipweakens when the company collects milk indirectly throughcontractors, which reduces farmers’ loyalty to the companyand increases the ability of contractors to bargain.

c) Investing in cold chain system

Back-end investment in a cold chain system for milkprocessing companies is becoming a must to ensure

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acceptable quality and timely delivery to the factory as thecompany plans to expand its direct milk collection network.

d) Commercial dairy farming – the way forward

Commercial farming is the way forward in the dairy industryto exploit the factors favoring its development including agri-land, adequate water supply, ideal weather conditions andavailability of feed. EFoods investing in commercial dairyfarming will gain from economies of scale and cost and qualitycontrol from backward integration. With a long-term visionof becoming fully independent in milk collection, EFL iscurrently running a model farm having more than 2,500imported cows.

2. Marketing – Loyalty & Share of mind

The dairy industry operates in a highly competitive environmentwhere companies need to gain top of the mind share on a continuousbasis. EFL management has shown its commitment towardsinvesting in building the brand to gain a strong market positionwith an average market expenditure of 11% during CY11-14.

Corporate Social Responsibility

Engro Corp and the Engro Foundation

The company believes in working with all the stakeholders to improvetheir quality of life, in a way that is both good for business anddevelopment. The company has been making sizeable contributionsfor various CSR projects. ENGRO’s urea manufacturing site is locatedin Daharki district Ghotki. The company’s commitment to this part ofSindh is evident in its social development projects as the bulk ofCompany’s contribution budget is spent in and around Daharki. Thecompany has intrusion in number of areas like education, health,environment, sports, and infrastructural improvements.

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EFoods has joined hands to provide support to flood victims withNGOs and other parties. For this project, they have helped in settingup various tents, providing them with basic necessities like water,milk, medicines, and food items. This ensures that EFoods has been agreat contributor towards helping poor and affected people by buildingthem up by fulfilling their necessities, some of their notable effortsare towards educational development such as the Ali Institute ofEducation made in collaboration with The citizens foundation andprogram for empowerment of women. Beside educational programs,Engro Corp through the Engro foundation has set up free snake biteclinics, and dialysis centers

Engro Foods

EFoods works alongside with the Engro foundation to fulfill its socialresponsibility. Some of initiatives that the company took arehighlighted below:

Khushal LivestockUSAID in collaboration with Engro foundation has started a schemeto help the farmers that were affected by floods. Engro Foods willoversee the implementation of the project through which Rs 78 millionwill be given to over 15000 farmers reaching out to 100,000 dairyanimals in a span of 6 months. This initiative has been started so thatthe pre-flood productivity of animals is restored. The package includesprovision of nutritional supplements, vaccination and fertilizers.

Dairy HubEngro Foods partnering with Tetra Pak Pakistan started the first dairyin the country in Kassowal, district Sahiwal. The primary goal of theproject is to help the farmers in improving the productivity andefficiency of the livestock. Through one herd concept, developmentand organization of the small-holder farmer milk production is done.This program provides agri-sevices, training and education on animalfeeding and deceases. This would lead to improved quality of milk,efficient value chain, improved livelihoods in rural areas, increasedemployment in agriculture and enhanced skills of farmers.

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EFoods Income StatementIncome Statement (PKR/Millions) 2006A 2007A 2008A 2009A 2010A 2011F 2012F 2013F 2014F 2015F Net Sales 3,631 8 ,173 14,665 20,945 20,945 30,195 38,025 46,295 56,338 69,054 -Ambient UHT 3,631 8 ,173 13,933 19,058 19,058 27,035 33,629 40,274 48,056 57,557

-Powder 0 0 0 219 219 277 508 918 1,649 2,405 -Juices 0 0 0 90 90 335 653 1,116 1,780 2,726 -Ice Cream 0 0 732 1,579 1,579 2,548 3,235 3,987 4,853 6,365 Cost of Goods Sold 3,370 7 ,128 12,163 16,552 16,552 23,612 29,658 36,410 44,692 55,385

-Ambient UHT 3,370 7 ,128 11,556 15,061 15,061 21,127 26,161 31,613 38,100 46,193

-Powder 0 0 0 173 173 216 395 706 1,259 1,831 -Juices 0 0 0 71 71 280 549 934 1,487 2,283 -Ice Cream 0 0 607 1,248 1,248 1,988 2,554 3,157 3,846 5,077 Gross Profit 261 1 ,046 2,502 4,393 4,393 6,584 8,366 9,884 11,646 13,669 -Ambient UHT 261 1 ,046 2,377 3,997 3,997 5,908 7,468 8,661 9,956 11,364

-Powder 0 0 0 46 46 61 113 212 391 574 -Juices 0 0 0 19 19 54 104 182 294 443 -Ice Cream 0 0 125 331 331 560 681 829 1,007 1,288 Marketing & Distribution Exp.

548 950 1,305 2,419 2,913 3,951 4,378 4,983 5,512 6,112

Administrative Expenses 55 129 304 347 473 549 618 681 748 829

Other Operating Income

2 2 80 176 55 139 51 68 76 90

Operating Income/(Loss) (340) (31) 974 1,803 1,061 2,224 3,420 4,288 5,462 6,818

Depreciation Expense 153 285 499 700 700 694 901 1,074 1,103 1,252

EBITDA (187) 254 1,472 2,503 1,761 2,917 4,321 5,362 6,564 8,071 Other Operating Expenses

32 20 53 131 131 282 381 456 553 665

Finance Charges 23 105 354 515 660 1,001 1,436 1,219 974 961

Earnings B/f Tax (395) (157) 567 1,156 270 940 1,603 2,613 3,935 5,192

Taxation @ 35% 230 334 303 223 95 329 561 915 1,377 1,817

Profit/(Loss) for the year (165) 177 869 1,379 176 611 1,042 1,699 2,557 3,375

EPS (PKR) (2.82)

(1.29)

(0.80)

