DipIFR

The Captain was sober, the First Mate was drunk. Was that true? Was that fair?

Published on: 02 Oct 2013

I’ve been a qualified accountant for a fair few years now.

sailorI had the pleasure of bumping into my first auditing lecturer last week. It was at a business mixer event and even though it was a long time since we last saw each other he really hadn’t changed that much.

We got talking and I reminded him of something that he told me that I’ve remembered ever since and to me is a great way of explaining what is meant by “True and Fair”. Those of you that have studied financial reporting papers will be aware of the importance of “True and Fair” in connection with financial statements.

In summary, financial statements should provide what is generally understood as a true and fair view of the reporting entity’s financial position, performance and changes in financial position.

I always remember my lecturer telling me the story of the ship’s captain that was having a problem with his first mate who was always drunk. In the end the captain wrote an official entry in the captains log saying “Today, the first mate was drunk.”

The first mate was upset about this and the next time he took charge of the ship when the captain was asleep, he wrote in the log that “Today, the captain was sober”. This of course implied that on other days the captain wasn’t sober as he was drunk.

Now, the statement “today, the captain was sober” was clearly true but I’ll leave it up to you to decide whether or not it was fair!

The 18 page remuneration policy and the £6,500,000 bonus…

Published on: 09 Mar 2011

IFRS 2 Share Based Payments has never been a popular accounting standard with many in the business community.

It’s also often unpopular with students, especially the deferred tax elements of it.  This is despite the fact that share based payments often provide an opportunity for easy marks (we promise!)

The reason given for finance directors’ dislike of IFRS 2 is often that it involves subjective estimation of the value of share options and other equity-based compensation.  This can be complicated and subjective.

Another reason why it’s unpopular might be that it involves stating the full truth of how much executives are actually being paid, including non-cash related rewards.

One person who is feeling the heat of this at the moment is Bob Diamond, who is CEO of Barclays Bank.  The bank has just published its remuneration report and it’s predictably controversial.

In an environment where many people, fairly or unfairly, blame perceived greed of bankers for the global financial crisis, CEO remuneration of a salary of £250,000 and a cash performance bonus of £550,000 might be considered brave by many.

But this is only a part of the story.

Once the expected value of equity based remuneration is included, the total figure rises to a bonus of £6,500,000.  In the days before IFRS 2, the total reported remuneration would have been less than £1 million.  No wonder some directors look on the pre-IFRS 2 days as the good old days!

If a person had invested £100 in Barclays shares on 31.12.05, those shares would now be worth £53.  This compares with a profit of 26% on FTSE shares in general over the same period.   At a time when shareholders have taken these substantial losses, this type of remuneration is likely to upset investors.  This possibly explains why the bank takes up 18 full pages to explain (or perhaps justify) its remuneration policy!

I’ll have two beers, some peanuts and 50 shares please…

Published on: 18 Feb 2011

Fancy having a drink of beer and getting some shares in the company as well?

Well, if you’re in Australia that is exactly what you can do at the moment.

Taking a novel approach to raising finance the Australian beer brand Broo is currently offering free shares with purchases of their beer.

Consumers need to purchase between one and fifty cartons of Broo via their website for AUD 54.99 each (approximately £35) and then they are entitled to get 10 free shares in the company for each cartoon.

The company is hoping to give away up to 10 million shares and these will be shares with full voting rights so it’s definitely more than a PR exercise.

The share prospectus can be found here but shares are only available to Australian residents who have until the end of the month to apply for them.

If you’re a heavy drinker then you won’t become the major shareholder in the company as the maximum number of shares each individual can get is 500.

All in all this seems a great idea by the company. Drinking beer and investing at the same time – sounds like a nice strategy!

Is it a historical drama? Is it a romantic novel? No, it’s a never ending story of…

Published on: 03 Nov 2010

Classic Russian novels are famous for being somewhat large.

My copy of Tolstoy’s “War and Peace” weighs in at 1,024 pages.  That is a big book.

Some day, I will get beyond page 20.

Dostoyevski’s “Crime and Punishment” is 448 pages.  I’m up to page 25 on that one.

According to a recent survey by Deloitte of UK listed companies, the size of IFRS accounts grew from an average size of 44 pages in 1996 to 101 pages in 2010.  That’s an annual growth rate of 6%, with a 7% rate of growth in the years from 2005.  The rate of growth itself appears to be growing.

So, just for fun, if you’re of a mathematical bent, and assuming that the rate of growth in volume in IFRS accounts continues at its current pace, answer this question:

How many years will it be before the page count in a set of IFRS accounts exceeds the page count for “War and Peace” and for “Crime and Punishment”?  The answer is at the bottom of this item.

Within all this bulk (which Deloitte criticises as being “swimming in words”), there is some notably useful information, such as 90% of companies clearly identified an average of 7 key performance indicators, up from 84% in 2009.

4% of companies (2009: 7%) received a modified audit opinion relating to going concern.

Surprisingly, only 35% of companies fully complied with the UK’s Combined Code on corporate governance.  That leaves a fair bit of explaining to do, on the “comply or explain” approach.

If you’re interested in the answer to the question of how many years will it be before the page count in a set of IFRS accounts exceeds the page count for “War and Peace” and for “Crime and Punishment” then IFRS accounts, at their current rate of paper busting growth, will be longer than “War and Peace” in 35 years and “Crime and Punishment” in a mere 22 years.

Forget who’s in charge of the TV remote control, who’s in control of the TV channels?

Published on: 25 Oct 2010

BSkyB is the largest broadcaster in the UK, reporting a profit of £11.7 million on revenues of £5.9 billion in its most recent financial statements.

