New business ideas: renting a car by the hour
I read this article in The Economist recently about businesses renting out cars by the hour. It’s a good story from many angles – threatening car manufacturers; reducing emissions; new business ideas. Have a read and see what you think.
Frugal living: transferable to a business?
Okay, this might be a bit of a laugh but here are 10 tips to live frugally I found on a blog recently. Could any of these be transferred to your business? Enjoy
The changing face of corporate reporting
Are companies using social media to publish financial results. The answer is yes. Here’s a link to a recent post on Nick Topazio’s blog on CIMA’s website.
Audit exemption for Irish companies
If your business is a limited company, one of the most difficult tasks is dealing with the annual audit of the company and its financial statements. However, most small Irish companies can avoid an audit by availing of an Audit Exemption under Irish company law.
What’s an audit?
An audit is a comprehensive examination of a company’s accounts and financial statements/records by an external auditor. It involves a detailed examination of the company books and records, a review of the estimates, policies, and judgements used in preparing the accounts. The output of an audit is a formal ‘audit report’ setting out the findings. In recent years, audits have become more stringent. Auditing standards apply equally to small and large companies. As a result, owners of small companies can find the audit to be a bit of a nightmare.
Does my company qualify for an Audit Exemption?
A limited company can enjoy an exemption from an annual audit if:
- Turnover is below €7.3 million
- The total value of Non-Current and Current Assets on its balance sheet is less than €3.65 million
- The average number of its staff in a year is 50 or less
- The company’s Companies Office filing record is fully up to date
- The company is any of:
- a company “limited by guarantee”, nor
- a holding or subsidiary company, nor
- a bank, insurance, management or investment company.
All these conditions must be met, both for the current financial year and the previous year.
For eligible companies, annual accounts must still be prepared and filed with the Companies Office, Revenue Commissioners etc. However these accounts need not be subjected to a formal audit – although they might be if banks or lenders require audited accounts.
Can the Exemption be lost?
Yes, if any of the above conditions are broken.
Even with an exemption, directors of audit-exempt companies must still comply with company law, including the keeping of proper books and records, and the preparation of annual accounts that comply with accounting standards and the requirements of the Companies Acts.
So what is the accountant’s role?
Although audit-exempt companies no longer need an auditor, most such companies still choose to have their accounts and annual returns prepared by a firm of practising accountants. This ensures all is keep in full compliance with accounting standards and relevant company law. If your company meets the conditions as set-out above, you might at least be able to reduce your annual accounting fee as a full audit is not required. However, I’d recommend that if you’re in doubt about anything to ask your accountant.
Proposals to improve the financial reporting of leases
The IASB and the FASB (respective International and US accounting standard setters) have recently published proposals
(see here) to change the way leases are reporting in financial statements, i.e. the income statement and balance sheet. A lease is a contract for the use of an asset, and in accounting terms a lease can be either an operating lease or a finance lease. Without going into detail, a finance lease is capitalised in the balance sheet, meaning the asset subject to the lease is included as a business asset, with a corresponding liability for the amount owed to the lease company or bank. An operating lease on the other hand does not appear on the balance sheet, with any lease payments going through the income statement as an expense. The new proposals are suggesting that all leases must be accounted for as assets of a business, with a liability shown for the amounts owed on the lease. The argument from the standard setters is that a balance would show the true future liabilities of the business. How would this affect a business? Well, it might not affect the business at all if it had no operating leases, but some firms use operating leases quite a lot. If these leases suddenly were capitalised to the balance sheet, an immediate increase in long-term debt occurs. This might put businesses beyond the capacity to raise more debt. Airlines typically lease aircraft, which are normally treated as an operating lease. For example, Aer Lingus (an Irish airline) has about a €50m operating lease charge on their balance sheet annually. Let’s assume this is a 10 year lease, so if this were to be capitalised to the balance sheet, an increase in debt of €500m happens overnight. On a smaller scale, many retailers in capital cities might have expensive 21 year leases on prime retailer sites. Putting these leases on the balance sheet might cripple the borrowing capacity of smaller companies. It looks like a debate on this proposal will be quite heated.
Spreadsheet skills: waterfall charts
The Chartered Institute of Management Accountants (CIMA) publishes a regular e-zine called Insight. One of their regular postings is Microsoft Excel tips for accountants and finance specialists. This posting (Spreadsheet skills: waterfall charts)shows how to produce a graph in Excel which shows the variation in a variables (e.g. sales, profit, output) from one period to another. Click on the link to get a full walk-through example
The right accountant for my business?
I’ll a bit lazy today, so here’s a useful recent blog post from smallbusinesscan.com The right accountant for my business?. It’s a good check-list if you’ve just started out in business.
Tax avoidance, tax evasion. What’s the difference?
Okay, so none of us as either individuals or businesses like to pay taxes. But, without taxes a huge amount of what economists call ‘public goods’ probably wouldn’t happen. Can you imagine no public transport, health and so on! In the press you’ll often read about tax avoidance schemes operated by large businesses or wealthy individuals, and also about tax evasion? But what’s the difference.
