Investing in stocks is a tricky business. You do it wrong and you lose money fast. You do it right and you can laugh your way out of the bank. Companies like Apple and Microsoft have been some of the fastest-growing companies riding on the wave of the third industrial revolution. If you invested in these companies in the 1980s, you would have had a multi-bagger in your portfolio. This is the reason people are looking into the best ai companies to invest in.

Artificial intelligence could be the next big thing. Companies that rely heavily on AI can offer good returns for the shareholders as this technology matures. Although there is no guarantee, however, research shows that companies that rely on technological innovations typically offer higher returns.  

Methodology

We employ an aggregated information approach for preparing the list of top companies to invest in. We used the information from six different sources to prepare the initial list of companies. Then we filtered the list based on the AI centricity of the company. We eliminated companies that are not primarily based on AI. We used the company homepage and the latest annual report to ascertain the AI-centricity of the firm. Then we tallied the number of sources citing these stocks as value AI investment. 

The top 3 AI companies to invest in 

1. NVIDIA 

2. IBM 

3. Amazon

NVIDIA (NVDA)

Nvidia is an American company known for its graphics cards or Graphical Processing Units (GPUs). The homepage of their website clearly demonstrates their commitment to artificial intelligence. The title of the page reads ‘Artificial Intelligence Computing Leadership from NVIDIA.’ NVIDIA has invested heavily into technologies that can drive the artificial intelligence platforms of the future. The tech-savvy readers may be aware that AI can benefit immensely from the use of GPUs. GPUs are far more optimum for AI type of computation when compared to CPUs or Central Processing Units. A modern GPU may contain over 1500 to 5000 processing cores while a CPU typically has about 4 to 12 cores. Also, the manufacturing of such sophisticated hardware has very deep dependencies. You can’t have an overnight competition from new entrants. Remember Porter’s five forces? 

There is a strong reason for the inclusion of NVIDIA in most of the lists presented above. Firstly, hardware is an essential player in any digital transformation. If we look back to the 1980s and 1990s, Major hardware players saw immense growth. The steam story can be repeated in this industrial revolution as well. NVIDIA is one of the largest companies in the world that is focused on making hardware for AI computing. Therefore, it will enjoy a decent market share in the foreseeable future.  

IBM (IBM) 

IBM is one of The Pioneers who jumped on the AI bandwagon. They have been marketing their AI supercomputer, which is the IBM Watson for over two decades now. It got a lot of media coverage when it defeated human players in the game of Jeopardy. However, it has now evolved into a full-fledged enterprise AI solution.  

On one hand, we saw how NVIDIA plans to create value through AI hardware products. On the other hand, IBM positions itself as a service company. IBM offers a host of software as a service or SaaS packages for AI-based applications. Some of the key offerings are: 

1. IBM Watson Assistant – multichannel communication solutions 

2. IBM Watson Discovery – data analytics platform 

3. IBM Watson Natural Language Understanding – text analytics 

4. IBM Watson Speech to Text – transcription services 

5. IBM Watson text to Speech – TTS engine 

6. IBM Watson Knowledge Studio – domain specific knowledge 

7. IBM Watson Language Translator – translation engine 

8. IBM MaaS360 with Watson – cloud unification 

They have built some specific industry or domain-specific tools and solutions. It encompasses everything from IT security to marketing automation.  

Amazon (AMZN) 

Although IBM was one of the highly revered companies of the 20th century, Amazon commands a similar respect today. We can safely say that it is not a startup anymore. Amazon has matured as not the largest marketplace in the world, but also a leading cloud service provider. It offers a host of AI as a service over its AWS or Amazon Web Services platform. Secondly, Amazon is also one of the leaders in AI assistants. Amazon Alexa is the third most popular virtual assistant after Apple Siri and Google Assistant. 

When we specifically talk about the enterprise AI solution, the first Amazon product that comes to mind is Amazon SageMaker. They try to differentiate it from other solutions by making it easier to build and deploy. This platform promises easy deployment of ML algorithms. They offer solution-specific algorithms related to Business process centers, marketing, document processing, fraud detection engines, media intelligence, data analytics, DevOps, and business transformation. 

