Mafia Buzz Issue 3
January 2000 (10 Minutes)
Accountancy
The IASC has published an issues paper on insurance which proposes that insurance companies move away from the matching/deferred model to the asset/liability model using fair value accounting.
The chairman of the Small Practitioners Association in the UK says: “It is widely accepted that the statutory audit has no practical or beneficial role to play for the vast majority of small private owner-managed companies.”
The UK’s FRSSE (accounting standards for small companies) has materially watered down the recognition, measurement and disclosure requirements of the statement on provisions.
The leasing industry is in turmoil because of proposals to capitalise all leases in the UK.
KPMG has prepared a report that shows that over 50% of cross-border mergers are failures: only 17% increase shareholder value. (This is scary when one considers how many RSA companies are going global.)
The Sri Lanka representative on the IASC said: “Sometimes shareholders complain that the complexity of accounting standards is a conspiracy by the accounting profession to make financial reporting more complex so as to rip money off the companies – to jack up audit fees.” (How often have I not heard this comment in my travels around RSA!)
In Sri Lanka if you deliberately do not comply with standards with the intention of deceiving shareholders they send the directors to jail!
On pages 54 and 55 there is a rambling article on time management. Some of the points that are made are:
• Give the right level of attention to the right tasks for the right amount of time.
• Start with the task you most want to do.
• Start right away – plan, visualise outcome and get going.
• Reduce large jobs into small bits.
• If there will be no payback, drop the task.
• Prepare the next day’s do-list the night before.
• Delegate as much as you can.
• Train your staff on how you want the jobs done.
• Remember that the urgent always drives out the important.
• Have a personal blueprint – know where you are headed.
• Plan to work during your quality time – morning or night person?
• If your staff do not produce the goods, fire them.
• Allocate jobs to those who have the competency to do them.
• Use e-mail rather than post.
• Work to achieve objectives – avoid wasted energy.
France has decided to allow the amortisation of goodwill as a deduction for tax purposes.
Terry Harding of PwC explains that the statement on financial instruments will result in major profit volatility. The only solution to this problem will be full explanations to the users of the financial statements.
Tim Sweeney of the British Bankers’ association sets out the argument why banker’s are not happy with the IASC’s insistence that fair value accounting for financial instruments is the only answer. He explains that historical accounting more fairly spreads the profits over the periods of a transaction. (These poor bankers do not realise that profit is irrelevant under "new-GAAP” – all that matters is that the balance sheet shows the “correct” amounts.)
Ron Paterson (I really enjoy this man’s ideas) attacks the UK’s suggested solution to the problem of accounting for pension fund actuarial gains and losses. The IASC statement (AC 116) accounts for the estimated (smoothed) income from the pension fund assets and the current cost of the post-employee benefits in the income statement. Differences between expected and actual is called an actuarial gain or loss and is smoothed over a future period (if outside the “corridor”). The UK does not agree with the smoothing of the actuarial gains or losses so has proposed that they be dealt with in the STRGL account in full in the year they arise. (Ron is having fun because he is a proponent of the matching concept. He is saying: “ How can you use fair value accounting in the balance sheet and then use matching in the income statement?)
If you are looking for some further reading on financial instruments (if you have read the statement five times or more), there is an article on pages 86 to 88 that is worth reading.
Accountancy SA
This journal featured fraud and corruption. (A losing battle?)
Straight talking dealt with questionable opinions given by some auditors.
On page 33 there was an interesting criticism of SAICA’s financial statements. I agree with the writer that the depreciation of a revaluation is not an expense, despite AC 123’s allowed alternative.
Techtalk
SAICA undertook to consult with interested parties before issuing circular 8/99. (One wonders whether small practitioners were consulted? No one seems to have heard about this circular until I informed them.)
Revised listing requirements for share buy-backs were published by the JSE (jse.co.za) and auditors may now accept engagements in this regard.
The IASC is in the process of restructuring. Twelve of the nineteen trustees will come from North America and Europe.
The IASC has commenced projects on discounting and extractive industries.
The IASC is in favour of fair value accounting all financial assets and financial liabilities with the changes going through the income statement.
The G4+1 has recommended that joint ventures should be equity accounted and not proportionately consolidated.
February 2000 (10 Minutes)
Accountancy “International”
SEC has announced that it will be working with criminal prosecutors to put corporate fraudsters behind bars. (Will the JSE/FSB please take note?)
Stuart Burns has given some sound advice on the rights of minority shareholders in private companies on pages 44 and 45. (My advice is: “Do not become one!”)
New Zealand gives the argument in support of not providing for dividends proposed or declared after the balance sheet date: they say that at the balance sheet date there is no present obligation because the enterprise has the discretion rather than an unavoidable commitment to pay the dividend at that date.
SEC has published guidance for the recognition of revenue. It states that revenue should only be recognised when all the following apply:
• There is persuasive evidence of an arrangement
• Delivery has occurred or services have been rendered
• The price is fixed or determinable
• Collectibility is reasonably assured
This is in line with AC 111 expect that the above four criteria are tougher.
The UK’s ASB is in the process of developing a new statement of accounting principles and is taking a hammering from the old timers. (Time for the IASC to re-look at its framework?)
On page 76 there is an article on the review panel in the UK. We do not have such a body in RSA, but desperately need it. Some conclusions reached in the article are:
• The class of auditing firm is an important factor affecting the quality of the financial statements.
• Creative accounting is motivated by pressure to meet performance targets to avoid criticism that follows poor results.
• Even well governed auditing firms can succumb to pressure for creative accounting.
• The review panel prefers to avoid confrontation with the large auditing firms because of the increased risk of loosing the case (sies!).
A suggestion that website costs should be regarded as software development costs is made by PwC.
Pages 85 and 86 contain some thoughts on IAS 39 (AC 133):
• Problems with recycling profits on financial instrument is discussed.
• Securitisation schemes will often be derecognised under this statement but will probably be caught by AC 412.
• Explanations will have to be given by directors for the volatility in profits created by this statement.
• Embedded derivatives are hidden traps, e.g. is there an embedded derivative in a foreign purchase order?
• Treasury departments will now have to worry about the accounting implications of their hedging decisions.
• The taxation implications are a minefield for which we have no navigational equipment.
The UK’s Financial Reporting Standard for Smaller Entities (FRSSE), effective March 2000 is published in full on pages 89 to 110: 22 pages of GAAP for small companies compared to 400 pages in RSA
Accountancy SA
This issue was devoted to franchising and enterpeneurs.
My article looked at the new concept of deferred tax, i.e. a setting aside of the future tax consequences of realising the economic benefits in the assets or settling the obligations of the enterprise.
Executalk
A plea is issued by Ken Mockler for members to get more involved in their Institute.
Ken draws the attention of members to circular 8/99.
Techtalk
The IASC Board has appointed the nominating committee which will select the trustees who will appoint the new Board who will appoint the standard setters.
The mission of the new IASC will be to “facilitate convergence of accounting standards to a single set of high-quality global accounting standards”. (Will not be achieved in my lifetime!)
The IASC passed the statement on investment property, SIC17 and SIC18.
The IASC has published an issues paper on insurance (short and long term).
The G4+1 group of standard setters has proposed that all leases be capitalised. The ASB in the UK is in general agreement with the proposals.
The IASC has published a study of business reporting on the Internet (.uk). (This is an essential development necessary to save the trees of the world.)
If you do not comply with section 140A(3) of the Companies Act (declaration of nominee shareholders) you are liable to a fine and two years in prison! Your AFS should publish all beneficial interests of 5% or more in a company (listed and unlisted companies).
Attention is drawn to SAAS 930, engagements to compile financial information. Good idea to go and re-read this before doing you next compilation.
March 2000 (10 Minutes)
Accountancy “International”
SEC says that it is possible that the Big Five in the US could be forced to separate audit practices from consultancy services.
The US Senate committee is to investigate FASB’s move to ban the pooling method of business combinations. Senator Phil Gramm is of the opinion that the pooling method has its advantages. (Page 6)
Volkswagen has gone the IASC route for financial reporting. (Page 6)
FASB’s Emerging Issues Task Force has ruled that revenue from barter advertisements can be recognised at fair value only if the company has a history (within the past six months) of receiving cash for similar advertising transactions. This is to stop overstating revenue by fictitious barter transactions being recorded. (Page 8)
UK’s ASB has recommended in a discussion paper that a simpler version of the full financial statements of a company be made available to private shareholders. (Page 10)
The issues paper on insurance is discussed:
• It starts from basic principles instead of looking to see what is done at present.
• It focuses on insurance contracts rather than on insurance enterprises.
• It had to decide whether to go the historical or the value model. It chose to go fair value.
• It has to choose between the asset/liability approach or the deferral and matching approach. Because IAS’s are based on the asset/liability approach, it took this route. (Page 78/79)
The ASB’s statement of principles for financial reporting is set out on pages 93 to 122. (A brilliant document!)
Accountancy SA
This journal is devoted to taxation matters.
An article on deferred tax and long-term insurers is set out on pages 16 to 19.
Karin Barac did an empirical study which concluded that there is a role for the small company audit in RSA subject to there being a more lenient GAAP regime for small companies.
My article is a tame look at circular 8/99. (Pages 35 and 36)
Fortune (20 March 2000)
On pages 66 to 70 an article called “Presto Chango! Sales are Huge!” details how dot-com companies overstate their revenues. They do this because analysts use revenues as the basis for valuation. Examples are:
• Showing the gross amount as revenue when the enterprise only earns a commission thereon, e.g. gross ticket sales in a travel agency
• Including barter transactions, often overvalued, in revenue
• Treating cash and trade discounts as expenses instead of deductions from revenue
• Treating losses on sales as “loss leaders”, i.e. adding the loss to the revenue and calling the loss marketing expenditure
• Treating sales rebates as expenses
• Calling operating costs marketing costs to give the impression that they are really investments in the future
• Recognising service revenue at the beginning of the contract instead of spreading it over the period the service is given
Maneo
Jillian Bailey gives an analysis of the results of practice reviews carried out. If you are a candidate for a practice review, study her article to identify what they are looking for.
Techtalk
The following statement is made: “The circular (8/99) has far-reaching implication for financial reporting in South Africa and should be adhered to with immediate effect.” One wonders whether SAICA is in touch with reality. There are over 270 000 companies (330 000 CC’s) in RSA. A small practitioner estimated that it would take 30 hours per company to convert to IASC GAAP. At R300 per hour this comes to R2,4 billion. What are the benefits? Can they possibly outweigh the cost? The clients will most certainly not pay for this. The profession will end up paying the price in ulcers and other stress related problems.
