Ritchie and accounting

Rather than losing money, as the company claim, the chemical plant at Grangemouth delivered £7million in profits last year, analyst Richard Murphy told the Daily Record.

Mhmhm.

Murphy said: “It is like buying a car. You can spread the cost over 10 years, you don’t spread the cost over a day.

“That is not the way I would recognise accounts to be done normally.

“The accounts are figures which are hard to understand.

“If we actually look at the accounts of the chemicals operation for 2012, the actual basic profitability, it made £7million. The year before, it made £6million. That is basic trading.

“What they did was quite unusual.

“They said they were facing major financial difficulties. They then said they were going to write off£390million of plant and equipment at the site. That is extraordinary.

“But Ineos chemicals was not loss-making.

“They then said, if we write off this sum, we won’t be able to pay off the money we have borrowed from other Ineos companies. So they were released from repaying loans of £464million.

“The net effect was they made a gain, they actually made an exceptional profit. Ineos said, you don’t have to repay the loans, so the loans they wrote off were greater than the assets.

“The net effect was they made a profit on the write-offs of £69million.

“As a result of the write-offs, they also did something else. They reckoned they had a tax credit of £79million.

“We have two conflicting stories. One is that the company were doing badly. On the other side, they are saying we are going to recognise we have got deferred tax assets.

“That means they think they are going to get profits in the future.”

Murphy added: “Using their numbers, they think they are going to save £117million in tax in future, at the rate of Corporation Tax they use in their accounts. That means they are expecting to make more than half a billion pounds in profits.

“The plant now has no more assets to write off, the loan has been written off. And actually, that massively improves the profitability of the site.

“I think there is an odd story in those accounts.

“The future of this company at the chemical plant could be quite profitable. It could make quite a
lot of money.

“How do you reconcile that, what’s going on here?

“They are using accounting rules I don’t recognise. They are using numbers I can’t find in any actual published accounts.”

Murphy said he would not have signed off the accounts.

He added: “There looks to me here to be a profitable plant. Why they want to close it, I don’t know. Are they preparing the business for sale? I just don’t know.”

Dear God.

In MurphyWorld Ineos writing off £464 million it had lent to a subsidiary is actually a profit.

Actually, what’s truly amusing here is that the world’s greatest advocate for proper and full corporate accounting decides not to use proper and full corporate accounting when Unite asks him to cobble something together. He’s looked only at the effects on the accounts of that specific subsidiary and entirely ignored the effects (ie, the loss of that £464 million which will now never get paid back) on the corporation as a whole.

Shameless, quite shameless.

27 comments on “Ritchie and accounting

  1. The £117m tax credit implies that they were losing several £m even excluding the £464m written off.
    Murphy assumes that we cannot do simple arithmetic

  2. Well yes. This guy, Analyst Richard Murphy, is clearly a bit of a chancer. There is another man, Tax Expert Richard Murphy, (isn’t sharing a name such a coincidence) who would have put him right straight away, “owned him” as they say. Tax Expert Richard Murphy, being a paragon of academic rigour and professional knowledge, would have pointed out that, just a corporations hide profits offshore, so multinational corporations might suffer losses in overseas companies even though the underlying business suffered those losses in the UK. Tax Expert Richard Murphy, being a model of fairness, would even use this example to support his case, rather ironically, for group-wide country-by-country reporting saying “the fact that it works in favour of the business here help my case, even if some of my more zealous supporters won’t like to hear me say it.” And of course Tax Expert Richard Murphy, being a shing beacon of professional ethics, simply wouldn’t drream of altering his analysis on a subject because the UNITE union happens to fund him; can Analyst Richard Murphy say the same?

    We need, need I tell you, to get Tax Expert Richard Murphy onto this.

  3. The repulsive fat f*ck and his family are sucking on the teats of the public and the third sectors. His wife is a GP – the most outrageously overpaid and incompetent publicly funded profession in the UK and he is funded by Union dues and other social organisations and charities.

    He has brought his own profession into disrepute and made me so angry I won’t be reading his blog again.

