Tesla and bitcoin on the balance sheet
Not many large firms hold bitcoin as an asset, but Tesla is one of them. A recent article in the Wall Street Journal highlights how bitcoin is accounted for by Tesla.
According to the article, Tesla holds about $1.5 billion in bitcoin. This, like any currency holdings, is an asset on the company balance sheet. If you have read any media reports of late you may know that bitcoin hit some historic highs recently, but it’s value is volatile. From a balance sheet perspective, as an asset it must be tested for impairment at least annually and any gains or losses are reported immediately against earnings/profit. The WSJ article suggests some positive results reported by Tesla in recent times are a result of selling some bitcoin holdings – alongside sales of some other credits it holds.
As most companies do not yet sell products for bitcoin or other crypto currency, we do not get to see how volatility effects balance sheets. I am not sure it would be a good thing to have balance sheets subjected to such fluctuations, as is the case in some hyperinflationary economies with devaluing currency.
The Tesla disconnect for me!
Ok, so I guess I will start with a caveat – I am not a fan of Elon Musk. He may be a great guy, I have never met him, but as an accountant, I see him as one of those entrepreneurs who may have good business ideas and models but they fail to turn them into profit. Tesla is a good example, and of course, I may eat my words in the future, but the company has yet to make any profitable product in a consistent manner – and they are on the third model of their car!
Looking at the Tesla 10K (which includes the financial statements) at the end of 2017, the accumulated losses are just under $5 billion. Okay, if we look at the balance sheet, the assets exceed liabilities, but some of the assets probably could lose value, or be over-valued, which would wipe any net assets. And okay, I get it that Tesla is breaking a mould, but they are not the only ones trying to make better cars. But, the company is 15 years old this year and still has accumulated losses; and the media reports production problems with the latest model still. And, it’s most recent quarter losses are about $700 million. So, let me ask this, would you invest in a company that cannot make a profit after 15 years? As an accountant, my verdict is no way!
Storytelling and numbers
Everyone loves a good story. But should accountants tell stories? Here is great post I found in LinkedIn which shows the value of stories
The charity sector – the accountability conundrum.
Some recent media coverage of problems in the Irish charity sector has been quite detailed. In one case, a charity founder was clearly exerting a lot of control and taking money for personal use. In another, a group of people on social media demanded detailed accounting and controls in a charity with only a single permanent staff member.
In both cases, and there seems to be a lack of accountability as regards to how money was spent. The first case was to me simply fraud, but the second case is probably more typical of the issues faced by smaller charities in Ireland and other countries. That charities be held accountable for what they spend if of course right and proper, but to do so they require accounting and contol systems. These systems do not come free of charge. For example, even to have one qualified accountant in a charity would cost in the region of €70000 per annum. This may a considerable portion of the income of a smallef charity and herein lies the conundrum – the public want accountantability, but they also want administration costs to be minimised. What’s the answer to this conundrum? Well, I am not sure, gut the answer may lie in simple economies of scale – that is, perhaps there are too many smaller charities who could consolidate. Or possible governments or some regulatory agency could provide shared service type accounting arrangements for charities.
Contingent liabilities and Brexit
Image from flaginstitute.org
Will any effects on business be revealed in the accounts of Irish (or other) businesses? The simple answer is yes, as if a company has close business ties with the UK then there is very likely to be a contingent liability or provision in the accounts. IAS 37 defines a contingent liability as:
- a possible obligation depending on whether some uncertain future event occurs, or
- a present obligation but payment is not probable or the amount cannot be measured reliably
As noted in an article in The Sunday Business Post, the outcome of Brexit is as of now uncertain, and looking at the definition of a contingent liability above, it would seem the financial statements of companies may have contingent liabilities (or even contingent assets) disclosed for some years to come. Only time will tell.
Charities as businesses?
In recent weeks, the Irish media has revealed yet another charity mis-using funds – this time the founders used a lot of the charity monies for personal purposes.
Regulation of charities in Ireland is not as good as it could be – we have some legislation waiting to be enacted since 2009 as far as I know. But laws cannot prevent what happens within an organisation from happening; they can only penalise after the event.
