If you’re in Australia then of course you can visit the gym at 3am….

One of my favourite countries is Australia. I’ve got some good friends there who are lucky enough to be able to enjoy the sunshine, outdoor life and great food that is present in Australia. They are also a very sporty nation being strong in sports such as rugby, cricket and not to forget surfing!

They were visiting London recently and I was chatting to them (in a coffee shop whilst it was raining outside…) and they were talking about a new chain of gyms that has opened in Australia called Jetts Gym. What was unusual about the gym was that it was open 24 hours a day and was focused on providing great exercise equipment but eliminated the “fancier” parts of a health club such as saunas, Jacuzzis and spas.

They kept the quality of the gyms high but managed to reduce costs by using techniques such as:

  • Locating the gyms in residential areas to encourage people to shower and change at home (save costs by not having large changing facilities).
  • Using full time video surveillance and only using staff during the peak times (save on staff costs).
  • Removing expensive items such as Jacuzzis.

There were clear benefits to the customer in having 24 hour access and the cost of membership was approximately half of the price of the average gym membership in Australia.

Using Bowman’s strategy clock model where does Jetts fit?

I would argue that it’s a low price with a medium to high perceived benefit. Are we looking at a Hybrid on the clock?

Either way, I’m not convinced I’d be using a gym at 3 in the morning!

Christmas parking and Michael Porter.

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You’re all no doubt undertaking some “last minute” revision in the run up to the P3 exam next Wednesday.

Christmas is fast approaching and I always tend to leave my shopping to the “last minute”. Christmas Eve for me is normally a mad rush around the shops trying to buy presents before the shops close. This year I’m determined that it’s going to be different.

I drove into town nice and early yesterday to try to beat the rush of Christmas shoppers but alas it seemed that everyone else had the same idea. Parking is always a problem near Christmas but there were two temporary car parks that had opened up for Christmas.

One was a large open area about 20 minutes walk from the main shopping area. You paid your money to park and simply parked wherever you could. The other one was closer to the shopping area and they actually washed your car whilst you were shopping.

Whether it’s me still being in the P3 mode but the first thing I thought about when I saw the car parks was Porter’s Generic Strategy. Out of the two car parks which one do you think was a cost leadership approach and which one was a differentiation approach? Put it this way, the car park close to the shopping area where they washed your car was 3 times the price of the other one so one of them was charging a premium price for a “different” product.

Best of luck in your exams on Wednesday!

Changes to NIC. In 2011…..

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Hopefully you’re taking a well deserved break after the ACCA F6 exam last Monday. That is of course unless you’ve got another exam coming up next week!

However, even though you can relax a bit now when it comes to learning tax rules for the December 2009 exam, tax is in the headlines in the “non exam world”. On Wednesday, Alistair Darling, the UK Chancellor delivered his pre-Budget report.

The press in the UK has been full of stories recently about the high bonuses that a number of banks were planning on paying some of their staff. This was causing uproar amongst the majority of the public given that the public had bailed out the banks earlier this year. The Chancellor announced in his pre-Budget report that banks will have to pay a 50% tax on bonuses in excess of £25,000 that are paid between now and April next year.

However, probably of more interest to the “tax people” amongst us is that he announced that all rates of National Insurance (for employer, employee and self-employed) will increase by an additional 0.5% from April 2011 (this is in addition to the 0.5% increase announced in his pre-Budget report last year.

This change alone is expected to raise in the region of £4bn in the financial year 2011/12.

Whilst this is interesting to know make sure that you refer to the latest set of our ExPress notes to find out what rates of National Insurance are actually examinable in the exam you’re sitting!

It wasn’t a Black Tuesday….

Was last Tuesday good or bad for you? Did you feel happy or sad when you left the exam hall after the ACCA P7 exam?

I only have one bit of advice after the exam and that is to forget all about your performance in the exam as you can’t change the result at all. There’s no use in worrying about the performance and instead just relax and enjoy life without having to study for P7!

One thing for sure is that last Tuesday was not as bad as the infamous “Black Tuesday” of 29 October 1929. This date is commonly considered to be the start of the Great Depression in the US in the 1920s with shares losing 13% of their value on Black Tuesday.

So, no matter how well or badly you think you may have done in the exam on Tuesday, rest assured that it definitely wasn’t a Black Tuesday.

Best of luck for your exam results but remember, forget about them until the results are out in a couple of months!

Historical costs deserve more friends.

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Historical cost accounting lies at the core of accountancy.  It’s derived from the simplicity of debits and credits and is therefore where we all start in our studies and practice of our profession.

The idea is simple; I pay some cash and that gives me either an expense or an asset.  With the exception of freehold land, all assets are simply future expenses, as all assets except freehold land wear out.  This means that sooner or later, they’ll all pass through profit and loss as an expense.

There are some well-known problems with historical costs.  Most notably, they begin to fall apart in terms of reliability during a period of inflation.  Depreciating the cost of a factory bought 20 years ago gives a lower depreciation charge than a factory bought last year.  If inventory is held for a long time before sale, historical cost accounting matches today’s revenue with yesterday’s costs; thus overstating profit.  All these things damage the relevance and reliability of financial statements and reliability is one of the core characteristics of what makes financial information useful, according to the IASB Framework.

Relevance and reliability aside, let’s face it; historical cost accounting is just not very sexy.  Dreary and reliable and borne of something as mundane as debits and credits, it’s hard to get excited about a balance sheet (SOFP) that shows its assets just as what was paid for them rather than what they’re worth.  So, enter revaluations and fair values.  Modifying historical cost accounting for revaluations means assets are shown at a more up-to-date, relevant (and frankly higher) value.  But it comes with a downside – your depreciation charges will now be higher, thus reducing profit.  Your eventual profit on sale will be lower, as the carrying value used to calculate profit will be higher.  Increasingly, you might come to have problems with investors not trusting the revalued amounts.  So perhaps we’ve substituted one form of plodding unreliability for a higher octane form of volatile unreliability?

This is a debate that has two valid sides to the argument.  But recent stock market falls and pervasive impairment losses mean that we suspect that the familiar world of pure historical cost accounting might start to look more attractive again.  It might be a bit dull, but at least people know what it means.

Tax free but it won’t be examined.

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Last Thursday a small picturesque toll bridge across the River Thames about 65miles (100km) away from London was sold for more that £1m.

Cars pay 5p to cross the bridge whilst lorries pay up to 50p to cross. This may not seem like a lot of money but it mounts up and gross annual revenue is reported to be in the region of £200,000.

What is unusual about the bridge though is that the owner is exempt from paying income tax, CGT, inheritance tax or VAT on it due to an ancient law passed in the 1700s which only applies to this particular bridge. “Grossing up” the income to take account of the fact that it is tax free suddenly results in quite a nice rate of return!

You can rest assured though that this will NOT be examined in the F6 paper. Make sure however that  you’re aware of other exempt income such as Individual Savings Accounts (ISAs) which could easily be examined.

IFRS 9 examinability

Graham Holt, the examiner for ACCA paper P2, has long stated that he wishes P2 to remain a “cutting edge” paper.  This means that he is fond of testing new accounting standards, especially those that are controversial.  We at ExP think that this is both appropriate and fair.

We’ve been asked by a number of people via the “ask the tutor” facility whether the new standard for financial instruments, IFRS 9 could be examined in the December 2009 exam.  The answer is that IFRS 9 is definitely not within the scope of the P2 exam in December 2009, though it will be from June 2010.