Are there some other AI companies to invest your money?

Of course, there is no dearth of good investment opportunities. Firstly, this list focuses only on American companies. There are several AI companies located in different places in the world. Also, many new AI startups are coming up every day. It requires higher due diligence to invest in these smaller companies. You may need to closely follow the latest IPOs to catch these investments early. We shall be updating this list with such opportunities soon. However, in this list, we have only included the top three companies that are relatively safer bets. These companies are also diversified into many different business domains. This diversification of business means a lesser risk for the investors. Please feel free to share your thoughts in the comment section below.

The post Top AI companies to invest in 2022 appeared first on Management Weekly.

Countries across the globe are becoming very specific about the reporting standards. This is essential in the case of accounting for carbon credits as well. The environmental aspects are an integral aspect of financial reporting now. It is no longer a question of whether firms should do it but the question is that of how should they do it.

Although the big four accounting firms have their standard practices, the onus is there on the governments to make provide a standard. However, the accounting standards are yet to provide clear guidance in this regard. Therefore, we observe a lack of parity when we compare companies that are reducing their carbon footprint.

A Quick Introduction to Carbon Credits

One of the dark sides of economic growth is the damage it causes to our environment. There was a growing debate about measuring this damage, which leads to the development of carbon credits. The Kyoto Protocol came into existence in 1997. It extended the scope of the United Nations’ Framework for Climate Change. The objective was to ensure that countries actively participate in reducing their Green House Gases (GHG) emissions.

Therefore, the concept of carbon credit was created. Carbon credit refers to a tradeable certificate that allows an entity to have one ton of CO₂ emissions. Now, it is also important to note that when we are talking about CO₂ emissions, it also includes the equivalents. For example, a manufacturing plant may produce other gases like methane which can be converted to equivalent CO₂ emissions.

The Kyoto Protocol provides practical ways to reduce the overall GHG emissions of the world. One of the ways of reducing carbon emissions is by reducing the GHG emissions in a country where it is easier or cheaper. For instance, it may cost a Japanese country USD 100 million to reduce GHG emissions in its plant in Kyoto. However, it can pay USD 40 million to a manufacturing plant in Vietnam to achieve the same results. Similarly, on a country level, let’s say China produces an excess carbon in the year 20XX. They can purchase the same amount of carbon credit from a country that has less carbon emission.

⚡  NOTE ► Scopes of emissions

Companies like Facebook or Airbnb may not have factories or manufacturing plants that create greenhouse gases. These companies may not have this type of environmental impact called ‘direction emissions’ or they may have very small direct emissions. Nevertheless, they may still have indirect emissions. Therefore, they are also bound by the regulatory requirements. For instance, Microsoft extensively works on its CSR activities to ensure that they are not just compliant but also proactive in sustainability. Similarly, Amazon’s CSR reporting ensures that they assess their direct as well as indirect activities. A study on Airbnb stays in Sydney revealed that the indirect emissions would be significant for the firm. They estimate that each stay generates anywhere between 44 to 46 kg of CO2.
Greenhouse Gas Protocol posits these three scopes for emissions:
Scope 1: Direct emissions from sources owned by the company
Scope 2: Indirect emissions that result from the purchase of energy
Scope 3: Emissions as a result of the upstream or downstream activities in a company’s value chain.
It is most difficult to work on accounting for carbon credits for the scope 3 emissions.

The carbon transactions

Let us understand this concept from scratch by taking a simplified example of two firms: Cherry LLC and Pineapple LLC. These are (fictitious )large multinational corporations based in Northern New Jersey. Both provide Software as a Service (SaaS). However, they have very different approaches to energy usage.

Cherry is an older company therefore uses older servers, and draws all of its electricity from the power grid. Around 57% of the power comes from natural gas. Therefore, it indirectly contributes to significant carbon emissions. Let us say it emits 100 tons of CO₂ equivalent (also called eCO₂t).

On the other hand, Pineapple set up its servers recently and invested $20 million in renewable electricity plants. They end up emitting about 20 tons of CO₂. Let us say that local emissions regulations require them to stay within 80 tons of CO₂ equivalent for a year. In this case, Cherry will purchase 20 carbon credits from Pineapple and maintain the requirement.