0.31

0.31 0.81 1.36 2.21 3.33 4.39

827



EFoods Balance SheetBalance Sheet (PKR/Millions) 2006A 2007A 2008A 2009A 2010A 2011F 2012F 2013F 2014F 2015F ASSETS Property, plant and equipment 1,309 2,744 4,567 5,809 7,148 11,633 15,616 15,327 14,989 17,518

Long term investments 0 0 0 153 980 0 0 0 0 0 Biological assets 0 10 307 439 428 471 518 570 627 690 Intangible assets 4 4 19 28 142 157 172 190 209 229 Long term advances, deposits and prepayments 4 6 9 8 23 28 33 40 48 58

Deferred taxation 247 0 0 0 0 0 0 0 0 0 Non-Current Assets 1,564 2,763 4,901 6,436 8,722 12,288 16,340 16,126 15,873 18,495 Stores, spares and loose tools 38 79 188 290 442 664 837 1,018 1,239 1,519

Stock-in-trade 152 418 1,239 1,164 2,089 2,320 2,914 3,578 4,392 5,442 Trade deb ts 2 8 9 25 52 55 69 85 103 126 Advances, deposits and prepayments 41 41 122 339 244 269 295 325 358 393

Other receivables 54 865 711 572 721 757 795 834 876 920 Taxes recoverable 0 0 56 31 9 10 10 11 11 12 Derivative financial instruments 0 0 0 0 1 0 0 0 0 0

Cash and bank balances 136 155 99 148 180 169 225 253 300 433 Current Assets 423 1,566 2,425 2,569 3,738 4,244 5,146 6,104 7,279 8,846 TOTAL ASSETS 1,987 4,329 7,326 9,005 12,460 16,532 21,486 22,230 23,152 27,341 EQUITY AND LIABILITIES

Share Capital 1,000 2,200 4,300 5,423 7,000 7,690 7,690 7,690 7,690 7,690 Advance against issue of share capital 603 200 50 0 0 0 0 0 0 0

Share Premium 0 0 0 0 0 147 0 0 0 0 Hedging reserve 0 0 0 0 0 0 0 0 0 0 Accumulated loss (444) (1,064) (1,618) (2,052) (1,876) (1,265) (223) 1,476 4,033 7,408 Total Equity 1,158 1,336 2,732 3,371 5,124 6,572 7,467 9,166 11,723 15,098 Long term finances 350 1,393 2,742 3,325 4,625 6,085 7,816 6,508 4,304 2,030 Obligations under finance lease 17 12 15 8 5 3 0 0 0 0

Deferred taxation 0 452 599 301 181 181 181 181 181 181 Deferred liabilities 2 2 3 3 3 4 4 5 5 6 Non-Current Liabilities 369 1,859 3,358 3,637 4,814 6,272 8,002 6,693 4,490 2,216 Current portion of - long term finances 0 0 58 117 200 465 1,199 1,621 2,204 2,275 - obligations under f inance lease 5 5 8 5 4 3 3 0 0 0

Trade and other payables 294 542 790 1,583 2,041 2,219 2,815 3,450 4,235 5,252 Accrued interest / mark-up on

- long term finances 5 61 176 183 275 0 0 0 0 0 - short term finances 2 15 23 2 2 0 0 0 0 0 Short term finances 154 511 180 108 0 1,000 2,000 1,300 500 2,500 Current Liabilities 460 1,135 1,236 1,997 2,522 3,687 6,017 6,371 6,939 10,027 TOTAL EQUITY AND LIABILITIES 1,158 1,336 2,732 3,371 12,460 16,532 21,486 22,230 23,152 27,341

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EFoods Cash flow statementCashflow Statement (PKR/Mi llions) 2007A 2008A 2009A 2 010A 2011F 2012F 2 013F 2014F 2015F Net Profit/(Loss) for the year (620) (554) (433) 176 611 1,042 1,699 2,557 3,375 Depreci ation Exp ense 153 285 499 700 694 901 1,074 1,103 1,252 Stores, spares and loose tools (41) (109) (102) (152) (222) (172) (182) (221) (280) Stock-in-trade (267) (821) 75 (925) (231) (594) (663) (814) (1,051) Trade debt s (6) (1) (16) (27) (3) (14) (15) (18) (23) Advances, deposi ts and prepayments 0 (82) (216) 94 (24) (27) (30) (33) (36) Other receivables (811) 154 139 (148) (36) (38) (40) (42) (44) Taxes recoverable 0 (55) 24 22 (0) (0) (1) (1) (1) Derivative financial instruments 0 0 0 (1 ) 1 0 0 0 0 Trade and other payables 248 248 792 458 178 597 635 785 1,017 Accrued interest / mark-up on 69 123 (15) 93 (277) 0 0 0 0 Cash Flow From Operating Activiti es (1,274) (812) 747 290 688 1,694 2,477 3,317 4,210 Propert y, plant and equipment (1,587) (2 ,108) (1,741) (2,040) (5,178) (4,884) (785) (765) (3,781) Long term investments 0 0 (153) (827) 980 0 0 0 0 Biological assets (10) (297) (132) 11 (43) (47) (52) (57) (63) Intangible assets 0 (15) (9) (115) (14) (16) (17) (19) (21) Long term advances, deposits and prepayments (1) (3) 1 (15) (5) (6) (7) (8) (10) Deferred taxation 247 0 0 0 0 0 0 0 0 Cash Flow From Investi ng Activiti es (1,352) (2 ,422) (2,034) (2,986) (4,260) (4,952) (860) (849) (3,874) Share Capital 1,200 2,100 1,123 1,577 690 0 0 0 0 Advance against issue of share capital (403) (150) (50) 0 0 0 0 0 0 Share Premium 0 0 0 0 147 (147) 0 0 0 Hedging reserve 0 0 0 0 (0) 0 0 0 0 Long term finances 1,043 1,407 642 1,383 1,725 2,465 (886) (1,621) (2,204) Obligation s under finance lease (5) 6 (10) (5 ) (2) (3) (3) 0 0 Deferred taxation 452 147 (297) (120) (0) 0 0 0 0 Deferred liabilities 0 0 0 1 0 0 0 0 1 Short term finances 357 (332) (72) (108) 1,000 1,000 (700) (800) 2,000 Cash Divid end - - - - - - - - - Cash Flow From Financing Activiti es 2,645 3,178 1,336 2,728 3,560 3,315 (1,589) (2,421) (203) Cash Balance - Starting 136 155 99 148 180 169 225 253 300 Net Change in Cash 19 (56) 49 32 (12) 57 28 47 133 Cash Balance - Ending 155 99 148 180 169 225 253 300 433