HOWEVER, the controversy around some of the perceived weaknesses of IAS 39 would be within the syllabus for the December 2009 exam.  This means that the new rules won’t be examined, but we can easily imagine a question that asks, say, if the number of different classifications within IAS 39 is excessively confusing and asking students to criticise whether people can really be expected to know all of IAS 39’s rather piecemeal rules.  For example, the treatment of transaction costs is rather inconsistent within IAS 39 depending on the initial categorisation of an investment; so that the same investment in the same shares could be required to include transaction costs (if classified as available for sale) or require that those transaction costs are written off (if classified as held at fair value through profit or loss).

Similarly, some weaknesses in IAS 39 that could be “inspired” by the terms of IFRS 9 could be in there, such as whether it really gives a true and fair view to have gains and losses on available for sale financial assets shown initially through equity, yet dividends from those same investments shown in profit.  Wouldn’t it be more sensible to have a uniform treatment for all gains and losses relating to that instrument (as IFRS 9 does).

So the full answer is a bit more complicated than the basic answer.  The examiner can’t test IFRS 9 directly, but he could test it through the “back door” by asking for criticism of the previous rules.

Is it a boat? Is it a plane? No, it’s the world’s biggest non-current asset?

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I just read that Royal Caribbean have recently entered the World’s largest passenger ship – the Oasis of the Seas – into service.  It is enormous, with elevators to carry passengers up and down the 18 passenger decks.  To my old fashioned tastes, it looks rather like a floating housing estate, but I think that’s just age.

Whilst watching an online tour of the ship, I found myself being rather accountant-like about it.  What’s it’s design life and is its useful life going to be shorter?  Do cruise ships go out of fashion before they become too unreliable to sail?  Will it generate more revenues in the early years than the later years?  So should sum of digits/reducing balance depreciation be used instead of straight line?  Of the cost of £800 million to build it, how much is down to the hull of the ship itself and how much to the decoration?  The decoration is no doubt ideal for its target customers just now, but it’s bound to look hopelessly dated in twenty years’ time.  So what’s their policy for “unbundling” the ship into separate components and depreciating each over a different life?

There is much criticism of ship owners sending their decommissioned ships to developing countries to be broken.  As a cruise company, this ship will no doubt not suffer that fate, as to do so would damage the company’s public relations.  So there might be a constructive obligation to decommission the ship in about 30 years’ time at a loss.  Have they recognised that as a liability and discounted to present value?  They should have done, because IAS 37 requires it.

Finally, the interview with the CEO of the company starts by admitting that 2009 has been “horrible” and 2010 doesn’t look much better.  Evidence of impairment right at launch perhaps?  IAS 36 only allows companies to project revenues five years into the future when valuing assets (unless an extension to this period can be justified). Will the global recession be over by then?

So whilst other people see a big ship, I see a floating cocktail of accounting and audit issues.  Is this normal?

Are Go-GO Hamsters skimming into my Christmas shopping?

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My 9 year old niece is a lovely girl and has some great characteristics. One of my favourites is that she’s a determined little girl who knows exactly what she wants! Christmas is fast approaching and top of her Christmas present list this year is a “Go-Go Hamster”.

For those of you outside of the UK you may not have heard of these toys. They are small battery operated hamsters with a retail price of £10. They are the latest must have toys for Christmas. I was determined not to leave Christmas shopping until the last minute this year and went off in search of some Go Go Hamsters. A slight problem however in that the shops have sold out of them! The big chains such as Toys R Us have sold out and even exclusive Hamleys in London has sold out.

A quick look on certain websites such as E-bay however shows that it is in fact possible to buy Go Go Hamsters. Some are being sold for more than £50 which when comparing to their retail price is a hefty mark up.

Anyway, back to ACCA Paper F5 and CIMA P2 and what exactly does my Christmas shopping list have to do with these papers? Students should be aware that Price skimming is where prices are set at a high price to catch customers willing and able to pay the price. Are we seeing an unofficial price skimming approach by individuals selling Go Go Hamsters?? Some may argue that it is simply individuals taking advantage of supply and demand and selling at a profit. The important thing for paper F5 though is to be aware of the concept of price skimming as well as all the other pricing strategies that a company can adopt (if you’ve forgotten then have a quick look at pages 14 and 15 of our ExPress notes).

In conclusion, I won’t tell you whether I actually bought a Go Go Hamster or not in case a certain 9 year old niece is studying F5 at an early age….

RBS directors threaten to resign

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In terms of examples of risk management and corporate governance, UK based banking group Royal Bank of Scotland (RBS) just gives and gives.  It’s an unfolding story that continues to grow.

RBS was a big success story in the last decade, showing very fast growth and taking over bigger banks such as Nat West.  Its considerable returns appear to have been won, rather predictably, by taking a high level of risk.  Previous blog entries have mused on the wisdom of having fired their risk manager.

The banking group was saved from collapse by receiving vast emergency support from the UK government.  This was controversial but almost everybody agrees that it was necessary in order to avoid a collapse of the entire banking system.  Such a collapse would certainly have made the recession very much worse.

The British public thus became an involuntary shareholder in RBS.  Indeed, the UK government now holds a controlling interest in RBS, though it’s been keen to avoid interfering much in the management of the bank.

The image of bankers in the UK at the moment is very tarnished. Most people who have an opinion on senior bank staff have an unfavourable opinion; often seeing them as people who were over-rewarded for taking excessive risks.  Many resent having to bail out a bank ruined by unwise risk management.

So it came as a surprise to many when the directors of RBS said that they intended giving bonuses and pay increases to many staff last week.  This provoked anger from the government and outrage from the public. The RBS board stated that they would resign if they weren’t allowed to pay the bonuses, as failing to pay people well would result in loss of talented staff.

It has to be questioned whether the board have ever studied stakeholder management and the Mendelow matrix. With 70% of the ordinary shares, the government is a key player; the views of the public must be respected.  If that means the synchronised departure of the board of RBS, so be it.  Bankers’ salaries and bonuses have been in an inflationary spiral in recent years and some bank must be the first to bring their salaries into the realm of sustainable expenses.

It will be interesting to see if the directors follow through on their threat, back down or are even removed from office by the shareholders (ie the government).  Whatever the outcome, their credibility is arguably much tarnished.

IFRS 9 released. This is a biggie.

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On 12 November 2009, the IASB issued IFRS 9 “Financial Instruments”.  This is the first stage of a three stage project that will probably make or break the international reputation of the IASB and its deeply impressive chairman, Sir David Tweedie.

The IASB inherited IAS 32 and IAS 39 from its predecessor, the IASC.  IAS 32 and IAS 39 have been rather markedly unloved ever since their introduction.  IAS 39 in particular has been criticised for taking fairly complicated financial transactions and making them more complicated still with piecemeal rules for different types of transaction.  Although it definitely had its supporters, many people said that the perceived complexity of IAS 39 made it insufficiently understandable by most people to be much real use.

Here at ExP, we believe that IAS 39 has had a slightly unfair press over the years.  It does have its faults for sure, but it also has a decent logic at its core.  The new IFRS (which will come in three parts over the next year; the next two stages to deal with impairments and the third phase to address hedging rules) has a tough job.  Make the rules simpler and it will create loopholes that will be exploited by creative accounting.  Close every possible gap and it will result in an accounting standard that puts on weight each year with minor amendments and ends up not understandable.

The attempts at simplification are honourable.  We’ll wait to see with interest how well they work.  But well done to the IASB for keeping calm in the global financial crisis that many commentators blamed the accountancy profession for making much worse.  They were under huge pressure to make change and they appear to have done a good job in the time they had available.

