Accounting for long term contracts
Construction type companies are subject to a special accounting standard called IAS 11 (see http://www.ifrs.org). This standard specifies how construction companies deal with revenues and costs associated with contracts in their published accounts. What’s the problem you might ask? Why a special standard? The problem is that construction or similar contracts often span multiple accounting periods. If too much revenue is recorded early, profits might be inflated incorrectly. And, if costs are recorded too early, profits might look much lower than they should be. So, IAS 11 says what is allowed and not allowed. In a nutshell, losses must be included in accounts immediately; profits should be reported only when certain and in proportion to the completion of a contract. A recent news article in the Telegraph highlights one UK company (Connaught Group) that may be incorrectly applying the standard – you can read it here – to long term social housing maintenance contracts.
In fact, IAS 11 applies two basic accounting concepts. First is applies the prudence concept, as losses are to be recognised straight away and profits only when reliable estimates are possible. It also applies the accruals concept, which means that revenues and costs should be matched against each other as evenly as possible over time.
Accounting for sustainability – practical insights
I read this article in the CIMA insight ezine recently. It reports 0n an initiative called Prince of Wales’ Accounting for Sustainability Project (A4S). The project has been developing practical tools and guidance to help ensure that organisations meet sustainability challenges. A recent publication shows how eight UK private and public sector organisations have applied the guidance developed by A4S. According to the author some common themes emerge; sustainability must be a strategic objective; executive commitment is vital; effective bottom up approaches are needed to capture insights from employees across the organisation. Click the link to read more.
The ‘forgotten’ part of performance management
I recently read an article in The Economist online http://bit.ly/aiSE5K about assessing the performance of fund managers. I found the article quite interesting, as we all know how people in the financial sector have been (and still are) rewarded based on their performance. And, what bank or fund has really performed in recent times?
The article mentions an idea called the ‘inertia benchmark’ – this the performance which would have been achieved if a fund manager did absolutely nothing. This measure could then be compared with the actual performance of the fund to assess if the actions of a fund manager actually yielded better results. This idea made me think do business owners and managers ‘forget’ the meaning of improved performance? As accountants we can create plans, monitor actions and report on performance against plans. And we know too how important it is to use the right performance indicators. In larger companies and many SMEs, reward systems are often linked performance ( banks and funds are a good example), and performance is often measured in terms of profit – again something accountants are good at measuring. So understanding, or more precisely, defining, the meaning of performance can have a big effect on rewards and the information needed to assess it. I wonder how many managers ask themselves what would have happened if the course of action taken was actually to do nothing. Yes, this would be tricky and identifying an inertia benchmark would be considerably more difficult than with a fund. But it might be good to consider such ideas when performance and reward systems are closely linked.
Tips to reduce debt
I found this (http://bit.ly/bTJVbf) feature in the CPA Ireland student e-zine. It gives some useful tips to help reduce personal debt. Sole traders might find it useful too.
Top 10 Book-keeping mistakes made by small business
Still on holidays, so a shorter piece again. I found this post on all allbusiness.com. It is US orientated, but you’ll be able to change VAT for sales tax and dollars for euro/pounds. The post gives some good tips, whether you’re looking after your own book-keeping or getting someone to do it for you.
Accounting for carbon emissions can be tricky
The July edition of Scientific American gives a great example of some of the difficulties in tracking and accounting for carbon emissions. Most larger business now track their carbon emissions, and in most developed countries have to pay to emit carbon dioxide. So it makes business and environmental sense to reduce emissions.
The article in Scientific American tells the story of plug-in hybrid and electric cars (a plug-in hybrid has a small normal engine which means it still uses more carbon based fuel, whereas an electric car has no engine at all). A plug-in hybrid you might think is emits less carbon than a normal hybrid, and in turn a full electric car would gave zero emissions. But it’s not that simple as you have to consider how the electricity is produced. As noted in the article, the vast majority of electricity is produced by oil, coal and natural gas in the United States. Coal is the worst in terms of carbon emissions and in some states it is the main fuel source for electricity production. So in Illinois or Ohio, a zero-emission electric car would contribute more carbon emissions than a normal hybrid like a Toyota Prius. In both regions coal is used to generate 65-75% of the electricity.
What this example shows is how tricky it can be to determine your own carbon emissions or that of a business. You really have to trace things back to source to be sure you’re counting is correct. Another example I came across recently really surprised me. It was in a book called ‘ In Defence of Food ‘ by Michael Pollan. The raising of lambs for meat in the UK uses a lot of energy and carbon as land is treated with chemical fertilisers. In New Zealand, lush natural meadows remove the need to fertilise. As the manufacture of chemical fertilisers consumes a large amount of energy, it may actually be more environmentally sound to import lamb by air from New Zealand to the UK. Crazy I know, but it shows the type of thinking needed when trying to account for carbon use.
Controlling your cash flow
I’m in holidays at the moment, so I am taking a short cut by referring to another blog! SmallBusinessCan is a website set up by an Irish bank and other sponsors to help small business by giving practical advice through its network of users and sponsors and through regular postings. Here is a recent post from the websites blog. Controlling your cash flow provides 15 suggestions to help control your cash flow.
Relevant costs and revenues – opening a barber shop earlier?
One Saturday morning recently I went along to one of the two local barber shops to get a haircut. I usually like to get out early so I was in my local town about 9:30. For my last haircut I tried a the newer of the barbers, who to build up business had a loyalty scheme where you get your fifth haircut free. But it did not open until 10:00, so I went to the other barber ( who opens at 9:00 ) and I made up my mind I’ll stick with this one.
Now let’s talk accounting. The newest barber is in a high rent shopping mall. They also want to build up a customer base. The older one probably pays less rent or maybe none. Now let’s assume the new barber is thinking if opening at 9:00 to attract early birds like me. What costs and revenues are relevant to this decision in – in other words, what are the marginal costs and revenues. The revenue is easy – simply all extra revenue generated e.g. 5 extra cuts at £/€10 per cut = £/€50 And costs? The main cost would be labour of any employees, say £/€20. Other minimal costs would be utilities (power, water) and any hair products like gels or creams, say £/€5. So in this simple example a profit of £/€25 is made. Hang on, what about other costs like rent? These are not relevant as these will be incurred even if the shop is closed. This kind of decision is made by businesses quite regularly and while my barber example is simplifying things, such decisions can make a huge difference to profits. Why? Simply because all additional revenue contributes to profits and once fixed costs like rent are covered, each extra sale (haircut in my example) means more profit. So make these types of decision as best you can in your business. Obviously, if your figures are showing a loss, the course of action might be the wrong one – maybe the new barber in my example thinks no customers will come before 10:00, so he’d loss all labour costs!
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