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 Viatcheslav Sokolov, Svetlana Karelskaia and Ekaterina Zuga. As the chapter (and post) title suggests, this chapter details accounting practices around vodka in Russia. For me personally, this was a very interesting chapter as I knew very little about accounting in Russia in general.
The chapter details accounting records around vodka dating from the early 1600s. In the 16th century, Russia gradually introduced a state monopoly over the production and distribution of alcoholic beverages. At this time, alcohol could be sold only in special drinking establishments owned by the state, known as kabaks. Profit generated by kabaks was captured made in kabak books, a special type of accounting register, and this profit was reported to the State. In 1649, a standardised system of accounting for alcohol was introduced State wide, and this remained in place until 1832.
In 1817, excise taxes were imposed on private alcohol manufacturers. The tax was based on actual the total output permitted by the producer. Producers recorded different types of beverages in a special book, where they registered the volume of product output, its bottling and delivery. Thes books were maintained using the double entry system. Later in 1895, the State for the first time issued a statute which described vodka, and effectively monopolised its production through strict controls on private producers. This implied Provincial Excise Offices played a key role in the accounting process. They kept ledgers to track cash flows, assets and settlements with the manufacturers, distributors and financial institutions relating to production and distribution of alcoholic beverages.
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 is a summary of the next chapter in our Accounting for Alcohol book, written by Karen McBride and Tony Hines. It explores accounting and controls for alcohol in the Royal Navy in the time of Nelson, and is a really interesting topic.
In today’s world, we may find it difficult to imagine, but beer and other forms of alcohol were part of the normal diet of a sailor in times past. As the authors note, beer was bulky to carry and required much room to store, and of course, it had a cost and needed to have an inventory level maintained and controlled. Thus, the British Royal Navy instituted rules and procedures to ensure alcohol use was controlled, both in terms of cost and volume per sailor. The authors provide some examples of forms used to comply with these regulations, and here is a great example from 1808:
It appearing that considerable quantities of wine and spirituous liquors have
been fraudulently run-on-shore from His Majesty’s Ships of War and Transports,
to the great prejudice of His Majesty’s Naval Service, and diminution
of the Revenue; for the better preventing of such practice in future, and
for punishing those who shall dare to continue or renew it, all Captains or
Commanders of His Majesty’s Ships or Vessels are hereby strictly required,
and positively directed, not to suffer any of those species to be ever issued
to the Companies, or any part of the Companies, of the Ships or Vessels
respectively under their command whilst in the Home Ports, nor at Sea, until
after the Beer is all expended.
The chapter is guided by Focault’s notion of governmentality. Rather than I explain this in the context of the chapter, the author’s words are very useful:
Foucault’s work observes that the unthinkable may become thinkable, where procedures and methods are put in place for one purpose but end up being utilised for another purpose that was not expected at first (Foucault, 1980). We argue that initially
the accounting and control of beer was determined for cost and provision
control; beer was issued for the seafarers’ health and well-being, replacing often
foetid water. Later it was used for the prevention of scurvy. Finally, it was used to
keep the men in a controllable but mildly inebriated state, which alleviated the
hardships they were under. Accounting was instrumental in this, as it provided
the means by which the allocation was measured and supplemented.
The chapter has many examples of how accounting was used in the control of alcohol on ships, including some comment on the Royal Navy’s own brewery in Portsmouth. It is well worth a read.
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.
This post #3 in my summary of a recent edited book. Chapter 3 is written by Desmond Gibney and explores proposals to acquire the brewing sector by the British government during the First World War. Desmond draws on archival records of the Macardles brewery in Dundalk, Ireland.
One of the drivers for the government acquisition of the trade was the temperance movement, which combined with the need for men to fight the war brought the notion to the government. A quote from Thomas Whitaker MP summarises the issue very well:
Drink is the greatest cause of inefficiency, waste, and loss of time, and
consequent under-use of plant and machinery, and an output considerably
less than the largest possible. Its production and sale wastes food, coal, and
labour, and occupies ships, docks, and railways which are badly needed for
vitally important purposes.
At the same time, the brewing sector was a powerful lobby, and if the trade were to be acquired and shut down, compensation would be required. Desmond explores how valuations would be made, and reveals that a multiplier method would be used. This method would average profits from a number of years and then apply a multiplier would be applied. This method is still used to today, and today, like then, an issue was to ascertain the reliability of the accounting records used to calculate profit. The directors of the Macardles brewery took the opportunity in 1915 to ascertain the real value of their assets in preparation for any negotiations with the government. The proposed scheme did not of course happen, but it is interesting to look back 100 years ago and see techniques used today in use then.
