Accounting standard setters can’t agree
I don’t normally write too much about complex accounting standards and I’m not starting now, but this blog post from The Economist caught my attention. I would have thought the term standard might have helped these guys figure out a “standard” approach.
Currency devaluations – the effects on assets
Devaluation (Photo credit: ervega)
It is not that often that we as accountants face the problem of currency devaluations. We would have to be an accountant in a large global firm who has assets denominated in a foreign currency that is devalued. You know I am a management accountant, so I will leave the complex accounting standards up to the experts. In other words, I avoid the complex issues here.
Last February, the Venezuelan Bolivar was devalued by about 30%. The exchange rate was moved from 4.3 bolivars to one US dollar to 6.3 bolivars. So for example, if a company had assets worth 430,000 bolivars or $100,000, the value of these in $ terms is now $68,253 (4.3/6.3 x 100,000). As Venezuela has many foreign investing companies, the balance sheet of these have been hit a little. For example, Irish paper and packaging company Smurfit Kappa saw its asset values fall by €142m – see here
Some quotes about accounting
For the fun, I decided to do a search of some websites who provide famous quotes for this post. I searched using simply the word “accounting” and here are a few of the results. Enjoy.
Mark-to-market accounting is like crack. Don’t do it.
I have made the tough decisions, always with an eye toward the bottom line. Perhaps it’s time America was run like a business.
I never get the accountants in before I start up a business. It’s done on gut feeling, especially if I can see that they are taking the mickey out of the consumer.
Reporting financial information on the Internet and social media
Image via CrunchBase
As you may know, public companies publish a lot of financial information. As accountants, the first of such information that comes to mind is the annual report and accounts – which is a legal requirement. Other such information includes regular notifications and reports to stock exchanges. Normally, the format, content and timing of any financial information releases by public companies is well-regulated and usually a mass communications medium is used. Of course, like all other aspects of business life the pace of technological change – in particular the use of Internet and social media – is causing some issues for the reporting of financial and similar information by companies.
Take for example the recent Netflix issue. In July 2012, the CEO of Netflix commented on Facebook
“Netflix monthly viewing exceeded 1 billion hours for the first time ever in June.”
The Facebook page had close on 250,000 followers at that time. The result of this post was an approximate 30% increase in stock price the following day. Later in July, a quarterly earnings release showed a substantial fall in revenues and the stock price fell. The US Securities and Exchange Commission (SEC) were not overly impressed with the initial release via Facebook, arguing that the information was material and should have been disclosed by means of a regulatory filing or press release. So, in essence, the argument of the SEC is that Facebook (or other social media) are not necessarily the correct communications medium. The counter argument would of course be that social media may actually be a communication medium with a much broader spread.
Perhaps what this example shows is the need for a policy for how and when to use the internet/social media as a means to reporting key financial and business information using social media?
Deferred revenues on software sales – the accrual concept in action
The accruals concept is one of the fundamental accounting concepts which – more or less – dictates how we do accounting. I have written about the accruals concept previously. Briefly, the accruals concept means that revenues and costs need to be matched against each other – when something is paid, or when the cash is received is not relevant.
Here is a great real life example. As you may know, Microsoft released Windows 8 in October 2012. Of course, for Windows 8 to be available on new devices, Microsoft sold it to equipment manufacturers well in advance of this. This means they had incurred the cost of distributing the software to the manufacturers and also received payment. However, the cash received is not a sale in accounting terms as the software was not officially released until October 26th, 2012. Or, to put this in accruals concept terms, there could be no matching of costs and revenues until the actual official release date had passed. So, in their quarterly report at the end of September 2012, Microsoft deferred revenues of $783 million. You can read more here.
Do accountants have a sense of humour
Last month, I asked were accountants sexy. I walked by a chartered accountants practice (see the pic) in Maida Vale (London) recently and decided at least some accountants must have a sense of humour – despite the stereotype. If the owner is called Charlie ( as in Charlie’s Angels ) wouldn’t that be just great. Or maybe it should read financial angles?.
Is accounting sexy?
CIMA, Financial Management, Oct 2004.
