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”?
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2010-06-18 05:34:462010-06-18 05:34:46IFRS 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..
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…
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2010-06-14 07:01:252010-06-14 07:01:25How much would you charge for an hour of your time? £900,000 would probably be ok as long as lunch was included….
Denmark is famous for many things. One of them is that it is home to one of the most recognized beer brands in the world, Carlsberg.
Carlsberg beer was first brewed in the mid 1800s and today is drunk around the world in 140 countries.
They have been in the news recently when nearly 800 workers in Denmark went on strike as a result of proposed changes to Carlsberg’s rules for drinking beer at work.
Currently, there is free beer (and soft drinks) in the canteen at lunchtime but the drivers of the delivery vehicles are eligible to have up to three free beers per day outside of lunch hours. The argument for this is that as they are on the road a lot they do not have the opportunity to have free beers in the canteen.
The warehouse staff went on a five day strike arguing that they should also be entitled to the additional free beers that the drivers get. Earlier this week the strike came to an end with an agreement to discuss matters.
Having an awareness of current worker relations issues is important in a number of exam papers but walking out on strike as a result of not having free beer is probably a relatively unusual issue! The vast majority of organizations have a no drinking policy in place.
There is also a big health and safety issue present. Having drivers that drink beer when they are on the road has some obvious dangers.
Carlsberg though have already thought about this and have identified a novel solution. All of their delivery trucks are fitted with alcohol sensing ignition locks that will not start if the driver is drunk.
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2010-04-16 06:10:592010-04-16 06:10:59Free drinks at work but not too much otherwise you’ll get locked out…
In terms of examples of risk management and corporate governance, UK based banking group Royal Bank of Scotland (RBS) just gives and gives. It’s an unfolding story that continues to grow.
RBS was a big success story in the last decade, showing very fast growth and taking over bigger banks such as Nat West. Its considerable returns appear to have been won, rather predictably, by taking a high level of risk. Previous blog entries have mused on the wisdom of having fired their risk manager.
The banking group was saved from collapse by receiving vast emergency support from the UK government. This was controversial but almost everybody agrees that it was necessary in order to avoid a collapse of the entire banking system. Such a collapse would certainly have made the recession very much worse.
The British public thus became an involuntary shareholder in RBS. Indeed, the UK government now holds a controlling interest in RBS, though it’s been keen to avoid interfering much in the management of the bank.
The image of bankers in the UK at the moment is very tarnished. Most people who have an opinion on senior bank staff have an unfavourable opinion; often seeing them as people who were over-rewarded for taking excessive risks. Many resent having to bail out a bank ruined by unwise risk management.
So it came as a surprise to many when the directors of RBS said that they intended giving bonuses and pay increases to many staff last week. This provoked anger from the government and outrage from the public. The RBS board stated that they would resign if they weren’t allowed to pay the bonuses, as failing to pay people well would result in loss of talented staff.
It has to be questioned whether the board have ever studied stakeholder management and the Mendelow matrix. With 70% of the ordinary shares, the government is a key player; the views of the public must be respected. If that means the synchronised departure of the board of RBS, so be it. Bankers’ salaries and bonuses have been in an inflationary spiral in recent years and some bank must be the first to bring their salaries into the realm of sustainable expenses.
It will be interesting to see if the directors follow through on their threat, back down or are even removed from office by the shareholders (ie the government). Whatever the outcome, their credibility is arguably much tarnished.
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-29 19:56:102009-11-29 19:56:10RBS directors threaten to resign
Royal Bank of Scotland (the UK based banking group) has had its fair share of troubles of late. It made some acquisitions that in retrospect were a clear mistake, such as its purchase of ABN Amro. It failed to manage risk properly, having chosen to fire its risk manager; allegedly for making too much noise about the company taking too many risks. The result of this all was a taxpayer bail out and the enforced departure of its chief executive, Sir Fred Goodwin.
At the time it became obvious that stakeholders were going to require a good degree of blood letting at board level, the bank’s chairman discussed the situation with Sir Fred. As a result, Sir Fred chose to resign, taking his right to an annual pension of £703,000 with him. Had he been fired, his pension rights would have been closer to zero.
Much public comment and anger followed, with virtually all of this aimed at the outgoing CEO. But where were the non-executives? The general duties of non-executive director are:
Remuneration: decide appropriate pay (including pensions) for executive directors in the circumstances.
Internal control and risk management supervision. History shows that this is at least questionable.
Scrutinise the executive directors.
Strategy: contribute to strategy.
Sir Fred Goodwin was entitled to his pension. He later voluntarily chose to waive £200,000 per year, but universal legal opinion is that he would have been entitled to the full amount, because the non-executives allowed him to resign.
Perhaps the press and the public are venting their frustration and anger too much at the executive directors?
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-11-11 18:50:172009-11-11 18:50:17Royal Bank of Scotland. Where were the non-executives?
I had to recently go into hospital for a minor operation on my knee. The nurses and doctors were fantastic there and thankfully everything is now fine with my knee.
The hospital I was in was a classic not-for-profit (NFP) organization and during my time there it really made me appreciate the challenges that NFPs face when setting objectives.
Hospitals have a significant number of stakeholders with a high level of interest. Patients like me are stakeholders with an obvious high level of interest in matters. Other local individuals who are not patients are also interested in case at some stage they need to use the hospital. The doctors, nurses and admin staff are also stakeholders with a keen interest in the activities and the government is another stakeholder interested in the hospital.
In summary, NFPs are different from most other organizations when it comes to stakeholders in that there tends to be a wider range of stakeholders with a high interest in a NFP organization than compared with other organizations.
Another issue that occurred to me during my stay was that there are a number of objectives that the hospital needs to balance. Two obvious ones are the quality of care given to a patient when he’s in the hospital versus treating more patients.
A final area I thought about was the classic finance term of Cost Benefit Analysis. Costs within hospitals are easy to measure but the benefits can be inherently difficult to measure. For example, how would they measure the benefit of reducing the waiting time for a knee operation by one month or 6 months?
You are not necessarily expected to be able to provide all the answers to the challenges of running a hospital in the exam but it is important to have an understanding of the challenges that a NFP organization faces when running its business.
https://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.png00Stevehttps://www.theexpgroup.com/wp-content/uploads/2018/06/styleguide-EXP-4.pngSteve2009-08-01 18:29:542009-08-01 18:29:54Not-for-profit organisations face several challenges.
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