A summary of the new investment property statement is given.
April 2000 (10 Minutes)
Accountancy “International”
The IASC has approved its new constitution. It will become a new legal entity. A board of trustees will raise funds and choose full-time technical experts to serve on a standard setting board, a standing interpretations committee and advisory council. (Page 10)
SEC has said that it will not endorse IASC standards without the creation of a global stock market regulator. It will not allow foreign companies to list in the US using IASC standards until it can be sure that the standards are properly enforced. (Page 10)
Joan Brown, an ASB project director, discusses the view that companies should prepare some form of summarised financial statements for shareholders who do not request the full set. She also discusses the use of the Internet for communicating a company’s results to its shareholders. (Page 110)
The G4+1 has produced a report on “non-reciprocal transfers”, i.e. transfers such as gifts, donations, government grants and taxes that may or may not have stipulations attached. It recommends:
• If the recipient obtains control of the asset, the asset and revenue is recognised in full, i.e. revenue is not deferred.
• If the transfer is subject to a stipulation, this does not create a liability and the revenue is still recognised in full.
• If there is a condition attached, treat it as a liability, which is transferred to revenue when met. Alternatively, treat it as revenue, which is transferred to an expense if not met.
• In the case of a go-between, such as a charitable organisation, if control of the asset is acquired by such organisation, it should be recognised as an asset.
• If the go-between can redirect the asset to a party other than the specified beneficiary, the credit should be treated as revenue. If not, the credit is a liability. (Page 112)
An operating and financial review is not compulsory under AC 101 (see CDB, page 2 of 13 pages, left hand column, under point 5). IOSCO has given guidance in its cross-border listing standards as to what it would like to see, e.g. impact of inflation, changes in sales due to prices and volume, changes in sales due to net products or services, etc. etc. etc. (Page 118)
Ron Patterson has a go at the recommendation made by the G4+1 on non-reciprocal transfers. He states that it is another nail in the coffin of the matching concept (Ronnie and I seem to be soul mates!) (Page 120)
David Cairns gives an interesting comparison between UK GAAP and IASC GAAP. For example, the UK:
• Does not require development costs to be capitalised
• Still uses the partial basis of deferred tax
• Requires the net cash investment method for accounting for leases in the accounts of lessors
• Proposes that actuarial gains and losses be accounted for immediately through their STRGL and not amortised over the lives of the members
The UK has published guidance on conflicts of interest and confidentiality following the Prince Jefri case against KPMG. (Page 164).
The UK has published guidance on receiving confidential information by auditors in the interests of encouraging accurate, timely and honest information being received by auditors during the course of their audit, e.g. from the staff of the client (Pages 165 to 166).
Accountancy SA
Companies now have to publish the names and holdings of all beneficial owners of 5% or more of the shares of a company in the financial statements.
Monica Singer gives the facts about STRATE (see pages 4 and 5).
This journal is devoted to e-business. If you are into e, read it.
My article this month was on AC125.
Circular 1/2000: Monitored Compulsory CPE
This circular requires all members and associates to sign an annual declaration, which will be incorporated in the annual subscription invoice. The year 2000 declaration for active members reads:
“ I declare that I am aware of the need for continuing professional education, i.e. the ongoing involvement in learning activities that are relevant to my work or career path. I also confirm that I am aware that all information pertaining to CPE is available on SAICA’s web site or upon request from the CPE department.”
The circular recommends that you keep a record of your CPE activities so that you can provide details should SAICA have to investigate a complaint against you.
Techtalk
Guidance is given on the thorny issue of set-off of cash at bank and bank overdrafts (see page 2). The legal right of set-off must be in respect of both the bank and the enterprise and the cash must go to reduce the overdraft for set-off to be applicable.
May 2000 (10 Minutes)
Accountancy “International”
Trade and Industry Secretary in the UK has announced that the threshold will increase from a turnover of £350 000 to £1 000 000 for an audit. It is expected that this will again increase to £4 800 000 in the near future. Companies with turnovers of between £1 million and £4,8 million may require a lesser form of audit assurance to be given (on pages 148 and 149 the independent professional review form of assurance is discussed in some detail). (Page 7)
Because of the SEC’s investigations into the lack of audit independence, the ICAFW has appointed a task force to look into the problem in the UK. (Page 9)
A survey carried out by KPMG has found that 70% of Europe’s chief financial officers prefer IASs to US accounting standards as they are cheaper to implement. 29% of the respondents are contemplating converting to US standards. (Page 12)
Professional bodies around the world are considering a new international academic qualification to meet the big auditing firms’ demands. It will not only focus on accounting and finance but will be broader in scope.
Accounting firms in the UK will now be able to call themselves chartered accountants if 50% or more of the firm is owned by CAs. (Pages 17 and 21)
The world is looking to the US to provide guidance on setting standards to attack the tricks being used by the IT companies to boost revenues. Some of the tricks are:
• Treating trade discounts as marketing expenses and not as deductions from revenue
• Treating refunds of services that are unable to be rendered as expenses, i.e. leave the amounts in revenue
• Taking the full revenue on a service to be provided in the future as revenue immediately
• Taking the full revenue in a situation where the company only acts as agent in respect of the deal
• Treating barter transactions for advertising deals as revenue
SEC has issued a bulletin stating that revenue should only be recognised when four conditions are met:
• Persuasive evidence that an arrangement exists
• Delivery has occurred or services have been rendered
• The seller’s price is fixed or determinable
• Collectibility
Note: In many cases in RSA revenue is recognised only when the first criterion above is met. (Page 21)
A warning is issued about “ramping”, i.e. pushing a share on the Internet for the purpose of off-loading stock onto the unsuspecting public before the share crashes. Haven’t we seen lots of this in RSA in the recent past? Remember the old adage: “If it is too good to be true it usually isn’t”. Greed can be the cause of your financial demise, so beware. (Pages 40 and 41)
On page 94 there is an excellent article on how the auditors of Barings Bank missed the £50 million fraud committed by Nick Leeson. Every auditor should read his book “Rouge Trader”. This article tells of the request by the auditors for evidence of an asset of £50 million. They accepted a document faxed from NL’s home (details of the source of the fax were on the fax itself) to support this enormous amount. There are three possible psychological reasons for this oversight:
• Expectations play a crucial role in determining what we see – we see but do not observe
• When faced with an outlandish event, one rationalises that it cannot be untrue
• Once an explanation takes hold, one rarely revises it in the light of further developments
Watch out for these traps!
Sir Brian Carlsberg stated that the IASC should take the needs of developing countries into account and is urging the new IASC to do just that. (Page 116)
Karel von Hulle of Germany says that politicians brag that they have adopted IASC standards in their country but do not know what these standards are about! (Sound familiar?) (Page 116)
On page 44 there is a good article about furthering one’s education by going the Chartered Financial Analysts (CFA) route.
Ron Patterson likens the penalties one has to pay for contravening one of the criteria for treating a bond as a held-to-maturity financial instrument as being sent to the sin bin in a rugby match! (Page 126)
The Board of the IASC is tentatively pursuing the measurement of biological assets in the agricultural at fair value and is busy doing field testing on this concept. (Page 128)
The chairman of FASB is determined to eliminate the pooling method of accounting for business combinations. (Page 128)
Accountancy SA (Retirement Planning)
The article on pages 12 and 13 sets out the following steps when setting a personal plan:
• Gather information about your financial position
• Analyse your current position
• Identify your financial goals
• Develop a financial plan to achieve your goals
• Implement your plan
• Monitor your performance
Note that my course on finance next year will improve on this and fill in the details.
The article on pages 15 and 17 gives some ideas on making the most of retirement, e.g. keep mentally and physically active, make financial plans, invest in your marriage and friendships, plan your location, etc.
My article is on deceit and AC105.
Executalk
The new executive president of SAICA sets out his priorities. I find it strange that “Provide the best possible service to SAICA’s members” is not one of them. One of the big complaints of members is that they do not see any benefit from the fees that they pay.
Techtalk
The IASC feels that biological assets and agricultural produce should be measured at fair value. This is a major change from the ED which only used fair value for biological assets.
The IASC agreed that the steering committee on business combinations should continue to look into the uniting of interests method.
The scrapping of current hedge accounting practices was discussed by the IASC. There is no consensus on this at present.
Potential changes to AC116 were discussed by the IASC. Let’s see what happens.
June 2000 (10 Minutes)
Accountancy “International”
IOSCO has recommended to its members that IASC standards be used for cross border listings. This is a major breakthrough! (Page 7)
SEC is looking into issues of auditor independence to ensure that auditors are perceived by investors to be credible and objective. (Page 8) See also page 18 where details of how the profession is reorganising itself to improve its image (splitting the consulting and auditing arms).
“Policy makers need to show a better understanding of the role of the owner-manager of a small company in order to make clearer regulations. Government departments responsible for regulations should compensate small companies for costs incurred.” Wow – should we invoice the APB for the R2 billion cost of converting small companies to international GAAP in RSA?
A recently published report questions the move from the “audit risk approach” to the “business risk approach” used by some large auditing firms. Concerns expressed are a widening of the expectation gap, additional audit costs and relevance of existing auditing standards. (Page 12)
Arthur Andersen has found that the average annual report has increased by 27% in four years. (Page 14)
A survey by Ernst and Young has found that management is failing to manage the risk of fraud and not learning from their mistakes. Fraud by employees is the highest risk, especially long-serving ones. (Page 15)
The director of the British Bankers’ Association writes that Paul Pacter’s suggestion that bankers are coming around to the view that fair value accounting for all financial instruments will become the norm is not true. He refers to “Accounting for Financial Instruments for Banks” which can be found at ww..uk which details reasons why the banking industry believes that historical cost provides the optimal basis for reporting the performance of the banking book.
