Published on: 18 Dec 2009
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!
Published on: 16 Dec 2009
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!
Published on: 14 Dec 2009
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!
Published on: 11 Dec 2009
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!
Published on: 09 Dec 2009
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.
Published on: 07 Dec 2009
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.
Published on: 04 Dec 2009
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.
Published on: 02 Dec 2009
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?
Published on: 02 Dec 2009
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….