829


Discussion Approaches In LeadershipDiscussion

APPROACHES IN LEADERSHIP:TRAIT, SITUATIONAL AND

PATH-GOAL THEORY:A CRITICAL ANALYSIS

Adnan KhanNova Southeastern University Fort Lauderdale,

Florida, USA

Introduction

Since the advent of the industrial revolution, employees,managers, psychologists and researchers have continuously askedthemselves and others one fundamental question, “What makes agood leader”. Interestingly, although a plethora of research and datanow lies at our fingertips, it seems that the answer to the question ismuch more varied, diverse and complex than previously imagined.Northouse (2010) summarized, some researchers conceptualizeleadership as a trait or a behavior, whereas others view leadershipfrom a participative or relational standpoint. Moreover, a review ofscholarly research on leadership clearly indicates there to be a widediversification of thought in explaining leadership theory. (Gardner,1990; Antonakis, Cianciolo, & Sternberg, 2004; & Mumford, 2006).Also, a lot of new research has paved the way for fresh perspectivesin understanding the study of leadership since when it was firstinvestigated in the earlier half of the twentieth century. Thus, in lightof new advances, a clear need for re-examining three early approachesin leadership, namely trait, situational and path-goal theories hasarisen. Taking a narrative approach, the author will examine the threeleadership approaches discussing their merits and drawbacks afterwhich findings will be summarized and conclusions drawn keeping inview some of the latest research emerging from studies in leadershipscience.

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Approaches In Leadership Discussion

Trait Approach

Initially studied and developed in view of certaincharacteristics and qualities present in certain political and militaryleaders, such as Mohandas Ghandi, Abraham Lincoln, and NapoleonBonaparte in the early twentieth century as a way of determiningwhat made them great. It was assumed that they reached their highstatus or greatness only because of their being born with certaintraits. The traits as defined by Stodgill (1974) were being adaptable tosituations, alert to social environments, ambitious and achievement-orientated, assertive, cooperative, decisive, dependable, dominant(desire to influence others) ,energetic (high activity level), persistent,self-confident, tolerant of stress and willing to assume responsibility.Kirkpatrick and Locke (1991) stated that leaders differ from others onmainly six traits, drive, motivation, integrity, confidence, cognitiveability, and task knowledge. Zaccaro, Kemp and Bader (2004), identifiedthe following traits as being central to good leadership: extroversion,emotional stability, openness, agreeableness, motivation, socialintelligence, self monitoring, and problem solving. Some of the traitscentral to the lists of almost all the researchers studying trait leadershipover the years are intelligence, drive, integrity, and sociability. (Zaccaroet al., 2004).

The Trait approach involves identifying and selecting leadersbased on the possession of certain prerequisite traits. This approachis nowadays almost never utilized in isolation, although theidentification of certain traits certainly plays a part in assessing andexemplifying a potential candidate for higher office, it is by no meansthe sole criteria utilized. This is because the Trait approach suffersfrom certain inherent weaknesses, the first being it’s ratherdiscomforting premise that good leadership can only arise from certaintraits which are themselves inherent and genetic, a statement whichleaves little room for motivation, advancement or growth in anindividual who feels that they do not match up to the required trait

831


Discussion Approaches In Leadership

leadership criteria. Secondly, the theory fails to take into account anysituational, motivational, emotional, or contingency factors in itsevaluation of leadership. As we now know, these are all critical aspectsof leadership which cannot be sidelined both from a theoretical andpractical standpoint.

The theory remains alive however, and has even madesomewhat of resurgence in recent years, primarily (a) because of thevast wealth of data and research that support its roots and (b) becauseof recent research in genetics that suggest that we do in fact acquirea large portion of traits from our ancestors. In an article in the HarvardBusiness Review, Sorcher and Brant (2002) concluded, experiencehas led us to believe that much of leadership is hardwired in peoplebefore they reach their early or mid-twenties. Advances in recentresearch in the field suggest two relatively new contributions to thescience, if included, would transform the trait approach into a morepowerful theory capable of explaining good leadership from the geneticperspective in the twenty first century. First, recent research ofcharismatic leadership suggests that certain leaders with charismaconsistently possess traits of self monitoring, confidence andimpression management to attain a vividly enhanced sense of beingin the public arena. (Jung & Sosik, 2006). Secondly, and moreimportantly, Emotional Intelligence has emerged as a formidable assetfor managers and leaders not only because of the vast range of selfmonitoring, relationship assessment and control mechanism itpossesses but also as it is increasingly being demonstrated as beingone of the key elements behind successful leadership practices.“Emotionally Intelligent leaders are more flexible, value driven,informal, connected and especially exude resonance. Their excitementand enthusiasm spread spontaneously invigorating those they lead.(Goleman, Boyatzis, & Mckee, 2004, p.248)

A strong case can be made for emotional intelligence whichencompasses the abilities of understanding one’s own and others

832



emotions and then adjusting or tuning these emotions relevant to thesituation or person as being trait driven, that is, genetically orinherently present in an individual from birth. In a major behavioralgenetic study of trait emotional intelligence, Vernon, Petrides, Bratko,Denis, Schermer, and Aitken (2008) concluded that, findings are inaccordance with studies of the major personality dimensions andprovide further empirical support for the conceptualization of EI as apersonality trait. Emotional Intelligence has the distinct advantagehowever, of being an intelligence or set of abilities and skills that canbe improved with training and other application mechanisms.