This post #2 in my summary of a recent edited book. This chapter by Alonso Moreno analyses the narrative information disclosed by a Spanish brewery, El Alcázar, from 1928–1992. The objective is to determine if the tone of the corporate reports is related to profitability. Today, the brewery belongs to the Heineken group.
The study focuses on a document entitled Memoria which is, in essence, similar to the Chairman’s Statement. Software was used to analyse the words in this report to determine the tone of the words. The tone (positive or negative) was related to other variables such as performance (profit) and the person acting Chair of the board. Over the full time period, there were more positive than negative references, irrespective of the actual performance of the company. This is a phenomenon called impression management and is something a lot of companies engage in still today. The interesting thing about this study is that overall, a positive tone dominates, despite many political events during the timeframe.
Along with my good colleague João Oliveira, I recently edited a book titled “Accounting for Alcohol -An Accounting History of Brewing, Distilling and Viniculture”. It stemmed from my own research on accounting history at Guinness, the world famous brewer of stout in Dublin. The book has 15 chapters covering many topics around accounting and beer, wine and spirits. In this first post, I will summarise Chapter 1, which is titled “The introduction of accounting machines at Guinness” and is written by Carmen Martínez Franco and Martin Hiebl. Over the coming weeks, I will provide a similar summary of each chapter. I hope you like it.
This chapter tells the story of the introduction of accounting machines at Guinness in the late 1920s. These machines, a Smith Premier machine costing around £200 at the time, could be simply described as typewriters with a built-in calculation function. These machines were at the time a new technology. In the modern day, it may be hard for us to imagine that all invoices and statements to customers were typed. I can only imagine the difficulty of having to add and check the sums on each typed item. These machines offered a solution to this problem, and by association made the accounting department at Guinness more efficient. The numbers of staff reduced by about 11 in one year according to the authors, customers were able to receive statements on a monthly basis – something not possible before then – and checking of discount calculations were no longer required. It also allowed Guinness to develop standardised procedures around customer transactions. The authors cleverly compare this technology change of nearly ninety years ago to more contemporary technology changes in the accounting world. They conclude there were several similarities – good management, gradual implementation and delivered efficiencies.
The gentleman above is Michael D Higgins, the Irish president – of course he is well known to me and other Irish people, but just for the benefit for others you might read my blog.
In October, there will be a presidential election and Michael D is up for a second term of office most likely. In recent months there has been a lot of media attention as of how much the presidential office costs to run. The office does not have much power, but is a great representation of Ireland as a country. According to the presidential website, the cost is about €3.6 million per annum. The vast majority of this consists of staff and travel costs. However, in various media outlets I have heard numbers being mentioned about the costs of the police officers and army associated with the presidential office. At the link above, these count for about €250,000 in 2017.
So what you say! Well, are these costs relevant to the cost of the presidential office? Would they be avoided if the office ceased to be? I doubt it, as the army and police would be put back to their normal duties. So this is a simple example of costs not bring relevant, and thus they probably should be excluded from any comments or analysis. I would guess too that the kind of simple analysis I have done here might be applied to many other political figures. What is probably most important though is that the costs of the office of the Irish president are now being discussed and new controls and checks may result – which is a good thing.
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.
Following from the previous two posts, today I will explain cryptography in the simplest way I can – in reality, it is more complicated. However, a basic understanding is useful to appreciate blockchain – which will be the final post on this topic.
Cryptography is the art/task of creating and solving codes. Messages have been sent in code from centuries, and you can read a good summary of some methods here. The basic idea of cryptography is to render communications unreadable to the human eye by mixing up inputs (e.g. letters) to give a different output. One of the more famous uses of cryptography was the Enigma machine used by the German armed forces during WWII. The Enigma worked by scrambling letters into other letters and relied on the sending and receiving machines being set up the same. The set up was from three initial letters, resulting in over 17,576 (26^3) combinations. As you may know, it took a computer and some captured settings to break the Enigma code.