So what bugs me? Well, the title of this post really – it is something I picked up from the print media in recent weeks. I am sure I have said somewhere on this blog that accounting is the language of business, so what about accounting for charities? My own opinion is that charities must have proper accounting, and there are accounting standards already in place for charities. But I often wonder should we be careful and not allow charities to become too much like a business? For example, we should be using accounting in charities to drive efficiencies, not necessarily monitor revenue and costs like in a business. Nor should we be using accounting just to get funding for a charity. In short, what I am trying to say is that we need to be careful and try to not let accounting (and other commercial sector notions) detract from what a charity should be.
Anglo Irish Bank – the circular transaction explained.
My colleague Michael Farrell has written a nice post explaining the dodgy accounting transactions at Anglo Irish Bank – the bank that was a big part of the Irish financial crisis in recent years.
Why media reports on profits annoy me a little….
Ryanair made a profit of €865 million in 2014. The Irish Times reports this figure and also notes “operating profits rose 65 per cent to €1 billion from €658 million”. Great news for Ryanair. The main reasons for increased profit seem to be a combination of lower fuel costs and increased passenger numbers. What sort of annoys me about such media reports – and all media seem to do this, not just the Irish Times – is that such reporting of numbers does not tell the full story.
Let’s take a brief look at more detail. In this example from Ryanair (or any company) on profits, we also need to consider the level of investment in assets. Forgetting about accounting for a moment, it is logical to think that if Ryanair for example acquired more aircraft, then it should be able to generate more profits due to increased passenger revenue. But, if we just make a statement like “profits rose by 65%”, this does not reveal the underlying assets.
The same Irish Times article reports that net assets (assets less liabilities) did in fact rise from €3.3 billion to €4 billion in the year. If we do a simple return on assets calculation (using operating profits), then for 2013 the return is 658/3300 = 19.9% and for 2014 it is 1000/4000, or 25%. This is a year on year increase in the return on assets of about 26%. This is a long way off the 65% reported increase in operating profit, and a lot more meaningful as it reflects the net assets (or capital) used. It is still a great improvement, but perhaps not so sensational a 65%!
Accounting for Bitcoin
We have probably all heard of the digital currency Bitcoin – there are some others but Bitcoin is the best known I think. I read a nice article on the Bitcoin magazine website recently which reminded me of the basic things us accountants need to consider if dealing in foreign currency or if a new currency comes along – it is not that long ago since the Euro came our way.
The article summarises well the three steps I experienced when operationalising the Euro more than a decade ago now. Like Bitcoin, the Euro was for me then a non-physical currency to begin with. The first “step” with the Euro and actually happening now with Bitcoin is use as a payment method. With the Euro, we had the ECU as a payment method first. In this case, the accounting entry is the same as any other payment method – such as a credit card or PayPal – all amounts are in local currency. Step 2 would be to treat Bitcoin as a foreign currency. In my experience this typically happens when volumes of payments to/from customers/suppliers become larger. For example, many Irish SME treat GBP as a foreign currency in their accounting systems, but treat the USD more like a payment method. As the articles notes, if Bitcoin is treated as a foreign currency then exchange gains and losses need to be accounted for. Step 3 is adoption as a base currency. This may not happen of course, only time will tell. Let’s assume it does happen, then the accounting system works pretty much the same as in step 2. The would also be some work in translating assets and liabilities to the new currency. With the Euro this was relatively simple as fixed exchange rates were agreed and then it was matter of running a routine within the accounting software to do the calculations.
As the article suggests, more businesses are accepting Bitcoin (as its stabilises in value) and thus are at step 1.
Apple’s numbers
As you may know, profits at Apple for Q4, 2014 were some $18billion. This is reportedly the largest quarterly profit in history.