A few months ago, I was at a workshop which consisted of publishers/editors and accounting academics. I was a bit late and when I arrived one of the editors asked me to introduce myself as follows ” tell us a little bit about yourself, where you are from and what makes accounting sexy?” First two questions, no problem. The last one, well thankfully I am a CIMA member and remember the series of adverts in 2004 from their Financial Management magazine. The ads (see the picture to the left) were for accounting software and featured a dominatrix and the caption “is your procurement strict enough”. I loved that ad! In one foul swoop it got rid of the dull and boring stereotype of accountants. Of course, some CIMA members did not like it at all and wrote to the editors. This complaining perpetuated the dull image of accountant and inspired a further article entitled “Miss Backlash” – see here.
So now for a completely unscientific experiment – I show just a few examples by the way
1. If I Google “is accounting sexy”, I get a good few interesting results:
A blog, accountantsaresexy.com – a bit dated
A blog post with the title The Surprisingly Sexy Chart of Accounts
A you tube video, JustThrive Makes Accounting Sexy – YouTube
2. If I google “sexy accounting”, I get some similar results to #1
I also get some pretty dodgy stuff.
3. If I google “sexy accountant”
The results are getting to beyond a PG rating! But a quick glance at the image search result throws up this ! You can decide for yourself on the sexiness (or otherwise).
So is accounting sexy? I don’t know to be honest, but I hope this short reflection puts a smile on your face. Now back to those ledgers……
(If you want to know more on the images of accountants, check out the work of Baldvinsdottir et al)
Is double entry accounting here forever?
Some time ago, I read a blog post on the Zoho website about double entry accounting. Zoho provide a number of business related applications. The essence of the Zoho blog post is conveyed in the title of this post. Double entry accounting has been around for the last six centuries and has been embedded in the most simple and most complex accounting software. And there are no signs of it disappearing. The have been some proposed alternatives, such as the Resources, Events, Agents model (which is sometimes used in teaching). But like the DVORAK keyboard, even if some alternatives may be an improvement on the double entry system, they are likely never to catch on. Why you might ask? Well, in my institutional theory thinking the answer is probably because the practices around double-entry accounting have been repeated so many times by so many people, that they have become the accepted way of doing things in business. In other words, the double entry system of accounting is a routine. And, not only that, there are also rules about double entry. I regard rules as written, and there are plenty of written rules of the double entry system – in text books, in software for example. If a practice has both been repeatedly performed for 600 years or so, and it has been written as a rule, the as the Zoho blog post says ” the traditional double-entry model was deeply ingrained in the business person’s and accountant’s psyches, and it was never going to be easily changed”. And it will probably remain so.
Facebook price earnings
I have written before about key financial ratios which can be used to analyse a business. Here is a great current example – the price earnings ratio for Facebook. The post is from a New York Times blog.
What is iXRBL
At end of last year (December 2011), Ireland’s tax collection authority (Revenue Commissioners) issued a consultation document on iXBRL. I have written a post of two on XRBL previously. XBRL is mark-up language (like XML or HTML) which has been specifically designed to assist in the electronic filing of financial reporting documents. If agreed as a global standard, XBRL would present great advantages for state agencies like tax authorities, company registries and statistical bodies. This is simply due to the fact that XBRL presents a common a relatively easy to use electronic way for businesses to file financial statements, without the need for any form of manual interference and without the need to send files more than once.
So what is iXBRL and how is it different from XBRL? iXRBL stands for “inline” XBRL. It is more or less the same as XBRL in that it uses tags to identify data within a file. For example, a tag would identify the figure for same in the statement of financial position. Using tags means that data can be intelligibly read using software, which makes data manipulation a whole lot easier. The only problem with tagged data is that is typically not human readable. Where iXBRL differs is that all the tagged data is “hidden” within a human readable document. For example, a PDF file of a company’s financial statements might include all the necessary tagged data. The major advantage of this is there no need to produce a separate special XBRL file. You can read lots more about XBRL and iXBRL here.
Fair value accounting – a brief summary
I read an article from the Guardian website last January, where a Bank of England official was suggesting that banks need to have separate accounting standards from other types of business. Some of the concerns mentioned were around the notion of fair value. This an extremely complex area, but I’ll try to summarise it here.
