I recently finished reading The Templars by Dan Jones. The Templars are the stuff of legend in many texts movies, and Jones’s book is a great and detailed read on the history of the Templars.
As I did not know a lot about the Templars – outside of movies – I was surprised at how good they became at accounting. The Templars were a military order, founded in 1119 and remained active for about two centuries until their papal suppression in 1312. They were involved in several Crusades to the Holy Land, all of which entailed military and financial resources. It seems as a result of this and their well structured organisation, they became not only good at accounting, but so good they were trusted by others to hold cash assets on their behalf and act as a bank.
Jones’s book gives many insights from an accounting perspective, here are just two examples. A letter from 1220 written by Pope Honorius wanted to ensure that taxes collected to fund the Crusades did not flow via Rome. The Templars were thus used as agents to account for and deliver cash from tax collected to the Holy Land. A second example which appears throughout Jones’s book is how the Templars accumulated wealth as an order over time. They acquired land and similar immovable assets, and these were used productively to generate moveable assets – oil, wine and grains for example. All of this has to be accounted for and controlled. Jones also mentions how ultimately one way the Templars were hurt as an order – their wealth was attacked.
Last month, I got 2Kw of solar photovoltaic panels installed on our home. The install was seamless, so thanks to the provider https://www.greenelectric.ie/.
A 2Kw installation equates to six panels. Our roof already has solar water heating panels, so I guess a standard install might be 3Kw or more. So how is it going you might ask? As I am an accountant, of course I want to do the numbers. Before I do, lest you need reminding, Ireland is not the sunniest of places, but we do have good daylight – which is key to solar PV. Since the install, the lowest we have generated is 3Kw in one day, the most 13Kw. In terms of daily usage, this equates to a range of about 20% of our needs to more than 100% – depends on the day, as some days we use more energy than others.
So, to the numbers. I am making the following assumptions 1) no revenue from sale of extra power to the grid, 2) a cost of 0.17c per Kw – this is my current costs, 3) 5% annual increase in energy cost and 4) an average of 5Kw generated by the panels each day. I think these are all quite conservative. The cost of the install was about €6,500 net of a government grant, so the question from an accounting view is when do I get my money back? Using a simple Excel sheet and the above assumptions, it takes about 16 years. This is reasonable, given the average life of PV panels is 20-25 years.
There is more to it of course. I will probably save the planet 1.5 tons of CO2 per annum, which is not at all considered in the above numbers. And of course, I will have power for a while in case of a power cut, and can always expand the system to have more batteries. So overall, I am happy as an accountant, but also happy that I am doing my bit for the planet.
A simple answer to the question posed in the title above is yes. This is because such customers use up more time and resources and should be charged more. If you have learned activity-based costing or activity-based management in your studies of management accounting, you will also know that such techniques try to allocate costs based on the resources used. Thus, a more time-consuming customer will pay more.
Of course, it is not that simple. You may not be able to charge customers more, or your business may be a service provider with back-end or post sale support. The latter case is what inspired me to write this post. My better half works for a large financial institution. She often tells me how customers are asked several times for the same thing e.g. documentation to prove their address, their age or even their identity. Some seem to ignore requests, not provide full information or deliberately try to hide some information. Getting back to the customer a second or more times adds to cost. Thus, the management accountant in me thinks I should charge these customers more. In normal circumstances no organisation would. But what if, as a bank for example, I asked a customer three times to provide a scan of their passport for identity purposes and each time they blanked out the date of birth? This would imply much more effort (and cost) was needed than should be. If it were up to me, I would say to the customer “ok, €/$/£25 please, as you as wasting time”. I guess no banks would be gutsy enough to do something like this, but maybe it would make for greater efficiency as customers would comply more the first time. I am just using a bank as an example here, I am sure there are many other scenarios where customers could be dissuaded by threat of a greater price/charge like this.
You may have read about the scandal at Wirecard AG (see here for example), where about €1.9 billion in cash probably did not exist. As a result, the German regulators are calling for more oversight. While I agree that more oversight may be useful, I also think it is worthwhile reflecting on the absolute basics of bookkeeping, accounting and auditing that seem to not get much mention in the media. As is often my style here, I’ll relate to my own experience.