One of the things accountants often do is use ratios to compare businesses from one year to another and with other businesses. With such a large profit at Apple, I’d begin to think that any comparisons might not be of great value. So is there any way we could our such a number is perspective. Certainly Apple could probably clear all Irish sovereign debt with there cash pile, but here is an interesting presentation from the BBC
Environmental and social reporting – new EU Directive
Image from viralheat.com
I recently read an article from the Guardian which highlights the problems of measuring and reporting all things environmental, sustainable and social. The article noted a recent study n the Journal of Cleaner Production. It analysed metrics used in academic literature to measure performance in sustainable supply chains. The study reveals a total of 2,555 different metrics were published in 445 different articles.
I think we would all agree that publishing some performance measures on sustainability and similar issues is very important. But if we do not have a set of standards to follow, comparing things is quite difficult. This should sound quite familiar to accountants, as before we had financial reporting standards in the 1970’s and IFRS at EU level today it was not easy to compare financial statements.
Although there are some standards on environmental and social reporting (such as the Global Reporting Initiative), these are typically voluntary. The EU has recently provided some help and impetus. According to a CGMA article, “About 6,000 large companies and groups across the EU will be required to disclose certain non-financial information on environmental and social impacts as well as diversity policies for boards of directors”. The Directive must be implemented by member states within two years, so by 2017, we should see the first reports. I am sure some will say the Directive does not go far enough, but at least it’s a start and it sets a standard. This is better than no reporting or such diverse reporting that it becomes pointless.
Tesco and its hello money.
Image from Tesco.ie
A few weeks ago, a news story broke about an accounting scandal at Tesco – see here for example.
So how can this happen? It’s very simple actually. Now, we don’t know if it’s an error or something deliberate, but from an accounting view the entries in the books are the same.
When I was in college 20 years ago, one of our accounting lecturers asked is how would we account for this “hello money” as he called it. Within a decade I was calculating and accounting for what were termed “long term agreements” in my role.
For the likes of Tesco, the amount involved are large and I would guess they account for hello money as a separate income stream – although it’s not shown in the published accounts. Another way would be to reduce purchase cost, but this would probably be for smaller amounts. But how can Tesco make such an error you ask? Simple, just ” over accrue”. This means recording future hello monies now. Of course, I have no idea this is what actually happened, but it does show how easy errors or manipulation can happen by using the good old accruals concept.
Building a better income statement – according to McKinsey
McKinsey have a nice web article which highlights the problems with GAAP reporting versus the needs of investors and analysts. The kernel of their article is that financial statements, with some small adjustments, could save investors a lot of re-working of figures. They provide the following example:
Image copyright McKinsey
Two things come to my mind. First, in my first real management accounting job almost 20 years ago now, we prepared an income statement which was not too far away from the one on the right above. And, most management accounting courses would teach students to draw up some kind so similar profit statement – at least separating direct and indirect costs.
Second, the articles does not mention XBRL at all. With tagged data from GAAP financial statements, XBRL could re-draw financial statements in any format. I am not saying all XBRL tags are there to do what McKinsey suggest, but it is certainly possible technically.
You can read the full article at the link below. It is worth a read.
Speed cameras business
In July this year (2013), I read an interesting brief news report about a speed van operator in Ireland. Yes, we all hate these guys, but the article made me realise this seems like a good business to be in – even if you are hated by motorists. According to the article, the GoSafe consortium makes a profit of almost €50,000 per week or €2.5m per year. It has almost €11m debt and is contracted to provide 6,000 hours per month to the Irish state. The article notes that at least one motorist per hour is caught speeding. I don’t know the ins and outs of the contract, but if the company makes a profit of €2.5m annually, even if it does pay out some dividends, the debt owing could be paid down quickly it would seem. The management accountant in me would really like to know what is the breakeven number of speeding motorists per day! You can read more at this link: http://www.rte.ie/news/2013/0720/463662-speed-vans/
The power of an infographic
I have written a few posts previously with infographics. I like them. They convey a message in an easy to understand way. Of course, as a management accountant, I would say they may also include some really useful information to help managers (and others) make decisions.
Recently, Dr Stephen Jollands from Exeter sent me this one. It is so clear and it’s message is direct and simple – despite the many complexities within renewables and the environment etc.
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