David Davies’ book “Fraud Watch” is reviewed. He identifies three broad themes for fraud:
• Pressures, e.g. to meet financial commitments, to reach targets, to keep one’s job
• Escalation, e.g. covering up a small error which then gets out of hand (Barings Bank)
• Disasters waiting to happen, e.g. unhealthy culture, poor management, inadequate controls (Page 72)
Despite the audit exception levels in the UK, many companies still have an audit done voluntarily. The article sets out the advantages of having an audit, e.g. assurance for directors and shareholders, credibility of financial statements for lenders, some insurance against fraud. The article adds to this list “advice” which is, with respect, not an audit function! (Page 76)
Rodger Hughes feels that auditors can add value by providing feedback to audit clients to improve their business but are being restricted by regulators from doing so (see SEC’s concerns regarding auditor independence). (Page 80)
IFAC’s exposure draft on fraud and error calls for auditors to obtain knowledge of management’s understanding of the accounting and internal control systems in place to prevent and detect fraud and error and to take these into account when designing substantive procedures. (Page 97)
Friendly Hotels in the UK has reversed all its post-opening costs out of its properties – see the statement on intangible assets. (Page 98)
If the G4+1 statement on leases becomes GAAP, it will have a major impact on the balance sheets (capitalising assets and liabilities) and income statements (accounting for interest (high in early years and reducing in later years) and depreciation) in the income statements of tenants who have long leases. (Page 104)
Ron Paterson looks at the proposal to send a shortened version of financial statements to shareholders unless they request a full version. He feels that the point is being missed. Why all the disclosure requirements if shareholders do not need them? (On the ball as usual Ron!) (Page 107)
Accountancy SA
Erna Swart looks at how US companies manipulate revenue to try to boost their share values. She lists the five criteria in AC111 that have to be met before revenue can be recognised and gives some guidelines on how we can put a stop to these unethical practices. (Page 1)
My article looks at the perceived consequences of circular 8/99. (Pages 23 and 25)
Prof Arnold Joubert comments on deferred tax: feels that accounting (historical) and finance do not mix well. He uses as an example capitalising interest and talks about providing for bad debts and renewals. (Note that one cannot provide for renewals under the new statement on provisions.) Not sure what he is trying to convey! (Page 32)
Joel Wolpert does not like the new AC107, i.e. he feels that a dividend declared after the year end should be matched against the profits of the year in which they were earned. (Hey Joel my mate: you have missed the first rule of GAAP: it is not necessarily logical – it is based on a framework that excludes matching as a fundamental underlying concept.)
Fortune June, 12
A new valuation concept is out there: You form a company, give it a fancy name and leave it dormant. This company has tremendous potential – just think what it could do! You then use option pricing valuation models to value all the options available to the company in order to value it!
Maneo
You are invited to visit the PAAB’s new web-site at paab.co.za.
You are also invited to give the strategy task group ideas on what the five major goals should be for the proposed Regulatory Board for Auditors.
A practitioner was fined R3 000 for errors in statements prepared for a close corporation and four practitioners were fined R15 000 each suspended for three years as a result of matters arising out of practice reviews. A member was found guilty of acting dishonestly and has been permanently disqualified from registration. Another member has been suspended for three years for not documenting evidence to support an audit opinion and for not responding to communications from the PAAB. Getting tough hey? Good!
If you are a practitioner, go to page 7 where the answers to what you always wanted to know about practice reviews but were too afraid to ask are given.
Techtalk
A brief summary is given of the ED on fraud and error published by IFAC – see above.
IASC has published 76 examples on the statement on financial instruments (.uk) and is calling for commentary thereon.
The Master of the High Court has advised that, to cut costs, no calls will be answered. (So much for service delivery by Government!)
July 2000 (12 Minutes)
Accountancy “International”
Companies will gradually converge on IASs as the basis for their financial reporting, the prize being a more efficient global capital market with better and more consistent information for investors and more opportunities for companies to raise capital in the market most appropriate for them. (Page 1)
The European Commission has announced that EU companies will have to use IASs to list on EU stock markets with effect from 2005 so as to give companies five years to alter their accounting practices. (In RSA we did this with immediate effect!). The EU will "intervene" when IASs contain material deficiencies and need to cater for EU problems. (So now we will be getting an EU IAS set of standards?) (Page 7)
The big five auditing firms have had a go at the UK's ASB for its ED on banning the amortisation method of depreciation as this method meets the concept of depreciation in their statement. (Page 19)
The Bank of England has come out in support of the full market value approach of accounting for financial instruments. (Page 22)
Government departments in the UK are not prepared for next year's planned transition from cash based appropriation accounting to accrual accounting. (And they expect RSA government departments to just change over with immediate effect?) (Page 23)
Nigel Turnbull, chairman of the Business Focus in the UK, says that apart from the value of his qualification, he has failed to benefit from being a member of the UK institute. (Page 24)
UK standard setters believe that there are two major defects in IASs: they need a statement on substance over form and they allow provisions that do not meet the definition of liabilities to be taken into account in calculating goodwill. (Only two?) (Page 30)
Page 43 contains an article on benchmarking, i.e. looking at what your competitors and others in the industry do to improve your performance.
Page 45 deals with how far one should go in obtaining information about one's competitor when making informed strategic decisions. (Spying!)
Pages 50 and 51 deal with the red tape trauma faced by small business (10 000 of them are set up each week in the UK!). There are about 2,3 million sole traders in the UK who cannot cope with the pressures of trying to do business. (Sound familiar?)
In this day and age, investors do not seem to be satisfied with dull long-term strategy that creates growing income streams across the next 15 years: finance directors score points for how much fashionable spin they can communicate. (Page 53)
The Turnbull report has firmly placed responsibility for the internal control systems that facilitate the effective and efficient operation by enabling the company to respond appropriately to business, operational, financial, compliance and other risks firmly with the Board of directors. The decision about how much to invest in protecting the company's network is, therefore, in the hands of the directors. (Page 58)
Decisions by directors to continually reconstruct operations can destroy value and staff moral - see more on page 63.
The Brooks Service Group in the UK has now provided for all future rentals on vacant property by discounting the cash flows at government bond rates (note excluding risk!). (Page 100)
Benford's law, which is used to detect fraud and error, predicts the frequency in which digits occur in certain naturally-occurring numbers, i.e. the probability of d appearing as the first significant digit in a number is log10 (1 +1/d), e.g. for 2 it would be log10 (1 + 1/2) = 17,609%. For 3 it is 12,494%. If the numbers in a population do not fit this law, they are probably contrived. (Page 126)
There is an excellent article on page 128 on how auditors miss simple frauds. In many cases common sense procedures would have picked up the frauds, e.g. checking the integral consistency of one accounting record with another, picking up the telephone and confirming a statement made, performing substantive tests, performing risk analyses, etc.
In 1900 the following advice was given to potential chartered accountants: Have a goal, go for it, be a master of detail, know more than you are expected to know, obstacles are there to be overcome, failures are stepping stones to success, be bold but prudent, make use of others' brains, listen, keep your mind and body in shape. Updating these attributes: Be critical (even at the risk of becoming disagreeable), operate within the limits of truth, honesty and decency and reach for the highest ideals. However, the rule today seems to be: go out there and make a fortune, any which way, as fast as possible. (Page 134)
UITF Abstract 24 states that start-up costs may not be carried forward as a prepayment or a deferred asset, and, to the extent that it is not included in the cost of property, plant and equipment, should be expensed. (Page 140)
An exposure draft is proposing that the time value of money amortisation method for depreciation be banned, other than in the case of an asset leased by a lessor under an operating lease, if certain conditions apply. (Page 142)
Accountancy SA
Johann Breedt and Stephen Temple discuss how AC133 treats credit derivative transactions. You will probably never come across the sort of credit derivative, i.e. a total return swap or a credit spread option, unless you are running a large bond portfolio for a financial institution so give this article a skip. Note that a normal credit guarantee is not a derivative and is, therefore, not measured and recognised. (Pages 5/9)
Brian Norton's article tells us that absorption costing and ABC should not be used when making business decisions when there is a constraint present: in this situation one should use linear programming tools using marginal costing. (Pages 11 to 13)
Doug Brooking mentions that we are well on the road to legal backing for our standards. One wonders why this is still a priority now that the JSE is enforcing statements of GAAP. (Page 17)
James Luke observes that it appears as if historical cost accounting is disappearing. (Page 23)
Colin Bullen deals with post-retirement medical benefits. He is of the opinion that this will have a huge impact on the financial statements of companies that have not yet address this problem. (Page 25)
Dave Garbutt says that the benefit of complying with Statements of GAAP is the reduction of the cost of capital, be it from investors, financial institutions or suppliers of goods and services. (I have been in business for over 30 years and have never been asked by a supplier to present my financial statements for the purpose of raising credit, I do not have a listing on the JSE and I do not need to raise capital, so what benefit do I derive for complying with Statements of GAAP?) (Page 29)
Henk Heymans makes the point I made above, i.e. the vast majority of business enterprises do not prepare their financial statements for general use so Statements of GAAP are not relevant to them. His article draws your attention to the work being done on differential reporting. (Just by the way, the idea behind our DP16 is not a first in the world: we got it from the Canadian draft on their differential reporting.) (Page 31)
My article covers GAAP problems in practice and introduces "Dan the Stationary Man". (Page 41)
Fortune, June 26
Research by J.P. Morgan suggests that the world is set to announce a $245 billion trade deficit with ourselves! (Or are we dealing with Mars or Venus?) The blame is put on how various countries prepare statistics and the differences in accounting standards around the world, especially in countries such as Indonesia, Russia and China. (Page 36)
Cisco took four years to develop a real-time management accounting system. It now closes its books in a day with hard numbers and needs three days to report its earnings, which has had the effect of halving its cost of finance and allows managers to act faster in making business decisions. There are no longer any surprises, which reduces risk materially. (Page 126)
Fortune, July 10
The authors consider whether the use of the financial benchmark Ebitda (earnings before interest, tax, depreciation and amortisations) is getting out of hand. It is not the same as cash flow, it ignores that fact that capital expenditure is necessary to keep a business alive, it can make a company look cheaper than it really is, it can be used to manipulate the performance of a company and it is a "one size fits all" measure that can be a dangerous basis for lending a company money. (Pages 90 to 91)
Techtalk
IOSCO has recommended to its members that IASC standards be used for cross-border listings.
IASC is looking into whether to retain the uniting of interests method of business combinations.
Discussion paper 16 was advertised - given less space than the advert for the ED on "bank audits"!
The UAPC is bringing out exposure drafts on assurance engagements, bank audits, computer systems and auditing derivative financial instruments.
Circular 5/2000 was published, which states that disciplinary actions can be brought against members not complying with statements of GAAP.
SAAS 700 has been revised to illustrate audit reports where modifications must be made because of non-compliance with paragraph 5 of schedule 4.
Two exposure drafts have been issued on reporting in respect of prospectuses.