The Biggest Rights Issue in UK history

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F9 and P4 students should be aware that there are a variety of ways to raise finance (see chapter 4 of our free F9 ExPress notes. One method is by way of a rights issue where a company issues new shares and sells them to existing shareholders. Shareholders are not obliged to buy them but merely have the “right” to buy them. By being given the “right” they have the security of knowing that their shareholding won’t be diluted by shares being issued to other shareholders without first being offered them.

The Lloyds Banking Group has recently announced the UK’s largest ever rights issue and the bank hopes to raise over £13 billion. Press reports state that the main reason behind the rights issue is to raise sufficient funds to avoid the bank having to take part in the government’s banking insurance scheme that was set up after the recent banking troubles in the UK.

This is going to be an interesting one to watch. Lloyds has nearly 3 million shareholders with the majority being private shareholders. Whether or not these shareholders will be willing to take up these rights remains to be seen. They are due to meet to approve it this coming Thursday. In the run up to the exam though I’m sure students will have more to worry about than the outcome of this vote but make sure you’re aware of the various finance raising methods for the exam!

Shutting the stable door

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A UK director of one of the Big 4 firms pleads guilty to false accounting and fraud, having fraudulently claimed more than £500,000 in expenses in order to finance his wife’s extravagant lifestyle!

The director told police that he had stolen the money because “he did not want her lifestyle to suffer”, being afraid that she would divorce him. Apparently his fraudulent claims were kept below £5,000, meaning that they did not require further authorisation!

A spokesman for the firm said:

“Mr Wetherall’s frauds were detected via our own internal checks and he was dismissed in 2008. A thorough internal investigation was carried out and the case was then handed over to the police.”

The firm also stated that they had changed their internal procedures to prevent such fraud being committed again.

That could be useful I guess when advising client’s on their internal control systems in relation to expense claims!

Companies Act 2006 Provisions now in force

A number of provisions from the Companies Act 2006 finally came into force with the final implementation of the Act on 1 October 2009.

However, the Act has been examinable in the F4 Paper for some time, albeit the examiner has expressed some concern about candidates still answering questions with reference to the old legislation.

It is very important therefore to ensure that your study materials are up to date.

As an example, one of the provisions which has just come become effective in practice is the changed allowable uses of the Share Premium Account.

Use of share premium is now restricted, so that only the premium arising on a specific issue of shares is available to write off any expenses or commission associated with that issue.

It is no longer possible to use an existing balance on share premium to write off the costs of a new issue of shares. Neither is it possible to use the share premium account to write off any formation expenses nor to write off costs/provide for premium associated with the issue/redemption of debentures.

British Airways and Iberia – suitable, acceptable but is it feasible?

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In last week’s P3 ExPand video I talked about the recent announcement of the British Airways (BA) merger with the Spanish airline Iberia. Some form of merger had been discussed on and off since they held talks in the summer of 2008 but now it’s looking like there could be some movement on this.

Students of Paper P3 will be aware that Johnson & Scholes argue that when evaluating strategic options, 3 major areas should be considered. Namely, is it suitable, is it acceptable and is it feasible?

The aviation industry is extremely competitive. In the current economic environment it is safe to say that the merger would help both companies in terms of synergies and hence from a suitability point of view it appears to work.

This issue of acceptability would need to be examined in the context of the key stakeholders of the firms. BA is quoted on the London stock exchange so some key stakeholders would be some of the big shareholders. The share price rose by 7% following the announcement so the shareholders appeared to like the news.

The final area is that of feasibility. An important issue from the feasibility point of view is whether it would get regulatory approval from the European Commission.

It’s suitable, it’s acceptable but is it feasible? Let’s wait and see what develops.

BA and Iberia to merge. Except not.

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British Airways is a big airline and so is Iberia; the flag carrier airline of Spain.  Both have experienced considerable difficulties in recent years with the global recession greatly reducing revenues and causing operating losses.

For nearly two years, the two airlines were in discussions about merger, in order to share routes and operating fixed costs.  The deal was finally announced in mid November 2009.

The deal is that the two airlines will fuse to create a new business with the working name of Topco. Topco’s capital will be 55% owned by BA’s shareholders and 45% by Iberia’s shareholders. The board will meet in Spain and the CEO of BA will become the CEO of the new business.

For accounting purposes, mergers don’t exist. There is always an acquirer and an acquiree; respectively being the controlling party and the controlled. In this situation, we accountants see it that BA has just done a deal to acquire a new subsidiary, called Iberia.  Assuming that Iberia’s shareholders agree to sell.  And before that happens, there’s the minor issue of BA’s huge deficit on its defined benefit pension scheme to sort out. IAS 19 produces some deeply unattractive pension liabilities on BA’s statement of financial position.

Anyone got a spare £9.8bn ?

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Mergers & Acquisitions (M&A) are an important part of the ACCA P4 syllabus and are also featured in CIMA F3. Those of you that have read our free ExPress notes (/expand/17-p4_advanced_financial_management.html) will be aware that to minimize the risk of failure in the M&A process, acquiring companies should follow a systematic series of steps prior to launching a bid.

Namely:

1. Clarify strategic reasons for wanting to acquire a company;
2. Draw up a short list of possible takeover targets and select the preferred one;
3. Value the target based on publicly available information and to establish an opening bid;
4. Identify financing options for the transaction

There has been a lot of coverage recently about the attempt by the American food producer Kraft to acquire the British chocolate maker Cadbury.  After Kraft announced their intention to acquire Cadbury, another company (Hersey) announced their interest in acquiring Cadbury.

The sums of money involved are significant. Identifying financing options for the acquisition (point 4 above) is therefore going to be key. Kraft’s bid is £9.8bn and press reports indicate that a syndicate of 8 banks has been brought together to finance the approach. The interesting thing though is that it is reported that these 8 banks have been tied into a non-compete agreement. This means that Hersey cannot approach the same banks to finance their approach. As a result it is going to be more difficult for Hersey to raise such amounts of funds.

Whatever happens over the next few weeks this will be an interesting story to follow.

It’s music to the ears…

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I’m a keen concert goer and enjoy listening to all types of music. In my opinion one of the most pleasing sounds on the ear is that of a piano.

Last month, Kemble and Co., the only remaining large scale UK piano manufacturer stopped production in the UK. Its main shareholder Yamaha transferred operations to Asia.

Whilst there is a debate amongst music aficionados around the world as to whether the sound of instruments is different depending on where it was manufactured, what is interesting from a strategy paper point of view is to think about why Yamaha made the decision to transfer production to Asia. There could well be a question in the exam involving relocating production to another country. So why did Yamaha move the production location?

The reason is clearly due to cost savings due to economies of scale, synergies and utilising spare capacity at some of their other production facilities in Asia.

In 2 years time, Kemble is due to celebrate its 100th birthday. It will still celebrate its birthday but they will be blowing out the candles on the cake in Asia and not the UK.

Was the audit evidence sufficient and appropriate?

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It could be very interesting to see how this one develops!

A UK accountancy group signed off the 2007 accounts of one of their audit client companies, having accepted the valuation of £11 million for one of its assets, a ruby known as “The Gem of Tanzania”.

In the previous year’s accounts, a different firm of accountants had accepted the valuation of the same stone at £300,000.

On the basis of the £11 million valuation the owner of the company, came to the rescue of another company Wrekin Construction. Wrekin Construction was subsequently put into administration earlier this year and the administrators, Ernst & Young, looked to have the ‘ruby’ valued.

