One of the fundamental accounting concepts is that of going concern. In simple terms, this typically means a business is unlikely to be able to continue in operation for the next 12 months.
It is not very often the examples come to light, but recently in Ireland we had one. The national football association, the Football Association of Ireland, has their auditors state the organisation could not be deemed a going concern. According to the RTÉ news website, the auditors noted:
“While the company has received some advanced funding from UEFA during 2019 to enable the company to meet some of its current liabilities there is not sufficient audit evidence that the company will be able to meet its liabilities as they fall due. Therefore we are unable to obtain sufficient audit evidence to support the assumption that the company will continue as a going concern.”
The piece also notes the levels of debt and losses over several years. The statement above provides a nice clear understanding of what going concern means. Do have a read of the RTÉ article and other coverage to get more insights on the association.
Being an accountant is sometimes portrayed as being a boring path in life, but like all professions and jobs, it has its moments when you feel like you may have helped someone. It is great to see a business take your advice and see them grow and become a success. Of course, as you deal with businesses or clients, quite often you may give general advice which may also yield some fruit. At the end of July, The Guardian had a great little feature on Mick Jagger, and it seems he heeded advice from his accountant when he was younger. Seemingly, Laurence Myers was his accountant – and the accountant of many other famous rock stars of the era – and in a new book written by Myers, he outlines the business sense the young Rolling Stones had. This sense would, of course, be nurtured by a good accountant. And indeed, the Rolling Stones have been a financial and business success (see more here), certainly thanks in some part to the advice and partnering of a good accountant over the years.
In recent years in Ireland, business insurance costs have been increased dramatically due to increasing volumes of claims against them. In some cases, the costs have increased so much that the businesses have simply closed. This post is more about the smaller claims, claims for refunds or costs incurred because a product or service was not up to scratch.
I will use Ryanair as the example here. Despite all the criticisms levelled against it, it remains one of my favourite airlines. They run a tight operation and keep costs to a minimum. They also do not payout refunds or claims unless they have to, this is the fun part for me. In a recent Irish Times article, there are details of a customer claiming €222 for taxi fares incurred due to a Ryanair mistake. The company fought it, but the passenger pursued through a small claims court and got their money refunded. Fair play to the passenger.
Recently I was subject to a delay on a Ryanair flight from Bristol. Some passengers, those who were UK citizens I later found out, were offered £5 refreshment vouchers. I was not, and followed up. To be fair to Ryanair they said if I could produce a receipt, they would refund me.
Now the accounting part. In both examples above there are a lot of costs already incurred in having a customer service function to deal with such issues. Let’s deem these as sunk costs. Once a claim is initiated, then I think we could see the situation as an instance of activity based costing perhaps. In my own case, I sent three emails and I can guarantee the cost of dealing with me was way more that the price of a cup of coffee I was seeking to claim. In the case of the passenger taxi fares, costs of engaging solicitors by Ryanair would have far exceeded the cost of the refund had they simply paid it based on the passengers receipts.
The point I am trying to make is that while I fully agree that firms should not just pay refunds without any basis, there is likely some value at which it costs more to defend a refund claim than simply pay it – with vouched receipts of course, not like me and my coffee. But, if you are not getting satisfaction from a company if you feel you should get a refund, apart from legal options, you can always waste their time a little and get some satisfaction that way.
I am sure you have read or heard stories in your country about political leaders or CEOs spending large amounts of money on expenses – hotels, meals etc. I have read a lot of such reports in recent weeks and just wanted to give a view on it.
To me, and much of this is based on experience, the first principle to me is simple – no receipt or invoice, then any expense should not be reimbursed. Doing this sets a basic principle which is easily understood. I have heard some comments over the years that there is a cost is running an expenses reimbursement system, which may exceed the value of the expenses, so why bother. This may be true in some cases, but I do not agree.