Accounting Methodology

Although accounting methodology may vary from the practices of a particular geography, we have attempted to provide an overview of the standard practices:

Carbon Credits accounting at PwC

PricewaterhouseCoopers is a leading accounting and consulting firm. They are among the big four accounting firms. Therefore, it is pertinent to understand their functioning and prerogatives in the context of carbon credit accounting. PwC sustainability accounting consists of the following aspects:

• Understanding the client requirements
• Client assessment through an internal audit
• Preparation of the reports in accordance with the local regulations
• Life cycle assessment of the products, processes, and services
• Consulting in the improvement of sustainability practices

Summary steps of CER accounting from PwC:

1. Define the scope of business operations
2. Establish the organizational boundaries
3. Categorize scope 1, 2, and 3 emissions
4. The reporting process is developed
5. Data analysis and preparation of reports
6. Assessment of energy and emissions
7. Report preparation

Accounting systems for IFRS

IFRIC 3 and its withdrawal

The International Financial Reporting Standards (IFRS) are global accounting standards provided by the International Accounting Standards Board or IASB. IASB is non-profit organization that develops reporting standards that are standardized across the world. This provides an easy, understandable and enforceable mechanism. Way back in 2004, they intended to offer a standard that could standardize the carbon credit reporting. The figure below shows their objective for introduction of the IFRIC 3 which encompassed a vast array of schemes as shown in image below.

Current state of sustainability at IFRS

However, they met with resistance and criticism and they had to withdraw IFRIC 3 in 2005. You may read about IFRIC 3 and subsequent standards here. However, they continue to look into the carbon and emission reporting systems. IFRS has proposed to establish a separate board for sustainability to look into these matters. Inclined readers may wish to download and read the consultation paper on sustainability reporting from IFRS from this link.

Guidance note on Carbon credits from ICAI

The Institute of Chartered Accountants of India, has added a section on accounting for Carbon Credits. It is reflected in the final year syllabus of the program. This is a welcome change as the future accountants are expected to be abreast of environmental accounting. This will also prepare them for specialization into reporting and governance requirements.

ICAI has an accounting standards board. They have developed the standard for carbon accounting (31-GN-CER). You may view the pdf of the guidance note via the ICAI website. It is based on the Self-generated Certified Emissions Reductions or CER. This saleable certificate is nothing but a legally binding contract note for carbon credits in the same unit we discussed earlier (tCO₂e or tons of CO₂ equivalent). These come under the Indian Accounting Standards IAS 26.

The GN 31 specifies the following (pg 450):

• The investments in technology that leads to emission reduction is reported as tangible assets under AS 10.
• However, expenditure on R&D is accounted as intangible assets and comes under AS 26.

The post Accounting for Carbon Credits appeared first on Management Weekly.

A bank customer can be defined as any legal entity like individuals or firms which interacts with and uses the bank’s facilities. We look at the types of bank customers based on these three criteria: the type of legal entity, size of business, and the type of account.

Who are the customers of banking services?

People from all walks of life require banking services. In fact, most of us cannot imagine a world without banks. Most of the larger transactions today, take place electronically. Banks form intermediaries between different parties. At the same time, banking services like money keeping, borrowing, and lending are used universally. This brings us to the question that what are the different types of people who use these services?

We can define the customers based on many different criteria:

1. Type of legal entity
2. Size of business
3. Types of account

Now let us look at each one of these, one by one:

Type of legal entity

A legal entity is something that has an independent existence in the eye of law. We may have different entities that take the use of banking services. Therefore, they become a bank’s customers. Here are some examples:

1. Individuals
2. Firms (such as a partnership, company or proprietorship)
3. Government
4. Bodies such as NGOs, Societies, etc

As we can see that each of these types of banking customers may have very different needs. An individual operating a savings account will be interested in getting her/his salary credited to their account and using the same to meet day-to-day expenses. On the other hand, a partnership firm that holds a current account with the bank may be happy when they receive a higher overdraft facility for their account.

Similarly, the other two types of customers may have their own sets of expectations. A government may have different accounts for each department or unit for various needs. Similarly, entities like NGOs and societies also need to store money safely. They may also need a line of credit from time to time. Therefore, they are also an important type of customer for the bank.

