June 2010

Fabio Capello’s comedy version of Sydney Pollack’s classic film “Out of Africa” was complete and utter…

Published on: 30 Jun 2010

So then, England’s football team are back home following their worst defeat in a World Cup ever.  As an Englishman, I care about this very much, but I’m trying to be brave about it.

Germany deserved to win.  They played better and importantly played as a team. England were fragmented and dreadful.

But the official score of 4-1 was rubbish.  The second goal went over the line by about a whole metre. Unfortunately, FIFA “disallowed” the goal because the linesman didn’t see it and they refuse to install goal line technology.  The official reason for this is that many countries can’t afford that technology, which is doubtless a fair argument.  But surely countries that can’t afford expensive “Hawkeye” style equipment that the major tennis championships use could still afford to pay a responsible person to stand by each goal line through the match and call when a ball goes over the line?  This feels like very poor judgement.

In the UK at the moment, we’re questioning three things in connection with the World Cup.

1.    How can England have been so bad? There are no immediate answers to that.

2.    How can FIFA possibly believe that their reputation can be held intact when they refuse to listen to the reasonable arguments of so many stakeholders?

3.    How is it that the England manager (Fabio Capello) can be entitled to a £12 million severance package if he’s fired next month?  His team’s performance was a dismal failure, so surely he should go.  £12 million is what’s technically known as “an awful lot of money to pay a loser”.

It feels to me that the Football Association in the UK could benefit from a reading of the ACCA paper P1 notes.  Executive remuneration being linked to performance and ease of firing a non-performing executive (Fabio Capello) and how to protect reputation (FIFA).

We’ll give them a course free if they want it.  They both need it.

Should Michael Jackson have had more of a bond with David Bowie?

Published on: 28 Jun 2010

It’s one year since Michael Jackson died.  In the year since his death, his estate has made earnings of £670 million.

Given that he was allegedly in serious financial trouble at the time of his death, this must be the source of a certain amount of posthumous frustration to Mr Jackson.  His ability to spend the money has been significantly impaired in the period since the money started to roll in, on the grounds of his no longer being alive.

This is a quandary well known to many pop stars.  The murder of John Lennon in 1980 sparked a sudden and deep revival of his career.

I can’t help but wonder why none of Michael Jackson’s advisors pointed him in the direction of the Bowie Bond.

David Bowie issued bonds in 1990 that were secured on the future income to be earned from songs that he had written up until that date.  This is a simplification of course, but that’s the big picture.  By doing this, David Bowie was able to get the benefit of some of his post death earnings while he was still alive.  He is a smart business operator as well as enormously popular song writer, it seems.

The Bowie bond has been influential in business since it was issued.  In practice, I personally used it as the backbone of market data to help in the divorce settlement of another well known musician.

Its influence amongst accountants is significant, though less so with the pubic at large. Rock stars probably don’t shout about it because valuation and securitisation of intellectual property isn’t really very rock and roll.

An accountant can make 65 become 60 but it takes rather extreme measures.

Published on: 25 Jun 2010

Ten years ago former accountant Mr. Christopher Timbrell became former accountant Mrs. Christine Timbrell.

Christopher had surgery to alter his gender and became Christine but still remained married to his wife, Joy.

Yesterday, three Appeal Court judges in the UK gave a ruling which links to a number of discrimination issues.

Under 2004 legislation, as a transsexual Christine is entitled to enjoy the full status of her gender. However, married transsexuals are only allowed to have their gender recognized if they dissolved their marriage. This is where the problem for Christine occurred as although she had the sex change operation she still remained happily married to her wife Joy and they didn’t get divorced.

This meant that Christine was still treated as a man for pension purposes and therefore became entitled to a pension at 65 rather than at 60 which is when a woman becomes entitled to a pension.

Christine argued that she was a woman and it was a violation of her human rights to be forced to get divorced to become entitled to a pension at 60. The three Appeal Court judges found in Christine’s favour and also added that she was a victim of discrimination.