It turned out instead of being the world’s most valuable ruby, it was in fact a lump of anyolite worth in the region of £100!

Bet those previous auditors are not sleeping very well right now.

Still it would make a really nice paperweight!

When is a discontinued activity not a discontinued activity?

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General Motors has had a difficult time of late, but things appear to be getting better.  Dogged by poor sales in its core US market, it was forced to raise cash by drastic means.  This involved agreeing the sale of its European subsidiaries (Opel and Vauxhall).  The sale of both to a consortium including Russian banks and Canadian car spares manufacturers. There were legal formalities to complete, but the deal had been announced, largely supported by the German government and looked certain to go through.

At the start of November 2009, it was announced that the board of General Motors had met after a mammoth session and decided not to do the deal to sell its European businesses.  The environment for GM had improved more rapidly than expected and a sale no longer looked necessary.

A discontinued activity is defined in IFRS 5 paragraph 32 as a separate business unit that (a)represents a separate major line of business or geographical area of operations,(b)is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations or(c)is a subsidiary acquired exclusively with a view to resale.  Vauxhall/Opel sounds like it would fit this definition.  It may have been presented as a discontinued activity after being reclassified as held for sale.

It’s unusual for a volte face this big to happen, but it occasionally does. It can produce odd effects in profit, as items are written down to expected sales value and then reclassified at their previous carrying value.

Is life getting back to normal?

As you prepare the themes in the final section of the P4 syllabus guide (“emerging themes”) it might be interesting to know that after a recent trip to Zurich, Switzerland, I asked my friends in the financial industry what was happening these days after all the drama of the bailouts and credit crunches.

They told me that life is getting back to “normal”: the banks are making money again; he said: “the bonuses will be back: borrowing at 0% from the central banks and investing in corporate bonds at 1% and 2% means unlimited, riskless profit… nothing has changed, except that there are fewer banks, making larger profits.”

The French have a saying: “Plus ça change, plus c’est la meme chose” (the more things change, the more they stay the same).

Royal Bank of Scotland. Where were the non-executives?

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Royal Bank of Scotland (the UK based banking group) has had its fair share of troubles of late.  It made some acquisitions that in retrospect were a clear mistake, such as its purchase of ABN Amro.  It failed to manage risk properly, having chosen to fire its risk manager; allegedly for making too much noise about the company taking too many risks.  The result of this all was a taxpayer bail out and the enforced departure of its chief executive, Sir Fred Goodwin.

At the time it became obvious that stakeholders were going to require a good degree of blood letting at board level, the bank’s chairman discussed the situation with Sir Fred.  As a result, Sir Fred chose to resign, taking his right to an annual pension of £703,000 with him.  Had he been fired, his pension rights would have been closer to zero.

Much public comment and anger followed, with virtually all of this aimed at the outgoing CEO.  But where were the non-executives?  The general duties of non-executive director are:

Remuneration: decide appropriate pay (including pensions) for executive directors in the circumstances.

Internal control and risk management supervision.  History shows that this is at least questionable.

Scrutinise the executive directors.

Strategy: contribute to strategy.

Sir Fred Goodwin was entitled to his pension.  He later voluntarily chose to waive £200,000 per year, but universal legal opinion is that he would have been entitled to the full amount, because the non-executives allowed him to resign.

Perhaps the press and the public are venting their frustration and anger too much at the executive directors?

G-20 conference requests public listing of money laundering territories

The examiner clearly reads a good newspaper on a regular basis and perhaps gets inspiration for future examination questions.

Which newspaper do you read?

In her article ‘Examiner’s approach to Paper P7 (ACCA)’, which appeared in the January 2007 edition of Student Accountant, Lisa Weaver made the following comments:

“A note on current issues – there is likely to be at least one requirement per exam dealing with a current issues topic.”

“Candidates should appreciate that they are expected to read around current issues and not rely on manuals from tuition providers. Good quality newspapers, professional journals, as well as ACCA’s website, provide sources of information on current developments in audit and assurance.”

I recalled the examiner’s comments when reading in the Sunday newspapers about the G20 conference earlier this year. I also recalled that since 2005, candidates sitting for the advanced level auditing paper have had to be familiar with the international anti-money laundering standard and know the implications of its recommendations.

Have you read a good newspaper today yet? Nothing wrong with starting with sports section, my personal preference, but make sure you read the rest of it as well!

Corporate governance across the Atlantic.

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Those of you who enjoyed the corporate governance parts of ACCA and CIMA may be interested – or excited, or irritated, depending on your point of view! – to know that the US Congress is considering legislation requiring the roles of the Chairman and the Chief Executive Officer to be split between two people.

This is big stuff. Why, you must be thinking, that is precisely the recommendation (read: requirement, hint, hint) of the Combined Code in the UK, and this feature distinguished it from the American Sarbanes Oxley law, which never mentioned such a split.

The reason is cultural: the Americans have always believed that one guy has to be in charge of a company, whether his name is Jack Welsh (General Electric) or, in an earlier age, Harold Geneen (of ATT).

In his book, “The Age of Turbulence” Alan Greenspan endorses this “John Wayne” approach to management. One guy in charge is the way to go. And now, after all the controversy on corporate mismanagement, bailouts and excessive executive remuneration, Congress is looking at … requiring the separation of the Chairman and CEO roles at US companies.

Watch this space…

Bankers’ bonuses. Necessary, a necessary evil or just evil?

A lot has been said about bankers’ bonuses in recent years, with a general view amongst the public that paid to bail out the banking system that they are excessive.

Bankers, unsurprisingly, say that without packages that include large elements of performance-related bonus, the banking industry would not attract the top talent that a complicated business needs. So goes the argument.

So who is right? The answer is simple enough; they both are.  Without bonuses, ambitious people are likely to relax, creating inefficiency. As banking is widely seen as the central nervous system of the capitalist system, lethargy in banking would hurt us all.

Yet it seems that many bankers (other than directors of the bank) had bonus systems linked only to short-term profit measures. Had they been paid in a more carefully crafted cocktail of short- and long-term measures that deterred risk taking (eg long-dated share options), then the perceived pattern of excessive risk taking for inadequate return may have been curbed. Perhaps the same discipline that affects the remuneration committee should pervade all remuneration deals.

With ambitious and aggressive people the rule is simple: WYPIWYG (what you PAY is what you get). If bankers were paid to take high risks on derivatives and not held back in pay terms for taking risk, it might be harsh to see it as their fault for doing what their remuneration package incentivised them to do.

Putting together a remuneration package for a banker without bonuses is arguably like making a cosmo cocktail without the vodka.

Speaking of which, I’m writing this on a Friday at 8.00pm. Time for a cocktail of my own. Cheers!

Xerox Corporation and Affiliated Computer Services (BPO world leader) unveil planned new business combination

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Everybody is calling it a merger, but do mergers really exist? And from what date does the combination happen?

Key aspect 1: Determining if IFRS 3 applies and identifying the acquirer.

IFRS 3 applies only to combinations as a result of which an entity (identified as “the acquirer”) obtains “control” of “the acquiree”. Is that the case?

Yes: Xerox is set to acquire 100% of ACS, with ACS expected to “continue to operate as an independent organisation” (branded “ACS, a Xerox Company”) and with Lynn Blodgett (ACS CEO) reporting to Ursula Burns (Xerox CEO).