The basic idea of fair value is that certain types of assets and liabilities should be measured in the financial statements at a value which reflects what they could be sold for or settled for. In the main, the types of assets/liabilities concerned are referred to as financial instruments – e.g. debt, equities. There are two complex accounting standards which deal with how such instruments are measured according to fair value. IFRS 9 defines the what happens to the difference arising on fair value adjustment. Without going into too much detail, the fair value adjustment goes through the income statement/profit & loss account. As mentioned in the Guardian article, this is normally fine when markets are causing the value of the assets to increase, but it perhaps less popular when markets are falling. And, of course there is the problem of ascertaining what exactly is “fair value”. IFRS13 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. It also describes a hierarchy of how to measure fair value and outlines detailed disclosures which must be made in the financial statements. Of course, all this presupposes there is a reasonable way to ascertain fair value based on a market price or equivalent market price. And, as we know from recent years, there have been plenty of media reports about the complex nature of some financial instruments. I’m sure the debate on whether or not fair value is right for the banking sector will continue.
What is a parntership? How does it change financial statements prepared?
In business, a partnership refers to the coming together of two or more persons to conduct a business. Normally, there is a maximum number of partners with exceptions made in cases like accounting practices and legal practices. A partnership is usually formed to take advantage of the combining of skills and resources. The objective is normally to make a profit, and this profit is shared out in some agreed way among partners. Losses too are borne by the partners.
As essential element in the formation of a partnership is the Partnership Agreement. This is a legal agreement (which ideally should be written) which contains items such as the following:
- the capital to be contributed by each partner
- how profits are to be divided
- any interest to be paid on capital contributions
- any interest to be paid by the partners on monies withdrawn
- salaries to be paid to partners
- arrangements for admission of new partners
- arrangements to dissolve the partnership, and procedures on the retirement/death of a partner.
In the absence of a partnership agreement, in the UK and Ireland, the Partnership Act 1890 applies (see here).
In terms of preparing financial statements, there are some differences. First, any adjustments to profit are made in a profit and loss appropriation account – which is in effect an addendum to the income statement/profit and loss a/c. For example, any interest due to or to be paid by partners, salaries etc are made here. The resulting adjusted profit is then shared among the partners as agreed. In the statement of financial position (balance sheet), each partner will have their own separate capital account. Some partnerships used a combination of capital and current accounts. The former shows only the fixed capital contributions, the latter shows profits, drawings, interest, salaries etc. This approach is probably better as the any negative balances on the current account will signify that perhaps a partner is taking out more from the business than they should.
IFRS adoption by country
International Financial Reporting Standards (IFRS) were adopted by the European Union in 2005 for all public listed companies. The standards cover a range of topics in financial statement preparation, from relatively simple issues such as Non-Current Assets to complex issues such as pension funds (see www.ifrs.org for a summary of all standards). However, the standards can also be used for the preparation of accounts of other entities. The use varies by country (EU and globally), so here is a very useful map prepared by PWC. Simply click on a country to see how the IFRS are used.
What is a ledger account?
Sometimes we often forget the basics of accounting. It’s so easy nowadays to forget what’s behind the transactions and journal entries we make in accounting software. So, today I’ll got back to basics and describe a ledger account. Ledger accounts can be used in financial and management accounting to accumulate things like costs, revenues, the value of assets etc.
It’s probably easiest to describe what a traditional manually written ledger account looks like. The term T account (see left) is often used to describe a ledger account as this is what an account looks like in a handwritten ledger (a ledger is just a type of notebook). The left side of the account is called the Debit side, the right hand the Credit side. The details of every business transaction can be recorded in a ledger account. There are rules (called rules of double entry accounting) which tell us what to do. What we do depends on the type of transaction. If we wish to record an increase in an asset or expense , then we record the details (date, amount, some narrative) on the debit side of the account. If we wish to record in increase in an income, liability or capital account, then we record the details on the credit side. For example, if I make a sale for cash of €1,000, I would record this on the debit side of the bank account and the credit side of the sales account. There are always at least two ledger entries for every transaction – this is the double entry system of accounting, which you can read more on in this post. If I were to enter this cash sale in some accounting software, while I might not see a ledger account, the principles are there in the background. For example, some software might show debit entries as a plus, credits as minus. No matter what the software, be it simple like Quickbooks or complex like SAP, the same process as a manual ledger account occurs.
Martin's accounting blog 