A few weeks ago, I read a nice article in The Telegraph by David Millward on one of my favourite topics, airlines and all things to do with airports – I was born close to Dublin Airport and it was a big part of my growing up.
Anyway, many of us have witnessed the phenomena of low-cost airlines emerge of the last 20-30 years, and as an accountant it’s the constant actions to reduce costs that amaze me. As Millward said in his article, one of the things that airlines have done is unbundle. This means you get the basic fare from origin to destination for as low as possible. If you want more you pay more. This is fine by me, on a shorter flight, but now as longer-haul low-cost carriers appear I am not sure – I have no experience yet, so I dare not say. The low-costs have of course eaten into some of the legacy carrier market, but they have also expanded the market by making flying more accessible. Millward suggests that the low-costs have by now probably stripped out all they can to reduce costs, but the legacy carriers can do more – if they wish. I read another article recently which mentioned how WestJet, a low-cost transatlantic carrier remove the in-flight screens to save 500 kg in weight and thus save fuel. They replaced the screens with a wi-fi system and the BYOD idea – most people have their own device on-board anyway. Surely such simple steps could be taken by any carrier.
In recent years, I have become interested in the broader role and use of accounting in society. In particular, accounting for water has caught my eye and in Ireland it’s been great fun in the past two years or so.
As you may know, one of the things we need in accounting is measurement. In business accounting, it’s relatively easy, as the unit of measurement is rather simple – it’s the unit of currency normally. Currencies are broken into various units – euro and cent for example – and we can use the decimal system easily communicate and measure larger numbers.
In accounting for water, the measurement unit is normally cubic metres, or 1000 litres. To measure (or account) for our water usage, we need a measurement device – a meter. Once a meter is in place, we can see how much water we use and take measures to reduce it if necessary – as water is a precious resource.
In Ireland, there has been much debate about billing for water. A recent (December 2016) expert commission report on domestic water billing has within its remit to explore if metering should occur. This, in my view, was/is a completely daft request. The report itself is full of statistics on water usage – none of which are possible with a meter. For example, it suggests usage on average of 111 litres per person per day or 20.8 cubic metres per person per year. In my own house, we have used on average 11 cubic metres per month for 4 people. Annually this is 33 cubic meters, so we are quite above average. And like any management accounting scenario, now that I have some information (on water usage) I can now take corrective action, or pay extra for my somewhat excessive usage. The latter is the subject of much debate in Ireland of course.
A review report by the Irish National Transport Authority published in 2016 makes for some interesting reading. It highlights the issues faced by many rail companies world-wide in that not all routes are profitable. When this occurs, many States subsidise services in the general public and social interest.
The 2016 report includes an interesting use of a breakeven approach to identify poorer performing routes. The analysis calculated the cash per journey required to breakeven. This was done by taking total cash costs less revenue divided by the passenger journeys on each route. The report notes that all government subvention, capitalisation, depreciation and exceptional costs were excluded. It identified four poorly performing routes, as shown below.
What this graphic shows taking the first route as an example is that about €550 per passenger journey is needed to cover what we might classify as the running and maintenance costs.I like its simplicity, and I don’t think anyone would be prepared such a fare. Using such figures, the rail company or the State has to decide if it can subvent to that amount on an on-going basis. The latter to routes seem to be more workable in terms of a combination of increased fares, cost cuts and/or subvention.
I can remember my time working in a manufacturing company as a financial controller and later a systems manager like it was yesterday. One of the great experiences I had was working with and configuring SAP.
One thing it changed in the company was the Accounts Payable (AP) process. My company at that time was quite good at ensuring only genuine suppliers were created. But that’s been newly 15 years ago now and I know the AP processes have become even more automated.
So this article in the Journal of Accountancy really interested me. It seems proper AP controls evade some companies still, but when managed well add to the bottom line. Have a read of the full article
According to a report on Fortune, the US Army accounts certainly do not eek of military efficiency. The report notes “the Army made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year”. That’s trillion, with 12 zeros, yes!
The military is of course the biggest spender of government funds in the US. The budget for 2017 is nearly $600 billion (that’s 9 zeros), but the errors noted above seem to have been accumulating over time. The Fortune article notes:
- The Army lost or didn’t keep required data, and much of the data it had was inaccurate
- there has been no way to know how the Defense Department – far and away the biggest chunk of Congress’ annual budget – spends the public’s money
- DoD and Army managers could not rely on the data in their accounting systems when making management and resource decisions
- the Army lacked receipts and invoices to support those numbers or simply made them up.
If this were any normal business, I would have to say it seems to be lacking in minimal and even simple accounting and management controls. But there again, one can imagine how difficult it may be to “control” spending in war zones, or even trace assets or expenses. I can’t imagine an auditor for example going to Iraq or Syria to verify a tank or similar asset has actually been lost
Okay, the title is a cliche…but in business size (or scale) can mean a lot. Take aircraft for example. An article in the Irish Times reveals how smaller planes like the Boeing 737 Max and the Airbus 320neo are now more fuel efficient and capable of crossing the Atlantic. These smaller planes are not only more fuel efficient, but have less crew and other lower running costs. They can thus offer lower fares than the same or similar flights on larger and more expensive aircraft. According to the article, many airlines from the more western parts of Europe are purchasing such aircraft, with an eye to serving smaller US airports, which are also cheaper to land at.
So, even with these smaller aircraft, it seems airlines will be able to offer cost efficient routes, for both passengers and their bottom line.
Probably my favourite (spectator) sport is motor cycle road-racing. There aren’t too many places it still happens – doing 180mph on public roads is not for everyone – but thankfully it still happens here in Ireland, the Isle of Man (IOM) and a few other places.
