Snippa Spuddas all over accounting standards

He’s not really got it, has he?

Third, there is intolerance to the needs of users. Take for example the recent change to UK accounting standards represented by new Financial Reporting Standards 102, now coming into widespread use for the preparation of accounts in the UK. These do, for example, embrace concept that many users of accounts, including the owners of the vast majority of SMEs will find entirely alien. As example, FRS 102 says that:

When a financial asset or financial liability, ie a receivable or payable, originates from an arrangement that is a financing transaction, that receivable or payable is measured at the present value of the future cash payments discounted at a market rate of interest for a similar debt instrument1 (paragraph 11.13 of FRS 102).

Very politely, whoever dreamt this up had never tried to explain what this meant to the director and shareholder of a company who finds the language alien, the maths of discounting incomprehensible, and considers the fact that this deems part of what they might be paid under a deferred payment arrangement to be interest is just wrong because that is not the commercial agreement that they reached with their customer. And yet despite all this an accountant is required to impose this rule on that director and prepare accounts as if they have done something they quite consciously disagree with, and tell the director in question to sign the accounts which they may well consider incorrect and mis-stated, or decline to provide them with professional services. That is the action of a profession disconnected from the reality of the interests it is meant to serve.

Firstly, it’s not deeming any part of the payment to be interest. It’s saying that the current value should be equated to a debt financing instrument. This obviously falls out of the accounts, with no interest on it, as the payment is made.

But think about this the other way around. Imagine that such future payments were not valued at net present value. I’m due £100 million in 50 years time (my new Nigerian mate promises, honest). What value should that have in my accounts today? £100 million?

Rilly?

And as to directors not understanding the point. It’s actually the smaller the company is the more they understand cash flow. Ask an FD of a 200 people SME whether he’d rather have money today or in 3 months. And then ask him how much – you’ll get to a high notional interest rate pretty quickly.

Sigh.

43 comments on “Snippa Spuddas all over accounting standards

  1. He really is a condescending twat.

    Someone who’s gone out of their way to build their own buisiness can’t understand the concept that a Tim explains with utmost clarity in a single, simple, paragraph?

    I suggest the inability to understand and explain clearly is with him and his ilk, and not businessmen who the accounts are aimed at.

  2. “The vast majority of SMEs” are micro-entities and will probably use the simpler FRS105 rather than FRS102.
    (Though if an accountant would want to pad the fees, then s/he might well use the more complex standard and charge the client for the time spent explaining it!)

  3. I think Murphy might know how a director of an SME could have difficulty understanding accounting techniques, basic business skills and how to present a set of accounts.

    He was, after all, director for a time of a business importing Trivial Pursuit into the UK?

    I can well believe he was as out of his depth doing that as currently and patently he is in the subject in which he has a professorship.

    What is not so easy to explain is how the hell he passed his accounting exams.

  4. Tim

    I certainly understand cash-flow,

    every month I receive a clear lesson,

    just a week before the end of the month

    🙂

  5. Ritchie really read this comment, and without any shame or detection of irony, posted it?

    Dr. Keith Crainshraw says:
    May 23 2017 at 8:29 am
    Fine words Richard. It will indeed be of comfort to those who have lost loved ones that you and other bright academics are working so hard to find the answers you crave. Let’s hope you find it soon before such tragedy strikes again.

    Than again, maybe he’s just stupid…

    Dr. Keith Crainshraw says:
    May 24 2017 at 8:36 am
    The clarinet is a wonderful instrument, it was one up from the recorder at my primary school 30 years ago. The enjoyment you get from blowing that ebony shaft is fantastic. Some great shows on the internet of that as well.

    Reply
    Richard Murphy says:
    May 24 2017 at 9:15 am
    I agree: I do play, quite often, but no band right now….

    And mine is definitely not ebony!

    Reply
    Dr. Keith Crainshraw says:
    May 24 2017 at 9:18 am
    It’s a worthwhile investment, as my clarinet teacher would tell me “once you’ve had black you’ll never go back!”

  6. Basic financial maths (i.e. time value of money) is not hard.

    If someone who is charging you to be your financial expert (let’s use the term “accountant”), but is unable to explain this concept then I’d suggest they really should not be calling themselves and “accountant”.

  7. “they might be paid under a deferred payment arrangement to be interest is just wrong because that is not the commercial agreement that they reached with their customer.”

    How the hell does he manage to do it so consistently?

  8. I’ll grant you that the idea of calculating a present value using discount factors seemed rather advanced to accountants in, oh, 1965 or so, but now? Spud-u-loathe is dire.

  9. Champion of the State lording it over the masses switches hats and tuts about how complicated it all is and difficult for taxpayers.

  10. Dr Keith Crainshraw anagrams as Richard was in the KR (RK?)
    Mean anything to anyone?

  11. @ Noel – you couldn’t make it up. the lack of self awareness is fucking astonishing.

  12. @BiS

    It was an anagram of “Richard is a wanker”, but I got a bit drunk one night and lost what it was I came up with and mis-remembered it.

    Chris Cenuittia (now in the delete bin) was my favourite (Ritchie is a cunt).