Close to 30 years ago now, I started to study accounting (September 1990). The first few weeks of the class covered bookkeeping. This was a bit repetitive for me, having done accounting as a subject at secondary school. One of the things I learned was how to prepare a bank reconciliation. In Summer of 1990, I got a summer job at a small audit firm. For my very first task, I was presented with two books (pre computer days 🙂 ) from a company – their cash receipts and cash payments. From these, I had to manually check every payment or receipt to the bank statements to make sure they matched. Some transactions had errors, some were missing, but at the end I could explain – or reconcile – the balance of cash per the company’s books and per the banks records.
Just pause for a moment. The act of doing this bank reconciliation means that the accounting records of a business agree with an external information source – the banks records. Thus, as either an auditor or an internal accountant at a business, I can be somewhat confident that the financial statements to be prepared from the accounting records are reasonably accurate. This assumes of course all transactions ultimately go through the company bank accounts. A bank reconciliation was one of the first things I learned to do as an accountant, but also one of the first things I looked for when doing an audit.
Following from the above, how can I be sure as an auditor that a company is disclosing all their bank accounts? I cannot speak for every jurisdiction, but usually the client signs a letter addressed to the bank(s). The letter is sent by the auditor and requests the cash balance at year end plus a list of all accounts held in the name of the entity/entities being audited.
Thus, if 1) a company accountant does a bank reconciliation, 2) the auditor checks it is done and 3) the auditor sends a letter to the company’s bank, then all should be fine and cash balances easily verified. I can only presume something very untoward was happening at Wirecard, but how it was allowed to continue beggars believe. Any auditor should be able to do the simple tasks I have described and surely a bank letter should have revealed the €1.9 billion did not exist.
However, as an educator, I rarely teach bank reconciliations. This is somewhat disappointing perhaps, and I often think should we (or I) be at least reminding students of the absolute basics. They will of course learn it quickly in practice. It is also worth pointing out that accountants (when part of a profession) are also bound by codes of ethics. Not every jurisdiction has a legally recognised accounting profession which educates and guides members.
It’s not very often I delve into the subject of taxation. I guess that’s because like everyone, it’s not something I like paying, but I have to 😀.
In recent weeks in Ireland, there has been some debate in the media about emergency payments made by our government to people who were made unemployed temporarily as a result of Covid 19. Our government took a quick and broad decision to pay everyone affected €350 per week until they returned to work.
Some anomalies arose – for example part time workers got more cash for not working. This was inevitable given the quick nature of the decision, but quick decisions are needed in a crisis
So should the Irish government be worried about cash being misspent on this? Simply, no. Why you may ask? Well, Ireland’s Revenue Commissioners are really good at digitalisation. Since January 2019 for example, all payroll data gets sent to them (as the state’s tax authority) at the end of each month. They thus have gross pay, taxes deducted and net pay for every employee in the country. This, in time, could be easily contrasted with the emergency €350 paid to see if some were paid too much. This would not be possible at all without digitalised payroll tax records. I am a big fan of digitalisation of our tax affairs despite not liking paying it😄.
A fairly obvious title to this post, but it is something we may often forget. As a management accountant you need to know how your business works, and this means getting out to the factory floor, to the process or working with those people doing the necessary tasks.
So why the old tyres Martin you may ask? Well, I recently read a two-page feature in Financial Management on how tyres are made and what happens the old ones – see here. This reminded me of some of my roles in industry. I knew nothing about making clothes or making cardboard when I joined my respective past employers. It is not that I became a technical expert in these areas, but I understood the process, what needed to be done, how the factory worked etc. And how did I learn you may ask? I learned mainly by talking to people, observing how things worked, determining how much things costs, where revenues came from etc. Then, as we updated various systems over the years, my knowledge became deeper and I started to question how some things were done, could they be improved for example. Having read the article in Financial Management, I was thinking based on my experience, if I started to work for a tyre company this would be my day one reading material.