Christine, aged 69 who has two children with Joy from before the sex change operation, will now receive backdated pension payments going back to when she was 60.

Auditors are good at lots of things but could we spot what’s happening to the bees?

Published on: 23 Jun 2010

I often believe that society at large does not get best value for money from auditors.

That’s not to say that we deliver bad value for money.  Quite the contrary in fact; audit work does not attract especially high fees, has high costs of provision and very high insurance costs as a result of fairly high risk of litigation.

All of these factors conspire to mean that audit work is often not undertaken by smaller firms of accountants at all – the risk/ return profile is just not good enough.

Today, I noticed that the UK government had committed to spending up to £10 million for urgent research by eminent scientists into why the population of bees and other pollinating insects is rapidly falling.  Answers are needed soon – bees play an essential role in the food chain that we all depend on.

There are significant amounts of money spent on government research and enquiries. For example, the results of an enquiry into the “Bloody Sunday” killings were announced last week.  This enquiry had reportedly cost £100 million in fees, with a further £91 million in disbursements.  It had also taken fourteen years to reach its conclusions.

Now, I rather doubt that most auditors have the scientific skills necessary to determine the reason for bees’ decline, but I suspect that they do have the skills necessary to identify the key assertions by witnesses to the Bloody Sunday killings, obtain and evaluate sufficient, appropriate evidence and then reach a conclusion.

This process is often known by an alternative name of “auditing”.  Our skills are already used in forensic investigations.  I wonder why people don’t think to use us in other situations where establishing facts is so critical?

With our innate focus on VFM audit and the natural sense of urgency that comes from having to report on financial statements within a matter of months, I can’t help but wonder if auditors would have been able to do the job for less than £191 million and sooner than fourteen years.

Nike and Michael Porter – generically speaking I think it’s somewhere in between…

Published on: 21 Jun 2010

The French football team revolted yesterday and refused to train, football powerhouse Germany lost to Serbia, defending champions Italy failed to beat football minnows New Zealand and England were embarrassing in their game against Algeria on Friday.

At least Nike seem to be getting it right though.

Last week we blogged about the Bavaria girls and their ambush marketing at the World Cup in South Africa.

Nike, which was established in 1962 by Phil Knight who incidentally was an accounting major,  is one of the best companies in the world in terms of getting its marketing just right.

They have a long history of having a certain flair for marketing. After the 1972 Olympic marathon trials for example they proudly announced that 4 of the top 7 finishers had worn Nike shoes. They neatly ignored the fact that the top 3 were wearing Adidas shoes!

Although Adidas are the official sportswear sponsors of the World Cup, Nike are doing rather well in terms of their profile.

Anyone that has seen a World Cup match will no doubt have been drawn to the orange Nike boots that a lot of top players such as England’s Wayne Rooney and Portugal’s Cristiano Ronaldo are wearing.

These boots, or Nike Mercurial Vapor Superfly II Elite boots (retailing at GBP 275) as they are officially known, are arguably catching people’s attention more so than any promotion that Adidas have done at the tournament.

Students of strategy papers will be aware of Michael Porter’s generic strategies whereby organisations compete either by way of cost leadership or differentiation (see our ExPress notes for a refresher if you’re unsure about these terms).

It can be argued however that Nike take the best of both of these approaches.

They focus on the differentiation side of things by investing heavily in R&D, design and marketing. As a result they can charge a premium for being “different”.

On the cost leadership side of things then Nike use external manufacturers rather than internal production. This means that they can source their manufacturing via approved suppliers which they will select for each product on the basis of the best price offered by these suppliers. It enables them to shop around for the best price whilst still guaranteeing the quality.

All in all a very smart business model but I’m sure that fans of the World Cup are more interested in the goals that are scored with these boots rather than the business model behind them.