Situational Approach

As the name implies, the situational approach is focused onleadership in particular situations. The theory is based on the premisethat each situation is different and thus, no one approach can fit allsituations, instead leadership complexities themselves have to caterto the differences in situations and adapt accordingly. Essentially,situational leadership stresses that leadership consists of twointerrelated dynamics, directive and supportive, and that each shouldbe applied appropriately in any given situation. The situationalapproach assumes, that employees abilities, skills, motivations anddesires vary over time and according to the situations, thus leadersinstead of employees need to change their strategies shifting fromdirective to supportive according to the prevailing needs of the hour.

The approach centers its theoretical basis on four leadershipstyles which are to be used by leaders when assessing and managingtheir employees. The first style is a high directive-low supportive stylein which a leader spends more time outlining his/her goals and relativelylittle effort in supportive behaviors. The second style involves a highdirective high supportive style also at times called the coachingapproach. In this conceptual framework, the leader actively supportsemployees as well provides goals and direction. In the third style theleader adopts a high supportive-low directive posture and lays more

833



emphasis on support and empathy than goals and achievement. Thefourth style also known as the delegating approach involves lowsupportive and low directive behavior. These styles are then closelylinked with a particular subordinate’s level of development and theyare classified into their own range of development categories as such.

The situational approach has had considerable successespecially in the practical and applied area of leadership training.Hersey and Blanchard (1993) reported, “Situational Leadership hasbeen a factor in training programs of more than 400 of the fortune 500companies and is perceived by corporations as offering a crediblemodel of training people to become effective leaders.” Another strengthof the approach is in the flexibility of leadership. Yukl, (1989) stated,“A major strength of situational leadership is that it emphasizes leaderflexibility.” Morever, situational leadership offers a unique perspectivein which to view the subordinate, in that, “it helps subordinates learnnew skills and become more confident in their work. (Fernandez &Vecchio, 1997).

This approach has its critics however, who contend justlythat relatively few comprehensive research studies have beenconducted to justify and validate the suppositions and assertions ofthe situational approach theory. Vecchio & Boatwright (2002) andBrazil (2006) are among many researchers who have questioned itstheoretical basis and asked whether it should be understood in theframework of a theory at all. Graeff (1997) stated that conceptualizationin the approach is very unclear and Blanchard et al., (1985) summarized,that subordinate commitment is composed of confidence andmotivation, but it is unclear how both combine to define commitment.Also, situational leadership suffers from a serious weakness in that itdoes not define how to distinguish between the issue of one to oneversus group leadership. There is a vast difference between matchingstyles and behaviors to one employee than those of twenty. Theexisting research in the field of situational leadership does not answerthis vital question. However, the situational approach has proven to

834



be a vastly practical approach especially in occupational roles forindividuals involved in rapidly changing environments such asemergency response units, airline operations, and certain military roleswhere quickness and flexibility of leadership abilities are of paramountimportance. Also, the approach has the advantage of having a clearset of prescriptions for action in a given situation, thus, leaders caninstantly adapt to developing scenarios and act accordingly. Insummary, the situational approach while easy to understand andpragmatic in certain particular situations needs further empiricalinvestigation and research before it can be universally applicable.

Path Goal Theory

The Path Goal theory of Leadership was developed toinvestigate and summarize previous findings resulting from empiricalresearch studies of leader task orientation and leader personorientation on employee performance and job satisfaction. The theorywas stimulated by Evans (1970) paper in which he hypothesized thatleader behavior would be positively related to follower path-goalperceptions in one organization. In short, the objective of the pathgoal theory or approach is to improve employee satisfaction andperformance by focusing on various aspects of employee motivation.(House, 1996).

Theoretically, the path goal approach posits that leaders needto adopt a particular style or method that best suits the needs ofemployees. It predicts that a directive style of leadership is best insituations in which subordinates are dogmatic, organizational policiesunclear and the work assigned is complex in nature. In these situations,directive leadership complements the work by providing guidanceand psychological structure for subordinates. (House & Mitchell, 1974,p.90). For tasks that are highly structured, stringent, and the work isunsatisfying and redundant, the path goal theory suggests, thatleaders adopt a more supportive stance. It hypothesizes, that in thiscase the human element or empathy, that a leader demonstrates will be

835



of vital consequence as related to employee job satisfaction andperformance. Furthermore, the approach calls for participativeleadership in cases where goals are ambiguous, and wheresubordinates feel a strong need for having a role in the decisionmaking process and achievement oriented leadership in situationswhere subordinates or employees favor more challenging anddemanding tasks.

The path goal theory has several positive aspects. First, itwas one of the first theories to specify four conceptually distinctvarieties of leadership, (e.g, directive, supportive, participative, andachievement oriented) expanding the focus of prior research, whichdealt exclusively with task and relationship-oriented behaviors.(Jermier,1996), second, the theory is a serious attempt at integratingthe motivation principles of expectancy theory into a theory ofleadership. (Northouse, 2010, p.133), third, the approach is practicalin nature, in that it is a readymade recipe for leaders to use in anorganizational setting.

Despite these advantages, the approach has its critics. Themost serious charge leveled against the theory is that large scaleempirical research studies have offered it partial support at best.(Castro, Schriesheim & Kerr, 1977; Indvik, 1986; Wofford & Lisa,1993; Zhou & DeChurch, 2006). The claims of path goal theory are yetto be fully substantiated and remain tentative as the research findingsdo not yet provide a consistent and unified picture of the basicassumptions, associations and essentials of the path goal theory.(Jermier, 1996; Schriesheim & Neider, 1996).

The research reflects that path goal theory fails to explainthe relationship between leadership behavior and worker motivation.Although, it incorporates the tenets of expectancy theory, it does notexplain how leadership is related to these tenets. For example, theapproach does not explain how directive leadership during ambiguous

836



tasks increases subordinate motivation. (Northouse, 2010, p.134).Finally, Path goal theory seems to place the burden of responsibilityunequally on the leader as opposed to the worker or subordinate, andfor this reason is criticized as letting the worker become overlydependent on the leader. Due to the overemphasis laid on the leaderadjusting his or her style according to the motivation levels of workers,the approach assumes and expects far too much flexibility on the partof the leader in an organization.