Key aspect 2: Determining the acquisition date

IFRS 3 requires the combination to be acquisition accounted for at the date when control is obtained. Is the “acquisition date” determinable based on released information?

Not quite: the agreement was signed by the two boards on 28.09.09, but the transaction is “expected to close” by the end of Q1-2010.

Key aspect 3: Recognising and measuring the consideration transferred

IFRS 3  requires consideration transferred to be fair valued at acquisition date, with any transaction costs being expensed and not included as part of the consideration. How does it work in the case?

Xerox is set to pay $18.6 in cash and issue 4.9 shares in exchange of 1 ACS share. Considering share prices on the eve of the deal being announced, such consideration would have amounted to $6.2 billion. However, due to the subsequent fall in Xerox’ share price , the fair value of the agreed consideration went down to $5.5 billion. By the “acquisition date”, the fair value of this consideration may again vary. As to the costs of issuing the new shares raising the $3 billion expected to be needed to finance the deal, IFRS 3 would want them expensed in acquirer’s books and NOT considered as part of the consideration paid (and, therefore, potentially capitalised as goodwill).

Thinking of Christmas already?

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Pricing is an important area of ACCA and CIMA. There are a variety of pricing methods discussed in the syllabus including customer based pricing and competition based pricing. Broadly speaking, the former is based on the amount that customers would be willing to pay for benefits whilst the latter involves setting prices based on the prices of competing products.

In the UK, the Toy Retailers Association has just released their list of the top 12 toys that they expect to be most in demand in the UK this coming Christmas.

The interesting thing about the list is that the average price of the toys is just over £26. This compares to an average price of £32 in the Christmas 2007 list. This represents a fall of nearly 20%.

Has this fall been driven by cost savings by the manufacturer on labour or material? Or maybe reductions in transport and storage costs?

My guess is that the toy manufacturers are aware of the recession and the impact on parents buying power (customer based pricing issue). They are also aware that the toy industry is an extremely competitive industry and at the moment their competitors will be offering cheaper products (competition based pricing).

Either way, I’m sure that there won’t be a lot of children debating this issue on Christmas day when they open their presents!

So, what deadline is on 31 October?

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So what exactly was important about yesterday (31 October 2009)?

Yesterday was an important day for any individuals that submit their income tax returns as a hard copy paper return rather than filing them online.

31 October 2009 was the deadline for submission of an individual’s paper income tax return for 2008/09. To be precise, the paper tax return should have reached HMRC by midnight on Saturday 31 October 2009 to avoid penalties.

If the paper returns are submitted late then there is an automatic penalty of £100 for late submission of returns.

What will be interesting this year however is the impact that the postal strikes have had. For those of you reading this outside of the UK who are not aware, there have been a number of days of industrial action by workers from the Royal Mail and this has resulted in postal delays. HMRC have stated that there will be no extension to the 31 October deadline. If however you can prove that the strike delayed your submission then you may be able to appeal the penalty.

Either way, the key thing to remember for your exam is that the deadline for submission of the paper returns is 31 October.

I’m sure that all F6 students are aware that the deadline for submitting an online return is after the paper return deadline. The deadline for submitting an online return for 2008/09 is 31 January 2010 and one thing is for sure and that is that if the online submission is late you are unlikely to be able to appeal against the late submission penalty on the basis of the postal strike!

Audit firms in the UK left unprotected against claims of negligence

It was announced recently in the UK media that Britain’s Big 4 auditing firms have been left exposed to a surge in negligence claims, after the Government refused to limit further the damages they could face.

The Big 4 have been lobbying hard for a cap on payouts, but although Lord Mandelson, the Business Secretary, appeared sympathetic to their concerns, he indicated that he was not prepared to change the law at this stage.

This decision has come as a great blow to the accounting firms, believing that there may not be another opportunity for a change in the law for some time. There fear is that they will be targeted by investors and liquidators looking to recover losses from big company failures and Madoff-type frauds.

Under existing company law, directors can agree, with shareholder approval, to restrict their auditors liability, but to date, no leading companies have done so.

Three of the Big 4 face litigation in relation to Bernard Madoff’s $65 billion fraud.

In 2005 Ernst & Young was sued for £700 million by Equitable Life, the claim was eventually dropped, but would have bankrupted the firm in the UK if successful.

Earlier this year KPMG were sued for $1 billion by creditors of New Century, a failed sub-prime lender.

Big 5 became Big 4 of course following the collapse of Arthur Andersen in the wake of the Enron scandal.

Some fear that Big 4 dominance of the audit market is such that British business would be subject to a state of disarray if a massive court action were to reduce Big 4 to Big 3! It was announced in the UK media that Britain’s Big 4 auditing firms have been left exposed to a surge in negligence claims, after the Government refused to limit further the damages they could face.

Auditors cleared in landmark negligence case

This was one of the headlines that recently caught my eye, remembering that auditor’s liability is one of the few ‘new topics’ in ACCA P7.

In August 2009, the UK Law Lords on a split decision (3:2) upheld an earlier ruling by the Court of Appeal in a multi-million pound action brought by the liquidator of Stone & Rolls (a commodity trader) against their auditors Moore Stephens.

The Law Lords ruled that the auditors were not liable for failing to detect a £58 million fraud perpetrated over a number of years.

The fraud involved the CEO of Stone & Rolls, a Croatian businessman called Zvonko Stojevic, using the firm as a means of defrauding banks by means of a letter of credit scam.

The split decision perhaps provides less clarity than the auditing profession might have wished for in relation to the court’s view on an auditor’s liability for the detection of fraud.

The senior Law Lord, Lord Phillips, said “It does not seem just that in these circumstances, Stone & Rolls should be able to bring about a claim that it had set about inducing.”

Lord Manse, dissenting said “the world has sufficient experience of Ponzi schemes ….. for it to be questionable policy to relieve from all responsibility auditors negligently failing in their duty to report on such companies’ activities.”

We could be seeing a whole number of new claims against auditing firms worldwide as companies go into liquidation in the current economic crisis.

What’s your view on this case? Who knows the examiner might ask you!

Are accountants to blame for the global crisis?

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A few accounting standards arguably have an unfortunate tendency to exaggerate the economic cycle.  During a time of economic downturn, the chances of a company having impaired assets is increased.  This has the unfortunate effect of taking poor trading results and augmenting them with impairment losses.  In other words, accounting conventions take a bad situation and make it worse.

Or so some people would say.

Some financial instruments are also shown at fair value.  Fair value is primarily decided by reference to market values. During a slump, this also makes reported results worse.

The argument advanced by many is that we ought to amend accounting standards to introduce some sort of dampening effect – requiring companies to impair assets or make provisions during times of boom and release these provisions during a slump.  This, it is argued, is only the equivalent of making hay while the sun shines.

There’s only one problem with this idea of “dynamic provisioning”. Mostly, it flies in the face of the definition of a liability in the Framework. Also, it’s precisely the opposite of what IAS 37 and IFRS 4 (insurance contracts) aimed to do. Fiddling with the accounts to save people from unjustifiable optimism and excessive, groundless pessimism might be politically popular in the current  market turbulence, but arguably it would only reduce the reliability of financial reporting in the long term.  Investors ought to be smart enough to use other information provided to them, such as the statement of cash flows, before reaching judgement on the desirability of a company’s shares.

We hope that the IASB stick to their guns and resist the pressure to codify creative accounting and massaging figures by bogus provisions. We’re confident that they will.

How could Bernie Madoff make off with so much cash?

