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


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?