Liverpool FC: You’ll never walk alone; or You’re never a going concern?

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Liverpool FC are in the news at the moment with their manager Rafael Benitez leaving by mutual consent last night. Liverpool are one of the most famous football clubs in the world. Last month they released their accounts for the year to 30 July 2009.

Their financial results weren’t very impressive with their accounts showing the biggest loss in their history (£55 million) as well as significant loans (£250 million).

Their auditors, KPMG, stated that Liverpool are now “dependent on short-term [bank loan] facility extensions” and “this fact indicates the existence of a material uncertainty which may cast significant doubt upon [Liverpool’s] ability to continue as a going concern”.

Most of you will know that going concern is a fundamental accounting assumption.  In the normal run of things, the financial statements make no mention of it.  Similarly, the audit opinion makes no specific mention of going concern, except in unusual circumstances.

Ignoring the specific issues involving Liverpool, going concern generally presents a tricky problem for the auditor.  If an auditor mentions going concern as a specific worry, it is likely that the company will fail.  The act of mentioning it could become a self-fulfilling prophesy.

Some would argue that there’s a significant divergence between what auditors actually say and what readers hear.

Looking at the three ways of reporting on going concern under ISA 705:

Situation 1: The company appears likely to be a going concern.

What auditors say: Nothing.

What auditors mean: The company appears to be a going concern, but there are no guarantees.

What investors hear?: All is well. Invest with no fear of possible insolvency.  Go forth and be merry.

Situation 2: Additional disclosures about elevated uncertainty about going concern.

What auditors say: The financial statements give a true and fair view, but we emphasise the disclosures by the directors about the elevated going concern risk in note x…

What auditors mean: The company’s continuing existence depends on the outcome of this external event.  It could go one way or the other, but it’s impossible to say which.  Take caution.

What investors hear?: The company is in serious trouble.  Run away.  If you are a depositor in a bank, get all your money out right now before it’s too late.

This difference in what we say and what people hear means that this option is hard to use.

Situation 3: The company is not a going concern

What auditors say: Either an adverse opinion (if the accounts aren’t prepared on a break up basis) or unqualified opinion with emphasis of matter (if they’re produced on a break up basis).

What auditors mean: The company is probably not a going concern.  It might be in the process of an orderly winding down in order to return money to investors.  Take extreme caution in investing, as there’s a very short time to recover your investment.

What investors hear?: RUN FOR THE HILLS! If you have already invested money in this company’s bonds or shares, you’ve lost it; make your peace with your grief and move on.

So in effect, mentioning going concern could be the kiss of death for many companies.

Could there be a better system to use? The international market for bonds for example has long had a well understood and much more subtle system, using gradings such as the Standard and Poor’s grading system of grading risk of default on bonds from AAA rating (virtually no risk) to BBB (becoming speculative) to D (virtually dead).

In the current high risk, post recessionary environment, might it be better for to adopt a similar system for going concern and thus the company’s shares as well as bonds?  The directors could present a separate report on going concern and assign their own S&P style grading, which the auditor could then perform a review engagement upon under ISRE 2400, giving investors explicit but limited assurance on the directors’ classification. By doing that, the spectrum of risk that going concern represents could be more accurately reflected in the financial statements.

Going back to Liverpool, there’s a view that some football clubs are too big to go out of business and I’m sure that most Liverpool supporters believe they will still be cheering on their team for many years to come and the subject of “Going Concern” isn’t top of their agenda.

If you’re heading to the exams next week then do you care whether this is a car or a van?

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On the way into the office this morning I was stuck in traffic next to a Peugeot 207 vehicle which was identical to the model to the left except that it was red rather than white.

If you’re heading to the ACCA UK stream tax exams on Monday then do you care if this vehicle is a car or a van?

The vehicle is certainly a nice looking Peugeot 207 and whilst most people would say it’s a car the fact that it doesn’t have side windows behind the driver and passenger doors makes it almost certain to be treated as a van by the tax authorities.

The good news is that you’re NOT going to be examined on the detailed rules of what is a car and what is a van (or lorry or truck for that matter) so should you care about the distinction between cars and vans?

The short answer is that yes, you should care!

I’m personally pretty certain that the exams on Monday will include a capital allowance computation which involves cars or commercial vehicles such as lorries or vans.

There are some new rules being examined for the first time by the ACCA this session (see chapter 5 of our F6 ExPress notes for a quick summary) so I think this has got a good chance of being examined.

In summary, vans and lorries are commercial vehicles and are therefore eligible for the AIA and FYA within capital allowances. Cars on the other hand do NOT qualify for the AIA or FYA (unless a low emission car which gets a 100% FYA).

Also, don’t forget to look out for the CO2 emission rate of the car as if it’s >160g/km then it only gets a 10% WDA as part of the special rate pool.

On the VAT side of things then VAT can be reclaimed on lorries and vans unlike with cars where it is not possible to treat the VAT as input VAT.

Being a tax tutor I’m one of those strange people that find all of this interesting and apologies to any of you that don’t share my excitement at discussing the distinction between cars and lorries…