Cost need to be managed. This is term I have probably heard or said many hundreds of times in my life as an accountant and teacher. Managing costs requires two things 1) a knowledge of costs and how costs are structured in the business, project or product and 2) managers. We probably take both of these for granted, but there are some classic examples of when one, other or both do not apply.
If you have ever been involved in a building project, or built your own house, you will know that construction costs are notoriously difficult to manage. Just think of any large building project in your country, was it delivered on time and within budget? Sometimes the answer is yes, but when it is no, it can be a resounding no. Take for example the Berlin airport which is due to be open on 31/10/2020 – probably the worst time in aviation history to open an airport due to the present pandemic. This project started back in 2006, and it is being opened at a cost which is billions in excess of plan. So what went wrong? I could probably write a book about it, but in essence bad management. Of course a large project may be late and over budget, but in the case of Berlin airport, the delay is about a decade and the cost overrun about 3 times. A BBC News article provides a good summary, and I will give some examples. First, there were changes during construction due to plans not including shops for example. This added time and money. Te question has to be how did the “managers” not notice a part of the airport which can give 50% of revenues was not there? Second, there were issues due to there being no specialist contractor, rather many smaller ones who the managers hoped could be compelled to reduce costs. However, not having a single point of contact in a the form of a specialist contractor implied the project management was very complex – and thus costly.
This is just a brief summary. Have a search around to find out more. Here is a nice article on the technical side, or here from CNN – which includes a final cost estimate of €7.3 billion (original plan c. €2 billion)
A pint of the black stuff (Guinness) would be most enjoyable now, ten weeks into “lockdown”. Of course, this is not a lament to me wanting a pint, but there is link to Guinness.
For quite a few years now, media and commentators have highlighted the large profits and low taxes of many companies. Take amazon.com Inc, whose Q1 sales in 2020 reached $75 billion (see here for more), or think of Apple, Facebook or many other companies. Before I say anything further, I am not a total socialist, nor am I a total capitalist – there is a happy medium in there somewhere. You may know from reading previous posts that I do some historic research on the Guinness company. Dennison and MacDonagh (1998) in their book Guinness 1886-1939: from Incorporation to the Second World War provide some very useful insights into the general management of the company, and I will draw on one of these now.
Sometimes I ask myself why do some companies need to make so much profit? On the other hand, in a democratic/capitalist society, they are free to do so. Now, with a serious pandemic gripping the entire world, some of our underlying models are at least being questioned. So my question is could companies be happy with a “living profit”. I first noticed the term in relation to Guinness dealings with Irish malt suppliers around the turn of the 20th century. The company wished to encourage the production of Irish malt, but were not willing to buy at the lowest market price. Instead the company noted a “living profit” should be attainable. What exactly this means is not specified, but the general principle if clear. Today, most (not all) companies seem to want lowest cost everything and highest profits – presumably to keep shareholders/investors at bay. Would it not be a great improvement for us all if more and more firms took the approach of the “living profit” espoused by Guinness over a century ago? I am sure economists and others could give me many reasons why not. But, perhaps it is worth having the conversation as the business world comes back a new normal in the coming months.
I hope a local distillery near my home does not mind me using their graphic above. As we are all dealing with the effects of the Covid 19 pandemic, I was really impressed to see how small local distilleries in Ireland (and indeed elsewhere and some large ones too) have changed to producing alcohol based hand sanitiser.
Many businesses cannot adapt their products to the current scenario, but the example of distilleries is a really good one. The Listoke Distillery is manufacturing and selling hand sanitiser at cost. Not only is this a good thing for society, it also in my view makes business sense. As the header of this post suggests, it is better to be “ticking over” and covering costs than losing money and not covering fixed costs. I would also bet that many of us (and certainly yours truly) will remember these local small businesses that helped us out in these strange times and, hopefully, they will see increased revenues and growth. Meanwhile, with costs covered, at least they have a good chance of surviving.