Its ownership structure is dominated by News Corporation, the transnational media conglomerate owned by Rupert Murdoch, whose other ventures include numerous newspapers and Fox studios in the USA.

It’s fair to say that Rupert Murdoch is a controversial figure.

A review of the most recent financial statements shows that News Corporation presently owns approximately 39.1% of the shares of BSkyB.  The next two largest shareholders own 5.02% and 3.01% of the votes in the company.

In other words, resisting the might of News Corporation to impose its will on BSkyB would require something more akin to a peasants’ revolt than a more standard company vote in the AGM.

IFRS 3 defines a subsidiary as an entity that is controlled by another entity.

Looking at the evidence, it would appear that the 39.1% ownership would be enough to give control of BSkyB to News Corporation, on grounds that it would be almost impossible to resist decisions favoured by such a dominant investor.

One such decision was appointing James Murdoch, son of Rupert Murdoch as chairman of BSkyB.  Lots of investors didn’t like this, but Murdoch took the helm of the company.

News Corporation produces its financial statements under US GAAP and has always consolidated BSkyB using the equity method, as an associate.

Under IFRS, it would have been arguable that full consolidation as a subsidiary would have presented a more true and fair view, as IFRS uses more principles based recognition of control than US GAAP.

However, a shock recently came to News Corporation, when it tried to increase its holding from 39.1% to a clearly controlling 61%.

The board of BSkyB refused to agree with the chairman that an offer of 700p per share should be accepted.  The board defied its biggest investor and said that they would recommend refusal of any offer less than 800p.  This appears to have come rather as a surprise to the dominant Murdoch family, who show signs of thinking of BSkyB as their fiefdom.

It’s just a nice example of when apparent control is not control and thus how to be cautious in deciding when to consolidate a company as a subsidiary, even if it generally does everything you tell it to.  If there appears to be a chance of the other investors saying “enough” and refusing to give into your will, it’s not a subsidiary.

The waiting is over. Say goodbye to David Tweedie and hello to Hans Hoogervorst.

Published on: 18 Oct 2010

Photo by Seb ter Burg

After a long wait and a fair bit of speculation, rumour and expectation, we accountants now know who the next chairman of the International Accounting Standards Board is going to be.

Now, this might not sound quite as exciting as we’d like to make it sound, but this really is very significant.  When a new pope is elected, crowds throng the Vatican, there is black smoke, followed by white smoke and a general excitement and drama.  Our own global leader was announced by a modest press release from Cannon Street in London (home to the IASB) with a type of modesty that may be typical of our profession.

The successor to Sir David Tweedie will be Hans Hoogervorst, with effect from 1 July 2011.

Mr Hoogervost is a Dutch national, with an interesting background in both academia, politics and business.

Between 1998 and 2007, he held a number of positions in the Dutch Government, including minister of finance, minister of health, welfare and sport, and secretary for social affairs. Prior to this, he served both as a member and senior policy advisor to the Dutch parliament and the ministry of finance. He also spent three years as a banking officer for the National Bank of Washington in Washington, DC.

Mr Hoogervorst holds a Masters degree in modern history (University of Amsterdam, 1981) and a Master of Arts degree in international relations (Johns Hopkins University school of advanced international relations, majoring in international economics and Latin American studies).

This is a varied profile of experience and one that is probably very suited to the man that will take IFRS to the next level of development with the (hopeful) convergence of IFRS and US GAAP.  We think that considerable assertiveness and diplomacy will be required in that task!

Whoever takes over from David Tweedie has a considerable job on his hands.  Under Tweedie’s leadership, IFRS has moved from peripheral relevance to near global domination.  Standards, on the whole, have become much better.  David Tweedie is a tough act to follow.

We wish Mr Hoogervorst every success.  We are pleased that we have the best part of a year to learn how to pronounce his name properly.

If you go to the bank today be careful in case you Kop some abuse for being a toxic asset.

Published on: 13 Sep 2010

On Saturday Wayne Rooney the England and Manchester United footballer was dropped for the game against Everton.

According to the Manchester United manager Alex Ferguson, he was dropped so that he wouldn’t have to endure excessive abuse from the Everton fans (whilst the married Mr Rooney has recently gone through a barren patch of scoring on the pitch he was reported in the press last week as having scored off the pitch with a number of prostitutes).

So, the Everton supporters didn’t have the opportunity to direct their witty chants towards Mr Rooney.

The Accountants amongst the Everton supporters though must now be looking forward to when they play their neighbours and fierce rivals, Liverpool.

Last week it was reported that Liverpool FC’s loan with the Royal Bank of Scotland (RBS) had been reclassified and moved to RBS’s toxic debt division. In other words the £260 million loan is now within the “bad bank” part of RBS which was created to put all their toxic assets from the recent worldwide financial crisis.

Even though RBS were reportedly getting £1million interest per week on the loan it is now considered clear that they have severe doubts over whether they will get their money back.

We blogged a couple of months ago about the going concern risk with Liverpool FC and this latest news can only add to the excitement.

One thing’s for sure though and the toxic debt division of RBS won’t be very sympathetic with Liverpool and will be looking to recover their money as soon as possible. A quick sale of the football club at a knock down price is expected.

Now, all you accountants in the Everton crowd get your singing voice ready and altogether “You’re toxic and you know you are, you’re toxic and you know you are….”

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.

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”?

Historical costs deserve more friends.

Published on: 09 Dec 2009

Historical cost accounting lies at the core of accountancy.  It’s derived from the simplicity of debits and credits and is therefore where we all start in our studies and practice of our profession.

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.

The ExP Group