A second principle to me is a basic accounting one – business expenses only. The idea of say using a business credit card for personal lunches or whatever at a weekend goes against the entity principle. This principle means only items for the business should no part of the accounting for that business.
Third, the expense, once for the entity should be reasonable, but what is reasonable? This is where common sense must apply. Let’s take hotels as an example. It may be that a room for €100 per night is ample for any business person, but in some cities this may not be enough for even a basic hotel. But, if I were to say €1000 per night, you would probably think that is a bit too much. Of course you may have read reports of business leaders and political figures spending many thousands of Euro/Pounds/Dollars per night on hotels. Is this reasonable? Personally I do think some of these people could be a bit more modest!
This is a brief summary of chapter 12 in our book, written by Stéphane Ouvrard, Hervé Remaud and Ian Taplin. The chapter describes the so-called Bordeaux Place, the organizing principle by which much fine wine from the region is sold. It is a marketplace with key actors (winery owners, brokers, négociants [merchants] and the officials within the city) interacting both contractually and on trust.
The authors note some form of organisation of the Bordeaux wine trade since the 1400s. The year 1745 saw the first classification of Bordeaux wine, which reflected quality and price. In 1855, the Paris Exhibition (promoting French products) first awarded medals to Bordeaux wine. This classification system has only changed twice since 1855. Today, the Bordeaux Place utilises the en primeur system. This is a futures system whereby customers (wine merchants of Bordeaux, distributors, final buyers) buy (and pay for) wine today, to be delivered about 18 months later. Deciding on the price from the producers perspective is, of course, a difficult one. The price has to cover the cost of producing, but for a substantial number of estates, marketing plays a more critical role in price setting than accounting. Wine producers can get help from brokers, obtaining indications about the price the market is willing to pay. But this is partial and somewhat biased, as merchants and the market prefer cheaper prices. In essence, wine producers base their decision on six main aspects (Remaud et al., 2015): vintage quality; how prices of similar quality wine have evolved over time; the level of stock on the market); the global economy at large, including interest rates, stock exchange prices and confidence in the economy; the status of the brand; and the extent to which an estate has been able to build a brand and not just a (high-quality) wine. This sounds like a great task for management accountants!
This is a summary of chapter 8 in our book, written by Julie Bower. The chapter explores accounting history in and around the Scotch whisky industry, looking at managing consumption, production and maturation. As the author notes, the whisky industry has some peculiarities around inventory management, financial management and even tax planning.
On the tax planning side, the author notes that “traditionally, the producers of spirits brands have shipped their products from their own, or shared, home market bonded warehouses to overseas distributors on fixed terms, splitting the profit between them on an ‘arm’s-length’ buyer–seller transaction basis”. Of course, this does not always apply, with the tax regime in Ireland for example, offering advantages to Irish whiskey (as opposed to whisky). With inventory, the time spent to mature creates issues too. The Immature Spirits (Restriction) Act 1915 stated whiskey must mature for a minimum of
two years, extending to three years in 1916. This three-year bonding (maturation) rule has remained in place ever since, meaning the industry’s stock maturity profile is significantly longer than other sectors. Finally, the chapter notes the chapter notes the issue of being able to finance the required inventory levels – the author cites the example of the value of maturing stock in Diageo as being around £4 billion – which of course has to be financed somehow.
This is a summary of the next chapter in our Accounting for Alcohol book, which was written by Peter Cleary. The chapter reviews the accounting information produced between 1792 and 1864 by the Watercourse Distillery and how it was used and reported upon by the firm. The distillery was co-founded by Thomas Hewitt, John Teulon and Richard Blunt, with Hewitt (along with his cousin) eventually assuming full control of the business and re-naming it Hewitt & Co. While accounting books were not generally available in the archival records, a reasonable overview of accounting was obtained from other letters and journals.