Size of business

We may also categorize the customers through the size of the business. This kind of categorization is important. It helps the bank in segmentation. Further, this segmentation helps the banks in developing their marketing mix.

Usually, the most useful types of bank customers banks are larger firms and rich individuals. These types of customers have a higher average account balance. This provides the necessary cash for the banks to survive. Such customers may also be sources of revenue through secured/unsecured loans. A bank may have dedicated relationship managers assigned to handle such customers.

On the other hand, we have retail customers. These customers have smaller transactions and smaller balances individually. However, on an aggregate level, they form a bulk of business for the entire banking industry.

Bank accounts for specific customer segments

Another strategy is to provide bank accounts that cater to specific demographics or types of bank customers. It is imperative that certain customer segments will have a different need than others. For example, senior citizens may have a lot of cash savings to keep in the bank with little liabilities. On the other hand, youth may have less cash but are heavy on liability.

Therefore banks may create accounts for special segments. For instance, one of the large private banks in India, Axis Bank offers these types of savings accounts:

1. Youth account
2. Women account
3. Children Account
4. Senior Citizen account
5. Digital Account

Types of accounts

Banks may also have different categories of accounts for the specific needs of the customers. The naming convention and the specific modalities may change from one country to another. However, all the banks have some specific categories of account types. Some of these are:

1. Savings account – this is the most common type of bank account. It is commonly used by different types of customers. It is the same as Sparkasse(Germany).
2. Checking account(USA) or Chequing account, Current account(India, UK), or Demand deposit account. It is also known as Girokonto(Germany).
3. Trading account or brokerage account. A brokerage account allows you to trade in stocks. Sometimes the account may allow delivery of stocks as well. Most modern exchanges use a digital form of stock delivery hence such accounts are called dematerialized accounts. The short form is a Demat account.
4. Forex account or Money market account. Customers who wish to trade in currency may opt for a forex account. The bank may allow forex customers heavy leverage. It helps the customers in holding bigger positions in the money market.
5. A retirement account is another type of bank offerings. Usually, these accounts help the customers in saving up for retirement. The rate of return is higher than the regular deposit account.

The post Types of Bank Customers appeared first on Management Weekly.

A lot of companies closed down because they don’t have enough cash to pay for their liabilities. This necessitates certain measures to analyze the financial situation of a firm. Let us take a look at one of the most commonly used financial ratios. Current Ratio interpretation can also give us a way of predicting any major problems that can lead to catastrophic failure of the firm. 

The formula for Current Ratio  

The current ratio is calculated by dividing the current assets by the current liability. It is important to note that both of these are “current”. This means that the assets and the liabilities are supposed to be met in the short run. Typically we take a period of less than a year. When a firm has the ability to pay back in the short term, we say that it has higher liquidity. Some of the liquid forms of money are bank balance and easy to sell investments. On the other hand, assets such as a factory may not be easy to sell to cover immediate requirements.

What are examples of Current Assets? 

• Cash 
• Assets that are equivalent to cash 
• Easy to trade investments 
• Account receivables 
• Raw materials  

What are examples of Current Liabilities?

• Accounts payable
• Deferred payments
• Fees and taxes
• Short term loans

How to interpret the Current Ratio?

Another important aspect is that what is considered a ‘good’ current ratio and what is a ‘bad’ one? It completely depends on the industry.

Factors that impact the Current Ratio

There are two factors that impact this ratio, current assets, and current liabilities. Firstly, let us discuss the current assets. Some of the important controllable factors are raw material and inventory. Inventory can be both work in progress as well as finished goods inventory. A company can attempt to go leaner in its production to reduce the material and work stuck in progress. This material and inventory is essentially money that is stuck. Therefore, a shorter cycle time of converting raw material into finished goods will also improve the current ratio.

For example, we may compare the current ratios of a highly optimized production system like Toyota with respect to a highly performance-oriented production like Ferrari. While Toyota has a CR of 1.5, Ferrari has a CR of around 4.7.