August 2000 (15 Minutes)
Accountancy “International”
The director general of the Institute of Directors in the UK asks whether it really is necessary to burden small businesses with unnecessary red tape. (He should see what small businesses have to put up with here in RSA!) (Page 1)
The ASBs Urgent Issues Task Force has issued a draft abstract on barter transactions for advertising. It proposes that revenue and costs may only be recognised if there is persuasive evidence of value, i.e. if the enterprise has a history of selling similar advertising for cash. This follows on from the recent US proposals. (We need to pick up on this in RSA.) (Page 4)
The big five are gearing up to fight SECs proposals to require auditing firms to split their audit functions from other services. (Page 7)
Sir David Tweedie has been appointed chairman of the new IASC committee. He brings with him a vast amount of knowledge of standard setting and lots of common sense. (Page 8)
PwC were sued for making defamatory statements in its letter of resignation as auditor to a UK company which was filed with the registrar of companies. PwC won, with costs. (A big relief for the auditing profession!) (Page 9)
The deputy chairman of Barings Group is to face disciplinary action for failure to monitor, control and investigate the activities of Nick Leeson. (I got hold of the film from the video store the other day - not a good commercial film but fascinating and scary.) (Page 10)
Germany has cut the corporate tax rate from 40% to 25%. (Page 14)
Sir John Harvey-Jones, ex ICI, is of the opinion that financial directors should reduce their focus on controlling and apply controls only when needed. They should become more ambitious and start taking risks - become more creative. They should ask questions such as: "What is the unique thing that this company is bringing to the party? How will it increase market share?" (Page 51)
Julian Birkinshaw asks whether companies are learning from their past mistakes. Diversification was the rage in the 1960s and 1970s, restructuring and unbundling in the 1980s and focus in the 1990s. Large companies have understood the benefits of focus and are restructuring accordingly. However, they are now starting a new round of diversification! Conventional wisdom is that unless a very good argument can be made to the contrary, companies should be single industry plays. (Page 56)
The European Commission proposes that all LISTED companies apply IASC standards as from 2005, at the latest. Justification for this is given as reduction in the cost of capital. (Page 108)
The Joint Working Group on financial instruments is proposing full fair value accounting for all financial instruments. The banks do not like this for various reasons: Costly valuation exercises, subjectivity in making valuation assumptions, volatility, not in accordance with the way banks do business, etc. (Page 109)
Tony Wedgwood is concerned that we are giving up on fair presentation and in place will be following a cookbook rule approach, i.e. going the way of the USA. (Page 110)
Kimberly Crook, a project director at the ASB, discusses the G4+1 discussion paper on accounting for employee share options. See below for a listing of what is being proposed.
Ron Paterson is at his brilliant best again with his comments on the ASBs initiative to ban the amortisation method of depreciation. He states that discounting is part of the accounting philosophy and cannot understand why the ASB would try to ban it for depreciation. He gives examples of other areas where discounting is permitted, e.g. provisions and lessors finance leases. (He could have added to his list employee benefits and impairment of assets.) (Page 117)
Accountancy SA
Ian Barnett's article on catching crooks is an excellent summary of how to reduce the risk of white collar crime. He suggests that organisations adhere to the principles of good corporate governance, implement strong internal controls and integral audit function, insist on the highest business ethics, identify risk areas and train employees in the assessment and mitigation of fraud. He gives ideas on identifying risks and suggests swift and decisive action in response to the discovery of a crime. (Page 10)
The article on pages 14 and 15 states that the four fundamental principles of financial accounting are historical cost, matching, accrual and cost allocation. I really would like to know where these four come from - before I qualified?
The authors give ideas on how to implement a successful scorecard system. They state that the system fails when it tries to balance the interests of the various stakeholders. The enterprise needs a clear blueprint as to how it will achieve its financial goals. It then needs to develop measures for finance, business processes, customers and growth. The authors warn that many measures can be manipulated so it is essential to define the measures carefully. The objective should not be to achieve a high score but to achieve the prime strategic goal. (Page 17 and 19)
My article sets out a suggested strategy for taking personal responsibility for one's own CPE. See Liz King's answer to my points on page 40. I agree with her response.
John Oxley and Erna Swart missed the point on page 37! The journal entry for inventory costs of a service provider is not to debit the balance sheet and credit cash, etc. It is to debit cost of sales and to credit cash, etc. Revenue is then recognised on a stage of completion basis in terms of AC111.22, the journal entry being debit customers for work done and credit revenue. When invoicing one credits customers for work done and debits receivables.
Finance Week August 4
Some investment tips from Lucas de Lange: don't think you are good if you make money in a bull market, keep your ego out of the equation, beware of the herd mentality, do your homework, remember that by the time news reaches you it is already factored into the share price.
Africa Media Entertainment's (AMEs) share price has fallen from a high of 188 cents to 5 cents a share. Reasons given are buying too many businesses, overextending management, not focusing on core activities and over-extending itself financially.
Finance Week August 25
The JSE retail index is now at 30% below its record high of 11 700 in April 1998.
Deon Basson warns insider traders to beware - Rob Barrow and his team are serious about bringing cheats to book.
Frik Els points out the dangers of day trading: 75% of those who trade on-line lose money. (The only winners are those collecting brokerage! Don't do it.)
Fortune August 21
The business world seems consumed with an Internet-like paranoia of irrational exuberance in which CEOs "have to do" certain things that make logical sense, but no business sense. It is like a buzz theme they need to pursue, or else they are not a guy. (Page 10)
Many companies excuse their poor performance by labeling themselves part of the old economy, but the real reason is often the under-utilization of assets by inept, entrenched management. (Page 14)
soared from $4,50 to $31.25 on its opening day but now trades at $2,00. The buzz is that the go-go days of scoring quick wealth are over and management should now focus on building real companies. Listening to customers is more important than innovation. (Page 16)
An audit of Rite Aid found that it overstated earnings by $1,6 billion. (Page 17)
Some recommended investments in the US are Broudcom (P/E of 255!), Genetech (P/E of 128!!) and Univision (P/E of 122!!). Scary stuff. (Page 33)
Massive pressure is put on companies in the US to meet the expectations of analysts. The truth is that revenues and earnings rarely rise quarter after quarter forever. When expectations are not met equity prices fall, CEOs come under pressure and employee moral drops. (Page 84)
Techtalk
IFAC has published various public sector accounting statements.
The Information Technology Committee has published various papers (an IT executive checklist, guidelines for executives on managing IT aspects and the impact of electronic commerce on the accountancy profession).
Following on Arthur Levitt's campaign to force audit firms to split their consulting activities from their audit work, IFAC has proposed new rules on independence.
IASC has published three new EDs. ED66 proposes certain modifications to recognition of financial instruments, ED67 proposes a new definition for pension plan assets and E68 proposes that STC only be raised as a liability when a dividend is declared. (I lost this battle for now.)
The latest on agriculture is that it is now proposes that both biological assets and agricultural produce be measured at fair value.
Work is progressing on financial instruments - the move is towards full fair value accounting through the income statement and a ban on hedge accounting.
A second group of questions and answers on IAS 39 (AC133) has been published by IASC.
Notice is given that AC305 will be withdrawn when the new AC116 becomes effective.
September 2000 (15 Minutes)
Accountancy “International”
Opposition to SECs audit independence rules is increasing. The big five are opposing the move. (I heard on TV the other day that if Bush wins the election, Arthur Levitt will be out of his job.)
An interesting case in Hong Kong: a tax inspector sent a copy of a set of accounts anonymously in breach of confidence to the local accountant's society which then took disciplinary action against the auditors. The auditors tried to get out of the action by arguing that the evidence was not admissible. The court dismissed the argument, with costs leaving the society free to discipline the auditors. (Page 12)
There is little chance of the auditing firms outside the big five entering the big league. The strategy the smaller firms should follow is to focus on the quality of what they are doing rather ran trying to go for the big time. The age of the specialist service is upon us. (Page 18)
Brian Singleton-Green tries to point out that success in business is about making profit. He questions how a company such as Freeserve can be in the FTSE index before it has made a profit. He asks whether a turnover of 7 million with a loss of 6 million is the picture of success. He warns that we should not kid ourselves that there is a new set of criteria for measuring success - profit is still the key. (Top line vanity, bottom line sanity, cash flow reality.) (Page 26)
One of the letters to the editor states that the granting of options to employees should not be treated as a cost to the company but as a dilution in the EPS of the company. The author criticises the ASB for trying to discourage wealth creation and to spread confusion in the minds of the users of financial statements. (The fight is starting!) (Page 26)
Another author of a letter argues that an aircraft company has a present obligation to maintain its aircraft, which makes the provision for future maintenance costs a liability. (I have been down this path already so know the frustration of being wrong!) (Page 27)
Sarah Perrin argues that risk management should provide a new framework for business analysis and strategic decision-making. She argues that if a company could demonstrate that its risk management policies and procedures were making a real difference to its performance, analysts would rate the share price higher. (Page 48)
The article on page 63 is based on a book "The end of shareholder value" by Allan Kennedy makes for depressing reading. It all starts with academics pointing out that equity should be valued by discounting free cash flow. Management says: hey, I can increase shareholder value by improving cash flows so: sell off under-performing businesses, down-size, outsource, demand higher prices for our products/services, reduce quality standards, cut research and development expenditure, etc. Short term thinking pushes up short term cash flows but destroys long term values. The trick is for the insiders to get out while the price is right as they know that management has exchanged short term gains for long term disasters. (Another case of "Show me how I'm measured and I'll show you how I perform!")
The Department of Trade and Industry in the UK has announced plans to tackle the problem with serial abusers of insolvency rules, i.e. directors who move from one failed business to another leaving behind a trail of aggrieved creditors and, yet, continuing to enjoy a lavish personal lifestyle. At present it is too easy for fraudulent or recklessly negligent directors to walk away from one failed business after another. Some argue that this attack on the directors is an attack on limited liability. (Page 65)
John McQueen suggests that one way to avoid financial trouble is to control your debtor levels. (Stating the obvious? No, always a good reminder.) (Page 74)
Emile Woolf and Moira Hindson discuss the embarrassing problem of an auditor discovering a fraud which the firm did not pick up in the previous audit and then being asked by the client to perform an investigation, which information could be used against the auditor in an action by the client. Answer to the problem? Avoid this situation by improving the firm's quality controls, report any potential fraud as early as possible and, if the worst comes to the worst, try to settle out of court before costs mount up. (Page 95)
BTG gives its own version of its income statement in its financial review to show users how it manages its operations. (A great idea (methinks)). (Page 101)
Ron Paterson discusses the proposal to account for share based compensation. He does not agree with the UK version of this document (favours the G4+1) regarding the valuation of the financial instrument - the UK proposes only valuing options at their intrinsic value whereas the G4+1 includes the time value in the valuation. He also believes that the recognition date should be the date that the instrument comes into being, and not the vesting date. (Page 102)
David Cairns looks at some of the differences between US GAAP and IAS standards.