The author posits that path goal theory rather thanencapsulating the entire paradigm of a complete leadership theory, isapplicable only in part, particularly in informing a leader about whento be directive, supportive, participative or achievement oriented. Forexample, the approach is helpful in explaining that a leader shouldadopt a directive style when goals are complex and a supportive stylewhen they are unchallenging, however, it leaves room open for otherleadership variables, contingencies and anomalies for which the theoryoffers little recourse. Thus, although, the path goal theory is helpfulin the study and application of leadership in a contextual framework, itdoes not provide for breadth or scope in some of the latest advancesin leadership research especially in areas such as visioning, social &emotional intelligence, impression management, and charismaticleadership.

Conclusion

In the 1990s neurologist Antonio Domasio during his studieson emotions made a remarkable discovery. “He found that peoplewho, because of a stroke, tumor or blow to the head, have damagedcertain parts of their orbitofrontal cortex lose most of their emotionallives. As a consequence, these people are at a complete loss withrespect to decision making in their lives, even though their reasoningand logical abilities are intact. (Haidt, 2006,). Even, though they performroutine tasks well enough as before, when it comes to making evensimple decision, they simply go blank. This suggests that sound

837



emotional input in decision making is not only fundamental to theprocess but an essential commodity especially when tied to leadershipscience. Unfortunately, none of the three theories or approaches wehave discussed so far address the importance or relevance of theunderstanding and management of emotions in decision making andleadership.

Moreover, although, the trait approach has more than acentury’s worth of data to support its central tenants, including recentstudies positing the importance of certain inherent characteristicsand traits, the situational and path goal approaches to leadershiphave yet to be empirically affirmed in cross cultural research. Drenthand Den Hartog (1998) concluded, organizations in different countrieshave consistently different characteristics or patterns of memberbehavior (or whether characteristics and behavior patterns interactconsistently within cultures and differently between cultures), andwe have to determine whether these differences are actually due todifferences between cultures, and this is largely determined bywhether there is theoretical rationale for expecting the differences.

Recent research in leadership theory also points to the roleof certain other vital attributes that influence leadership in many ways.Research in charismatic leadership received a boost after PresidentBarak Obama ascended to the highest office of the United States inrecord time having almost no political roots and having been aWashington outsider. Charisma is now seen as an essential tool alongwith others to enhance the prestige of the individual and transformhim/her to a pedestal where the leader is fundamentally inspiring tofollowers or subordinates. Also, strategic visioning, innovation, andthe audacity for enterprise are proven attributes that have ledleadership thought in new directions. Apple CEO Steve Jobs, andFacebook founder, Mark Zuckerburg being recent examples. The threeapproaches have little to contribute in this changing dynamic ofleadership study. Impression Management and Image Manipulationare two more fields in which there is a great deal of ongoing research.

838



These and other areas are expanding and pushing leadershipapproaches into unchartered and yet highly penetrable new turfs inwhich the study of leadership has moved well beyond the limitedscope of the three approaches discussed so far. As leadership scienceevolves, it seems that the paradigm will move even further away fromthe scope of the three theories.

839



References

Antonakis, J. Cianciolo, A.T., & Sternberg, R.J. (2004). Leadership:Past, present, future. The nature of leadership, (pp.3-16). ThousandOaks, CA: Sage

Blanchard, K. Zigarmi, P. & Zigrmi, D. (1985). Leadership and the oneminute manager: increasing effectiveness through situationalleadership. New York, New York: William Morrow

Drenth, P. J. D., & Den Hartog, D. N. (1998). Culture and organizationaldifferences. In W. J. Lonner, & D. L.Dinnel (Eds.), Merging past,present, and future in cross-cultural psychology: Selected papersfrom the fourteenth international congress of the internationalassociation for cross-cultural psychology (pp.489502).Bristol,PA: Swets and Zeitlinger Publishers.

Evans, M.G. (1970). The effects of supervisory behavior on the path-goal relationship. Organizational Behavior and Human Performance,5, 277-298

Fernandez, C.F. & Vecchio, R.P. (1997). Situational Leadership theoryrevisited: A test of an across-jobs perspective. Leadership Quarterly,8(1), 67-84

Gardner, J.W. (1990). On Leadership. New York, NY: Free Press

Goleman, D., & Boyatzis.R, & McKee. A. (2004). Primal Leadership.Boston, MA: Harvard Business School Press

Graeff, C.L. (1997). Evolution of Situational leadership theory: A criticalview. Academy of management review, 8, 285-291

Haidt, J. (2006). The Happiness Hypothesis: Finding Modern Truthin Ancient Wisdom. New York, New York: Perseus Books

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Hersey, P., & Blanchard, K.H. (1993). Management of OrganizationalBehavior: UtilizingHuman Resources (6th ed). Englewood Cliffs, NJ: Prentice HallHouse. R. (1996). Path-Goal theory of Leadership: Lessons, Legacyand a reformulated theory,Leadership Quarterly, 7(3), 323-352

House, R.J, & Mitchell.R.R. (1974). Path-goal theory of leadership:Journal of contemporary Business, 3, 81-97

Indvik, J. (1986). Path-goal theory of leadership: A meta analysis. InProceedings of the Academy of Management meeting (p.p. 189-192).Briarcliff Manor, NY: Academy of Management.

Jermier, J.M. (1996). The path-goal theory of leadership: A sub textualanalysis. Leadership Quarterly, 7(3), 311-316

Jung, D., & Sosik, J.J. (2006). Who are the spellbinders? Identifyingpersonal attributes of charismatic leaders. Journal of Leadership &Organizational studies, 12, 12-27

Kirkpatrick, S.A, & Locke, E.A. (1991). Leadership: Do traits matter?The Executive, 5, 48-60

Mumford, M.D. (2006). Pathways to outstanding leadership: Acomparative analysis of charismatic, ideological, and pragmaticleaders. Mahwah, NJ: Lawrence ErlbaumNorthouse.P. (2010). Leadership: Theory & Practice, Thousand Oaks,CA: SAGE

Schriesheim, C.A., Castro, S.L., Zhou, X., & DeChurch, L. (2006). Aninvestigation of path-goaland transformational leadership theorypredictions at the individual levels of analysis. Leadership Quarterly,17, 21-38.