Move forward 70 years and a lot of information sent today over the internet uses some form of cryptography. There are two basic forms 1) encryption and 2) hashing. Encryption is what the Enigma did, an original message was scrambled on one end, sent via morse code, and de-scrambled on the other end. Hashing only involves scrambling. It uses an algorithm to derive a fixed length string which is different from the original text. A good example is a password. Passwords are usually not stored on servers in their original form, but as a hash value. If you enter a password, it is run through the algorithm and if it matches the stored hash value, you’re in. A commonly used hash is SHA256, which has 2^256 possible combinations – let’s just say that is a big number.
Encryption, as mentioned above, is a two-way thing. While I could write a lot more, let me try to keep it simple and explain the most common form, which is asymmetric encryption. First though, let us remind ourselves that encryption means some form of setup or code is needed, which is usually referred to as a key. In asymmetric encryption, there are two keys, a public key and a private key. Here is a simple example of how this works. Let’s say I want to send you an encrypted message. Your public key is sent out to anyone who may want to send messages to you. To send the message, I use your public key to encrypt it, so the message is secure when sent across any networks. When you receive the message, your private key unscrambles it. Only the combination of these pair of keys can do this, making the system quite secure. An example of an asymmetric encryption protocol (or set of rules) is TLS (Transport Layer Security) which is embedded within most operating systems and web browsers. It also offers 256 bit security, which is 2^256 – see more about TLS here. The current agreed TLS version is 1.2, and below you can see it is embedded within my version of Windows.
So, to sum up, encryption is complicated, but it is commonplace in our daily lives and apps. So can it be broken/cracked? Yes, but it would take a long long long time. See a great infographic below which details how long it would take to crack the code/cipher used in AES 256 – which is used by the TLS protocol mentioned above.
So now you know a little about cryptography, the next post in this series will cover blockchain.
In Part 1 two weeks ago, I wrote about currency. Here, I’ll explain how “miners” help a cryptocurrency like bitcoin be useable.
To be honest, I had no idea until recently what bitcoin mining actually means – and remember bitcoin is just one cryptocurrency, but I will use it here as an example.
Some weeks ago, I visited a friend of mine who owns and runs a technology maintenance firm. His office is always full of various parts of computers, but on this visit I noticed the office was quite warm and there was a hum of computer fans. So, I stuck my head around a corner and I seen something like what is in the picture above. So, joking I said, “what are you at now, mining bitcoin?”. “Yep” was the reply. So I took the opportunity to lean on my friend for some explanations.
The bottom line for me as an accountant, is that a “bit-coin mining rig” like that in the photo costs about €3,000 and can earn about €500 per month before energy costs – I will come back to these costs in a later post. So what the hell is it and what does it do I hear you ask? In my previous post, I established that bitcoin is not really a currency (yet) in the sense of dollars, euro or pounds. It also does not have a central bank behind it, or commercial banks taking it on board as a major currency. So this creates a problem, which in essence is if I want to pay you one bitcoin, how is this to be done – and remember bitcoin is an electronic medium, there are no paper notes.
Well, if I were to pay for a coffee with my credit/debit card, there is an extensive payments processing system behind the payment – think of the credit card machine, Visa/Mastercard/Amex systems and ultimately the retailer’s bank. Also, you may know that for every card transaction, the retailer is charged by the bank so they never get the full value of a card sale. For a bitcoin payment, where is the system? This is where the “miners” come in. A miner is someone who essentially processes bitcoin payments. My friend mentioned above told me the steps roughly are as follows:
- you get a rig (like the picture above). The faster the better, so rigs tend to use the fastest available memory cards – think about the graphics in a gaming console – these use really fast memory.
- Join a mining community
- Start solving hashes (encryption puzzles)- that is, process and verify bitcoin transactions. This includes working with blockchain, which will be explained in an upcoming post.
- Get a commission for each transaction
- Transfer the commission to a bitcoin wallet – for example, the Coinbase app
- Transfer to your bank account as you see fit.
So, in essence, a bitcoin miner like my friend is taking the place of the commercial banks and/or credit companies and processing payments. It is basically a form of distributed computing.
So from an accounting perspective what does this mean? Well, not very much actually. But, and this is a big but, would/could we trust people like my friend to effectively become a banking system. Personally, I am not sure. We have decades of regulation around our banking systems, and even with all the oversight, it still fails from time to time. The counter-argument could be something like the redundancy of systems or devolvement of the now rather central power of the banking and finance systems. But I’m not so sure just yet.
My next post will explain the basics of encryption.