IAS treatments different to US GAAP:
• US does not have a fair presentation override
• US treats compound instruments as liabilities
• US uses fair value as the upper limit in impairment
• US does not allow reversal of impairment losses
• US requires all development costs to be expensed, other than software costs
IAS treatments permitted but not allowed by US GAAP:
• Retrospective adjustments for accounting policies are not allowed
• Revaluations of PPE are not allowed
• Capitalisation of forex losses arising after acquisition to PPE are not allowed
• Borrowing costs attributable to the acquisition, construction or production of qualifying assets must be capitalised
• The equity method of joint ventures must be used, i.e. not the proportionate consolidation method
Three new exposure drafts have been published by IASC. The important proposals are: (Page 109)
• That derecognition on a regular-way sale may be at trade date but the enterprise must choose trade date or settlement date for regular-way transactions and stick to its choice (E66)
• A change in the definition of plan assets (E67)
• That STC be raised only on the declaration of a dividend (E68)
PwC answers questions from readers:
• Capitalisation of pre-production rental cannot be capitalised to PPE
• A contractual liability to restore operating lease assets at the end of the lease period does not meet the definition of a liability until the work is done (Page 111)
The IASC now boasts membership of 153 accounting bodies from 112 countries representing over 2 million accountants. (Page 133)
Accountancy SA
Michael Gearing and Ganesh Venkatramen look at the balanced scorecard as a tool to measure performance. They state that for this technique to be successful: the strategy of the enterprise must be crystallised, the measures must be carefully chosen, and they must be clearly defined and programmed. The concept should be accepted by management and employees. They refer to "The balanced scorecard" by Kaplan and Norton for further reading. (Page 16)
My article considers the definition of an accrual. Read Erna Swart's reply where she agrees with my point on not accruing for audit fees that have not been earned. She disagrees with my STC point.
John Oxley does not like the idea of the differential accounting committee to exclude risk disclosures from limited purpose financial statements. Firstly SARS is not interested in this information. Secondly, the banks have a checklist of information they need when advancing overdrafts to small companies. Why should the thousands of small companies that have no overdrafts produce, at great cost, information that no one is interested in reading? (Page 38)
I really appreciated the letter from E H Smithers. He is quoting his experiences between 1944 and 1953 at a large auditing practice. Those where the days of high levels of ethics. I am quoting information in the late 1990's from small auditing firms. Things have, unfortunately, deteriorated since your days, Mr Smithers. But I have full confidence that we are on the road back to the past. I am pleased to report that the cases I was referring to seldom, if ever, involved one of the big six (now five). (Page 38)
Exectalk
The one language policy is still being considered.
Finance Week September 1
Deon Basson attributes the success of the Wallabies to sound management: a board of directors that includes CAs, legal practitioners and businessmen, with players represented thereon, a culture of accountability and transparency and a mission statement that incorporates high ethical standards and ambitious goals, e.g. to become one of the foremost entertainment industry operations in the country. (Page 27)
Steve Griessel of Tourvest gives some tips on success, e.g. creating a flat management structure, encouraging employees to be entrepreneurs, dumping unprofitable parts of the business, keeping costs down and keeping your, and your employees', vision alive. (Page 30)
Gizelde Brady of SG Securities gives a brief explanation of how to choose warrants. The value of a warrant is a combination of the intrinsic value (the difference between the spot price and the strike price) and the time value (which is a combination of many factors such as the time value of money, the volatility of the underlying, etc.) (Page 41)
LJ makes the point that one should assess the quality of earnings by looking to the cash flow of the company, e.g. in the case of Heritage, profit grew by 69% to R18 million but working capital needs increased by R45 million. (Page 44)
Shaun Harris looks at the threats to the banking industry of legislation presently in the pipeline, e.g. loans to SMMEs and discrimination based on race. (Page 46)
Finance Week September 15
"Return on equity is the best ratio to use to determine the type of yield a company should earn shareholders." The problem with statement is that this yield is easily manipulated (one of many examples is the writing off of intangible assets to bring the denominator down) so analysts have to restate the figures in the financials before this calculation is made. (Page 10)
"One should be more concerned with what's delivered than with where and how the work is done". (Page 37)
"The improvement of your skills makes you more marketable, even in your own company." (Page 37)
"Many companies no longer have a clear strategy: they think it sufficient to change continually, though there is not much talk of changing according to carefully planned strategy." (Page 37)
"The group has proudly declared its strong growth in profitability for the six months to June but this includes profit from the disposal of various investments. It seems that the group would have us believe that trade in businesses and shares is part of its ordinary operations." (See what happens when you produce statements of GAAP such as AC 103!) (Page 66)
Finance Week September 22
Soon after Brainware's listing two years ago the group, which had a following among small investors, had a market capitalisation of R3 billion. Today it has all gone. Some people won big and some, the small investors, were taken for a ride. Investor, beware!
Finance Week September 29
Shaun Harris states that the volatile stock market RSA has had to endure for the past two years is making investment decisions for small investors extremely difficult. He states that equities no longer seem to be the sure bet they used to be. (Page 44)
Fortune September 04
Norman Macrae states that from his long experience, scary projections about oil shortages, technological doom and financial crashes do not materialise. (Page 30)
A book called "Leading the revolution" by Gary Hamel is reviewed. Three stories of how individuals turned companies completely around are given (e.g. Sony's conversion to play stations). Some strategies given are:
• Start with a bold and seductive vision
• Co-opt skeptics, don't berate them
• Invest relentlessly in your own learning
• Get impeccable data
• Analyse the data thoroughly
• Start small: create a platform for big successes
• Use experiences from your own company (Page 67)
SEC is requiring more information to be disclosed by brokers to enable investors to rate their performance. (Page 95)
Thomas Stewart explains how PwC shares its knowledge base to provide consulting and other services to its clients around the world. The system was named "Kraken" and uses Lotus Notes. It is demand-driven, it sources experts within the firm, it tolerates fuzzy questions and it is full of opinion. (Page 114)
Fortune September 18
Reality has caught up with the market: in a matter of months telecom stocks have transformed from investor's pets to Wall Steet's pariahs. The index has dropped 25% while other stocks have gone up. (Does not augur well for Telkom's listing.) (Page 16)
Geoffrey Colvin questions professional firms going casual. A study was conducted at business schools on the ability to dress casually was the last thing new recruits wanted. (Page 26)
"It makes sense to adjust pay to fit output, not the amount of time bums are on seats." (Page 32)
"The only business language worldwide is English". The European Commission, with 11 official languages, has switched to English as its working language. An estimated 1,3 billion people around the world speak English as their first or second language.
"It has become an open secret that many ... analysts don't criticize the companies they follow. Instead, they make nice in order to collect banking fees - not to mention build careers." (Page 115)
Maneo
Claude O'Flaherty is frustrated that no one has responded to his request to assist with crystallising strategy for the Regulatory Board of Auditors!
The PAAB considers it to be highly unprofessional for an employee of a firm to solicit clients of that firm in anticipation of the employee leaving the firm and establishing their own practices.
The PAAB points out that one cannot be a director of a company and a partner of the firm that does the audit of that company.
I have had some concerned feedback on the implied threat by Practice Review to extend its process to beyond the attest function. They need to clarify this to put practitioners' minds at ease.
Jillian Bailey gives some guidance as to what is expected when testing the completeness assertion.
Techtalk
The IASC is working on a statement dealing with share-based payments, e.g. options paid to employees for services to be rendered. They are proposing that such transactions be measured at fair value at the date the securities vest with the recipient and recognition be made when the goods or services are consumed. Another deferral on the way? Or will they argue that options issued for future services will be an asset on the balance sheet?
Paul Pacter makes it absolutely clear that black lettered and grey lettered paragraphs in accounting statements have equal standing.
IFAC has issued a standard giving guidance on assurance services where no existing standard is applicable. This is in response to a widening of the attest work done by accountants.
IFAC has issued a standard giving greater guidance on external confirmations as a means of obtaining audit evidence.
AC 120 and 121 are becoming outdated due to recent developments in accounting standards. Any statement issued after these two statements that are in conflict with them takes precedence.
Auditors of long term insurance enterprises need to report on the report of the actuary (include it in the page references) and, therefore, need to apply audit standards to this document. This does not apply to the actuarial calculation of embedded values. The statement on other information applies to this calculation.
Differential Reporting
Read my next article on it! SAICA has rejected the option of reducing the burden of recognition and measurement for limited purpose financial statements. I have collected over 1 000 signatures of persons who feel strongly that Statements of GAAP are not relevant to companies with a limited readership (SARS, who would be confused by GAAP, the shareholders, where they agree to reduce this burden, and the banks, who can call for further information, demand guarantees and require full compliance if they feel it is warranted). You haven't heard the end of this saga - I am on a crusade for the good of our country and our profession (even though the profession cannot yet see that it is for their good!).
[Note: dated 11 April, 2001: We are winning!]
