Hybrid Journal

Keeping your ledgers balanced all the time 

Yes, you read it correctly: Hybrid journal entry. Like the currently ubiquitous Prius that runs on both electric and fuel, this type of journal entry is capable of leaving its footprint into duo environments at the same time!

It's really a nice, easy way to make an impact on your twisted subsidiary ledgers position from your favorite general ledger platform.

The entries will debit the GL expense account as usual. But on the other side, pick 'Vendor' instead of having 'Ledger' as the account type and the Vendor Name account (eg. ABC123) instead of the GL Account code for the Trade Creditors.

The beauty of this method is the system will automatically process the entry as if it was processed in A/P module although you actually posted it in the GL module. Therefore the amount is now sitting in the A/P module thereby eliminating the need to reconcile between GL and SubLedger.

Another reason for going hybrid is that the main Creditor account itself should ideally be 'locked' and made inaccessible for direct posting by GL-level users. This is because direct posting to this 'control account' will upset the apple cart altogether creating unnecessary reconciliation work at month end.  (EJ - 7/06/13)

Financial mismatch calls for creative accounting

... in a top-level broadband deal.

Canberra needs creative accounting: NBN

• Jennifer Hewett, National affairs correspondent 
• From:The Australian 
• March 20, 2010 12:00AM

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A FRUSTRATED Telstra has finally belled the cat on the tortuous negotiations over the national broadband network.

The real significance of the company's statement to the ASX yesterday lies in the implicit warning to government that Canberra needs to urgently come up with some creative accounting to make this deal possible.

Telstra pointed out there was a "significant gap" between what it and NBN Co considered to be an acceptable financial outcome. In very deliberate phrasing, it also noted that these negotiations were currently being conducted on a "business to business" basis.

That is a polite way of saying that NBN Co, which is supposed to run as a commercial operation, can't or won't agree to pay another commercial operation, Telstra, what it thinks its assets are worth.

Related Coverage

• Telstra desperate for NBN deal The Australian, 1 day ago
• Big gap for Telstra Herald Sun, 4 days ago
• Telstra extorting over NBN, lobby says The Australian, 4 days ago
• Telstra warns of NBN 'gap'Herald Sun, 4 days ago
• Telstra safe from poaching by NBN Adelaide Now, 10 Mar 2010

But Telstra noted the company was discussing ways in which this gap could be bridged, "recognising that the government has highlighted the national interest benefits of the NBN and reform of the telecommunications industry".

The invitation could not be plainer. If Canberra views this new broadband network as a national interest issue, it should help out with some form of extra public funding or assistance that will allow the two businesses to reach a commercial compromise. But right now it looks more like a case of lose, lose, lose -- for Telstra, for NBN Co and for the government. So far the government, despite being just as desperate for a deal, has not been willing to provide any such additional financial assistance beyond the $4.7 billion of public money already committed. Even if it had the money, this would be politically devastating.

And it is this huge financial mismatch that is far more crucial than whether or not the government has its NBN legislation stalled in the Senate. In fact, the delay in the bill until after the budget suits the government, as it attempts to see whether or not a deal with Telstra will actually come off.

It's another reason Canberra is sitting on the implementation study that reportedly says a broadband network is viable without Telstra's co-operation -- but will also point out the complications of this and of the whole project.

That leaves a lot of uncertainties and nasties for the government to explain away as the opposition seeks to attack.

But it is also true that time is running out for the government to have a credible account of progress on its big broadband plan before the next election. That's why no one can afford to delay much longer on announcing a deal -- or not.

Communications Minister Stephen Conroy wants Telstra to understand that no matter how painful failure to reach a deal would be for the government, it would be bloodier still for Telstra. Think of it as the nuclear option.

Either Telstra signs up within a few weeks or the government deploys every punishment it can against the company and scrambles around to negotiate a series of deals with Telstra's competitors.

These alternatives would be piecemeal rather than national in scope, slower rather than quicker to set up and the costs potentially even more expensive and unpredictable -- even without the need to compensate Telstra.

