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“There’s no such thing as a free lunch” but will there be such a thing as a free drink or cheap drink in the future?

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Binge drinking in the UK is a major problem. City centres at the weekend can be full of people that are literally trying to drink as much as possible in as short a period of time. Violence and health issues often ensue.

As well as the disturbances to local residents there are also the costs both health-wise to the drinkers and financially to police forces, hospitals and society at large arising as a result of this binge drinking.

As a potential solution to this problem, the government is currently investigating whether to ban free or cheap drink promotions. One of the ideas being discussed is whether to make it illegal to sell alcohol below cost price. In other words to prevent businesses offering “loss leaders” on drinks so as to encourage higher spending at a later date.

If you’re an accountant, and assuming you’re not reading this in the middle of an actual binge drinking session yourself, this raises an interesting discussion on what exactly is meant by “below cost” and in particular the term “cost”.

The major alcoholic drinks manufacturers produce a range of drinks. Diageo for example produce drinks as varied as Smirnoff vodka, Johnnie Walker whisky and the famous Irish stout Guinness.

Identifying the cost of each particular drink would be challenging exercise. Whilst they no doubt have sophisticated management accounts which allocate overheads and indirect costs in certain ways, there would be a clear debate as to which was the “correct” allocation of these costs.

Apportioning overheads such as head office costs, R&D and marketing to individual products would result in a certain amount of flexibility in terms of identifying the cost figure to use for “below cost” purposes.

One solution to this inherent problem of identifying the cost of individual products has been proposed and that is setting the minimum cost of the drinks as equivalent to the duty and VAT that needs to be paid on the particular drinks.

So, the next time you’re out having a quiet drink with some non finance friends feel free to start a discussion about how much each of your drinks cost to make. You can then explain about the various possible methods of allocating indirect costs. Then again, talking about management accounting cost allocation whilst out with your friends may result in your  non finance friends starting a binge drinking session themselves…

If you’re going to buy shares in Skype then watch out as the Sky could be the limit.

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The internet telephone company Skype is planning on raising $100 million via an IPO (Initial Public Offering) on New York’s NASDAQ later this year.

Skype is probably the best known “internet telephone company” and users can make free Skype-to-Skype calls. Paid for calls to mobiles or landlines can also be made.

$100 million however is a significant figure and the filing documents submitted on Monday show that in 4 of the last 5 years the company lost money. In addition, the proportion of Skype’s customers that use the paid for services is also relatively small (8 million out of total registered Skype accounts of 560 million) so arguably there’s a real risk that it may be a significant time before the company is well into profit making territory.

The IPO submission documents must also show any identified risks and there is an interesting one present with Skype.

If you look at page 30 of the IPO submission document it was revealed that BSkyB, the owner of Sky TV in the UK, is in a long running dispute with Skype over the use of various trademarks. There is a view that Sky and Skype could be confusing for certain individuals especially given that BSkyB are promoting their telephone services alongside their Sky TV services.

It’s a case of watch this space to see what happens next.

Of course, free phone calls are one thing but if Skype ever started showing free television programmes then that’s when things would get really exciting.

Forget the sunshine, the beaches and the fantastic food – if you live in Australia sell your house and move to America…

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Asset valuation is a tricky business.  It is, however, a skill that accountants are often commissioned to use.  It’s also a useful one to have when making personal decisions, such as whether to buy a home or not.

Some people would argue that a major driver of the current economic slump in many countries is the collapse of house prices.

In a number of countries, house price bubbles were enormous.  There are lots of motivations for buying a home; principally as a place to live, a store of value for the future; certainty come retirement (when the mortgage is paid off so housing costs drop only to be maintenance).

Another motive has been speculation.  In my opinion, speculation in house prices is a bad thing, since it drives up house prices.  This means that new houses are not affordable for the young.  The more that house prices go up, the greater the transfer of wealth from the economically active young to the less economically active old.

Unsustainably high house prices cause uncertainty in an economy and when a crash eventually happens, it can cause people to be locked into homes with loans greater than the value of the asset (negative equity).  As well as a source of human misery, negative equity reduces labour mobility, which is bad for the economy as whole.

The Economist newspaper tracks house prices in different countries, using a method based on rental yields.  The assumption here is that rental markets react more readily to underlying supply and demand conditions.  If one had $500,000 to invest, would one use it to buy a house which could then be rented out, or buy other investments such as bonds?  If the rental yield (rent / initial value x 100) is less than the yield on bonds, then the house price is overvalued.  It’s a simple enough methodology that can give some revealing results.

A couple of years ago, this analysis suggested that UK property prices were 35% overvalued.  A crash followed.  There have been property crashes and recession in many countries where speculation is a big motive to buy property.  The alarming thing is that a recent analysis (Economist 10 July, page 75) revealed that properties are under and overvalued in certain countries:

UK: 33.8% overvalued (following a hard-to-explain recovery in house prices)
USA: 6.5% undervalued
Spain: 50.4% overvalued
Australia: 61.1% overvalued
Germany: 14.5% undervalued
Ireland: 15.7% overvalued.

This may be poor news indeed for the economy of countries with very overvalued property.  With these sorts of valuations, mortgages may become unaffordable the moment that interest rates rise to above the rock bottom levels we have at the moment.  This could release very big downward forces in the economy and dampen out any economic recovery.

On the plus side, the USA looks to have reacted quickly, albeit brutally, to the changed economic circumstances and it might be a good time to sell your home in Australia (cash out your investment while it’s arguably overvalued) and buy somewhere in America.  If you can get a visa.  Oh, and a mortgage!

