How are assets classified in accounting?
In my previous post, I introduced assets. Now let’s see how assets are classified in accounting.
There are two major asset classifications 1) non-current and current, 2) tangible and intangible. Let’s have a brief look at each.
Non-current versus current assets
A non-current assets is one which typically cannot be converted into cash within one year. The classic example of a non-current asset is plant, property and equipment. Current assets normally convert into cash within one year e.g. receivables from customers, inventories. This non-current and current classification is used in the financial statements of most organisations.
Tangible versus intangible assets
This one is a little more tricky to understand, and it is something not normally seen on financial statements. As you might guess, a tangible asset is one which you can see and touch i.e it physically exists. Typically examples are again, plant, property and equipment, but also inventories are a tangible asset. Money due from customers is also arguably a tangible asset, as it does exist as money albeit somewhere outside the business. Intangible assets are those which do not physically exist, but yet have a value. This value may arise from intellectual or legal rights. For example, trademarks, patents, in-house software or knowledge built up through research and development are intangible assets. The accounting standard which governs intangible assets is IAS 38, and it gives some examples:
- computer software
- patents
- copyrights
- motion picture films
- customer lists
- mortgage servicing rights
- licenses
- import quotas
- franchises
- customer and supplier relationships
- marketing rights.
An effective internal auditor: key attributes
An internal auditor is someone who checks the internal control systems in an organisation – usually larger organisations. Staff typically fear the arrival of an external auditor, but at least they go away in a few weeks. The internal auditor is not only ever present, but knows a lot more about a business than any external person. Thus, in my own experience, internal auditors are perhaps less liked than external auditors. However, perhaps my experience was just a bad one. This articles from CGMA at least suggests that an internal auditor needs some decent communication and social skills to0.
(Image from CGMA)
The effective internal auditor: 7 key attributes.
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
Setting up business
A great analogy for a new business
While out for an early morning walk, I glanced upon a popular San Francisco community garden.
It was tranquil, peaceful — and surprisingly well-organized.
It was small so many of the gardeners found ways to maximize their space, using careful planning, creativity (and a little muscle.)
Your businesses can benefit by being equally ingenuous. Develop your own small business “green thumb” and get “more for less” by using creative, economical ways to attract, convert, and retain your prospects and customers.
Cultivating Your Business Idea into a “Sales Generating Garden”
1. Choosing the right kind of plants for you (Your “Aha” Moment): Okay, so you’ve got an idea. But is it enough to support a viable business or product — able to solve the problems faced by your potential customers? Your ability to sell (and ultimately, make money) is based on your idea’s attractiveness to potential customers.
2. Planting…
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Fraud at Olympus
Internal controls and fraud are not really an area that I write a lot on. Just before Christmas I read this article from CIMA about fraud at Japanese firm Olympus. It includes interviews with Michael Woodward, who was at the heart of putting things right. The are a lot of issues in the article and it is worth a read.
The problems with big data?
Big Data (Photo credit: Kevin Krejci)
The previous two posts have hopefully given you a very brief insight into what big data is and how it can help even small organisations. Now let’s briefly consider larger organisations. Nowadays, even if a company like amazon can process a few million orders a day, the amount of accounting data associated with this (i.e. a few million invoice and a few million payments) seems insignificant if we start to think about other data that might be collected at the same time. For example – and these are just a guess on my part – the age, sex, location of the purchaser, the type of device they searched and bought on, what the looked at before buying etc. The amount of data starts to get really, really big.
A report by Deloitte includes two quotes that capture the perceptions of big data really well:
“Big data is the new oil. The companies, governments, and organizations that are able to mine this resource will have an enormous advantage over those that don’t.”
“Big data will generate misinformation and will be manipulated by people or institutions to display the findings they want.”
(Source: The insight economy Big data matters— except when it doesn’t, Deloitte, 2012, available at link above)
As the report says, both the above perceptions are right. The key things about big data is getting information out of it and transforming that information into business knowledge. In other words, like many other things organisations encounter on a regular basis, big data needs to support the organisation’s strategy. This may mean being more competitive, gaining some market knowledge before others or opening up new business channels. Whatever big data might mean for larger (and smaller) organisations, I believe management accountants in particular have a key role in making in useful information/knowledge – after all, we are good at analysing information and filtering out what is relevant.
Related articles
- The future of big data (infographic) (siliconrepublic.com)
Big data and (small) accounting software
Last week I wrote about big data in general. Now I will try to give an example of how accounting software used in small business can be a source of big data, which can ultimately help those same businesses.
Quickbooks is a common accounting software product used in many smaller and medium-sized businesses. Traditionally, Quickbooks was installed on a computer in the organisation, but nowadays it is also available as an online product. In other words, there is a cloud version. According to an article in Forbes in April 2012, as much as 35 million of Intuit (the owners of Quickbooks) customers use online software for accounting and tax returns. With anonymous data on 35 million small businesses, Intuit can obtain quite a lot of information for their own purposes in terms of capturing user needs and developing their products. But they are also using this information to assist their customers. One great example cited in the Forbes article is a Trends feature. With this feature, a business owner can compare their business to average performance trends in the same sector, and even with similarly sized businesses. A comparison of sales, operating margins and payroll cost is possible. This kind of information would be really useful for any small business and typically such a business would have neither the time or resources to obtain such data.