  4. What a mess.

    First thing to do is ignore the loan write off. It’s an intercompany balance and whatever led to it’s creation is now sunk. The write-off has no bearing on the underlying profitability of either the division or the group.

    Second, let’s ask if the write-off of the plant actually led to the write-off of the loan. Murp indicates that it did.. I suspect that’s unlikely. What’s likely is that the reason that the plant needed to be written off is the same reason that the loan needed to be written off… the plant ain’t making a return.

    Now let’s pause and wonder if Richie bothered to ponder just how long it would take the chemical division to make the profit required to cover the depreciation of the plant and to repay the loan (which could, of course, have been simultaneous as only one is a cashflow). I make it about 70 years.. before discounting.

    Now.. accounting jiggery aside.. Richie does seem to have found that there is a profitable underlying business. I’ve no idea how that £6m profit fits into the grand scheme of things.. but a profit is a profit and they shouldn’t be saying the business is losing £10m a month (per a news story I heard) if that’s just a paper loss from sunk costs. If they pissed £400m up the wall on plant that’s not making a return (oops) then that doesn’t mean they have to cut the pensions of the people doing work with plant that, one presumes, *is* making a return. That’s asking the workers to ‘suffer’ to partly bail-out the mistakes of management. Maybe it’s necessary, maybe it isn’t.. but it’s fair enough to whine about it.

    Also, the deferred tax thing does look odd and does indicate that they believe there will be big profits going forward. Alas, I didn’t pay attention to deferred tax at Beancounter School because it was very boring and not worth many marks on Beancounter exams. Maybe I’m as clueless as Richie on that one.

  5. The Thought Gang

    Sorry Mate, you’re one of the good’uns, but if theyKve made a loss, they’ve made a loss. And it will need to be funded. And it doesn’t matter if it’s an operating loss or a piss-up-the-wall vanity investment. And the £10million a month may be a pro-rata presentational trick to sell to the TV and Press (and about time business caught on to the power of PR). A loss means something must give. So Murphy comes along and writes what UNITE tells him to. Take the money Ritchie and don’t try to look the decent people in the eye.

  6. Thought Gang

    The deferred asset lseems perfectly plausible to me. Ineos seems to be a big group of companies, so my assumption would be that losses at Grangemouth could be transferred to profitable companies elsewhere in the group. Most groups keep the books straight by getting profitable companies to pay for such losses.

  7. @ TTG
    So they have spent £464 million more than the auditors and the tax inspector and anyone else thinks the plant is worth. Sadly they didn’t have £464 million in the back pocket to start with, so they borrowed some of the money to buy and upgrade the plant. So their assets are now worth less than their debts
    So the business is worth less than nothing. Some idiot says that if the union will co-operate he will spend £300 million (rather less then he has already lost, so maybe he’s a gambler thinking “double or quits”) to fix the plant to work on imported shale gas from the USA. But Unite, the union, thinks it can blackmail him to keep losing £120 million per annum and spend £300 million at the same time. Has anyone seen a photo of Len McCluskey indoors accompanied with data on the doorway through which his head entered the building?

  8. I have followed this site and your reports on the ramblings of Ritchie for some little while. I am a member of the ICAEW and cannot believe that a member of that body can actually be so economically illiterate. Is he an advisor to Ed Balls by any chance? It would explain a lot. It has always been my belief that a half decent accountant should LEGALLY minimise their clients tax liability. Christ on a bike, I would hate to be one of Ritchie’s clients.

  9. Nathan Brittles (#8)

    There’s speculation he will be a Special Economic Advisor under Ed Miliband so in that sense, yes, he is advising Ed Balls.

  10. For fuck’s sake, petrochemicals – and indeed oil refining too – has been in trouble throughout most of the old First World for years. Why in God’s name would Grangemouth be an exception?

    Note to government: the exceptions that spring to mind have been rescued by fracking.

  11. So Ineos should sell him the plant; valuation based on his figures. Come on Ritchie – put your money where your mouth is.