Is this the real Willy Wonka? After all he bought enough chocolate on Friday to make over 5 billion bars of chocolate.

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Anthony Ward, a British financier who set up hedge fund Armajaro Holdings, bought a huge chunk of chocolate on Friday.

To be precise, he spent over £650 million buying 241,000 tonnes of cocoa beans.

This was the highest single purchase of cocoa for nearly 15 years and happened as cocoa bean prices rose to their highest level for 23 years. On news of the purchase cocoa futures for July delivery jumped by 1.5%.

The trade took place on Liffe (the London International Financial Futures and Options Exchange), a market which trades contracts in commodities such as sugar, coffee and cocoa.

As well as the sheer size of the transaction the strange thing about it was that Mr. Ward’s company has actually taken delivery of the cocoa. This is very unusual as the vast majority of cocoa transactions normally involve traders exchanging option or futures contracts without actually taking possession of the beans.

So why has he purchased so much chocolate?

He’s a very astute and wealthy businessman who reportedly lives in a £10 million house in Mayfair, London.

The speculation is that he is stockpiling huge volumes of cocoa in order to be in a strong negotiating position. Harvests in the cocoa heartlands of Ghana and Ivory Coast have recently been weak and there is an increase in demand for chocolate in the Chinese and Indian markets.

It looks like chocolate prices are on the rise so what better excuse for me to stock up on some chocolate before the price rises. Somehow though I don’t think my stockpile will be anywhere near Mr. Wards…

You know you’ve had too much to drink when your eyesight goes blurry, you slur your words and you spend half a billion dollars…

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Steven Perkins, a 34 year old commodity broker, attended a company golfing weekend, had a bit too much to drink over the weekend and then took the Monday off of work.

This in itself didn’t justify being fined £72,000 earlier this week by the Financial Services Authority (FSA) and being identified as “an extreme risk to the market when drunk”.

It was what he did on the Monday evening that caused all the excitement.

After the golfing weekend, Mr. Perkins felt the need to carry on drinking and started drinking again on the Monday lunchtime. Late that night in a drunken stupor he bought 7 million barrels of oil using $520 million dollars belonging to his then employers PVM Oil Futures.

Because the purchases took place in the middle of the night other traders around the world thought that there was something major happening in the oil market and as a result the price of oil shot up by $1.50 a barrel in less than 30 minutes. Through the alcoholic haze Mr. Perkins gradually increased his bidding price each time to push the price up until at one stage he was responsible for nearly 70% of the global market volume.

He tried to gradually sell down his position in the morning but no doubt with a very dry mouth eventually admitted everything to his employer.

His drunken night time purchases resulted in PVM losing £6million, him being fined £72,000 and banned from the industry for five years. Plus of course, an almighty hangover.

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

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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.

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

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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…

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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….)

Ready to go to the movies? Don’t forget your drink, your popcorn and your derivatives…

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Students are probably aware of what currency futures are. To quote our ExPress notes:

“These are contracts, transacted over an exchange, representing a standard amount of currency which can be bought or sold with a specified future settlement (delivery) date, at a rate expressed in another currency. Settlement is guaranteed by the exchange, which acts as counterparty.”

Currency futures, interest rate futures and even relatively obscure items such as soya bean futures are all currently traded.

Last week however an application was made to the US futures regulator to create a contracts market for film futures. If the application is successful this will mean that there will be a “movie derivatives” exchange.

In simple terms this will enable people to “bet” on whether a movie makes money or is a financial failure. Traders will be able to buy and sell contracts speculating on how much money a movie will make at the box office.

As an example of how movie futures could work, a futures contract could be bought by a trader valued at say $1 for every $1m in expected ticket sales during the first month. Therefore, if the market believes a movie would make $100m, traders would be able to buy a futures contract for $100.

If box office estimates were to rise to say $150m because of positive movie critic reviews in the run up to the movie launch, holders of existing contracts would be able to resell them for $150. This would result in a profit of $50.

Of course, if the reviews aren’t very good then the box office estimates would decrease and the value of the contracts would go the other way and there would be a loss!

There are two opposing views to this.

Some people say that this offers a new, novel way for movie producers to manage their financial risk.

Last week however, the Motion Picture Association of America (MPAA) joined forces with producers and cinema owners to oppose the move on the basis that it would encourage speculation, financial irresponsibility and could be harmful to film releases.

To be honest though as an ACCA P4 tutor I find all this so interesting that I personally think they should make a film out of it – surely it would be a box office hit?

Remember the short term and long term

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One item that people should be aware of is that management accounting and financial management are similar to the extent that they are both concerned with resource usage. But there are differences.

I was lucky enough to have recently flown on the new Airbus A380 super jumbo and that got me thinking about some of the financial management issues that Airbus face. Designing and producing the A380 must have been a phenomenal exercise and a real testament to man’s engineering skills. It’s capable of carrying over 800 passengers and has a range of nearly 15,000 km. It’s a fantastic machine.

But what has this all got to do with the difference between management accounting and financial management? One difference is that management accounting tends to deal in short-term timescales whereas financial management is generally more concerned with the longer term. Whilst the longer term is generally considered to be more than one year be aware that certain industries and companies have a distinctly longer “long-term”.

From inception to delivery the A380 took nearly 10 years and the long term view taken by Airbus is certainly longer than some businesses in for example the IT or fashion industries. Some of the businesses in these industries have distinctly shorter “long-terms”.

Anyway, despite the millions spent on design and development of the A380 there was one disappointing thing about my flight and that was I fell asleep during the film and missed the ending…