What is big data?
Big Data: water wordscape (Photo credit: Marius B)
This post gives you a brief introduction to “big data”, a term used in many circles and in many businesses. The following posts will then give some examples from real business to help you understand the effects this might have on accounting and accountants.
Although the term big data has become mainstream in recent years, it has been used for a decade or more by scientists to simply describe very large amounts of data. Diebold (2003) defines big data as follows:
Big data refers to the explosion of quantity (and sometimes, quality) of available and potentially relevant data, largely the result of recent and unprecedented advances in data recording and storage technology.
It is hard to believe that this definition although only a decade or so old, bears little resemblance to what can be achieved today in terms of data collection. Devices such as smartphones and tablets in a cloud-computing environment allow users to use cloud-based services (such as software or social networks) and, in turn, data can be collected through these devices and stored elsewhere in the cloud. The result is vast potentially vast amount of data, which can be analysed for many purposes, including business decisions. Facebook has about a billion users, there are about 500 million tweets per day sent on Twitter and Google handles about 3 billion search queries per day. These vast uses of each of the mentioned websites/network generates hitherto unknown amounts of data, some of which may be useful, some of which may not. In an article for Forbes, Feinleib notes three issues with big data, which give a good insight into what it is, and the problems facing business:
1) big-data is ill-defined.. We are not sure what exactly big data is, but a Jevons Paradox seems to exist in the world of big data. As technology evolved to allow the storage and analysis of large volumes of data, more data is being stored and analysed by organisations.
2) big data is intimidating. He asks “how do we make big data approachable” from perspectives such as having tools to analyse data, to getting the right insights and information from the data.
3) big data is immediate. Huge volumes of data are generated, but the analytical value of this data can decay rapidly. For example, in the near future companies like Google and Groupon may display adverts on mobile devices for businesses in the immediate proximity of a consumer – the time to analyse and act on this data could be a matter of minutes, or even seconds.
References:
Diebold, F. 2003, “ ‘Big Data’ Dynamic Factor Models for Macroeconomic Measurement and Forecasting” (Discussion of Reichlin and Watson papers), in M. Dewatripont, L.P. Hansen and S.Turnovsky (eds.), Advances in Economics and Econometrics, Eighth World Congress of the Econometric Society. Cambridge: Cambridge University Press, 115-122.
Are languages important for accountants?
(Photo credit: Wikipedia)
If you are a native English speaker like me, then to some extent you’re probably like me and not all that great at foreign languages. I do speak pretty good German, but that’s it. I’d bet many of you reading this you are not native English speakers probably speak 2 or 3 languages quite well. So how important is it for accountants to speak a foreign language?
Some of you might say accountants already speak a foreign language – debit, credit, journal and so on. However, remember that accounting is a social practice. We need to talk to people and if we can speak in their native language, that will improve our ability to get things across. A second (or third) language for an accountant is probably a must if you work in a multi-national. To quote a recent piece from CPA Ireland’s newsletter (Dec 21st, 2012)
” The August Morgan McKinley Employment Monitor highlighted that employers are looking for part qualified and qualified accountants with a second European language, so knowing a language such as French, German or Spanish could increase your employability dramatically. The most recent report for October showed that the majority of hiring continues to be among multilingual professionals in the accountancy sector”
So why not learn or perfect that second language. Do a business specific course if you already know the language. As an accountant, you might be surprised by much you already know. For example, I was teaching in Spain last year and while flicking through a local newspaper I came across this term:
Beneficios antes de intereses, impuestos, depreciaciones y amortizaciones
It didn’t take me very long to figure out this was EBITDA. I speak no Spanish by the way. Don’t you just love the word “impuestos” – it really capture how tax is”imposed” on us. Have a read of the article in Scientifc American below – apparently we are even sharper with our reasoning in foreign languages.
Related articles
- Foreign languages: the 10 easiest to learn (telegraph.co.uk)
- Reasoning Is Sharper in a Foreign Language (scientificamerican.com)
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.
Sustainability – an accountant’s brief thoughts
Sustainability is a huge issue for us all, not just for accountants. It is not my specific area of expertise, so over the next few weeks Dr Stephen Jollands, University of Exeter, will be writing a few guest posts on my blog. He will give you much more on sustainability actually means, but let me tell you what inspired me to ask Dr Jollands to write some stuff.