I have been meaning to write something on blockchain for quite a while now. So, in this post and the next few, I will write what I hope are some simple lessons which will give you an appreciation of blockchain. To do this, I want to go back to some basics first and here I will remind you what a currency is. For these posts, I will use the example of a blockchain being used in cryptocurrencies, but there may be many other uses as time goes on.
So what is a currency? We probably all think we know what it is, it is the money in our pockets. That is a fair starting point, but we need to big a little deeper. In accounting – see for example the IASB’s Conceptual framework – there are several measurement bases: current cost, historic cost, present value, realisable value. The conceptual framework of the IASB defines measurement “as the process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the balance sheet and income statement”. Monetary means in money, and money can be defined as a current medium of exchange – hence the word currency. So, for accounting, this means we measure assets, liabilities, incomes and expenses in currency – a dollar, a euro, a pound. So why not in bitcoin, or litecoin or ethereum? Are these not currencies?
To answer these questions, let me divulge for a moment. When I was in secondary school, I studied “Business Studies”. From this, I remember something which used to be printed on all the Irish pound notes before we had the Euro, the term legal tender. I also recalled that all pound notes were legal tender, and a certain amount of coinage. Legal tender means that the currency is acceptable as a means of settling a debt. In Irish law, before the introduction of the Euro, a 1969 law set out that all notes and some coinage were legal tender e.g. a debt of £20 could be paid in coins of 10 pence or greater. The concept still applies to the Euro notes, and in other currencies too. However, being legal tender only means something is an acceptable means of payment, it does not have to be accepted in general. Thus, cheques, credit cards, PayPal, ApplePay, and guess what you got it, cryptocurrencies, do not have to be accepted as a form of payment. Having said that, typically banknotes are issued by a country’s central bank and are nearly always accepted.
So, if something is not legal tender, then there is a chance they may not be accepted as a method of payment (i.e. settlement of a debt). At this stage you are thinking, but if credit cards etc are not legal tender why are they so widely accepted? The answer lies in the fact that the banks who issue the cards and process payments are doing so typically in a currency recognised as legal tender.
Let me pose a question now. If you went to a typical shop in a town or city, and you had some cryptocurrency, maybe bitcoin, in an electronic wallet would you be able to pay for a coffee? The answer is generally no, but there are some online and other retailers who will accept payment in bitcoin. So it is probably fair to say that as bitcoin is not generally accepted (yet), it is not a currency. And, as far as I am aware, no cryptocurrency is yet legal tender. For accountants, this means that we are not yet measuring in cryptocurrency, and no accounting reports will be prepared in bitcoin for example. Thus in accounting terms, any cryptocurrency a business may have is treated as an asset in the financial statements – typically a current asset, like a normal bank or cash account. Of course, cryptocurrency values seem to be rather unstable, but this is not something I cover here.
Now that you know what a currency is, Part 2 of this series of posts will explore how bitcoin payments are processed.
I hope to write a few posts on this topic in the coming weeks, as we hear so much about blockchain and bitcoin and how it affects accounting/accountants. Before I do, this article in a great primer. For example, it relays the fact that bitcoin (for now) is an asset not a currency in accounting terms. Have a read, more to come soon.
Or a profit and loss account if you like the older term. Below is simple income statement (which has been published in the public domain), or more precisely an income and expense account, which is a term often used in clubs and charities. So, this example if not IFRS based, but the basic principles are the same. To be fair to the preparer of the statement below, it is quite detailed and transparent. But there is one problem – can you spot it? (“Einahment und Ausgaben” could translate as income and expenses or receipts and payments, but I will come back to this below).
Just to remind you, accounts are generally prepared using the accruals concept, but in smaller organisations like churches and charities, using a cash basis is common. Have you spotted what is seemingly incorrect? It is under the “expenditure heading”. Got it? It is the “repayment of loan”. This is a repayment of a capital item, or capital expenditure. Remember that only revenue expenditures appear as expenses in an income statement, so in the case of a loan only the interest on the loan would be included. So is the above statement incorrect? The answer is probably not, but now back to the nuances of language. The statement above is probably best described as a “receipts and payments” account, as it seems to be more representative of cash coming in and going out. We would need to have a chat with the preparer to be sure. However, including the loan repayment is a pointer that the above is not an income statement/profit and loss. This fits too with the nature of the organisation (a church).
You might also notice “reserves” on the income side of the statement above. Again, this is likely a capital item, and maybe should not be included as income. We would need more detail to be sure.