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!