Bernie Madoff is in prison and he handsomely deserves to be.  Over years, he ran a private investment fund that took deposits from rich investors and delivered consistently great returns of 10% real terms each year or more.

The only problem is that the whole thing was a vast fraud. He was stealing funds and using new depositors’ funds to hide the hole his pilfering was creating.  It’s called a ponzi scheme and is strictly illegal.   Total investor losses are estimated to be in the region of £18 billion.

Can you even imagine such a figure?

The question is – how did he get away with it?  There’s no single answer, but these features are significant:

• There was a very excessive degree of authority and power vested in one man (Bernard Madoff himself).

• There was a lack of scrutiny by directors and senior management and investors themselves.

• A whistleblower had contacted the regulator ten years before the scandal broke saying that the returns made were mathematically impossible. The regulator did nothing.

• The auditor was too close to the client and generally showed a deep lack of professional scepticism.

So, Madoff was a colossal failure of corporate governance.  Almost every significant principle of the Combined Code was broken. Yet this happened in the USA – home to the stringent Sarbanes-Oxley Act. How could this happen? Well, SOx only applies to listed companies and Madoff was a private equity investment, so outside its scope. There appeared to be no appetite for voluntary compliance with best practice.

Perhaps the biggest lesson is that when investors are being given apparently huge returns, they become unwilling to ask questions.  Indeed, investors who asked too many questions were dropped by Madoff as being a nuisance.  Maybe the victims of the Madoff scandal became victims of their own credulousness and greed?

When is a non-executive not a non-executive? Ask Stelios!

You may have heard of easyJet. You may have flown with easyJet. You may be Stelios, in which case the public thinks that you own easyJet, but you actually only own a minority interest. The public also thinks that you’re the CEO, but actually you’re not even an executive director.

What you do own, if you happen to be Sir Stelios Haji-Ioannou is approximately 66 million easyJet shares and the easyJet brand, which you licence to easyJet.

Sir Stelios is the public face of a company that he founded and grew to a state of financial health where it could buy its most bitter rival, list on the London Stock Exchange and generally grow up rather quickly.  He resigned as an executive director in 2003, becoming a non-executive.

In 2008/09, he had a major difference of opinion with the executive directors over the strategy of the company.  Having been outvoted, Sir Stelios (a non-executive director, remember) sought to increase his equity ownership of the company again to a level where he could appoint some favoured nominees of his own as executive directors; thus giving him (a non-executive director) effective control once again.

Sir Stelios was naturally acting in the best interests of the company as he saw them. The Tyson report lists four duties of a non-executive director (see our ExPress notes if these don’t trip off your tongue! /expand/14-p1_professional_accountant.html) These include scrutinising executives, but not sacking them if they disagree.

It all makes it easier to see why the UK Combined Code requires that non-executives should be paid a basic salary only and have no shares or share options in the company, as well as requiring you to wait at least five years outside the company if you’d previously been a senior executive there!

Marks vs revenue

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We know the allocation of marks in the exam between the various taxes but what about the revenue generated?

ACCA F6 students will be well aware that the vast majority of marks available in the exam are in connection with income tax and corporation tax. Other taxes such as CGT and VAT also play an important part but not to the extent that income tax and corporation tax do.

Whilst these two taxes represent the bulk of the marks in the exam, how does it compare with the split of revenue generated by the various taxes?

HMRC have published their statistics for 2008/09 which provide the following information:

Total £439bn 100%
Income tax £148bn 33%
National insurance £97bn 22%
VAT £78bn 18%
Corporation tax £43bn 10%
CGT £8bn 2%

Over 50% of revenue is generated from income tax and national insurance alone. CGT on the other hand only generates 2% of the revenue.

I’m sure however that the key % in students minds at the moment is the 50% they need in the exams next month so good luck with your studies in the next couple of weeks!

Organic, Natural and Ethical or fraudulent trading?

‘Organic, Natural and Ethical’ is what the One stood for in the name of a company called Onefood.

Reported recently in the UK media, I think this case could well become my new lecturing example for the criminal offence of fraudulent trading.

Ostensibly the company was supplying the famous London food store Fortnum & Mason (as well as others) with organic produce. In reality, the company was buying cheap non-organic foods in supermarkets such as Waitrose and Tescos, removing the original packaging and then replacing with the company’s own packaging.

Neil Stansfield the CEO of the company, who also traded under the name of Swaddles Organic was quoted in a local newspaper as saying “Fortnum & Mason searched for the finest British classic pie throughout the UK and after arduous searching they came upon Onefood and Swaddle, sampled the product and found it to be the best in the UK. We’re impassioned by supplying natural, ethical and unadulterated food and we’re here to educate consumers about the well-being that comes from choosing British-grown organic meat.”

In truth the pork pies being referred to were bought from a local butcher for £1.30 and sold to Fortnum & Mason for £2.50. In another example given in court, a salmon purchased from Waitrose for £20 was sold on for £51.

Stansfield, his wife Kate (who acted as Company Secretary) and Russell Hudson (the company operations manager) all pleaded guilty to fraudulent trading. Neil Stansfield was sent to prison for 27 months and disqualified from working as a company director for 6 years. Kate Stansfield was sent to prison for 50 weeks, ordered to do 150 hours community service and banned from being a company director for 3 years. Russell Hudson received a 40 week prison sentence, suspended for 2 years and was ordered to do 150 hours community service.

Now where’s that organic chicken I was going to roast for supper tonight?

Do you know your cost of capital?

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The other day I was talking to a few local business owners and I asked them if they knew what their cost of capital was. I got a few blank stares.

When we discussed the issue further, people started to warm up to the idea that the cost of capital can be viewed in terms of opportunity costs:

1. One owner said his cost of capital was the interest rate on his bank loans. I suppose he was 100% debt financed and probably not planning to refinance any time soon! Good luck to him!

2. A second owner said he took out all his savings from the bank and put it into his business. Since the bank deposit rate was so low, he figured his opportunity cost was pretty low as well. He has a point, though he must realize that he has moved into a higher risk category by withdrawing his money from the bank and investing it in a start-up business.

3. Another business owner said he started his company by borrowing from his relatives. Since they haven’t asked for it back he assumes its cost is zero. But he does pay a price, I suppose: at family gatherings he gets dirty looks from his relatives and his wife gives him constant grief. He suspects that the relatives complain about him to his wife.

Since all three owners want to expand their businesses, they asked me if I could recommend new sources of finance. I thought of sending them to our P4 candidates (after the exam!).

The Premier League and the UK income tax rate…

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Cristiano Ronaldo’s well publicized move from Manchester United to Real Madrid in the summer understandably received a lot of publicity. A world record football transfer fee of £80m is bound to catch the attention.

Ronaldo’s first year remuneration from Real Madrid is reported to be in the region of £11m. Students sitting the 2009 exams should be well aware that the 40% tax rate for the 2008/09 tax years applies to taxable income above £34,800. An individual in the UK with annual earnings of £11m would exceed the 40% threshold in just 2 days!

There were no doubt many factors that persuaded Ronaldo to move to Spain to play for Real Madrid. From a tax point of view though, Spain has favorable tax legislation that enables foreign players to pay tax in the region of 23%. When you compare this figure with the 40% top rate in the UK (and the upcoming 50% tax rate which is not examinable in the December exams) and apply the difference to the amounts of remuneration that Ronaldo is earning then the tax bill  would be significantly lower in Spain than in the UK. Approximate figures show a difference in tax next year when the 50% rate is in place of nearly £3m per year. This adds up to a significant amount when looked at over his contract period of 6 years.