October 2000 (15 Minutes)
Accountancy Journal October
PwC and E&Y favour splitting certain non-audit services, e.g. consulting and internal audit functions, from the attest function. KPMG is in the process of divesting non-core services whereas D&T is against the SEC proposals. AA has already split its consulting arm from the attest function. (Page 7)
The ASB is meeting with Revenue to find out how it uses accounting information for tax purposes. (We should do this as part of the differential project.) (Page 16)
Sunmantra Ghoshal looks at the functions of a CEO and the characteristics needed - the usual soft skills stuff (self-confidence, self-awareness, ability to dream, enthuse others, optimistic, inspire people, have a love for people (CA's??), etc. (Page 46)
A company's directors have a fiduciary duty to run the company for the benefit of the shareholders, not for their own benefit. When directors start seeing the business as theirs, dishonesty emerges - inflated expenses, first-class travel, expensive hotels, etc. (Page 52)
The mobile telephone company Orange recently fired 40 of its employees for downloading and e-mailing sexually explicit material. (Please pass this message on to your secretaries!) (Page 76)
A study done by the 2020 Consulting Group found that clients of auditing firms feel that fees are too high, they don't get the work done promptly, they would like greater continuity of staff and are not impressed with the ability of auditors to generate ideas. The report states that accountants are hopeless at marketing themselves. Want a copy of the report: the price is £500! (Page 83)
Firms in the UK are having to find new ways of generating revenue with the raising of the ceiling for an audit (£350 000 turnover). Avenues being followed are voluntary audits, review reports, compilation reports, non-financial information assurance, consulting, IT, e-commerce, cash flow management and outsourcing of accounting, tax, payroll, etc. (Page 84)
"Consolidators" is a term to describe acquisitions of accounting practices by big organisations so as to get access to the firm's clients for the purpose of marketing their financial services products. The move is big in the US and is starting in the UK. (Page 89)
Hazel Powling of AA, states that it is a tall order for companies to achieve compliance with IAS standards by 2005. Firstly, preparers must understand the new rules. The company's systems must be amended to ensure that the necessary information is captured. Comparatives have to be converted to the new standards (for example, if five years comparatives are supplied, the company must go back five years). (In RSA we were given one month's notice, not five years, and she is complaining!) (Page 101)
Richard Abramson says that a third of the FTSE 100 companies disclose inadequate information about post-employment benefits. He states that a 1% change in the assumed investment return on plan assets could result in a change in pension costs of 25%. By the time this statement becomes applicable in RSA, most companies would have converted to defined contribution plans, so the problem should be watered down here. (Page 102)
Prof. William Baxter of the London School of Economics and Political Science criticises the ASB's decision to ban the amortisation method of depreciation. He says that accountants prefer straight lines to curves. (Got news for him!) (Page 104)
Ron Patterson raises an old argument: Are you happy or sad if the value of the building in which you operate goes up in value? As you are going to use up the building in the process of generating revenue, you should be sad: the cost of amortising a higher resource reduces profits. He feels that valuations have a place in financial reporting but laments that more research is necessary. (Page 108)
Can a company provide in advance for rent that is payable during the closure period. Answer: No as this is not an onerous contract. (Page 110)
Before the publication of AC421, it was argued that one had to provide for deferred tax at the capital gains tax rate (presently zero in RSA) in respect of a revaluation surplus of an investment building that is not depreciated. However, AC421 now requires deferred tax to be provided on this revaluation at the normal tax rate using the argument that over the life of the building tax will be paid at the normal rate on the economic benefits resulting from the consumption of the asset. (If you are involved in investment properties, you had better check this out!) (Page 111)
The IASC has published questions and answers on AC133 - see .uk. (Page 112)
Dr Peter Walton of the ESSEC business School in Paris says that many emerging market countries have adopted IASCs when these statements are dominated by the needs of capital markets and are, therefore, not applicable to the needs of these countries. He argues that the link between using IASC's and running a business efficiently has yet to be made. He believes that basic cash accounting should apply to micro enterprises, basic accrual accounting to small firms leading up to full IASC accounting for enterprises accessing the capital markets. (He has a point!) (Page 114)
The International Valuations Standard Committee has launched a three year standards project to develop a comprehensive robust set of international standards. It is hoped that comparison between them and us will lead to a better understanding of each other's role. (Page 115)
The UK standards state that until debt is converted into something else, it should be recognised as a liability with suitable disclosures. This is directly opposite to AC125. (See Gerhard Zeelie's article to be published in Accountancy SA soon.) (Page 134)
A firm in London was fined the equivalent of R20 000 for not responding to a letter written by the Institute! (Page 145)
The ASB found during the 70's that 75% of users read the directors' report, less than 50% studied the income statement and 25% did not read the balance sheet at all. New research indicates that the chairman's statement is widely read, less than 25% study the income statement and only 15% glance at the balance sheet with over 50% ignoring it. 10% study the cash flow statement with 60% ignoring it. Fewer than 10% read the auditor's report! The ASB is looking into shorter reports for shareholders who request them. 65% of respondents said they would prefer a shorter version. (Page 158)
Accountancy SA October
Messrs Gearing and Kahn emphasise that companies should strive for long term results and not, as they tend to do, focus on the short term. They need to build capacity for the future: if they don't, they will lose their competitive edge. (Page 12)
Stuart Downie and Una van Wijk discuss whether or not to outsource the treasury functions of an organisation. They state that the treasury function should not be outsourced if it is core to the company's business, which it seldom is. (Page 20)
My article discusses E68's treatment of STC and ideas (which will be totally ignored) for rectifying the situation. (Page 27)
Finance Week October 20
Charl du Toit of PwC draws attention to a change in the definition of dividends in the Income Tax Act. Previously, a loan to a shareholder or a relative of a shareholder was deemed to be a dividend. The word "relative" has now been changed to "connected person", which includes companies, close corporations and trusts associated with the shareholder. This could have serious STC problems for companies. Better check it out if in doubt. (Page 50)
Finance Week October 27
Some wisdom from Christo Wiese:
• The making of money takes time.
• To make money you have to take risks.
• There are unlimited opportunities but you have to get your priorities right and you have to work.
• You don't become wealthy from salaries. (Page 11)
Could culture be a cause of the poor economic growth rate in Africa? It is maintained that in traditional African society, which exalts the glorious past, nothing is done to prepare for the future. We all want greater material gains but the price is less leisure (and more hard work). (Until we create a proper work ethic, we will stay at the bottom of the pile.) (Page 26)
Vic de Klerk looks at warrants as being a potential investment source. He makes an important point: Warrants are not suited to buy-and-hold strategy as there is often no real value in them. (I have often tried to get someone to explain how listed prices of options are arrived at. Why would one pay a hefty premium for an option or warrant when there is virtually no chance that the market value of the underlying will exceed the exercise price? Another case of herd mentality of the manic variety?) (Page 51)
Analysts say that Ellerine has over-provisions of about R220 million (well over a year's profits) which it can bleed through the income statement at will. (SAICA: Action?) (Page 52)
Fortune October 9
Surveys done by pension consultants, most investors are expecting returns of 10% to 12%. (Page 80)
"As I look out for the next ten years, I think I'd be happy with an 8% earnings growth (some people would say that's rather aggressive). And on top of that we'll have a 1% dividend yield, which means an overall 9% investment return. That's assuming that the average P.E. ratio remains at 30. If the P.E. ratio goes down to 20, you lose four points off the 9% return. And if you want to keep getting the 18% return we've had in this bull market, the average P.E. would have to go to about 72." (Page 84)
Howard Kurtz maintains that financial reporters can tout a stock or spread a rumour which, in the short term, can affect the price of a share. However, in the long term, they have zero influence over stock price movements. (Page 110)
A warning is issued to avoid buying shares where insiders are selling, especially if they are selling when the price is going down. (Page 112)
Viant has created a system of knowledge sharing whereby all the lessons learned by all employees are pooled, summarised and passed on to the other members of the team. Jack Welch, CEO of General Electric, considers this aspect to be so important that he takes personal responsibility for it (in addition to allocating resources and developing people). (Page 129)
Fortune October 16
The author reminds us that it was Senator Lieberman (Al Gore's running mate) who "saved" stock options from being treated as an expense in the income statement of US companies. He argued that stock options would hurt cash-starved technology companies that need options to pay their people. (This subject has been resurrected and is being debated around the world at present.) (Page 18)
Arthur Levitt, the chairman of SEC, is fighting to split the auditing and non-auditing functions of firms using the argument that consulting to an audit client impairs independence. The big five are saying: "Show us the proof that this is so." PwC and E&Y are supporting SEC with minor suggested changes but D&T, KPMG and AA are apposed to it. (Page 26)
Mark Samuel, a management consultant, argues that employees should take responsibility for their actions and own up to their mistakes. He states that when there is no accountability in an organisation, people don't keep their commitments, come late to meetings, don't complete projects on time and, when asked for information, don't give it. (Sound familiar?) He says that organisations should have a recovery plan for mistakes that are made instead of merely laying blame when they are made. (Page 147)
Techtalk October
IFAC has issued an ED on auditing derivatives.
SIC has issued an ED giving guidance on how to treat revenue earned before property, plant and equipment is ready for its intended use. It proposes that this revenue be recognised as such, together with the related costs.
The APC is considering proposed amendments to Schedule 4 of the Companies Act.
The JSE has published its new listings requirements effective from 2 October 2000. They now require listed companies to comply with Statements of GAAP and there are some tough new disclosure requirements. (I must summarise these disclosure requirements and insert them into my course material.)
The FSB has been busy with new bills on pension funds, collective investment schemes, financial advisory and intermediary services and investment services being published.
I am really sorry that we lost Rosanne to Australia. Mafia Buzz wishes Alta Prinsloo, who has been appointed to replace her, a long and fruitful stay at SAICA.
AIMR
I thought that you might be interested in the AIMR's proposed policy on CPE. They state that CFA's must protect the integrity of the charter. The programme should be highly flexible allowing for all types of learning. Records kept should be simple. A commitment of 20 hours p.a. should be made of which two hours should be spent on ethical/professional matters. The programme must focus on educational experiences. Informational experiences do not count for credit. Mafia Buzz, therefore, would not count as part of the 20 hours as it focuses on giving you information and not educating you! Studying financial statements or reading Fortune would be informational whereas studying the journal of portfolio management would be educational. Interesting!