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Schriesheim, C.A & Neider, L.L, (1996). Path-goal leadership theory:The long and winding road. Leadership Quarterly, 7(3), 317-321.

Schriesheim, C.A, & Kerr, S. (1977). Theories and measures ofleadership: A critical appraisal. In J.G. Hunt & L.L.Larson (Eds.),Leadership: The cutting edge, (pp.9-45).

Carbondale, IL, Southern Illinios University Press Stogdill, R.M. (1974).Handbook of leadership: A survey of the literature, New York, NewYork: Free PressSorcher, M & Brant J, (2002), Are you picking the right leader? HarvardBusiness Review, 8, 647-802

Vecchio, R.P, & Boatwright, K. J. (2002). Preferences for idealizedstyle of supervision. Leadership Quarterly, 13, 327-342

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Yukl, G.A. (1989). Leadership in organizations (2nd ed.). EnglewoodCliffs. NJ: Prentice HallZaccaro, S.J., Kemp, C., & Bader, P. (2004). Leader traits and attributes.In J. Antonakis, A.T. Cianciolo, & R.J. Sternberg (Eds), The natureof leadership (pp. 101-124). Thousand Oaks, CA: Sage

842


Book Review What Is Global Leadership?Book Review

WHAT IS GLOBALLEADERSHIP?

Fareeda IbadDepartment of Communication

Institute of Business Management (IoBM), Karachi

The title of the book being reviewed is What is Global Leadership?It was published by Intercultural Press, an imprint of Nicholas BrealeyPublishing, Boston and London in 2011. The authors are ErnestGundling, Terry Hogan and Karen Cvitkovich. All three authors havebeen involved with the organization Aperian Global which seeks toimpart training in leadership development. The theme of the bookrevolves around the question of what is global leadership, how it hasbecome crucial for managing change strategically through a globalmindset, what are the causes that have necessitated this change andfinally, how this kind of leadership is to be achieved.

In chapter one global leadership has been rendered a keycompetency requiring global leaders to possess a particular skill setwhich will facilitate change in the way business is done in globalmarkets taking into consideration innovation, market fluctuation,demographics, culture, communication and strategies that prevail.Apart from the skill set, what is needed is a global mindset, the capacityto grasp complexity in reorganizing skill sets, the ability to adaptbehavioral practices and to possess the acuteness to perform in aglobal locale where there is an abundance of diversity in culture andbusiness practices.

The book is a qualitative research study using interviews andcase studies to provide answers to the research questions. Theauthors have provided the rationale for the book in Chapter Onewhere they have stated and identified the three megatrends that have

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What Is Global Leadership? Book Review

resulted due a fast changing global landscape. This fast changingglobal landscape calls for restructuring global leadership skills,thereby equipping leaders with the vision and strategies to functioneffectively in this new environment.

The three megatrends which the authors portend would influenceorganizational survival and growth are namely, population growth inthe developing world; changes in the balance of GDP; and rapidurbanization in Asia and Africa. In describing the three trends theauthors have not only provided a background for the researchinitiative, but have also justified the need to change present leadershipstyles to suit the global mindset. In the context of explaining theglobal mindset, the researchers have given examples of global leadersof the present day and their successes which qualify them to becalled as such. Thus, Chapter One justifies the need for the researchas timely and urgent.

In chapter two the concept of leadership and where it is derivedfrom is admirably discussed. The difference between leadership andmanagement is identified. Sufficient literature review has beenpresented, specifically in regard to multiple intelligences andneuroscience. The importance of these two areas is highlighted sinceleadership development and training is based on how intellectualdevelopment takes place. Another aspect of interpersonal perspectivesis also discussed. The authors describe intercultural training as crucialto the global context of leadership. The importance of culture ishighlighted and a case explaining the connection between cultureand neuroscience is given to justify the importance of interculturaldevelopment. The impact of the force of globalization affectingleadership sets the stage for which research in this area has becomeimperative. Chapter two states the two research questions which are, what isglobal leadership, and how is it different from leadership in general?Answers to another question, how an effective global leadership

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Book Review What Is Global Leadership?

behavior is disseminated as rapidly and efficiently as possiblethroughout an organization? is also sought This makes for a clear aimof the research; however, there is no single statement of purpose. Infact, the entire background presented becomes adequate as thepurpose for the research. The participants of the study were fourteen major organizationsfrom a wide range of industries and one nongovernmental organization.The organizations selected were located in North America, Europeand Asia with branches globally. The number of participants wasseventy and they were selected by their organizations and possessedcertain characteristics. Eighty percent of the participants were in seniorleadership positions, had been on more than one internationalassignment and were successful in their roles. The participantsbelonged to twenty-six different countries and had collectively servedon assignment to thirty-two different country destinations. In thisway the writers had presented an overall picture of participantdemographics. Upon looking at the aim of the study, the researchquestions, the tools for the research, and the participants, it can besaid that the qualitative research methodology is appropriate for thestudy. Since the data collection is in the form of interviews and casestudies, it can be said that the literature reviewed is helpful, yet sparse.

Chapter two also presents a brief overview of the research findingswhich state that ten behaviors emerged as necessary for global leadersif they could be called as such. These ten behaviors were categorizedinto five major stages. In the overview given, the authors presenteddirect quotes from the participants of the research regarding thefindings identified. The potential applications of the findings werealso discussed briefly which contributes significantly to the value ofthe research. To sum up, it can be said that the background provided was relevant;however, literature reviewed was somewhat inadequate. The studydesign is completely suited to the research questions and objectives.

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The theoretical perspective is abundantly identified, and is clearlyexplained in every chapter throughout the book. To summarize theresearch design, it can be said that participant demographics are madeabundantly clear, the methods used to generate data are mentionedand they are suitable for the purpose, but how the interviews wereconducted all over the world and regarding the development of casestudies, nothing is mentioned. All in all, the stated methodology isappropriate for the study design type.

