September 2009

Organic, Natural and Ethical or fraudulent trading?

Published on: 30 Sep 2009

‘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?

Published on: 26 Sep 2009

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…

Published on: 23 Sep 2009

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…

Published on: 19 Sep 2009

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

Published on: 16 Sep 2009

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

Published on: 12 Sep 2009

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.

Published on: 09 Sep 2009

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?

Published on: 05 Sep 2009

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…

Published on: 02 Sep 2009

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…

The ExP Group