November 2000 (15 Minutes)
Accountancy Journal November
them quickly. This is the opposite of The author feels that one should approach the independence issue raised by SEC more analytically, i.e. exactly what functions are in conflict with the attest function? Keeping the books and performing internal audit are clearly out. Proposing tax arrangements and arguing a tax case are dicey. Head-hunting for the client is a no-no. Design of accounting systems is not too much of a problem. (Page 1)
SEC's request for congress not to intervene in the independence issue has brought angry responses from various players. Senator Gramm says that the proposals are too draconian. (Page 7)
Red tape is the main barrier to small business growth and wastes management time says a report on smaller businesses and regulation. (And this is the UK where they do have differential accounting!) (Page 8)
The ICAEW, the Irish Institute and the Scottish Institute have withdrawn from the cognitor global qualification project. (Note that I have just read that SAICA has also withdrawn.) (Page 10)
Karel van Hulle of the IE says that SMEs and emerging market companies cannot be expected to implement IAS because they are standards for capital markets! (At last, they are waking up!! Unfortunately, despite support from Sir Bryan Carsberg, the rest of the board members do not seem to understand the problem.) (Page 12)
The pooling of interests accounting method of business combinations issue is still being fought in the US with a group of senators objecting to the elimination of this method (we know it as the uniting of interests method). (Page 18)
The smart, successful companies today are "sense-and-respond" organisations: they anticipate customer's demands and meet "make-and-sell". However, 85% of executive teams spend less than one hour a month discussing strategy! Part of the problem is the "annual budget". There is a need to be more flexible, e.g. encouraging employees to beat the competition rather than the budget, using rolling forecasts, working more with front-line personnel, etc. (In a nutshell - loosen the controls a little and become more thoughtful.) (Page 64)
Trust is an important business tool and is fundamental to client satisfaction and loyalty. It must be earned and deserved. Listen to your client, only offer advice if asked, phrase responses sensitively, put your clients interests ahead of yours and offer care. The four essential components of trustworthiness are credibility, reliability, intimacy and low-level of self-orientation, i.e. a focus on your client, not you. To earn trust you must engage, listen, frame, envision and commit. Give ideas freely and take responsibility instead of trying to lay blame. (Page 78)
A good way to keep up to date is to read statements as they are published and, when you have a problem, contact the library of the Institute. (They don't have a CPH in the UK!) (Page 80)
Jim Schiro, CEO of PwC seems to imply by his article that the profession should be addressing the accounting model (e.g. the balance sheet doesn't measure the very assets on which today's companies are often valued (intangibles)) rather than wasting time on independence rules (I am trying to read in-between the lines of his article to understand his thinking!) (Page 86)
The accounting framework says: If it isn't a liability, it isn't an expense and if it isn't an asset it isn't income. How can the issue of an option (which is equity) result in an expense! All standard setters insist that standards be based on the framework and yet they are happy to overlook the framework in this case. The author says that one would expect this sort of a standard from a group that calls itself the G4+1 when the members are US, UK, Canada, Australia, New Zealand + the IASC (get it?). (Page 99)
The breakdown in the relationship between the company's balance sheet and the stock market valuation means that traditional financial statements are an inadequate means of communicating shareholder value. (As far as I was aware, the balance sheet has never purported to communicate shareholder value!) (Page 100)
Ron Paterson has a go at the statement on provisions. Unfortunately, the example he gives about the maintenance of aircraft owned by an airline is a bad one due to SIC 23 so let me change the example: an airline operates an aircraft on an operating lease. In terms of its contract, it has to maintain the aircraft. It is not allowed to provide for this maintenance until the work is done. However, GAAP requires an enterprise to provide upfront for decommissioning costs. He asks the question: what is the journal entry for these costs? GAAP says that they are added to the asset. He says that it is ridiculous to report an asset at the future cost of removing it! (I sympathise with him in that I get tremendous flack when debating this statement in workshops.) (Page 102)
Companies are going to have to change the way they do business to ensure that they can fairly report their results, e.g. if you want to use hedge accounting, you are going to have to hedge each item and comply with the hedging criteria. (I object when accounting dictates how businesses should be run. Surely, accounting should be the servant of the businessman and not the other way around. We are getting too big for our boots!) The new guidance issued on AC133 (the set of 100 questions and answers) permits hedging at group level where the individual companies in a group hedge with the treasury centre for the group and this centre runs a book. Previously, at group level, hedge accounting would not have been allowed. (Page 106)
Many companies are using the new AC104 to present their own version of earnings per share (together with the reconciliation and explanations). (Page 110)
Accountancy SA November/December
Rob Ross looks at the future for small to medium audit practices. Some of the ideas from the article are:
• Find a sustainable niche, i.e. specialise
• Become market driven and don't rely on regulations to stay in business
• Provide more value by adding consulting services
• Become more technology oriented
• Obtain a better understanding of the client's business
• Get more involved in tax issues, estate planning, trusts and investing overseas.
(Some of the above seem to be in conflict with the auditing function - see the fight in the US at present with independence issues.) (Page 4)
Ceri Moodie looks at the analyst's problem with "intangibles", or is it "goodwill"? She indiscriminately interchanges these two terms. They are not the same thing, especially from an analyst's point of view. Goodwill is merely a balancing figure (excess paid for a business) whereas an intangible is a real asset, without physical substance. (Page 20)
Vassi Naidoo, CE of D&T, debates his firm's view of SEC's proposal to split the auditing function from other functions, such as consulting. He argues that the proposal will reduce rather than enhance the audit quality. He states that clients look to their auditors to provide advice and if SEC has its way, this valuable resource will be lost to clients. He also makes the point that the profession could lose valuable skills as auditing could become a "regulated institution of government", a most unattractive career for highly skilled people. (Page 31)
Karin Barac makes similar points to Rob Ross - see above. (Page 33)
Sian Singh's article on our new auditor-general makes for interesting reading - Shauket must be causing waves in the public arena as he is uncompromising and tough - a breath of fresh air. His advice to upcoming CAs is worth quoting: "All you need to do is to have a vision, be focussed, committed and work hard at achieving your goal." (Page 39)
My article dealt with the problem of having to consolidate a subsidiary that is held with the intention of disposal outside the "near future" window, financial structuring schemes that pass benefits on to the employees of a company and Pep's accounting policies. (Page 45)
Business Day November 16
Specialised Outsourcing fell from a peak of R76,50 per share to R2,85 today (30 December). Why? The article jokes: "Ask an accountant what one and one is and he will say: `Tell me what you want it to be and I'll see what I can do.'" (Whenever shareholders lose, they look to the accountants and the auditors to lay the blame. Losses such as these are usually caused by a combination of the low ethical standards of get rich quickly "serial entrepreneurs" and investors who do not do their homework. The US is presently trying to lay blame for the IT bubble's collapse: one of the analysts said: "The public wanted to buy it so we sold it to them." If you don't do your homework, you'll look like a fool. Greedy investors must learn that wealth comes with effort and time, not with luck. There will always be a "serial entrepreneur" (a polite word for you-know-what) waiting to take your hard-earned money!)
Exectalk November/December
It appears as if the language policy will be to keep Afrikaans and to consider one or more African languages. Expect your fees to go up!
Finance Week November 3
"It took 112 hours in 1994 to manufacture the average car in SA. This was reduced to 60 hours last year. That seems impressive until you find out it takes only 20 hours in Europe, which is aiming for 16." (Page 18)
Didata is trading at a P.E. of 69. London's FTSE 100 is at 26 and its IT sector at 59. (Page 48)
Vic de Klerk suggests that companies could pay dividends by issuing options on its shares. (One wonders whether companies should get involved in this: should they not keep things simple and focus on their core activities leaving the financial institutions to issue warrants on their shares?) (Page 50)
Fortune November 06
The author asks the question: Why are dozens of top-performing companies with double or even triple digit growth rates selling at pitiable prices (PE ratios of 5, 6 or 7) when the average stock in the S&P trades at a mind blowing 30 times earnings? The conventional wisdom is that these companies are too small to get the analyst's attention. However, the writer argues that the real reason is that the majority shareholders control the company and do not permit interference, hence the discount. (Page 34)
The authors look at what investors learned from the dot-com collapse. They list 62 truths, e.g. people would rather go into a hardware shop than buy over the internet, day trading is a sucker's game, the small investor is usually the one left holding worthless stock, youth is not the same as intelligence, "cool" is not the same as "profitable", etc. But they warn of the next bubble: "Optical networking". (Page 54)
Fortune November 20
A letter to the editor argues that a stock option is a cost to the shareholders and not to the enterprise and that the cost is measured in the dilution of earnings per share. Therefore, to treat the option as a cost would in effect be double counting. (Page 20)
An article entitled "Death of a continent" makes for depressing reading. It deals with the aids problem in Africa. Some of the comments it makes are:
• Governments are unwilling to acknowledge the cause and extent of aids. TM is considered to be the worst offender.
• In RSA, when apartheid ended, barely 1% of the adult population was infected. With borders now becoming more porous, nearly 20% is now infected.
• The world would hardly notice if Africa's entire economy disappeared overnight. Africa accounts for a fraction of 1% of the world's manufactured goods.
• Traditional healers in Botswana treat 70% of aids cases. They suggest that a victim cure his aids by having sex with a virgin.
• It's like talking to teenagers about smoking: They know it kills but they do it anyway.
• The impact on companies will be considerable. (Eight of the 12 top executives at one power company are HIV positive.)
• The article concludes by asking: "If African men refuse to use condoms and continue to view women as nothing more than sexual objects, how much sympathy do they deserve?" This is a no punches pulled article! (Page 113)
In the US companies get a tax deduction when employees exercise options on the difference between the market price and the exercise price at the date exercised. In 1999 S&P companies collected $15,5 billion in options-related tax benefits. Remember that the cost of the options does not appear in the income statement! Microsoft got a $10,2 billion tax break on its options. This makes companies' earnings look good. Another trick is to sell put options on your own shares. The company gets a tax break on the "losses" incurred on exercising the puts but there is no loss on buying back your own shares. The big question is: "Are options free money?" (Page 141)
SEC's new Fair Disclosure regulation has become effective. This will stop companies from selectively giving inside information about forecasts to analysts. It should level the playing field between the small investor and the big analysts. (Page 144)
Techtalk November/December
Information is given about the batches of questions and answers on AC133 published by IASC - see elsewhere in this issue.
SEC published comments on feedback on its proposal to achieve international harmonisation. Concerns were expressed by commentators about the absence of enforcement mechanisms for IAS standards and the lack of a global infrastructure to support their use.
Techtalk publishes its first batch of questions and answers. What courage to do this!
The second questions asks: "Is project delays due to rain a cost that can be capitalised with the total cost of a project." I presume the "is" should be "are". The question does not specify what kind of costs s/he is talking about!
Question 4 was not answered. The question was: "Is it a requirement to disclose gross profit in the income statement?" The answer is: "No."
