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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.

The “Princess and the Pea” is a famous fairy tale but should there be a new version called the “Princess and the Pound Notes”?

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Sarah Ferguson, the Duchess of York and former wife of Prince Andrew, has been in the news for all the wrong reasons.

Evidence came to light last week of the former member of the British royal family accepting money in used bank notes to arrange access to her husband ($40,000 as an initial payment of an agreed total of £500,000). Many people were shocked as taking money to arrange access to people in influence could look like corruption.

The Duchess of York (no longer referred to as “Her Royal Highness” following previous run ins with the more senior royals) may be in greater trouble than the public relations mire and financial trouble that she admits to being in.

If the Duchess was not planning to include full and frank disclosure of the cash received (or what some people may call “bribes”), she appears to have been engaging in activity that could look like money laundering. Accepting payment in notes and coins is often fairly good evidence of wanting to disguise the origin of the funds.

Now whilst money laundering shouldn’t normally be an issue for an ex-Princess, money laundering is big news for professionals, especially professionals practising in the European Union.  The EU’s third Directive on money laundering requires that all accountants and tax advisors are effectively trained in detection of money laundering.

Penalties for non-compliance with this can be severe. Money laundering, or facilitating money laundering, under UK law can carry a criminal sanction of two years’ jail time.

This could be an interesting bit of gossip to follow for students!  Maybe the Duchess should use some of those used bank notes to engage the services of a good lawyer?

ACCA exam tips released today but this individual won’t be running free range over the exams…

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A mixture of intelligence, hard work and dedication are needed to ensure success in the exams. No training company knows for sure what will actually be in the exams next month but our tips identify areas which we believe you should have covered particularly well.

For those of you sitting audit, ethics or law papers the following case shows an individual who clearly didn’t show intelligence, hard work and dedication.

Organic and free range eggs are becoming more popular in the UK with a premium being paid as a result of the expense of feeding the chickens with natural produce and letting them roam free.

An individual by the name of Keith Owen was recently jailed for 3 years as a result of mis-describing eggs as free range when they were in fact battery hen eggs. The judge also made Owen surrender the £3 million profit he made and stated that it was “a carefully planned and executed fraud by false accounting” (false accounting by altering records to hide the fact that the eggs weren’t free range).

The scale of the fraud was phenomenal. He defrauded all the major UK supermarkets, including Tesco and Sainsbury, as well as numerous small shops by selling them approximately 100 million (yes, one hundred million) battery eggs as free range eggs.

The fraud started to come to light when it was noticed that the number of free range eggs sold by his company was more than could be laid in all the farms in the UK.

There were also complaints from a number of lorry drivers that would drop off consignments of battery eggs at his factory, be told to wait a few hours and then pick up some free range eggs to be delivered elsewhere. The free range eggs were suspiciously of a similar quantity to the battery ones that had been dropped off a few hours earlier with the only difference being a new label on the packaging!

Now, I don’t know whether Mr. Owen ever considered attempting the ACCA exams but in terms of “intelligence, hard work and dedication” then somehow I just don’t think so.

The “little black dress” is a fashion icon but when you’re sitting your exams don’t forget to…

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The “little black dress” is an evening dress that is simple, classic and fashionable. Its origins date back to the 1920s with fashion historians claiming that the first design of the little black dress was made by the designer Coco Chanel back in the 1920s.

The design has been worn by numerous women over the years. The most famous “little black dress” was arguably the one worn by Audrey Hepburn in the film Breakfast at Tiffany’s.

This is all very interesting but what has it got to do with a blog for finance students and in particular what has it got to do with the ACCA exams that are taking place next month?

Well, if I’m honest it actually has very little to do with the exams as I can’t imagine there will be a lot of people wearing little black dresses to the exams! What should be happening though is that everyone should be attending the exams with a “little black pen”.

The June 2010 ACCA exams will for the first time see all the papers marked using scanning technology. The scripts will be completed as normal by students but instead of the scripts then being physically sent to the markers they will instead be scanned and then marked by markers “on screen”.

It is important therefore that you use a black ballpoint pen in your exams. If you use other colour pens, pencils, fountain pens or highlighter pens then these are unlikely to be picked up by the scanning technology and as a result the marker may not be able to see your answer.

Put simply, it doesn’t matter how good your answer is but if it is not picked up by the scanning technology then you may well find that you miss out on passing the exam.

In summary, forget about wearing a “little black dress” to the exam but don’t forget your “little black pen”.

Do you have a €500 note on you? If you do then there’s a 90% chance you…

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The UK doesn’t officially use the euro, though there are a fair few shops that choose to accept it voluntarily, and normally at a rather unattractive rate of exchange.

This means that although not legal tender, euro bank notes are not an unusual sight on the streets and in the exchange booths of the UK.

One that you won’t find from now on, however, is the €500 note.  This rare beast of considerable value is fairly commonly seen in Germany, where it’s culturally normal to pay for even large purchases in cash.  The other place that it’s found is in the hands of criminals and money launderers.