Of course the football purists amongst us would argue that it’s the football team and supporters that are important rather than the tax bill but then again I can’t be sure about this until somebody offers me £11m a year to live in the sun in Spain!

Nice car, shame about the usage…

As promised, the blog will be used to build up your database of decided cases for ACCA F4 purposes and increase your CLOUT in the F4 exam room.

Case 190 1997

The defendant, an Austrian seller of imported Italian cars, sold a Lamborghini Countach to the plaintiff, a Swiss buyer. The seller, however, was not able to make delivery of the car to the buyer.

The court held that as the car was purchased for personal use (if I had one I wouldn’t let anybody else drive it!), in accordance with Article 2(a), the CISG did not apply to the case.

However, the court indicated that the CISG could have been applied to the case if the fact that the seller ‘neither knew nor ought to have known that the goods were bought for any such use’ had been proved by the buyer.

The largest single property deal in UK history, both in form and…in substance

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Sale and leaseback of a very noticeable building by a very noticeable bank! Is this a sign of a bank needing cash flow to shore up its solvency? Or just a good opportunity at a good moment in time? And how do we tell the shareholders about it?

In 2007, HSBC sold and leased back its iconic headquarters in London, the 1.1 million square foot, 210 metre high, tower at 8 Canada Square, Canary Wharf.

Imagine yourself in a top floor office as a proud HSBC accountant about to book this transaction in the bank’s IFRS statements.

The buyer-lessor was a wholly-owned subsidiary of Metrovacesa, S.A. one of Europe’s highest profile property companies. Under the terms of the agreement, HSBC sold the tower for £1.09  billion and leased it back for 20 years (with an extension option for a further 5 years) against an annual rent of £43.5 million. HSBC had moved in 2002, having incurred some £500 million in tower’s construction costs.

So, how would you account for it?

First, you need to determine the nature of the lease: finance or operating? Based on available information, the lease has fair chances to be operating, as (a) the term is 20(+5) years, with the building (the useful life of which may exceed 40 years) being only 5 years old on lease inception, and (b) the present value of the agreed annual rents probably falls significantly below the upfront selling value.

If that would be the case (operating lease-back), you would (a) take the building out of HSBC’ balance-sheet at its carrying amount, (b) recognise upfront the profit made on disposal, and (c) subsequently take the incurred rental costs to operating expenses, on an accruals basis.

Fairly straightforward, isn’t it ?

Cider and spreadsheets

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Cider drinks and spreadsheets – what’s the link?

Cider is an alcoholic drink made out of apples and has become more popular in recent years in the UK. One of the most popular brands of cider in the UK is Magners cider, the brand owned by the C&C Group.

We all know that there are lots of benefits of using spreadsheets such as Excel (e.g. speed of use, quantity of data that can be analyzed, etc) but we should all be aware that mistakes do happen with spreadsheet.

Earlier this summer shares in the C&C Group fell approximately 15% after the group said that revenue in the 4 months to the end of June had fallen by 5% rather than the 3% increase that had been reported a week earlier!

The group’s Finance Director said that the error in the earlier announcement occurred after data was incorrectly transferred from an accounting system to a spreadsheet used to produce the trading statement. Quite an embarrassing mistake and a valuable lesson in that even if spreadsheets are extremely powerful tools in business if the wrong data is inputted you will receive misleading results.

Also, it should be stated that consuming excessive amounts of cider when using excel could result in unpredictable results…

A strategic alliance with local farmers.

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I always tell my students that they need to look around at their surroundings to see what is happening and see if they can link it with the  syllabus in any way. Doing this will make it easier to remember concepts and ideas.

I was lucky enough to visit Germany recently to do some work. I noticed an unusual vending machine and it made me think of strategic alliances.

Strategic alliances can come in a variety of forms including the very large formal Joint Ventures such as Sony Ericsson (a 50:50 JV between Sony and Ericsson) and co-operation agreements such as the airline alliances of Sky Team and Star Alliance.

What was unusual about the vending machine that I saw? The thing that caught my eye was that the vending machine sold fresh farmers produce such as milk, eggs and sausages rather than the typical selection of snacks that you would find in vending machines.

Farmers are facing a tough time at the moment. Distribution channels can be a problem for farmers. If they sell through the large supermarket chains they can end up in a weak negotiating position. Selling direct to the customer is something that a lot of farmers don’t have the skills or facilities to undertake.

Some further investigation found out that a number of farms have collaborated with a vending machine manufacturer to stock these machines in several towns in Germany. This alliance is helping both parties. The farmers for example now have a great new distribution outlet. The customers also appear to be pretty happy as they get fresh local produce in a convenient location. The fact that the “middle man” is removed also means that the produce is priced very competitively.

Will we see this expanding to other items and other parts of the world?

What kind of dog are you?

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Way back in 1896 in the famous Kingston Cotton Mill Case, was Lord Justice Lopes suggesting that auditors need a dog licence?

The facts of this case were basically that an action was brought against the auditors of the company for negligence, in failing to detect a fraud which involved the management of the company wilfully overstating the value of the company’s inventory.

In finding that the auditors were not guilty of negligence, the Judge famously said the following:

“An auditor is not bound to be a detective, or … to approach his work with suspicion, or with a foregone conclusion that there is something wrong. He is a watchdog, not a bloodhound.”

The Oxford English Dictionary provides us with the following definitions:

Watchdog: ‘A dog kept to guard private property.’

Bloodhound: ‘A large hound with a very keen sense of smell, used in tracking.’

It’s a long time since 1896 and nowadays, there is perhaps more a way of thinking that auditors should be a little bit less of a sleepy old watchdog, and rather more of an active bloodhound.

Make sure that you are up to date on an auditor’s responsibility for detection of fraud.

My 85kg and ratio analysis…

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I weigh 85kg (approx 13.5 stone or 187lbs).

So, how am I doing weight wise? More to the point, what has this got to do with the exams?

Ratio analysis is an important area of the syllabus and one overriding principle to remember when looking at ratio analysis is that a ratio is irrelevant when looked at in isolation. Ratios must be looked at against comparatives or benchmarks in order to interpret them and then to look at the underlying causes.

So, back to my weight of 85kg. How am I doing? Is my weight ok?

85kg by itself is irrelevant. We need to look at comparatives for somebody who is my gender and my height. For example, 85kg for an adult male with a height of 1.90m (6 foot, 3 inches) is a healthy weight. 85kg for an adult female with a height of 1.60m (5 foot, 3 inches) is an unhealthy weight with the person being classified as obese.

Using my example of 85kg, by comparing it with people who are the same height as me is in effect comparing it with “industry standards”.

What about my performance over time? Is my weight increasing, decreasing or remaining static when compared to last year and the year before. Comparing movements within this personal ratio analysis unfortunately reveals that my weight has increased.

Now onto the important issue behind ratio analysis and that is of looking at the underlying cause of the movement in the ratio. Unfortunately, it looks like the cake I have with my afternoon tea could be on the way out…

Is 40% average?

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Students should be well aware that the maximum personal UK income tax rate is 40% but how does this compare to the rest of the EU?

The EU have released the 2009 edition of their report on the “Taxation Trends in the European Union”. There are some interesting findings.

The top personal income tax rates in the EU range from a high of 59% in Denmark to a low of 10% in Bulgaria. The 40% top rate of income tax is also present in Greece, Hungary and Poland.