It is certainly not Canberra's preferred outcome -- just as it is not Telstra's, which knows it will then face the full wrath of a vengeful government. It's why Telstra was negotiating "constructively" and some modest progress has been made. But the remaining numbers gap of billions of dollars requires a big leap rather than just more incremental steps.

David Thodey doesn't think he can persuade his already irate shareholders that it is a good idea to undervalue (on its figuring at least) Telstra's assets -- access to its ducts and a migration of its traffic -- while effectively writing off its copper network before it has to. NBN Co's Mike Quigley isn't interested in compensating Telstra shareholders for lost value, but simply assessing what makes the best business case for NBN Co as a commercial project and what it might cost him to use alternative suppliers.

And one roadblock preventing the government considering any additional help to get around this is that Labor outsmarted itself with the way it has consistently described NBN Co as a commercial project. If it were to alter that wording to emphasise the investment as a nation-building project, the supposed $43bn cost would have to be added on to the federal budget -- which Canberra is absolutely determined to avoid.

Thodey also knows that the government will be ready to punish Telstra and that it will almost certainly get legislation passed that gives the minister wide discretion, including cutting off access to spectrum, forcing it out of Foxtel and generally trying to ensure it can't compete with the new fibre network.

What a bloody mess.

Source: The Australian, 20 March 2010

Incurred vs. Expected accounting losses

This seemingly endless mark-to-market issue turns out to be so and even more convoluted with the recent GFC.  (Emil Jayaputra)

 

Beware the ripple effect of expected accounting losses

By Jane Fuller

FT, August 27 2009 03:00 | Last updated: August 27 2009

As preparers and users of accounts brace themselves for another regulatory onslaught this autumn, one thing they should not count on is an end to so-called "pro-cyclical" accounting.

Some believe the International Accounting Standards Board's proposed switch from an "incurred" loss model to an "expected" loss model will help smooth out peaks and troughs in bank profits over the economic cycle. But in responding to the IASB's "request for information" (deadline September 1) they should be careful what they wish for.

While factoring in expected losses from the start of a loan may top-slice profits in a boom, it will also condense the reporting of losses during the bust. That will intensify pressure on balance sheets.

It is worth remembering that, for all the fuss about "fair value" accounting, narrowly interpreted as "mark-to-market", it typically applies to less than half of bank assets. The incurred loss model for loans is a historic system that reports losses well after the cycle turns and we all start to "expect" that losses will mount.

This lag has been captured in exercises conducted by the International Monetary Fund and central banks estimating bank losses over the next couple of years. The question is not whether there is much more to come, but how many hundreds of billions of dollars. Witness, at last, the mounting loan loss provisions at German banks. The expected loss model would not wait until a loan has been stabbed, poisoned and shot, Rasputin-style, before a cut in value was recognised. But while some losses would have been anticipated, expectations are affected by the cycle. Changing sentiment at the onset of recession would cause them to be revised downwards and, hence, provisions to mount.

Resulting impairment charges would come hot on the heels of mark-to-market losses, which are leading indicators. This means that banks would have less time between waves of losses to recover and raise new capital from the private or public sector.

To cope with that, banks will have to carry higher capital buffers, as every regulator and commentator has suggested. Bank managements have bad form on this. In the EU, for instance, when IFRS was adopted in 2005, it was clear that balance sheets would get bigger and that results would be more volatile - with the inevitable multiplying effect on that bigger asset base. The obvious response should have been to build up a bigger equity cushion to absorb potential losses. On the contrary, profits were splashed out on pay, dividends and share buy-backs.

This is why prudential regulators are set to order additional capital buffers to cope with unexpected losses. US bank regulators have already done this under the Supervisory Capital Assessment Program. In the accounts, such buffers could be called "economic cycle reserves", an appropriation from after-tax profits that cannot be distributed to staff or shareholders.

But there is another way in which the expected loss model will continue the march against historical accounting. First, the trigger for loan impairments will be much more sensitive to current market sentiment. And second, the debate is being fuelled about what interest rate to use.