The IOM TT is probably the pinnacle of road-racing – it’s two weeks of fund each June. imagine my delight when I read an article featuring news on the 2016 TT and creative accounting! The article notes the number of TT visitors for 2016 to be similar to 2015 – based on data from the IOM government. The article also suggested a revenue of £738 per visitor for the economy, based on this same data. In the comments beneath the article, the fun starts.
One comment notes:
“This year’s TT races in June brought a £4.1 million benefit to the island’s exchequer, according to government figures just released.” OK, so that is the claimed revenue, now let’s see the total costs. And by total, I mean the total cost to the island not just the cost of TT preparations. How much for a fatality or serious injury involving medevac? How much for the road closures and effects on businesses as well as the public? These are real costs and the list goes on.
I note the total expenditure of £738 pp is not broken down into for example travel costs and monies spent on island. Therefore that figure is meaningless If the figures of £31.3M, £22.5M and £4.1M are based on the £738pp they are also meaningless. Creative accounting it is for sure. In addition, if the government can come up with a figure for the benefit to the island they must be in possession of all costs, such as DOI, medical, policing, helicopters etc. So why do they never produce such figures?
These two sharp commentators highlight many things -the subjective major of accounting, where costs and revenues are attributed, and what are the relevant costs, for example. I’ll be using this example in my teaching at some future point.
I read a nice article in the Financial Times recently on the cost of buying a vineyard. The article is investment focused, but mentions that given costs of production, wine prices and annual sales in bottles, the investment will breakeven in a few years – meaning the investment is recouped. If you have studied management accounting, you’ll be aware this not breakeven in the way you many have learned it – fixed cost/contribution per unit. It is not very different though. In essence, the investment is regarded as a fixed cost, with the contribution per unit being the annual contribution which can be made from sales of wine in a year. It’s not a perfect measure, but a good enough rule of thumb to help make an investment decision.
This post was prompted by a comment from a reader. The question was where do I show the customs duty in an income statement. If we are referring to a published income statement, the answer is it is not shown. And this made me think of the items that are not visible on a published income statement. Of course, such items may be visible/shown on an internal income statement within a business.
Let me use the customs duty as an example. If the duty is paid on items of raw material/items purchased for re-sale, the duty will be included as part of the cost/expense. On internal income statements, it probably will not be shown separately, but may have its own ledger account. On a published income statement, it will be included in cost of sales.
There are many other items which we would typically not see on an income statement, even an internal one. For example, discounts are likely to be netted off against the relevant expense; or sales of waste product against sales. However, the materiality concept may kick in, if the amount is large (material) enough to merit separate disclosure. Even if material, such items will not be seen on the income statement, but in a note.
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.
As you are probably aware, the United Kingdom (UK) is leaving the European Union. This will have many effects on business, and in Ireland we are likely to experience the effect quite early on due to our close business ties.
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.
On July 14th last, it was reported on the BBC website that the total cost to BP of the Deepwater Horizon oil spill back in 2010 was totalling $61.6 billion – quite an amount. If you look back at the media websites/newspapers over the years you will see the amount rising over time.
Just out of curiosity, I had a look at the most recent financial statements of BP to see what they include on this. Two things came to mind before I looked at the accounts 1) the amounts involved here are material and 2) it spans many reporting periods, so IAS 10 Events after the Reporting Period would probably kick in. Looking at the accounts to 31.12.2015, they contain a separate note which itemises the events of the event on each of the three financial statements. You can see the accounts here – look at note 2. It is quite detailed and I do like how they have shown the effects, and the note is quite detailed. It is not very often such significant events occur, and as far as I can see BP have done a good job on this note. It certainly should provide an investor with enough information to decide whether to invest in the company or not – a key criteria of what financial statements should do.
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.
On a recent research project I read an article from 1914 which was written by an “old” accountant of the time. On testing accounting students knowledge through examinations (s)he notes “we see interesting problems set out in symmetry and order”. This made me think about what has changed today.
Indeed we still use examinations in university and in professional bodies. They are a good tool to test knowledge, and increasingly examinations draw on methods such as case scenarios which are less structured in an effort to imitate real life scenarios. However, no matter what we do as teachers, we cannot replicate the real world. This is of course where professional development and on the job training come in. I do hope we at least provide the basic knowledge to help students hit the ground running when they start their careers. We can only improve the value of this basic knowledge by trying to get students to use their knowledge in an unstructured way. In an examination scenario, this means we need to use fresh ideas and new ways to ask standard material – this can be tricky sometimes, but it helps both students and us teachers to apply ourselves in a more real world fashion.
In recent years many operations – both business and public sector – have been closed or reduced in capacity to save costs. Closing an operation is one of the topics I often teach too. When I teach, the basic message is to focus on the fixed costs, and how much can be reduced or eliminated. Of course, some labour costs are increasingly seen as fixed – and this may be a more certain feature in the public sector.There may also be some hidden or unforeseen costs, which are often not included in the analysis. Let me give you two recent examples, both of which are from the public sector.
In Ireland, the government closed down 139 Garda (police) stations due to economic woes. Most of these closures were in rural areas. The total annual cost saving is estimated at just over €500,000 – see here. This is likely due to the fact that only the only savings were operating costs of the stations e.g. light and heat were the only real costs saved. Police staff and equipment simply moved to another station – where costs may have been incurred to accommodate them. There is a big hidden cost though, which is increased rural crime. While there was probably no money value on this cost in any cost estimates prepared, I’d be quite sure it is higher than closing stations. Recently, the decision to close has been reversed.
A second example comes from Lambeth council in London who closed two libraries – see here . According to a report in the Guardian, the daily security cost is higher than the cost of keeping the libraries open. There seems to have been some protests against the closure of one library in particular, which drove up the costs. This unforeseen cost, if included in the closure decision might have changed things.