Additionally, firms may work around CR as well. Expensing vs Capitalizing can play a role in ‘adjusting’ the CR. Therefore the interpretation of the current ratio may not be very accurate.

Common mistakes in Current Ratio interpretation

1. Never compare CR for companies from different industries. It can be misleading
2. A higher CR is not always better and a lower CR is not always bad. It is only an indicator and we need to look into the current assets and current liabilities to understand it better.
3. The Current Ratio is not the same as Acid Test or Quick Ratio. QR takes into account only the easily liquidated assets like cash and does not include the inventory.

The post Current Ratio Interpretation appeared first on Management Weekly.

Expensing vs capitalizing is one of the key financial decisions for a firm. Whenever we spend money, it can either be shown as an expense or towards the capital. Nevertheless, there are some basic guiding rules that can help us understand why and how one should be selected over another. 

What is an expense? 

An expense is a cost of running any business. We have to shell out some money to run the operations of the firm. Expenses are like inputs to the business which in turn helps us run the operations. Finally, business operations provide us with a stream of revenue. However, not all expenses are operating expenses. Some expenses that do not directly contribute to running the business are also incurred. These are called non-operating expenses. 

Some common expenses: 

• Cost of raw materials 
• Cost of other supplies 
• Salary of staff 
• Depreciation 
• License fees  

Benefit of expenses:  

Although, expenses may seem evil. They are also tools to maneuver financial management. Here are some of the benefits of expenses: 

• Some expenses are tax deductible. This means that from the taxable income, we can deduct these expenses. Therefore, our taxable income becomes lesser.  
• Typically, easier to manage than capitalization.  

 There are two ways to record the expenses: 

1. Cash basis 

2. Accrual basis 

The cash basis is a simpler method. Here, we record the expenses as and when they occur. On the other hand, the accrued expenses are recorded when billed. For example, let us consider your firm purchased a three-year subscription of Adobe software suite billed annually at $600. This means that the monthly subscription cost is $50. If you expense it out monthly then you will have an expense of $50 every month on your income statement. On the other hand, if you put it down as a one-time cost of $600 then you are using the accrual cost basis. 

What is capitalization? 

The capitalization method is essentially recording the cost as the value of the asset. For example, if you spend $40000 to repair a machine, it can be recorded not as an expense but as a restoration cost. If the original cost of the machine was $200,000 then the balance sheet will record it as $240,000.  

This cost expensed through the life of the asset. Typically, the smaller purchases like office stationaries may be recorded as an expense while the purchase of expensive machines may be recorded as capitalization. These large assets are also called fixed assets. However, we need to match the cost to the accounting period. Therefore, we amortize the asset over a period of time. For example, our expense of $40000 extends the useful life of our machine by 5 years. Therefore, we can amortize it as $8000 every year. 

The RAB thumb rule 

One of the thumb rules for capitalization is RAB. The cost incured in the following may be considered as capitalization: 

1. Restoration costs 

2. Adaptation costs 

3. Betterment costs  

Benefit of capitalization 

Capitalization has a direct impact on the balance sheet. However, it also has an indirect impact on the income statement. When we capitalize on it, it helps us in reducing the variability in the income statement. One of the reasons for the same is that expenses are less predictable than capital costs. Consequently, there could be a year on year difference in the expenses. When it is capitalized, it projects a more steady income. This helps in signaling investors and may enhance confidence.  

Difference between expensing vs capitalizing

It may appear from the discussion, that any cost can be easily manipulated as an expense or capitalization. However, that is far from the truth. In fact, we need to work withing certain several frameworks regarding expensing vs capitalizing. Firstly, and most importantly, firms in each country have to follow the national accounting standards. For instance, accounting standards mandates leases longer than certain periods be recorded as assets. Secondly, the governance guidelines of a firm also dictate these terms. A firm may set that any expense higher than $20000 is considered as capitalization. Thirdly, it is also dependent on geography/industry-specific practices.  

Expenses can help maintain the balance sheet as it appears in the income statement. The same expense can be also capitalized and therefore would be shown in the balance sheet. However, accounting honesty is critical for the going concern of a firm. Ethical businesses that are transparent have higher returns.

The post Expensing vs Capitalizing appeared first on Management Weekly.