IFRS 911: Accounting for environmental catastrophes? The BP oil spill illustrates a number of issues in IFRS. Here are just the first few we thought of..

Published on: 18 Jun 2010

BP chief executive Tony Hayward was grilled yesterday by the US Congressional panel.

The failure of the Deepwater Horizon drilling platform has been a catastrophe for lots of people. Stakeholders ranging from individual fishermen through to major shareholders have all been severely impacted.

Being natural accountants though, we couldn’t help but think how this would affect the accounts, given that it may well inspire some future exam questions.

The most obvious effect is the impairment of the well itself.  Only the hardware is currently recognised in assets, since the value of the reserves is too uncertain to be recognised as an asset.  Rigs cost vast amounts of money however and this is a significant impairment.

Similar drilling arrangements will also require major safety upgrades.  This would cause an impairment, but no provision, since BP could always simply close down a well.

Then there is goodwill.  BP grew to its vast size by organic growth and by acquisition.  This activity may well have been through an acquired subsidiary.  This is pretty solid external evidence of an impairment and so goodwill must be written off.  Lots of goodwill needs to be written off.

Fines are a near certainty.  The White House has been careful to ensure that the world knows that the $20 billion payment to a trust to settle damages is not a full and final settlement.  This means that an estimate of likely costs will need to be made and disclosed in a very transparent way.  BP and BP’s lawyers would probably prefer to avoid that transparency of how much they think this is going to cost them.

A number of years ago, IAS 10 was amended to require that only dividends that were legally required to be paid could be shown as liabilities.  Many people commented on how this was not true and fair, since it was unthinkable that large companies could ever change their minds about dividends that had already been proposed.  Well, BP changes that a little, given that they have agreed to skip this year’s dividend to shareholders, in response to huge pressure from wider stakeholders such as affected communities and the President of the United States.  It turns out that companies do sometimes change their minds about dividends before the cheques get sent out!

What about recoverability of insurance proceeds?  That one is simple; BP did not have insurance we believe.  Ouch.  Dare we breathe the words “going concern”?

36 attractive Dutch ladies, Hugo Boss and an ambush. It’s all happening at the World Cup.

Published on: 16 Jun 2010

So the World Cup is in full swing but what got all the publicity yesterday involved a team of attractive female Dutch fans rather than a team of footballers.

36 young blond Dutch fans wearing bright orange mini-dresses were removed from the stadium at half time and two of them were arrested and then released on bail.

But what exactly was their crime and why all the media attention?

Their crime was that they were alleged to be part of an ambush marketing campaign by Bavaria, the Dutch brewer.

Ambush marketing is where companies which are not official sponsors of tournaments aim to get their marketing message across without making any payment to the tournament organisers.

The mini-dresses the ladies wore were promotional dresses provided by Bavaria in the run up to the tournament and when they all started clapping and swaying in unison in these dresses they understandably attracted a lot of attention. Unfortunately for them this attention was not only from the world’s press but also FIFA representatives that were on the lookout for ambush marketing.

Anheuser Busch’s Budweiser is the official beer of the tournament and no other beer company is allowed to promote itself within World Cup stadiums. FIFA receive significant amounts of money from official sponsors and therefore are keen to protect their sponsors.

Another example of ambush marketing involving a major sports tournament was at the 2009 British Golf Open. Hugo Boss sailed its corporate sponsored yacht just off the coast of Turnberry, Scotland where the golf course was located.

As a result of this the BBC who were filming the golf had little choice but to show the Hugo Boss yacht in the background of a lot of shots. Great advertising for Hugo Boss!

Back to the Dutch girls and the 2010 World Cup though and it’s safe to say that whatever the outcome of this situation it’s no doubt been a success for Bavaria. More people have now probably heard of Bavaria beer as a result of the arrests than if the girls had just been left in the stadium to sway and clap in unison and enjoy the rest of the game!

How much would you charge for an hour of your time? £900,000 would probably be ok as long as lunch was included….