  12. A plant that was profitable at one point can become unprofitable. How long does the rest of the company have to carry an unprofitable plant? Will upgrading/adding to the plant over time improve profitability? Will cutting some costs help with the profitability issue? Does government regulation and taxation of the site and its products impact on profitability?

  13. @ Ironman

    “Sorry Mate, you’re one of the good’uns, but if they’ve made a loss, they’ve made a loss. And it will need to be funded.”

    Yes, possibly. Or possibly not. It may have already been funded (when considered on a group basis). As we here know, one of the things companies do with profits is invest them.. e.g. in plant. We know this and we try to make that point whenever we hear ‘blah blah profits evil’. So whilst this all makes paper losses appear, we don’t know from Richie’s piece whether there are real losses that need funding, or is it just that the group now needs to make cuts to maintain a level of earnings. If so then, of course, that’s valid.. but they’re lying about it for PR purposes.

    I work in a corporate group where entities have made big losses. They had a big effect on other entities when there were external debts to pay.. not so much when there weren’t. You don’t nobble things that do make money to try and make up for bad decisions elsewhere. Ineus would look at the underlying performance of the assets that are making a return and decide if they generate enough to justify keeping them going.. pension costs are a factor in that decision, but the fact that half a bil has already been lost is, in itself, irrelevant.

    @ Diogenes
    re. Deferred tax.. that potentially makes sense – though I think you can only use deferred tax losses to relieve profits from the same trade. I don’t know how narrowly ‘same trade’ is defined. They can’t use them to offset tax on a cupcake shop, but perhaps they have unrelated UK activities that are similar enough for the nice people at HMRC.

    @ John77
    Thanks. I haven’t followed the actual story in any detail. I’m not defending the Unite position, and if it’s as you say then perhaps it’s indefensible. I’m just a open to the idea that Richie isn’t entirely wrong to question the spin that’s been put on things.

  14. Sorry to break in on the accountancy experts’ love-in here but…

    When we get to the stage where the average lay-man such as myself needs an accountant on stand-by just to help him sort through the “facts” of the story, isn’t that an indication that maybe, perhaps, the whole accountancy thing has disappeared up its own arse?

    Surely there must be a simpler way of deciding how we should fund the courts, the police and the armed forces?

  15. Anthem – give us your definition.

    One of the real problems is that the UK govt has decided to tax specific forms of net income for individuals and corporations, using rules that are not identical. The system has evolved into a set of rules of massive complexity. In the old days in South Africa, the apartheid legislation placed vertically reached about 5 feet high. The English tax code is approaching that height.

    The government solution is to add to the complexity by plugging so-called “loopholes”. Another approach would be…do something different. The solution suggested by many authorities is: tax land values. Land exists. it cannot be trafficked or exported or hidden.What do you think?

    Consider CGT. IHT, CT, IT, NI, Fuel duties etc…….landfill tax…insurance premiun tax….

    One tax…land value tax. Unless you are a tax advisor, what is the objection?

  16. John77

    “Murphy assumes that we cannot do simple arithmetic”

    He assumes nothing, the thought simply never occurs to him!

  17. The Thought Gang

    Basically agree with you, there is a lot of PR at large here. Good! UNITE got what was coming.

    In the tax sense, a trading loss is either utilized in the year or gets restricted to future losses of that trade. NT loan write offs aren’t chargeable, so I am presuming the losses are trade losses caused by the write down.

    On the main subject, a loss must be covered. Here the loss is the write down of assets. It doesn’t matter where the losses come from. This isn’t tax; this is commercial.

  18. Accountancy aside, as a business decision it doesn’t matter what the plant cost in the first place, that’s a sunk cost. If you have a choice between running a plant and closing it, you just need to know which leaves you better off from here.

    However, Ineos had another option, which was to threaten to close the plant, and use the threat to get better terms from the Unite and BP, and money from the Scottish and UK governments. They judged that that option gave the best expected returns. And they seem to have been right.

  19. Unite had options, too.

    Personally, sad as it would have been for the workers, I wish they had closed the place.

    At some point, reality has to smack Unite, Murphy and Milliband in the face, in full view of the public.