With chapter three begins a series of chapters devoted to explainingthe ten key behaviors required of global leaders which can be acquiredin five stages. What emerges here is that the authors are of the viewthat the process of global leadership acquisition is experiential innature, that is, ‘learning by doing’. In this chapter the first stage ‘SeeingDifferences’ is presented in the form of case studies and examples ofglobal leaders and how ‘learning by doing’ worked in each situation.An emphasis is placed on two major aspects, namely ‘culturalawareness’, and ‘invite the unexpected’. The authors view culturalawareness as the first move to seeing differences. The leader’s abilityto perceive cultural diversity as critical to recalibrating his expectationsis the first rung of the ladder to effectiveness in the arena of globalleadership. The authors identify areas of differences and provide viewsof participants of the study to reinforce the importance of this behavior.

The second behavior in this stage is inviting the unexpected. Thisis possible, according to the authors, when leaders adopt a learningposture denoting openness to new learning and ideas. In this regard,the importance of language and cultural insight is highlighted. Theauthors substantiate these claims with comments of the participantsof the study and reference to literature from neuroscience and culturestudies. To sum up the chapter, the panorama of experiential learningbegins to unfold here and what can be expected to follow in thiscontext, the reader can well anticipate.

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Chapter four discusses the second stage in global leadershipdevelopment where the key behaviors of ‘results throughrelationships’ and ‘frame shifting’ are described and discussed withthe help of case studies, data revealed through interviews in the formof examples, and quotes of the interviewees. These two key behaviorsare a part of the second stage of ‘Closing the Gap’. The authors’assumptions that strong relationships across cultures will facilitategetting the job done are supported via the above mentioned sourcesof data. The importance of interdependence, leveraging of relationshipnetworks and finding a cultural guide are significant measures usedby global leadership to achieve organizational objectives.

The second important key behavior to be practiced by globalleaders is identified as frame-shifting. This is a strategy used to closegaps when traversing national and cultural boundaries within whichmajor differences exist. The challenges in this area are in the contextof the communication style, leadership style, and leadership strategy.The authors provide a theoretical connection of neuroscience andculture in this regard, as well as communication techniques, leadershipstyles emanating from the views of the participants of the study.Leadership strategy is also identified by the authors by providingexamples from case studies. A meaningful picture of the phenomenaunder study is being revealed and the authors are well on the way toproviding answers to the research questions in a well-documentedmanner.

In chapter five the authors discuss the third stage of globalleadership development, ‘Opening the System’ where two moreleadership behaviors are discussed, namely ‘expand ownership’ and‘develop future leaders’. The authors maintain that after identifyingthe differences that persist between markets and business practices,it becomes necessary to examine systemic issues if businesses are togrow and flourish. In this regard, leaders can minimize distancesbetween their global associates and themselves by breeding strongrelationships and frame shifting. All this is possible if the cache of

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ownership is expanded and the development of future leaders isencouraged. To expand ownership means to establish a culture whereengagement in work and accountability for positioning and achievingtargets is shared between the leader and his counterparts in otherglobal locations. This can be achieved by updating systems in thelight of local culture and customs. This basically means that processesthat were viable at headquarters in a western location may not work ina regional location and would need to be remodeled. Accountabilityshould also be shared by applying the diversity principle ofinclusiveness which means that the leader would adapt decision-making processes with input from regional counterparts.

In developing future leaders, another step to expanding ownershipneeds to be taken, and that is of ‘opening the system’ for new leadersto emerge from global locales whose project leadership skills would behoned to produce global leadership. In this context, high potentialindividuals from all global regions be selected so that leadershipexperience becomes more generic, i.e., having skills to deal efficientlywith headquarters. The authors used case studies and examples toexplain how ownership can be expanded. In discussing how futureleaders can be developed, the authors used data from neuroscienceand culture studies to support their assumptions. The chapter is amplyinterspersed with examples and quotations from the data elicited inthe research and provide the ground for the authentication of thestudy.

In chapter six the authors discuss ‘Preserving Balance’ as a part ofleadership activity. It has always been maintained via previous researchthat flexibility and adaptation are important for global leaders. Theauthors of this book maintain that adaptation rests on the leader. Thelocal culture will not adapt, it is the leader who will have to adapt. Thisstage of development discusses two more key behaviors, ‘adapt andadd value’, and ‘core values and flexibility’. These behaviors will helppreserve balance. How leaders adapt to the local culture will make forconstructive change which will add value. Further ways of achieving

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balance are by building mutual respect and devoting time to know thenew environment. This can be done by asking questions to challengethe status quo and presenting new perspectives. Positioning theleader’s role was another adaptation technique where the leader drivesnew initiatives with imposing his own expertise.

In regard to core values and flexibility, the data gleaned from theresearch supported the notion that learning the values of the newculture would help in establishing meaningful relationships whichwould allow for support from local colleagues, thereby allowing theleader to be flexible and effective in the new environment. Inability tobe flexible would never allow a leader to be successful. Another aspectof dealing with core values was in regard to dealing with corruptioneffectively. When this happens, an atmosphere of fairness, honesty,respect, effective feedback, openness, respect for the law, allegianceto common objectives and meaningful allocation of resources follows.The authors have used case studies, examples and quotations tosupport their views.

Chapter seven discusses the final stage of global leadershipdevelopment where ‘Establishing Solutions’ emerges as a conceptwhen testing the effectiveness of leaders in global locations. ‘Influenceacross boundaries’ and ‘third way solutions’ are key behaviors thatassist in the act of creating solutions. Influence across boundariesrefers to global leaders being able to work where support systems areunequal to their home markets, having to work without direct authorityand being able to influence others across the organizational matrix.Additionally, they need to serve as ambassadors of their countryboth inside and outside the organization. Their influence must extendacross functional boundaries and they have to create solutions in anatmosphere where there is freedom to experiment and follow a rapidlearning curve. Third way solutions means being able to put everything together,drawn on all the behaviors discussed earlier, and produce realsolutions. As usual, the authors use case studies, examples, and

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views of interviewees to support their assumptions. At this point theauthors mentioned a drawback of their research approach when theystate that they compared role expansion between global and domesticleaders. However, they claimed that data from interviewees revealedthat the level of responsibility of global leaders far exceeded that oflocal leaders.