By the way, I’ve just bought my second bottle of sanitiser – accompanied by a bottle of gin of course.
If you have studied management accounting, or perhaps read some of my previous posts, you will know the word cost can have many meanings and descriptions. For example, a cost can be fixed, variable, mixed or opportunity.
In this post, I would like to think more about what the word cost can mean outside the world of accounting. The etymology of the word cost is from Latin constare which means to stand firm, stand at a price, which seems to suggest its origins are associated with business transactions. However, today cost can also be used to describe many non- business things. For example, the Alberta oil sands in Canada may have quite a high extraction cost in money terms, but also have and/or will have a large cost in terms of environmental impact.
As I write this post, many of us are working at home due to the global Covid 19 pandemic. This also provides a good example of the many meanings of the word cost. It is perfectly summed up in a phrase I heard on radio “we can count the cost in money now or in more lives lost later”. This comment was in response to plans (or lack of plans) by governments to respond to the pandemic and being more concerned with economic impacts.
These two short examples show cost has meanings which are perhaps commonly understood, and thankfully are becoming more and more a part of business decision-making- which is a good thing of course.
A Guardian headline in recent days says “Tesla shares soar 40% after analyst says firm’s value could hit $1.3tn“. Similar headlines could be seen in other newspapers. So, the market values Tesla at $1.3 trillion, yet their 2018 10K shows assets valued at around $30 billion, and accumulated losses of $5.3 billion. So, why are these values so different? This is something students of mine often ask. I’ll try to give a simple answer.
The market value is based on expectations for the future, and these drive up the share price – some media sources though suggest the price is being driven by short sellers trying to buy shares to cover losses they may be making as they bet against Tesla shares rising in price. Accounting values are in general based on historic cost – what was paid for something in the past. Also, for example, accounting does not include items which do not have a historic cost – such as the Tesla brand name. Thus, accounting statements do not reflect future plans or values in general. If another business were to buy Tesla, then its actual (market) values would be captured by accounting of course – brand value, goodwill and such things not captured previously. At this purchase point, there is a historic cost.
Telecommunication services in Ireland used to be provided by the State, through various entities. The most recent entity is eircom, now a private firm. eircom were one of the earlier providers of free email accounts, but that is about to change as the company now wish to charge €5.99 per month for email accounts. Well, there is no such thing as a free lunch as the saying goes.
But let’s put on our accounting hats for a minute. There is of course a cost involved in hosting email accounts – servers, cooling, power, buildings. This may have been okay when eircom was a state company and there was less of a profit motive. Gmail is free I hear you say; it is not, you give your data to them to make money from. So eircom probably need to recoup some of their costs, and that seems like a good accounting decision, The price does seem a bit high though – about €4.86 next of VAT will be earned by eircom. To me, it seem more like a prohibitive price, and the real objective to force email account holders to move to other providers.
If you live in Ireland and are of a certain age, you’ll remember the above £20 note, and maybe even the older one with W.B Yeats on it. Now, we have euro notes of course, since 2002. So what if you had old pound notes? Well, when currencies change, there is usually a period of time during which the note can be redeemed at the Central Bank of the country in question. That is exactly the case in Ireland.
So where is the accounting in this you may be thinking? Bank notes have their origin in a “promise to pay the bearer on demand” as it used to say on old Irish currency, and still does on some bank notes. In other words, there is a liability on behalf of a bank to pay something – historically something like “pounds of silver”. In the case of the Irish Central Bank, there is still a liability to repay the the bearers of old currency, namely the Irish pounds. As recently reported, the Irish Central Bank has a provision in its accounts (specifically in the Statement of Financial Position) of €350 million for old notes and coins to be redeemed. This is 18 years after the notes ceased to be in circulation and be legal tender. This is why the term “provision” applies, as according to International Financial Reporting Standards a provision is “a liability of uncertain timing or amount”. In this case of the outstanding old Irish currency, the amount is certain, but the timing is not. I would imagine at some stage, the provision will be reversed, maybe 30 years for example, but until then, it will remain on the books of the Irish Central Bank.
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.