If the valuation employs the initial rate set, either fixed or variable according to a contractual formula, that is the one applied in the calculation of present value. But a fair value calculation would use the current market rate for that type of instrument. Such up-to-date valuations are shown in the notes under IFRS. The US standard-setter is inclined to put gains and losses in the "other comprehensive income" bucket, still excluded from earnings per share.

Controversial accounting changes have a habit of moving from the notes to OCI to the income statement. Those looking for accounts to be smoothed through the cycle (not this author) will find little comfort in the current proposals.

Jane Fuller is co-director of the CSFI and chairs the Accounting Advocacy Committee of CFA UK

www.ft.com/accountancy

Accounting & Finance: An integrity or diversion?

Treatments of Employee options, Leases, and R&D costs are discussed by a finance professor.

Are accountants learning?

While I have many areas of disagreement with accounting, there are three accounting practices that I have taken particular issue with over time.

1. Not treating employee options as expenses when granted: There should really be no debate about this. Employee options are compensation, and like all other compensation expenses should be recorded at fair value, when granted. The fair value is the option value and not the exercise value.

2. Treating leases (or at least a significant portion of them) as operating expenses: Both FASB and IASB have used the ownership of the asset as the determinant of whether a lease should be treated as an operating or capital lease. As an earlier blog post noted, this allows retailers, restaurants and other big lessees to move most of their debt off the balance sheet.

3. Treating R&D expenses as operating, rather than capital expenses: Using the tenuous argument that the benefits of R&D are too uncertain, accountants have insisted on expensing R&D. In the process, they misstate earnings at technology and pharmaceutical firms and keep the most valuable assets of these firms off the books.

As recently as three years ago, all three practices were still entrenched in accounting statements and standards. But the times are changing. A couple of years ago, accounting finally came around to the point of view that employee options should be valued and expensed when granted (FASB 123). Now, there is chatter that accounting rules will be changed to force all leases to be treated as debt.
http://www.globest.com/news/1380_1380/insider/177832-1.html

I know that companies will be up in arms over this rule and that analysts will issue scary reports about how making this change will be devastating for companies. I don't think so, and have written what I hope is a comprehensive paper on what treating leases right (which to me is to treat them as debt) will do to all the numbers that we use in corporate finance and valuation. Since I have been treating all lease commitments as debt, in both my corporate finance and valuation classes, it will not change how I look at companies but it will surely make it easier for me to do so:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1390280

All that is left now is for the accounting rule makers to take a look at R&D and exploration costs and the logical fixes to make their treatment consistent with capital expenditures at other firms. I have mixed feelings about this happening. On the one hand, it will be a vindication of much of what I have been arguing for, over the last decade. On the other hand, what will I have left to argue about with my accounting colleagues? ASWATH DAMODARAN

IAS 2 on Inventories

International Accounting Standard on Inventories (IAS 2)

The following is a brief summary of IAS 2 on Inventories.

Definition

Inventories include:

1. FG = Finished Goods (assets held for sale in the ordinary course of business)

2. WIP = Work in Process (assets in the production process for sale in ordinary course of business)

3. DM = Materials & supplies consumed in production (raw materials)

Valuation

Inventories are valued at Lower of Cost and NRV (Net Realisable Value).

NRV = Net Realisable Value = the Estimated selling price in normal course of business less the Estimated cost to complete and make the sale.

FV = Fair Value = The amount at which an asset could be exchanged or liability settled between knowledgable willing parties in an arm's length transaction.

Cost of Inventories = Purchase cost + Conversion cost + Other costs incurred in bringing them to their present location & condition.

* Purchase Cost = PP (purchase price) + import duties + transport + handling cost for acquisition of the goods.

* Conversion Cost = Direct Labor + Overhead (variable + fixed)

* Other costs = Cost of designing products, etc

Excluded Costs from Inventory valuation:

- Abnormal amounts of wasted material, labor, other product costs.

- Storage costs

- Admin OH unrelated to production

- Selling costs

- Forex differences from acquisition of the inventories

- Interest cost

These costs should be expensed during the period.