Published on: 14 Jun 2010

It’s tough to qualify as an accountant. The exams are difficult and it’s hard work. The rewards, both financial and non financial however, can justify all of this hard work.

If you work for a firm of accountants then the fee income of the company is largely based on the hourly charge out rates of the employees. I’ve got a feeling though that no matter what your position is within your company you won’t be able to command a charge out rate of £900,000 per hour!

On Friday however a mystery individual paid $2.6 million (approximately £1.8m) for lunch with Warren Buffett, the 79 year old billionaire head of investment giant Berkshire Hathaway and world’s 3rd richest man.

Arguably the most famous and respected investor in the world, Mr. Buffett auctioned his time in aid of the Glide Foundation, a San Francisco charity . Assuming a 2 hour lunch the winning bid of £1.8m results in an impressive hourly equivalent of £900,000.

The winning bidder can take seven of his or her friends along to the New York steakhouse, Smith & Wollensky and are free to ask anything although Mr. Buffett will not be disclosing what he is buying or selling.

Of course, I’m also assuming that someone will make the reservation for the meal rather than risk turning up and not being able to find a table for 8 people as the restaurant is fully booked…

It’s a pretty good interest rate and it tastes a lot better than all the others…

Published on: 09 Jun 2010

One of my weaknesses is that I just love chocolate.

Hotel Chocolat is a top end chocolate company with nearly 50 stores in the UK, the US and the Middle East. I must admit that I probably spend a bit too much time in their shops than I should but everyone has got their weakness.

As an accountant with a love of chocolate I was pleased to see Hotel Chocolat take a rather unusual approach to raising money to fund their expansion.  They are looking to raise cash to increase the number of Hotel Chocolat stores as well as invest in their plantation in St Lucia.

They are raising money by way of issuing bonds. This in itself doesn’t sound particularly unusual but what is different about this bond issue is that whilst they are genuine bonds with interest being paid on them, the actual interest paid is in the form of chocolate rather than money.

Two values of Chocolate Bonds will be issued. Holders of the £2,000 bonds will receive six chocolate tasting boxes with a value of £107 which represents a gross interest rate of 6.72% whilst holders of the £4,000 bonds will receive a higher interest rate of 7.29% via chocolates to the value of £233.

The bonds are fully redeemable after 3 years and on every anniversary after that so lovers of chocolate will be able to recover their full investment whilst at the same time enjoying some fantastic chocolates.

The interest rates on the chocolate bonds are pretty impressive when compared to what you would receive on a typical bank account so I’m sure that there will be many chocolate loving investors that will literally be licking their lips in anticipation of the interest that will be received (and eaten pretty soon afterwards….)

Allegations about two of the Big 4 and “espionage”? Make sure you don’t do this in your exam…

Published on: 07 Jun 2010

So the June ACCA exams are finally starting today. After all the hard work students all over the world are facing that unique mixture of excitement, fear and anticipation as they turn over their actual exam papers for the first time.

One thing that really goes without saying though is that when you’re sat in the exam hall you shouldn’t be looking at the person next to you and trying to see what they are writing.

Although exams aren’t being sat in these two particular buildings occupied by PricewaterhouseCoopers and Ernst & Young in London, there have been various allegations recently that the buildings are a little too close for comfort.

Three years ago PwC moved into an office next door to EY. At their closest point the buildings are approximately 10 metres apart. This has led to concerns that the rival companies could spy on each other.

PwC have apparently made the first move to reduce the threat of “espionage”. In order to prevent EY employees spying on them through the windows they have installed automatic blinds that close as soon as audio-visual equipment is turned on. The offices have also been designed so as to prevent any computer screens from being visible through the windows.

EY were reported to be evaluating their options in response.

Whatever the outcome of this is, all of us here at ExP would like to wish you the very best in your exams and sincerely hope that you don’t feel the need to try to spy on your neighbour in the exam! GOOD LUCK.

The ExP Group