During the 17th and 18th centuries, the city of Cork expanded, driven by an increase in trade via its port and in the number of buildings within its boundary. As with all cities at this time, Cork’s merchants possessed most of the wealth and were therefore at the forefront of these developments, facilitating further increases in their wealth and influence. As a result, they became known locally as the “Merchant Princes”. The Hewitt’s were among these “Princes”. Increased investment from Cork’s “Merchant Princes” invariably required additional accounting-based information to allow them to determine if, at the end of a particular time period, their commercial exploits had resulted in a financial gain. But, at this time, regular and systematic book-keeping was still rare. As revealed by the archival records, although no accounting books survived, certainly a profit account was maintained for each partner of the distillery. Letters and journals also reveal monthly “closing of the books”. Letter and correspondence also reveal issues with giving credit to customers. From about 1850 onwards, the letters reveal loss being made, and the eventual demise of the distillery.
This post #4 in my summary of a recent edited book. Chapter 4 is written by Kazuhisa Kinoshita, and details the role of the Orion Brewery in the economy of the Okinawa region post the Second World War.
The Orion Brewery, while small in terms of the overall Japanese market, helped rebuild Okinawa and the dreams of the young. Okinawa was home to a large US air force base from the 1950s through to the 1970s, and the base became part of the local economy. Supplies to the base were a large source of income to the local economy, and in this environment, a “local” product to generate a sense of identity belonging for local people. This product came in the form of beer from Orion.
From an accounting perspective, the chapter looks at costs and output – in essence, cost volume profit analysis. The remote location of the Okinawa islands increased the cost of building a brewery, and limited the market size affected sales. There was also the effect of beer duties to be included in the decision, and the regional government were favourably disposed towards a lower beer duty. The end result was the construction of the Orion brewery in 1957, and it is still active to this day.
Okay, from my previous posts now you know a little about cryptography. And, you also know that bitcoin (and other cryptocurrencies) is managed decentrally. In the bitcoin system, transactions are verified as genuine (among other things) by cryptography – you can imagine how useless the system might be otherwise. This is achieved through a blockchain, which I will now explain briefly.
A block is essentially a transaction or group of transactions – in bitcoin, each block contains a megabyte of data (presently). When a block is full, a new block is added – hence the term blockchain. As blocks are added, the cryptography used links a block to the previous block. This means that the transactions can be verified all the way back to the original block, and it cannot be tampered with.
Also, I already wrote a little about bitcoin mining, and from that post, you can see that the blockchain for bitcoin is public – in effect a public distributed ledger of every bitcoin transaction that has ever happened.
What does blockchain mean or accountants then? Well to start, blockchain is a technology which is separable from things like bitcoin. It is the verifiable ledger that may be most appealing to business and the world of accounting. Businesses may soon be using blockchain in a less public way than bitcoin, using some form of private blockchain. Let me try to give an example of how accounting is done today, versus how it could be done with a blockchain.
I formerly worked in the paper business, in the cardboard packing part. Back then and still I would imagine, pharmaceutical companies would not allows recycled paper, due to the risk of contamination. The company I worked for had to maintain records to show the sources of all materials in an order for a pharmaceutical company. Just focusing on the accounting, there are four ledgers at play – the paper supplier, the cardboard manufacturer, the pharmaceutical company and the end vendor. All while four may have quite integrated systems within their own company, all four are likely not linked. And if they were linked, how can the truth and verifiability of the transactions be maintained. Here is where blockchain can help. Using a blockchain and its encrypted data, one single transaction can in theory flow through all four ledgers – and remain unchanged and verifiable. Also, the pharmaceutical company in this example can be sure that records are intact and full traceability of materials used maintained. This is just one example, and anything that involves traceability could benefit – I am sure auditors would have many uses for blockchain technology.
So where is the catch? If blockchain is used privately within a firm, then we can trust the hardware involved – no bitcoin miners needed. The catch at present is the energy usage. To solve the cryptography used in blockchain takes a lot of computing power and thus energy. At present, the energy used for bitcoin processing alone in a year is similar to the power consumption of a small country like Ireland. Less energy guzzling ideas are being worked on.