The arithmetic average of the 27 member states is 37.8% so the UK rate is slightly higher than the average for the EU. What is interesting is that the newer member states such as the Czech Republic, Romania and Slovakia all have relatively low income tax rates (15%, 16% and 19% respectively). When compared with the older EU member states the UK rate is relatively low.

This is all very interesting but the key thing to remember for the exams is that the top rate of income tax in the UK is 40%. In fact, ask anyone that has qualified since 1988 what the highest income tax rate is and they should say 40%. The top rate has been 40% since 1988!

Do you have the CLOUT?

If you look up the word ‘clout’ in a dictionary you will find a variety of meanings.

A blow especially with the hand.

A white cloth on a stake or frame used as a target in archery.

A piece of cloth or leather.

If you are wondering what this has to do with your paper F4 studies, you would be right, absolutely nothing!!

However, what is relevant to your studies, is that based on a decision by the United Nations Commission on International Trade Law (UNCITRAL) at its twenty-first session in 1988, the Secretariat established a system for collecting and disseminating information on, court decisions and arbitral awards relating to Conventions and Model Laws that have emanated from the work of the Commission.

The acronym for the system is CLOUT (Case law on UNCITRAL texts).

This would be an obvious source of application questions for the examiner. Some of the CLOUT decisions are referred to already in your study materials.

In future blogs we shall look at some of the more recent cases, the facts of which, which might well feature in examination questions.

Every gentleman is a man, but…

Every gentleman is a man, but not every man is a gentleman. Every lady is a woman, but not every woman is a lady.

By now I have either upset all students, regardless of gender, or hopefully I have rather got you all interested enough to read on.

The real message I want to get across is that “Being a good accountant doesn’t necessarily mean you will be a good auditor, but perhaps you cannot be a good auditor unless you are a good accountant!”

Apologies to those of you who have already heard this because I taught you for ACCA F8, but the message is even more important for ACCA P7 the Advanced Audit and Assurance paper.

“Clearly, the auditor must fully understand the relevant financial reporting standards to be able to reach an opinion as to whether they have been complied with. This is why the Paper P7 exam will test, on a regular basis, the matters which an auditor must consider with regard to a variety of financial reporting issues.”

Hopefully you will recognise the above quotation, coming as it does from an article written by Lisa Weaver, the P7 examiner, which appeared in the November 2008 Student Accountant.

So if when you got the good news that you had passed P2 you had a ceremonial burning of your study materials, now is the time to rake through the ashes!

Hard times for deferred tax

Deferred tax assets are only assets if they are expected to generate an inflow of benefits.  In the current environment, impairments are hurting lots of companies; one of the World’s most high profile electronics giants included.

In January 2009, Hitachi Corp (New York and Tokyo listed) issued a statement aimed at warning capital markets about group’s intention to book a valuation allowance in the amount of 200 Yen billion against its deferred tax assets as at 31/03/09.

IAS 12 requires recognition of deferred tax assets (that is, “receivables” due from the tax authorities, as arising from the temporary deductible differences between the accounting and the tax bases of reporting entity’s assets and liabilities as at the reporting date) only if the reporting entity can prove recoverability of such assets, in the form of tax savings by reducing taxes payable in the future.  This is done by deducting calculated temporary deductible differences at the current reporting date from future expected taxable profits. If such future profits can no longer be reliably foreseen (and that is supposed to happen pretty often in economic downturn times, as it was with Hitachi’s case), any previously recognised deferred tax assets are impaired, with the consequent adverse effect on the entity’s reported net income for the year.  This makes bad times worse, as disappointing profits are made worse by tax asset write-offs.  Ouch.

As the columnist Paul Davis put it in the one of the September 2009 issues of the “American Banker” magazine, “’Deferred Tax Assets’ May Be Next Bottom-Line Hit”

Iceland, Computers and PESTEL Analysis

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One of my best ever trips was when I visited Iceland. It is a fantastic country with some great people and some truly dramatic scenery. There are also some very large whales and some very cute puffins!

Their financial crisis has been in the headlines over the last year or so but there was an interesting piece of news that was recently reported. Iceland has a year round cool climate and chilled fresh water. At the same time the number of computer servers that are needed around the world to store the ever increasing amount of data that the world is generating is growing rapidly.

A key component of data storage is to keep the servers cool. With Iceland’s below average temperatures it means that the cost of cooling servers is significantly less than in other countries with average or above average temperatures. Some businesses are now putting the cool Icelandic climate and the increasing server storage demands together and data parks are being designed and built in Iceland.

The cool temperatures and developed business environment in Iceland make it an ideal place for such a scheme to work.

Now, back to the exams. What exactly does this news have to do with exam? Given the exam is just around the corner I’m hopeful that I don’t need to explain what PESTEL analysis is and I’ll leave it up to you to decide which out of P, E, S, T, E and L the cool climate of Iceland relates to!

Count UP 12345 NOT down 54321

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Count UP 12345 NOT down 54321.

If you want to improve your marks in the real exam, that seems to be the message from your ACCA F8 examiner Alan Lewin.

Requirement (a) of Question 1 of the June 2009 F8 exam required candidates to ‘list and explain the purpose of the main sections of an audit strategy document’.

You are reminded that the examination consists of 5 compulsory questions, with total marks allocated to each question being as follows:
Q1 – 30 marks
Q2 – 10 marks
Q3 – 20 marks
Q4 – 20 marks

Q5 20 marks

In his specific comments on the performance of candidates on Q1(a) the examiner stated “A significant number of candidates did not appear to be aware of what an audit strategy is.”

This comment is in itself quite worrying, but perhaps of even more concern is that it would appear that many candidates do not have any strategy for tackling the paper as a whole!

If we look at the examiner’s general comments he has this to say:

“Many candidates presented their answer to question 1 first, indicating appropriate use of reading time to prepare for the main scenario. A significant number of candidates answered questions in reverse order in this sitting (i.e. 5,4,3,2 and finally 1) or attempted question 2 first, leaving question 1 to the end of the examination, with question 1 rarely being completed. The pass rate for these candidates was also lower than those where question 1 was attempted first.”

The format of the paper on all subjects is known in advance and as part of developing a successful exam technique, it is clearly vital that you have a clear strategy (which you have practised beforehand) on what your approach to the paper is going to be.

Proper planning is vital to quality control of an audit engagement.

Proper planning is vital to quality control of your examination answers!

That reminded me.

Question 10 in the June ACCA paper F4 (GLO) exam was a 2-parter dealing with the two criminal offences of ‘money laundering’ and ‘insider dealing’. It would appear that the examiner was fairly pleased with the standard of answers on the former, but not the latter.

He commented as follows:

“However, there was some concern as to the insider dealing part of the problem, which raised some concerns and suggests that a full question on that area would have met with much less success (could this be a hint for the future??!!). The essential problem was that candidates seemed to think that insider dealing was just using or revealing information gained from inside a company. That, of course, is completely incorrect and it is not insider dealing unless the purchase or sale of securities is involved.”

Earlier this year the UK financial regulator, the Financial Services Authority brought a successful criminal prosecution against solicitor Christopher McQuoid and his father-in-law James William Melbourne. The facts of the case were that McQuoid discovered that his employer, TTP Communications was about to be taken over by Motorola. Just 2 days before the announcement of the takeover, Melbourne purchased over 150,000 shares in the company.

After the takeover had gone through, Melbourne sold the shares making a profit of around £50,000, half of which he then paid over to McQuoid.

Since this topic was first brought into the syllabus, it has prompted a number of questions in the exam. Will you be well prepared for the next one?