December 2000 (15 Minutes)
Accountancy Journal December
The UK's Accounting Standards Board (ASB) has issued a task force opinion on barter transactions for advertising. It states, in essence, that revenue can only be recognised if there is persuasive evidence of value. Criteria are set out in the opinion to give guidance on when there is such evidence. The full opinion is published in this jounal. (Pages 4 and 102)
The proposals by the ASB and the G4+1 on accounting for share option costs is causing an outcry. Estimates are that 33% of FTSE100 companies could see earnings fall by 10% and 9% of these companies could see a fall of 50% in earnings. (Page 8)
If a company pays a bonus in cash and that bonus is used to buy shares in the company, there would be no argument about expensing the bonus. So why should share options be any different? (Page 26)
Only repeated risk-taking, creativity and imagination will help businesses survive in the new competitive era. You can't outsource strategy, you can't outsource innovation. We have to embrace change and take risks all the time. (Page 40)
A recent report on the future of multi-ethnic Britain asks why so few non-white workers reach senior positions in the workplace. One view is that there is institutional racism in the UK profession. However, co-opting a candidate from an ethnic minority just to make up the numbers seems like an insulting move to everyone concerned. (Page 42)
In website design informing is easy, communicating is harder and connecting is a real challenge. Six factors could make the difference: timeliness, interactivity, horsepower, mutability, content and design. People become frustrated if a page takes too long to download. (Page 48)
Vision is in great demand but in short supply. Typically a new chief executive does a quick shuffle of the existing businesses, than declares that the world is changing and that two-thirds of the business should be sold while buying two thirds of someone else's business. The share price is ramped, options flourish and the CEO spends the rest of his time telling analysts about the great opportunities that have been created. (Page 55)
Companies should ensure that their own behaviour will bear investigation before they litigate against others. (Page 56)
Systems that are properly backed up should be a vital part of any IT infrastructure. This aspect is easy to overlook until something goes wrong. 60% of data tapes fail to restore when tested. (Page 58)
If you are thinking of a career in forensic accounting, study this article. (Page 68)
94% of SMEs surveyed disagreed with the statement that accountancy firms should only be permitted to carry out audit and not offer other services and 76% could not see that auditor independence would be compromised in any way. It is contended that sole practitioners would be of better use to the business community if their skills were more wide-ranging than just audit. If professional and ethical standards are high, Chinese walls are not necessary. Small practices are often dependent on audits for survival and auditors often fulfill the role of financial directors for companies that can't afford to employ one full time. (Comment: this independence thing could become another attack on the small practitioner!) (Page 70)
In the UK they are proposing that a shorter financial statement should become the default document sent routinely to shareholders, unless they request full financial statements. (Page 92)
The forces of darkness have proved adept at constructing leases that narrowly fail to give lessees enough of the property that they need to bring the lease on to their balance sheets. Ron Paterson used to have three rules: If 89% was mentioned anywhere in the lease, if the lessor was a bank or if the agreement is headed "operating lease", it is a finance lease! It seems naive to believe that the new proposals being made on leasing will defeat the machinations of a wily leasing industry. (I wonder at an industry that survives purely by deceiving the owners of the entities they serve.) (Page 93)
If positive goodwill is paid on the acquisition of a company and subsequently further shares are acquired resulting in negative goodwill, can the two be off-set or must they be treated separately? The short answer is that they should be dealt with separately. (Page 94)
A company acquires shares in another company and payment is to be made either in cash or in shares of the company, at the company's option. Is the credit a liability or equity? The answer given is "equity". (Page 94)
On pages 98 to 100 there is an article in which members of the IASC debate the concept of differential reporting. I was horrified on reading their views: they have no idea about what a small private company is. They cannot understand that most SME's only prepare financial statements for the Receiver: There is no need to communicate to capital markets. Maybe they need to read Dan the Stationary Man! Some comments made were:
• Sir Bryan Carsberg has endorsed the proposal that the IASC should consider developing simplified standards.
• Should there be different recognition principles? I would say no. Should we have different measurement principles? I would say possibly. And disclosure? Certainly. (The man from FASB)
• At FASB we have reduced disclosure requirements for smaller companies, even if they have public shareholders.
• Should SMEs not merely have to comply with tax rules, full stop?
• The IASC constitution says that its objective is to create standards for capital markets. What do we do for the others?
A review of 162 international companies' accounting policies was made to gain insight into the impact of the statement on presentation of financial statements:
• 73% claim full compliance for 1998 and 1999
• 6% claim compliance only for 1999
• 8% dropped their reference to IAS compliance
• 9% claim compliance subject to exceptions (which is not allowed) (Page 104)
SIC-D27 deals with an enterprise that leases its assets and then subleases them back again. The proposed interpretation states that the substance of such a transaction is that the two transactions cancel each other out and should, therefore, be treated as if the lease does not exist. The fee received for such a transaction should be treated as income. (Page 107)
IFAC has proposed a new statement on the audit of international commercial banks (). (Page 107)
A member was fined R10 000 for issuing a cheque to a creditor that bounced three times. Another member was fined R20 000 for accepting a client without undertaking sufficient enquiry into the identities of the firm or the nature of the client. (Page 133)
Page 134 sets out UITF Abstract 17 on employee share schemes and page 136 UITF Abstract 26 on barter transactions.
Fortune December 4
Instead of being concerned about sector and company fundamentals, there seems to be a manic depressive herd on the run pushing tech stocks up to enormous P.E. ratios. The problem was that the phenomenon was driven by slick MBAs with get-rich-quick mindsets, hence the number of failures we have seen. It is contended that once the weaklings are out of the game, companies with good business models will eventually make money. So the answer lies in choosing stocks carefully using bottom-up techniques, being dispassionate, understanding the difference between stocks and companies and escaping and learning from mistakes. A major problem is the number of charlatans masquerading as CEOs out there. (Pages 40 and 53)
Maneo December: Issue 25
Claude O'Flaherty sets out the initiatives that are to be tackled in anticipation of the proposed new Regulatory Board of Auditors (RBA). It is expected that the new legislation will be effective in 2002.
Two practitioners where fined R10 000 each for the unacceptable wording of their audit opinion. Another practitioner was fined R10 000 for offering training whilst not being accredited.
A practitioner argued that he could not be disciplined by the PAAB for an infringement that occurred before his registration with the PAAB lapsed as he was no longer a member of the PAAB. He lost the case in the Cape High Court. (Damn! I thought that I could use this avenue!)
Jane O'Connor gives guidance on the rule that the names of firms may not be frivolous, descriptive, comparative or in any way be misleading. If you are thinking of starting a firm or renaming it, study this guidance.
Angela Vest Louw discusses the principles for the development of a curriculum framework for registered auditors. She states that auditors are expected to possess intellectual, analytical and advisory skills and should take responsibility for their own learning through a positive attitude towards life-long learning and a personal commitment to CPE. She states that training offices that are accredited by SAICA to provide training to prospective RAAs should be monitored.
Jillian Bailey states that the practice review system is having the desired effect of getting rid of practitioners who do not meet the laid down standards of auditing.
The US Panel on Audit Effectiveness has released a report to foster more effective audits which improve the reliability of financial statements, enhance their credibility, contribute to investor's confidence and improve capital market efficiency. One of the recommendations is that the auditor perform some "forensic-type" procedures on every audit to improve the prospects of detecting material financial statement fraud. "Auditors often do not focus directly on the audit quality in the context of a service provided to protect the interests of the investing public." (Question: If there is no investing public in respect of the client, what is the purpose of doing an audit??)
Taxation Buzz 2000
In Cactus Investments v CIR, the CIR challenged a scheme whereby the taxpayer swapped future interest revenue for future dividend revenue to escape paying tax on the income. The taxpayer lost.
In CIR v Conhage, the CIR disallowed the capital portion of the rental payments on a sale and leaseback transaction on the basis that the substance of the transaction was a loan. The CIR lost.
In Tinktin Timbers CC v CIR, the CIR disallowed interest on a loan raised to pay a dividend. The CIR won. I ask: why do these cases ever get to court? There are many precedents. Attorneys making money out of their clients?
CIR v Elma Investments CC was another case where the taxpayer tried to get interest on a loan to "pay" a dividend. Guess who lost!
In ITC 1602 a CC borrowed money to buy a member's interest and claimed the interest on this loan as a deductible expense. Need I tell you who won this one? The CIR of course. First year varsity stuff!
In ITC 1667 a taxpayer discounted future rental payments with a bank, retaining the obligation to maintain the assets over the rental period. The taxpayer claimed a 24C allowance in respect of the future expenditure. The taxpayer lost as, for 24C to be effective, the obligation must be in terms of the same contract as the contract under which the income was received.
In ITC 1645 a taxpayer was denied a deduction in respect of rebates to be awarded to customers after the year-end.
Pre-production interest on loans raised to finance the purchase of land was disallowed in ITC 1619.
Losses on discounting promissory notes to raise money for working capital are deductible. (ITC 1628)
In volume 36, part 8 of the Income Tax Reporter, there is an article explaining how the premium on a forward cover contract is deductible. If companies have to follow AC112 and prepare tax records using section 24I, we will need many more CA's than SA can provide. Something must be done about 24I!
Volume 39, part 3 contains an excellent article on capital gains tax by Michael Stein. Note that you can download the proposals from .za.
The Government rejected proposals for cash accounting for tax purposes. One of the arguments against this was that taxpayers would have to make adjustments to their reported profits to arrive at their tax calculations. We are having this problem at the moment with being forced to comply with GAAP which is, in many cases, incompatible with tax accounting rules. (IT Reporter, Vol 38, Part 3, Page 87)
SARS has ruled that interest accumulated in personal medical savings accounts is taxable in the hands of the members and not in the hands of the medical schemes so will have to be declared by the members in their tax returns. (Taxgram, Issue 9, page 3)
Trevor M appeals to business and accounting professionals to stop robbing the fiscus of valuable resources through dubious and over-aggressive tax structuring plans. I agree: we should get on with the business of doing business and stop this non-core distracting activity of trying to duck and dive. (Taxgram, Issue 11, page 9)
13. Metcash says that the claim for VAT and penalties will not impact on headline earnings. Which "headline earnings"? Their version or AC306's version? I tell you, it isn't the latter! (Taxgram, Issue 10, page 6)
SARS has circularised all Revenue offices pointing out that raising fees are not interest or a related finance charge within the context of section 11(bA) and are, therefore, not deductible in terms of that section. In addition, they may not be capitalised as part of the cost of the machinery or plant to which they relate. (Taxgram. Issue 6, page 5)
The Organisation for Economic Co-operation and Development has published a list of 35 tax havens warning that sanctions will be imposed if they do not change their ways. (Taxgram, Issue 7, page 9)
It is now necessary to get a certificate of good standing from SARS if you want to tender for government work! (Integritax, Issue 33, page 8)
A taxpayer's bookkeeper was convicted for tax evasion. It was held that s/he had the intention to do wrong, and not the taxpayer. (Integritax, Issue 37, page 8)
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