Tax avoidance means using legitimate means to reduce tax payable. While we might think this is limited to big firms and the rich, we all can (and do) engage in tax avoidance at some point in our lives. For example, in Ireland, I can buy a low emissions diesel car which avoids tax in two ways 1) on the registration tax is low as it’s based on CO2 emissions, and 2) by paying less fuel duty each time I visit a service station. Or I could by something online from another country in the EU because it’s cheaper – in this case the VAT in Ireland is avoided. In businesses, large companies often organise themselves so that as much profits as possible are attributed to a low tax country. So tax avoidance is a conscious choice, within the law, to reduce tax payable by an individual or business. Tax evasion is a little different in that a person or business purposely conceals income or profits so as to not pay taxes. The easiest example of tax evasion is what is commonly known as the ‘black economy’. A recent article in the Irish Independent quoted research which estimated undeclared black economy activity in Ireland at 14% of GDP, which translates to around €1billion in VAT. The same research estimates black economic activity in Europe at €2trillion. Without doubt, any black economy activity adds to a countries woes in recessionary times.
What exactly is a Social Entrepreneur?
There term ‘social entrepreneur’ has come into my radar in several places lately. My curiosity got the better of me, but I’m not going to write about it as here’s a well written explanation from an NY Times Blog: What Exactly Is a Social Entrepreneur? – You’re the Boss Blog – NYTimes.com.
10 Ways to Finance Your Business
Here’s a nice article from inc.com on way to finance your business 10 Ways to Finance Your Business. Yes, it’s aimed at a US audience but is good summary for any start-up. Item 3 refers to getting money back from you taxes as an employee. This is also possible in Ireland (see here) under the Seed Capital Scheme. Not all options may be relevant to you, but it’s worth a read.
Accounting for long term contracts
Construction type companies are subject to a special accounting standard called IAS 11 (see http://www.ifrs.org). This standard specifies how construction companies deal with revenues and costs associated with contracts in their published accounts. What’s the problem you might ask? Why a special standard? The problem is that construction or similar contracts often span multiple accounting periods. If too much revenue is recorded early, profits might be inflated incorrectly. And, if costs are recorded too early, profits might look much lower than they should be. So, IAS 11 says what is allowed and not allowed. In a nutshell, losses must be included in accounts immediately; profits should be reported only when certain and in proportion to the completion of a contract. A recent news article in the Telegraph highlights one UK company (Connaught Group) that may be incorrectly applying the standard – you can read it here – to long term social housing maintenance contracts.
In fact, IAS 11 applies two basic accounting concepts. First is applies the prudence concept, as losses are to be recognised straight away and profits only when reliable estimates are possible. It also applies the accruals concept, which means that revenues and costs should be matched against each other as evenly as possible over time.
Accounting for sustainability – practical insights
I read this article in the CIMA insight ezine recently. It reports 0n an initiative called Prince of Wales’ Accounting for Sustainability Project (A4S). The project has been developing practical tools and guidance to help ensure that organisations meet sustainability challenges. A recent publication shows how eight UK private and public sector organisations have applied the guidance developed by A4S. According to the author some common themes emerge; sustainability must be a strategic objective; executive commitment is vital; effective bottom up approaches are needed to capture insights from employees across the organisation. Click the link to read more.
The ‘forgotten’ part of performance management
I recently read an article in The Economist online http://bit.ly/aiSE5K about assessing the performance of fund managers. I found the article quite interesting, as we all know how people in the financial sector have been (and still are) rewarded based on their performance. And, what bank or fund has really performed in recent times?
The article mentions an idea called the ‘inertia benchmark’ – this the performance which would have been achieved if a fund manager did absolutely nothing. This measure could then be compared with the actual performance of the fund to assess if the actions of a fund manager actually yielded better results. This idea made me think do business owners and managers ‘forget’ the meaning of improved performance? As accountants we can create plans, monitor actions and report on performance against plans. And we know too how important it is to use the right performance indicators. In larger companies and many SMEs, reward systems are often linked performance ( banks and funds are a good example), and performance is often measured in terms of profit – again something accountants are good at measuring. So understanding, or more precisely, defining, the meaning of performance can have a big effect on rewards and the information needed to assess it. I wonder how many managers ask themselves what would have happened if the course of action taken was actually to do nothing. Yes, this would be tricky and identifying an inertia benchmark would be considerably more difficult than with a fund. But it might be good to consider such ideas when performance and reward systems are closely linked.
Tips to reduce debt
I found this (http://bit.ly/bTJVbf) feature in the CPA Ireland student e-zine. It gives some useful tips to help reduce personal debt. Sole traders might find it useful too.
Top 10 Book-keeping mistakes made by small business
Still on holidays, so a shorter piece again. I found this post on all allbusiness.com. It is US orientated, but you’ll be able to change VAT for sales tax and dollars for euro/pounds. The post gives some good tips, whether you’re looking after your own book-keeping or getting someone to do it for you.
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