    This crock is just Unite’s attempt to rescue some PR from the fire of their embarrassment.

  20. @Diogenes – Agree with everything you’re saying there. Layer upon layer of tax law has created a monster.

    It really does need tearing up and starting from scratch.

    I’ve never looked into taxing land values but it’s an interesting idea and I’m going to go away and do a bit of reading.

  21. Anthem, try Mark Wadsworth’s dedicated LVT blog kaalvtn.blogspot.com (Killer Arguments Against Land Value Tax, Not) where common arguments against LVT are dealt with. I think there is also a ‘calculator’ on there where you can design your own scheme, plugging in different rates and values to see what comes out.

  22. Ironman

    “In the tax sense, a trading loss is either utilized in the year or gets restricted to future losses of that trade. NT loan write offs aren’t chargeable, so I am presuming the losses are trade losses caused by the write down.”

    The accounts for Ineos Chemicals Grangemouth Ltd show that the deferred tax asset primarily relates to “accelerated capital allowances” so is depreciation in excess of capital allowances. This might relate to the write down of plant and machinery on which capital allowances haven’t been yet claimed.

    When the capital allowances are received they should be able to receive relief against profit or surrender it through group relief. So your presumption was actually incorrect.

    Mind you, I had thought it would be a loss too before I checked the accounts. This was based on Murphy’s conclusion that the company would be profitable.

    It now seems his conclusion is not logically sound in itself.

  23. Ritchie loves to plug his own work on his blog. In fact much of his blogging serves only to sockpuppet his own work elsewhere.

    So why is he so shy here? A search of Grangemouth on his website turns up nothing.

  24. C’mon guys, you’re missing the really easy hit! (Okay, also slightly cheap, but it’s everyone’s favour WGCE we’re talking about.) Murphy is quoted as saying, “The accounts are figures which are hard to understand.” Tax expert, industry analyst, and now self-confessed innumerate.

  25. Ben Saunders:

    The fact that the DT asset is unused capital allowances tells me straight away that the business has probably been loss-making for some time.

    With big plant like this you have a fairly long operating life, so depreciation is relatively low, but capital allowances of course stay at the same level regardless of depreciation. Normally you’d therefore get a DT liability as the capital allowances outstrip the depreciation. It’s always dangerous to try ot deduce a tax position from a few numbers, but if we have £500m of capital allowances in excess of depreciation to date, then disclaiming the allowances because of losses seems far more likely than any other alternative.

    The only other scenarios I can think of for capital allowances being low don’t really work:

    1) The plant only gets special rate allowances (8% not 18%). Arithmetically this seems unlikely, as the main reason for plant to be special rate would be because it has a long life (25 years plus), at which point the depreciation would still be lower than 8% CAs.

    2) The plant is very old and has been fully depreciated. Again, arithmetically it seems unlikely to leave a £500m rump: you’d need a very high initial investment for that.

    In theory you could also have a situation whereby CAs have been disclaimed beacuse other members of the group have been loss-making in past years and surrendered their losses across to this company, which has disclaimed the CAs so as to be able to absorb them – but if that is the case then why is Ineos closing the profitable business rather than the loss-makers?

  26. So to summarise: the obvious conclusion to be drawn from the existence of a large deferred tax asset in respect of capital allowances is that the company has for several years been loss-making beyond the capacity of the group to absorb those losses, and so has disclaimed its allowances. However, the FD has persuaded the auditors that group relief will be available in the future, and so the asset doesn’t need to be derecognised for being irrecoverable.

  27. Pellinor, thanks for that. It seems a reasonable conclusion to me.

    I was thinking that Richard had a point about recognising the deferred tax asset until I realised it wasn’t trading losses. Now I think it proves the opposite to what he concluded.

    Incidentally, his yearly comparisons about increasing profits were misleading, if not completely wrong. You shouldn’t compare the 2012 and 2011 accounts because Ineos Chemicals Grangemouth Limited didn’t acquire the trade until 1 April 2011. Richard was (mistakenly, apparently) comparing a 9-month period with a 12-month period.

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