I was travelling back to Ireland on an Aer Lingus flight recently. It was an early flight, so I ordered a breakfast, some muffins and drinks for my kids and a tea and cake for my wife. So we started to eat. As I was eating my breakfast I realised I had a portion or marmalade I did not want to eat just then, and portions of salt/pepper I did not use, and some plastic cutlery and some milk. So I thought why not bring some of it home and use it for lunch – which I duly did. Then I started to think about how many similar items would be simply waste on the flight. And, thinking further, the effort (and cost) that goes into produced all these portions is simply wasted too. This, I thought is completely daft, and here it come, not sustainable. All sorts of questions came into my mind – why do we waste so much, why do the flight attendants not ask if you want certain portions, how much money is wasted in this one flight, what natural resources are wasted etc.
This simple everyday experience of mine shows the kind of issues that might be part of the broader sustainability field. I’ll leave it up to Dr Jollands to give you some more insights over the coming weeks.
Business recovery plans – a must, but a cost?
This summer, customers of the Irish based Ulster Bank faced 3-4 weeks of problems getting paid and paying bills as the banks payment system failed. Customers had to queue to get cash from their accounts and go to other banks to pay bills- see my post 2 weeks ago about how some countries are limiting the amount that can be paid in cash; these limits would be too low to pay a mortgage in Ireland for most.
When I worked in a paper firm, I was involved in the decision to set up a simple business recovery plan. At the time, I was IT manager at a plant with about €30m turnover and 150 staff. The whole place was more or less run by a single system which managed sales orders, production planning and invoicing. We had a server onsite which done all this. This was not always so, so once I realised we were so dependent on a single piece of hardware/software I initiated a discussion with the plant management board to get a recovery plan in place. To keep it brief the cost of having a server available to us at any location within 4 hours was €7000 per annum. As part of the contract we could also do a free trial run once a year to test how long it would take to recover our systems. I always remember the production manager saying this was a cheap deal as if we had no systems we would basically loose wall customers within a week. And all we did was made cardboard boxes. Surely a bank should have a much better system in place. The cost does not really matter in the decision, it’s much more about the list revenue and lost customers.
The photo by the way comes from a friends Facebook page .
That’ll be €1500. Can I pay in cash? Sorry sir, no.
Cash (Photo credit: BlatantWorld.com)
During the summer, I was on holiday in Sud Tirol (it’s Italy, but the culture is more Austrian). We were led to our room, shown around and then asked how will we pay when we leave. The reason for the question was that a law introduced as part of Italy’s austerity measured prevents cash payments in excess of €1,000. Now, I never carry much cash, but I was thinking what an odd law. Is it to stop tax evasion? Apparently so. I read around a bit and found that Spain also has a similar law. And apparently the Italian’s actually wanted to implement the law with a lower amount.
Now, as an accountant I completely understand the issue of tax evasion, cash deals and the black economy. But where is this headed? When I done Business Studies in secondary school, I remember being thought the concept of legal tender. Pre the Euro, the Irish Punt notes were legal tender for settlement of any amount and apparently this may be still so (see here re Euro legal tender). If cash cannot be used at all, what happens when the banking systems fail? Don’t anybody tell me they can’t/won’t; see my post soon on Ulster Banks’ systems failures this summer. And if I were to get a bit political, are we perhaps in the future to trust the very banks that brought the world a financial crisis to manage all transactions. Yeah, I’m being a bit over the top perhaps, but I completely disagree with strict cash controls. There must be other ways to make businesses more tax compliant e.g. focused audits, serious penalties.
Algebra in management accounting
Many years ago when I work in an accounting practice, we had a client who kept no wage records for a while. All we had was the net pay of each employee. We needed to get the gross pay, as well as the tax and social insurance, to do proper accounts and sort out the taxes owed. Back then we had no software to do this. So what did we do?
Well, we used algebra. We knew tax and social insurance rates and these were all a percentage of gross pay. We ended up with something like this :
G – 0.20G – 0.07G= Net
So we solved for G. It’s a bit more complicated today as back then the social insurance was a flat rate – and what I show above is only illustrative. What made me think about this past experience was a CIMA post about how we still use algebra in many management accounting tasks today – read more here.
Another cost-volume-profit example – supersize portions
In June this year, I was watching a programme called “The men who made us eat more” on BBC. It told the story of how super-size portions and combo-meals came about in fast-food chains like McDonalds, Burger King and other similar ones. One of the participants mentioned how the profit margin on the extra portion (or the additional products in a combo-meal) is huge. He explained why, and the explanation is again an application of understanding costs and volumes (or CVP).
Let’s take the example of a portion of french fries. If we think about the cost of a regular size portion first. The variable cost would be mainly the ingredients, i.e. potato, packaging cost and maybe energy costs. There would be quite a few fixed costs – all the costs associated with the running of the restaurant, including staff costs (they need to be paid even if there are no food orders). Now if we make the portion size larger, the additional cost will be very small – some extra ingredients, a slightly bigger package and that’s about it. But, the price increase is proportionately much higher than the cost increase usually. Thus, by encouraging a customer to super-size or buy a combo-deal, profits can rise at a much faster rate than the corresponding increase in costs.
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