Measurement

Inventory cost should be measured using one of these two methods:

* FIFO Method, or

* WAC (Weighted Average Cost) Method

Source: IAS 2 (www.iasplus.com/standard/ias02.htm)

The Power of Fair Value Accounting

It's somewhat a pleasant atmosphere to know that the occasionally at-odds relation (due to competition) between two major accounting bodies in Australia seems to be put aside when furthering the interests of the  accounting profession. If you read on, you'll see why it behooves them to be so for the sake of this more glorious cause.

In a joint letter signed by the CEOs of CPA Australia, ICAA, and NIA, the Joint Accounting Bodies wrote to Kevin Rudd ahead of the Prime Minister's attendance at the US-spearheaded G20 meeting in Washington 14-15 November 2008.

The first key aspect highlighted to the PM is a resounding conviction of the importance and usefulness of fair value accounting as opposed to historical cost method as being asserted by some commentators. Worse, some government leaders are also alleged to point their fingers to fair value measurement as the main culprit to the current market volatility we're experiencing recently.

The heads of these accounting bodies are unanimous, however, in their view that it would "place an unnecessary burden on capital providers to provide capital without having relevant fair value information to make decisions" based on up-to-date situation if everything is valued at their historical values.

In contrast, using fair value for measurement of assets and liabilities will provide more transparency and comparability of the actual state of a company's economic worth. This is despite them acknowledging that copping fair values of some financial assets and derivatives is not always as easy or possible.

The second issue also brought to attention is the need for 'financial reporting' to be segregated from 'prudential reporting' in the context of external reporting. The latter's purpose is to provide decision-useful financial information to the owners of the balance sheet's right hand side, namely investors and lenders (external users). The former's goal is to promote and maintain financial stability even in adverse circumstances, something that chiefly become the concern of the owners of the left hand side of the balance sheet, i.e. the management (internal users).

CPA, ICAA, and NIA wanted to ensure that the financial reporting standards are stringently adhered to cater to the capital providers' needs and, hence, recommended against such modifications as profit stabilisation or creative accounting that will only dress up the performance of the management. Doesn't the term 'prudential reporting' then sound too good to be dubbed  'prudential' in this kind of setting?

 

And lastly, they are also throwing in their firm support for the independence of IASB as the undisputed IAS setter. This is given the unexpected, alleged development that the G20 summit will appoint a new body in place of IASB (hmm, I didn't know that from the media!).

Overall, I am personally wondering whether this sort of deeply technical letter laden with accounting terms would ever attract the attention of our PM. And if it actually was, did the PM really voice these concerns to the world leaders? Once again, I have never read accounting issues ever discussed among them on newspapers. Anyway, what's important to the accounting profession has been done and conveyed properly and clearly to the highest authority in this country. (EJ)

Source: http://cpaupdate.cpaaustralia.com.au/cpalink/1019_31058?Division=New+South+Wales&Segment=The+Rest

IFRS: Off or on balance sheet?

IFRS seems to be the world financial language nowadays. This excerpt below highlights one of the key aspects in US GAAP that diverge from IFRS. Shall we be forgiven for thinking this might be one variable that lurks behind all the recent hype around the globe with the torrential collapses of American (and now European) financial giants?  (EJ)

 

Harder to keep assets off the balance sheet under IFRS

While the SEC deliberates over whether to broaden its use of IFRS, one crucial difference between US and international accounting standards is their approach to what instruments/liabilities may be kept off the balance sheet. Under current US accounting rules, certain loans such as those linked to risky mortgages and credit card debt, can be kept off balance sheet in vehicles known as qualified special purpose entities (QSPEs). Under IFRS, the central idea is control and it is a more principles-based approach, which makes it difficult to design something in such a way that it is kept off the company's balance sheet. Deutsche Bank managing director Charlotte Jones said at an accounting roundtable event that one of the most difficult parts of the conversion from US GAAP to IFRS in 2006 for Deutsche Bank was the requirement to consolidate a lot of their QSPEs (more than 200) that were kept off the balance sheet under US GAAP. Jones said that although it required more work, the IFRS control-oriented approach presents a more realistic picture of where the entity stands economically.

Source: http://www.ey.com/global/content.nsf/Australia/In_balance