If you have been in business, or work as an accountant, you’ll know cash is king. Of course, cash does not necessarily mean notes and coins, but cash in the bank. In my experience, getting cash from customers is not as easy and automated as one might think. There are always reasons why customers won’t pay – be it a quality issue, problems with services received or just being stubborn. But regardless of the reason, a business needs to get the cash in, otherwise, it WILL fail.
In my career, I have had the (dis)pleasure of sitting down once a month or so with a list of customers owing money. It’s great fun sometimes, and you get the “dog ate my homework type excuse”. One of the great excuses was ” we never got your invoice”, and today this would be retorted with “well it’s in your inbox now, so please pay”. And there may be some genuine excuses, like a family bereavement or lack of action on something like taking back returned goods or issuing a credit note. Or it may be as simple as your credit checks were not up to scratch. Regardless, whatever the reason or excuse, the best attitude is to be friendly but firm – or maybe professional is a good word. A guide from CPA Ireland equates getting paid by customers to getting your salary paid. This is a great analogy. The guide also emphasises the importance of communication, and this means not just with customers, but also with internal staff like sales people to try to determine why customer and not paying – unfortunately, the accounts receivable functions on most software I have ever seen never have the full story on why customers won’t pay.
As you may know, many businesses incorporate – which means they are formed as a limited company. The are various types of company, but by far the most common is a private company. One of the key advantages of a company is that it is a separate legal entity, meaning it can sue and be sued in its own right. This means that individual shareholders and managers are protected in some ways and need not always bear the risks associated with the business.
However, you may also have heard the phrase “lifting the veil of incorporation”. Let me give you a recent example from personal experience. Where I live, a new residential development is proposed, and like all developments, it must go through a planning process with the local council. While looking at the development files, I noticed that the builder was a company and the designing architect another company. By coincidence, I noticed that the two companies were owned by the same person. This, as you can imagine, creates a bit of a problem in my mind. Then the owner of these two companies as a person submitted a document favourable to the proposed development. So, in eyes of the law, this is three people/bodies, but if we lift the veil of incorporation, we can see it is all the same people behind the entities.
Just a short post today – I will get back to more regular posts soon.
I have written before about several aspects of cloud accounting – see here for example. But we can also think about what cloud accounting providers can do for their clients.
Simply, these providers have lots of data and insights on their clients. The Intuit group seem to have been quite clever in recent years with such data – mainly in the US market though as far as I am aware. Here is their latest offering, offering loans to small business. If we assume the potential market is users of Intuit’s Quckbooks, then I could easily surmise that data – even aggregated – from the software could be used to assess the ability to repay and so on. If you are thinking there may be privacy concerns on the data, well I think any bank or lender would ask for financial statements regardless.
In my daily work as an accounting academic, income across many papers and articles which explore the broader role of accounting in society and out daily lives. Lisa Jack from the University of Portsmouth writes about the role of accounting in the food supply chain. This is a very interesting area, as information on costs and margins is crucial in the food sector. She has just published an article on the recent contamination of eggs in some
European countries – you can read it here. It gives a good overview of how accounting is entwined in this and other food issues, and how it could help.
I probably don’t need to explain the title of this short post, it’s quite obvious. Any business needs to appreciate all costs of the products or services it delivers.
- In past years, manufacturing has shifted to some degree to lower cost locations such as China, and the Foxconn relationship with Apple is a classic case. In the case of a product like an iPhone or iPad, it’s quite easy to see how the assembly costs are probably the higher component, and as they are small, distribution costs are low. But as a recent article in Forbes shows, transport costs are often a reason for manufacturing being close to market. In the article, there is mention of Foxconn planning to $10 billion plant in the US to build larger displays – for say 60 inch TVs. The article notes that the cost of capital in the US is similar to anywhere else, and labour costs and relatively low, although higher than China. However, the transportation costs would be much lower for such larger displays and thus it makes sense to build a new plant in the US.