Chapter eight, nine and ten deal with training, teaming and coachingthe ten key behaviors that global leaders must adopt. In this regard,an experiential program design is outlined. The researchers bring tolight the fact that most leadership models, although labeled as ‘global’are developed and shaped keeping in mind Western and U.Sperspectives and may not prepare leaders to function effectively inother cultures which are hugely diverse. All training strategies to learnthese behaviors are supported with examples where they havesucceeded.

The final chapter of the book, entitled ‘The Future of GlobalLeadership’ once again emphasizes the concept of ‘multiplexity’ as amust have skill. The differences between domestic and global leadersare highlighted. The authors recap the process by summarizing bothindividual transformation and organizational transformation. The‘learning by doing’ process transforms both the individual as well asthe organization. The outcome of in-depth interviews and focus groupoutcomes is also discussed as a part of the research effort. This aspectwas spread over a period of two years involving senior leaders fromFortune 100 companies where practitioners and academics were askedto describe global leadership efficacy, distinguish global efficacy voidsin organizations and recognize impediments to closing these voids.Data emerging from this strategy was surprisingly consistent andparticipant answers were unanimous. As a result of these findings,the organizational global mindset emerged as a phenomenon thatcannot be ignored and must be adopted if organizations are to survivein the dynamic business landscape. Step by step strategies fordeveloping global leaders have been outlined and supported by case

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studies. The authors conclude that if business results are to beachieved, the model companies of the future must build globalleadership by a focused development of their workforce spanning allglobal locales.

The book presenting a true picture of global leadershipdevelopment experientially is a bold research effort which has changedthe way leadership has been perceived in the past into somethingrevolutionary, given the strategies outlined for its acquisition. Thewriters not only have a command over the concept of globalleadership, but have a command over the writing style, language andthe research methods. The interspersing of research data findingsalong with their views ably supports their belief about globalleadership competencies.

The authors’ use of hard science and organizational researchrenders the book as an authoritative guide to global leadershipdevelopment. All in all, this highly readable, lucid and provocativework does not disappoint the reader and serves as an excellentresource for companies to use in employee training and leader-ledaction learning.

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Volume 14 Number 4 January2013


INSTRUCTIONS TO AUTHORS(Research Section)

1. Papers must be in English.2 . Papers for publication should be sent in triplicate or by e-mail to:

Managing Editor, Pakistan Business ReviewInstitute of Business Management

Korangi Creek, Karachi- 75190, PakistanUAN: (9221) 111-002-004 Fax: (9221) 3509-0968, 3509-2658

E-mails: [email protected], [email protected]

Submission of a paper will be held to imply that it contains original unpublished work and is notbeing submitted for publication elsewhere. The Editors do not accept responsibility for damages orloss of papers submitted.

3 . PBR is a multi-disciplinary journal covering all subject areas of relevance to business inPakistan. Research in the areas of Finance, Human Resources, Management, Informatics,Marketing, Psychology, Economics and issues related to governance is specially encouraged.

4 . Manuscripts should be typewritten on one side of the page only, double spaced with widemargins. All pages should be numbered consecutively, titles and subtitles should be short.References, tables and legends for figures should be typed on separate pages. The legends andtitles on tables and figures must be sufficiently descriptive such that they are understandablewithout reference to the text. The dimension of figure axes and the body of tables must beclearly labelled in English.

5 . The first page of the manuscript should contain the following information; (i) the title; (ii)the name(s) and institutional affiliation(s); (iii) an abstract of not more than 100 words. Afootnote on the same sheet should give the name and present address of the author to whomreprints will be sent.

6 . Acknowledgements and information on grants received can be given before the references orin a first footnote, which should not be included in the consecutive numbering of footnotes.

7 . Important formulae (displayed) should be numbered consecutively throughout the manuscriptas (1), (2), etc., on the right hand side of the page where the derivation of formula has beenabbreviated, it is of great help to referees if the full derivation can be presented on a separatesheet (not to be published).

8 . Footnotes should be kept to a minimum and be numbered consecutively throughout the textwith superscript arabic numerals.

9 . The references should include only the most relevant papers. In the text, references topublications should appear as follows: “Khan (1978) reported that….” Or “This problem hasbeen a subject in literature before [e.g., Khan (1978) p. 102].” The author should make surethat there is a strict “one-to-one correspondence” between the names (years) in the text andthose on the list. At the end of the manuscript (after any appendices) the complete referencesshould be listed as:for monographs and books.Ahmad, Jaleel, 1978, Import substitution, trade and development, Amsterdam: North-Holland,For contributions to collective worksNewbery, Daved M.G., 1975,. The use of rental contract in peasant agriculture, in: Reynods,ed., Agriculture in development theory, New Haven: Yale University Press p. 3-40.

Continued next page



INSTRUCTIONS TO AUTHORS(Research Section)

From previous page:

For periodicalsBaumol, W.J., 1982, Applied fairness theory and rational policy, American EconomicReview, 72(4): 639561.Note that journal titles should not be abbreviated.

10 . Illustrations should be provided in triplicate (one original drawn in black ink on whitepaper and or with two photocopies). Care should be taken that lettering and symbolsare of a comparable size. The drawings should not be inserted in the text and shouldbe marked on the back with figure numbers, title of paper and name of author. Allgraphs and diagrams should be numbered consecutively in the text in arabic numerals.Graph paper should be ruled in blue and any grid lines to be shown should be inkedblack. Illustrations of insufficient quality which have to be redrawn by the publisherwill be charged to the author.

11 . All unessential tables should be eliminated from the manuscript. Tables should benumbered consecutively in the text in arabic numerals and typed on separate sheets.Any manuscript which does not conform to the instructions may be returned fornecessary revision before publication.

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