Richard Murphy says:
July 22 2020 at 11:01 am

Consolidation baffles most accountants, I think

14 thoughts on “??”

  1. Further down that thread he reveals his lack of understanding of group accounts

    Actually, the reason why we do consolidated accounts is precisely because we did not think subsidiaries have substance, they are merely form

    He has got it precisely wrong. If someone else had written it, you would think it’s a typo because it is self-evidently wrong – eg you buy BT plc because you are interested in the business activities of its subsidiaries rather than because it owns shares in a number of companies (hint it’s a Telco not an investment trust). With the Spud of Ely, it is innate stupidity and ignorance combined with astonishing arrogance.

    NB before J77 comes along, it would be truer to say that BT is a pension fund with a Telco attached

  2. I think he’s probably right though.

    I guess the majority of accountants in private practice deal with clients who are, oh say farmers, actors and musicians, small shopkeepers etc.

    It’s entirely understandable that an accountant practising in the likes of Downham Market would not face groups of companies day to day and be wholly out their depth in group accounts and complex accounting standards applicable to large multinationals.

    The difference being that most such accountants would not spend their later life opining critically on such matters without a sound basis of knowledge and, indeed, suggesting that their own competence in those areas is greater than that of real experts.

  3. It’s been a long time since I did my exams, but IIRC a lot of consolidation accounting is to do with reporting debts & transactions between group companies. Company A might owe Company B squillions so in isolation it doesn’t look great, but since both are fully owned by Company C the debt doesn’t really exist outside of the group’s books.

    Similarly, Company B might be selling to C and making profit, but that’s matched by C’s costs so it doesn’t exist outside of the group, either. Trading figures and debts between group companies simply net off so don’t get recorded in consolidation.

    It’s not a difficult concept to grasp.

  4. @ Diogenes
    Thanks, but I am going for the bigger point that we do not think that subsidiaries are merely form. Many holding companies – especially property ones – have a multiplicity of subsidiaries so that if one component of their group goes belly-up the holding company can just write off its equity stake and dump the net liability. Commercial and Industrial groups do this so that if a government decides to nationalise one of its companies (usually without or with totally inadequate compensation) it is only the subsidiary, not the whole group, that is stolen/destroyed.
    So, in order to get a fair picture of the whole group we have consolidated accounts. I don’t find them baffling but then I’m not an accountant living in a rural backwater.

  5. Dennis, CPA to the Gods

    Consolidation baffles most accountants, I think

    Translation: Consolidation baffles Richard Murphy.

    Bravefart –

    I haven’t had to deal with consolidation issues in the 36+ years I’ve been in practice. That doesn’t mean it baffles me. Consolidations are time consuming and often complicated, and would I be out of my depth doing consolidations for a Fortune 500 company? Sure. But that would be more of an experience issue than anything else. Is consolidation accounting complex? Sure. But baffling? No.

  6. But we already know consolidation baffles “Professor” Richard Murphy. Because, if he really understood consolidation, he would realise that it makes CBCR impossible.

    Explanation: imagine a company comprised of a selling company (R) in Ruritania and a manufacturing company (N) in Narnia. As the only transaction of the year, N manufactures a bunch of widgets and sells them to R. From a consolidated accounts perspective, nothing has happened: these are merely internal transactions. From a tax perspective, N has generated a profit, on which it must pay tax. Yet Ritchie insists that CBCR must be reconciled to the consolidated accounts.

  7. aaa, the beauty of that example is precisely why Tim, being such a pendant, has fastened onto Spud’s view that the consolidated UK government accounts cancel out the internal transaction of QE and that this reflects reality better than expressing the transactions separately. Where the divine principle of MOAR tax is involved, Sped whirls around like an angel on a pin. People with brains know that different accounting conventions are useful for different purposes – one size does fit fit all

  8. Back in the day, I was the go-to person in my (Big 4) office whenever we had big group client with a complex consolidation. That day was within a couple of years of my final ACA exams. Not long after that I changed departments and had fewer big clients with consolidations. That was over twenty years ago now though. If you thrust a FTSE100 consolidation at me now, I’d run a mile. I mean in theory, a consolidation is just a case of eliminating intra-group transactions and balances. That’s fine. But when you get minority interests, associates, joint ventures, acquisitions etc, it gets really difficult.

  9. @ Diogenes
    Some of them are really complex – minority interests in associates which have negative book value are just starters and valuation of work-in-progress that includes components purchased from another group company get into the realm of judgement. So the possibility of getting a + or – sign the wrong way round is frighteningly high for anyone the teeniest bit rusty (I’ve found errors in audited and published accounts for quoted companies). So Mark may be prudent in avoiding them even though he understands them perfectly well.

  10. Thank you John and just for the record, I have produced consolidated accounts for quoted multinational groups, including 20-F filings

  11. @ Diogenes
    I’ll give you best on that – I’ve been volunteered to prepare QUITE A FEW accounts, mostly for charities, but only UK GAAP.

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