Proceeds from serious crime (eg people trafficking) are not much use unless they can get into the banking system and from there used to buy nice things like expensive cars and villas in some nice, warm place.  Getting dirty money into the apparently clean banking system often involves having a “friendly” bank somewhere that will turn a blind eye to where the funds are coming from.  This does, however, give a logistical challenge to the UK based serious criminal.  If one wishes to transport £500,000 from London to a “friendly” bank abroad, it’s necessary to fly and go through pesky things like X-ray machines and customs declarations.  Airport security staff are trained to spot the metal strips in bank notes in X-ray machines and alert police to what is likely to be proceeds of crime being moved.  The logic is that if the flow of money out can be stopped, the flow of illicit activity in will also dry up.

Enter the 500 euro note. This wee beast is compact enough that €20,000 can be rolled into the inside of a cigarette packet, which conveniently is wrapped in metal, thus becoming invisible on X-ray machines.  It’s about 20 times more compact than the £20 bank note.

The UK government estimates that a full 90% of €500 notes in the UK are used to service serious crime.  Thus they can no longer legally be sold in Britain.

If Britain ever adopts the euro as its official currency, this may require something of a rethink!

You may recognise this volcano but what about recognising the revenue?

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It seems that a certain volcano in Iceland is going off again.

At the time of writing, a number of UK airports have had to close because of drifting volcanic ash. This, it seems, is likely to be an ongoing problem, especially for more northern European countries.

I have a flight booked in a couple of weeks’ time. I am innately cost conscious and so booked a non-refundable, non-changeable ticket.

Under the Framework definition of an asset and a liability, the airline has received my money and the only obligation that they have is to incur the marginal costs of flying me there, which are likely to be fairly small.  Using the logic of the Framework therefore (and the probable logic of the new accounting standard on revenue recognition that is likely to come through in a couple of years’ time), they would be able to book revenue at the time that the sale was made.

Under the approach of the extant accounting standard IAS 18, however, revenue can only be recognised when the service is provided.  This means that none of my cash is currently in the airline’s profit or loss.

That approach has always seemed excessively prudent to me, as the chances of having to refund the money to the customer has always seemed remote.  I’ve long believed that IAS 18 is in need of replacement with something that focuses more accurately on assets and liabilities.

Mount Eyjafjallajokull has made me wonder whether perhaps holding all revenue in deferred revenue as a liability until it’s sure that it’s no longer a liability might not be such a bad idea after all….

They’re merging with a competitor so surely it must be a merger? In fact it’s not a merger but…

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The troubled US airline industry is going through a period of consolidation.  Consolidation in the sense of companies getting together to reduce their fixed costs per transaction, not consolidation in the sense of producing group accounts.

This article, however, is about group accounts.  The circumstances of the Continental/ United merger do make it look like it’s a voluntary merger and the stock market was conspicuously unsurprised at the news.

The problem is that IFRS 3 requires that for all new business combinations (a new business combination is one that doesn’t arise from a reconstruction of a pre-existing group), an acquirer and acquiree is identified.  This company is then the parent.  Often, a merger happens by a share-for-share exchange and the new parent chooses to change its name to a suitably “merged” sounding name.  But as far as the rules are concerned, one must be the acquirer and the other the acquiree.

So a decision will need to be made about which company becomes the parent. It’s likely that this will be the company with the greater retained earnings.  It’s also likely that formal merger will happen on the first day of the parent’s accounting period, so that a full year of “merged” profits is consolidated.

The group retained earnings of the new group will certainly be less than the sum of their individual parts, since the acquiree’s pre-acquisition profits will not be consolidated.

This may seem harsh if it’s truly a genuine merger, since the idea of pre-acquisition reserves should perhaps be restricted to where there’s a genuine acquisition.  So why is this option not allowed?  You can probably guess – it was subject to creative interpretation of what constituted a merger.  The IASB stated that they believed genuine mergers would probably happen globally about once every five years.

Perhaps Continental/ United is one such genuine merger?

It’s just the presentation and nothing to worry about…

The various professional bodies are always aware of the demand to make their exams more applicable to real-life.

There was a recent announcement in issue 03/2010 of the Student Accountant magazine by Lisa Weaver, the ACCA paper P7 examiner. The full article can be found here but the edited highlights are that the P7 exam will now contain more “real life” requirements such as responding to emails. Lisa has stressed that it is only the presentation that has changed and the intention is not to make the exam more difficult.

The revised style will apply to exam sittings in 2010 for the UK and Ireland P7 papers whilst for all other adaptations of P7 the new style will apply from the June 2011 sitting.

The ExP Group is strongly in favour of any changes that provide more of a real life slant to the exams  and our advice to students is this is nothing to worry about. After all, there can’t be many students out there that haven’t replied to an email at some stage!

It wasn’t a Black Tuesday….

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!

Shutting the stable door

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A UK director of one of the Big 4 firms pleads guilty to false accounting and fraud, having fraudulently claimed more than £500,000 in expenses in order to finance his wife’s extravagant lifestyle!

The director told police that he had stolen the money because “he did not want her lifestyle to suffer”, being afraid that she would divorce him. Apparently his fraudulent claims were kept below £5,000, meaning that they did not require further authorisation!

A spokesman for the firm said:

“Mr Wetherall’s frauds were detected via our own internal checks and he was dismissed in 2008. A thorough internal investigation was carried out and the case was then handed over to the police.”

The firm also stated that they had changed their internal procedures to prevent such fraud being committed again.

That could be useful I guess when advising client’s on their internal control systems in relation to expense claims!