    I guess the good Dr. is now dead, so next up is……?

  13. And it gets better. In response to Dr Crainshaw’s comment about never going back, Spud replies:

    “Maybe

    But my Yamaha has done me well for many years”

  14. =NPV(0.1,100) typed into an excel spreadsheet returns £90.91

    Clearly this is not £100 with a 10% interest element.

    Cuntedly, Microsoft is peddling broken software.

  15. The Murf is not wrong in principle about the new standards.

    For most companies, outside of the financial sector, there was no good reason to change the basis of accounting to value based from historical. People who read accounts previously knew and understood what they were looking at. The example about a 50 year debtor is somewhat extreme in practical terms! If debtors are due after more than one year, it had to be spelt out in the accounts in any case.

    Like MTD (stopped clocks and everything), he’s not wrong with all the faux “value” nonsense. I say faux, because accounts at the end of the day don’t pretend to assess the value of the company. The balance sheet was always a factual historical analysis of what had happened (up to and) at a point in time.

    Accounts risk becoming less intuitive to most ordinary users with changes like this. More relevantly, like so much regulatory shit, it’s adding unnecessary work, bureaucracy and cost, for no actual benefit.

    Pointless nonsense, all of it.

  16. PF – I agree that a lot of the “new” standards make accounts virtually incomprehensible. Do you know anyone who really understands accounting for share options or derivatives (including embedded derivatives) outside the technical departments of the major accounting firms?

  17. @ Diogenes
    I could, if I was bothered – but I can’t be bothered as it’s not relevant to the reduced amount of work that I now do and the current standard for dilution of eps is theoretically incorrect for medium- and long-dated share options.

  18. As usual, Richard Murphy doesn’t actually understand the accounting standards he is discussing.

    From an IAS summary of FRS 102:

    FRS 102 includes two sections on financial instruments. Section 11 applies to so-called ‘basic’ financial instruments, whereas Section 12 applies to other, more complex financial instruments and transactions, including hedge accounting…

    Section 11 applies to basic financial instruments, including cash, certain equity instruments and certain debt instruments which meet specified conditions. Initial recognition is generally at transaction price, including transaction costs, but with some exceptions…

    Section 12 applies to financial instruments not covered by Section 11. Examples of financial instruments normally within the scope of this section include interest rate swaps, forwards, options and investments in convertible debt. Initial recognition is generally at transaction price. Subsequent recognition depends on the instrument, but for many instruments in this section, fair value through profit or loss is applied.

    Not quite as far-reaching or draconian as Spud would have us believe. The example Murphy uses involves a receivable or payabe arising from a financing transaction, which a very specific (and narrowly defined) type of transaction.

    And let’s face it… If you are a Chartered Accountant and you have an SME client lead by a director that (1) doesn’t understand net present value but is (2) is using interest rate swaps, chances are they won’t be a client for very long.

  19. The irony in this is that Spud’s all worried about the effects of imposing FRS 102 on the business community, but never gives that same thought to the effects of imposing country-by-country reporting on the business community.

  20. @DtP

    That’s because Spud changed the world by inventing country-by-country reporting so it’s a ‘good’ thing. FRS 102 was not invented by Spud so is a ‘bad’ thing.

  21. @MB 90.91 x 1.1 = 100, so don’t know what you’re getting at (and I’d be the first person to say Microsoft are s£££).

  22. Lads and lassies, I’m just going to try and get a credible name from

    Ritchie Camel Toe

    I may be some time…..

  23. @BnB

    Spud logic in quasi tuberlingo.

    OMG- I hope Rocco S doesn’t get any ideas from that…

  24. DtP: Isn’t “Ritchie Camel Toe” spelled BZJXXLLWCP in Welsh?

    No, you’re close though: BZJXXLLWCP are sexual orientations in Welsh.

  25. MB – apologies I think I may have missed the sarc in your original comment, for which mea culpa. Either that or you can’t do maths and shouldn’t be playing in Excel:)

  26. Who makes business decisions based upon annual stats accounts drawn up several months after year-end. Don’t these people have management accounts with relevant KPIs issued on a timely basis many times during the year?

    If you have a complicated business with lots of potential discounting and the like that will impact upon your distributable profit and taxable profit you should have this built in to your models.

    All companies with a 31 December 2016 year end now have their accounts prepared under the FRS102.

  27. If you have a complicated business with lots of potential discounting and the like that will impact upon your distributable profit and taxable profit you should have this built in to your models.

    In theory, yes. But then again, Spud’s got a brain the size of a walnut; so no such models exist.

  28. I’m a business owner, in my own business I’m not relying on end of year accounts produced 7 months after year end to tell me anything about the business. I’m using current figures, current cashflow, current stock.
    At this point in time if was using published accounts I’d be looking at the situation as at 31st March 2016 at best – almost 14 months out of date for some figures.

  29. But then again, Spud’s got a brain the size of a walnut; so no such models exist

    And under the operating system and hardware that Spud wants the Currajus Mistake to provide, no such models can exist.

Leave a Reply

Name and email are required. Your email address will not be published.