Download - Accounting and Accountability
ACCOUNTING AND ACCOUNTABILITY
[What’s it all About?]by
DAVID C. JONESChartered Public Finance
AccountantChartered Certified Accountant (UK)
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ANNUAL FINANCIAL STATEMENTS
Balance SheetStatement of Financial Position‘
-------------Income and Expenditure (Profit and Loss) Account – Income Statement
Statement of Comprehensive Income-------------
Statement of Cash Flows
2
CROWN WATER COMPANYFinancial Statements for 20_1 and 20_2
(Continued)
$ 708,000======
100,00050,00075,00035,00085,000
159,000----------204,000
76,000----------128,000======
6.4%71%
IncomeNet Water Revenues
ExpensesPersonnelChemicalsPowerMaterials AdministrationDepreciation
Net Operating IncomeInterest
Net Income
Rate of Return on Fixed AssetsOperating Ratio
$ 675,000======
100,00048,00071,00035,00085,000
150,000----------185,00072,000
----------113,000======
6.0%72%
20_1 20_2INCOME STATEMENT
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CROWN WATER COMPANYFinancial Statements for 20_1 and 20_2
(Continued)
$ 204,000159,000----------363,000
15,000----------348,000----------
50,00076,000
----------126,000----------222,000330,000----------108,000
Internal Sources of FundsNet Operating Income (Before Interest)Add Depreciation
Less Increases in Needs for Working Capital
Total Internal Sources of FundsDebt Service: Amortization Interest
Total Debt Service
Net Internally Generated Funds (After Debt Service)Capital Investment
Funds Required from External Sources
$ 185,000150,000---------- 335,000
- ----------335,000----------
45,00072,000
----------117,000----------218,000300,000----------
82,000
20_1 20_2CASH FLOW STATEMENT
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CROWN WATER COMPANYFinancial Statements for 20_1 and 20_2
(Continued)
$ 108,000100,000----------
-8,000=====
348,000126,000
2.76----------222,000330,00067.3%
----------
Funds Required from External SourcesNew Loans
Net Increase (Decrease) in Cash
Ratio Analysis:Total Internal Sources of FundsDebt ServiceDebt Service Coverage Ratio (Times Covered) Net Internally Generated Funds (After Debt Service)Capital InvestmentPercentage Contribution to Capital Investment
$ 82,000
100,000----------
18,000=====
335,000117,000
2.87----------218,000300,00072.8%
----------
20_1 20_2CASH FLOW STATEMENT (CONT.)
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CROWN WATER COMPANYRevised Financial Forecasts for 20_1 and 20_2
(Continued)
$ 5,630,0002,309,000
----------3,321,000
----------
110,00065,00050,000
----------225,000----------
3,546,000-=======
Fixed AssetsFixed Assets (Revalued)Less Accumulated Depreciation
Net Current Value of Fixed Assets
Current AssetsInventoriesReceivablesCash
Value of Current Assets
Total Assets
$ 5,000,0002,000,000------------3,000,000------------
100,00060,00040,000
----------200,000
------------3,200,000=======
20_0 20_2BALANCE SHEET as at 31 December$
5,300,0002,150,000------------3,150,000------------
100,00060,00058,000
----------218,000
------------3,368,000=======
20_1
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CROWN WATER COMPANYFinancial Statements for 20_1 and 20_2
(Continued)
$ 700,000241,000----------941,000
1,500,000------------2,441,000------------1,005,000------------
100,000----------
3,546,000=======
29:712.3
EquityContributed CapitalAdd Accumulated Retained Earnings
Total Contributed Capital & Retained EarningsRevaluation Reserve
Total Equity
Long Term Debt
Current LiabilitiesPayables
Total Liabilities and EquityRatio Analysis:Long Term Debt : Equity RatioCurrent Ratio
$ 700,000
- ------------
700,0001,500,000------------2,200,000------------
900,000----------
100,000----------
3,200,000=======
29:712.0
20_0 20_2BALANCE SHEET as at 31 December (Continued)$
700,000113,000
------------813,000
1,500,000------------2,313,000------------
955,000----------
100,000----------
3,368,000=======
29:712.2
20_1
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ACCOUNTING AND ACCOUNTABILITY
Fundamental Principles of Cost Accounting (FPCA)
ORCost Principles of Financial
Accounting (CPFA)By
David C. Jones, CPFAChartered Public Finance Accountant (UK)
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ONE HUNDRED AND ONE WAYS OF LOOKING AT ACCOUNTING!
• The attached PowerPoint slide-show explains, in detail, using teaching documents, how to examine many ways of looking at accounting theories and practices, which lie behind statements and accounts.
• They include many ideas and concepts that emanate from my own thoughts, adaptations or inventions, to facilitate that those studying and demonstrating accounting will “get the point” beyond a mere learning of a series of book-keeping entries and accounting practices.
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ONE HUNDRED AND ONE WAYS OF LOOKING AT ACCOUNTING!
• When I studied accounting, about fifty years ago, I found that the principles used, to explain the accounting practices, to be very confusing and inhibiting. So, subsequently, I have tried to invest in my own ways of perceiving the principles. Thus, the resulting slide-show could easily be entitled as
• “One hundred and one ways of looking at accounting!”
• All of these were researched by me or prepared from my personal and professional knowledge. The slide-show was prepared, personally, by me, in my own home office.
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ONE HUNDRED AND ONE WAYS OF LOOKING AT ACCOUNTING!
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• What is certain is that a computer output will always lack the illumination of traditional accounting. It will seem hollow, by comparison.
• A mathematical computation should not only answer the question. It should always give some understanding of why the answer is what it is.
• Merely sending an input into a black box and receiving an answer out of the other end adds to knowledge but NOT to understanding!
Simon Singh: Fermat’s Last Theorem
WORLD-WIDE FINANCIAL CRISIS
• World leaders have been meeting frequently, to try to develop new strategies for resolving various ongoing fiscal crises. • Many of their potential solutions seem to involve the creation of new “bail-out” funds to support casualties of the crisis – countries teetering on the brink of default and financial institutions facing large sovereign write offs.
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WORLD-WIDE FINANCIAL CRISIS• But how robust can those solutions be? • Crucially we should ask the question:
“What impact will the creation of new – or much larger – bail-out funds have on the financial health of sponsoring (central, state or local, governments?”
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WORLD-WIDE FINANCIAL CRISIS• The shocking answer to this question is that, in all but a handful of cases, we do not know! Why?
• Because most governments still account on a cash basis. They do not maintain balance sheets. They do not systematically record and value assets and liabilities including multi-billion dollar obligations to “bail-out” funds. • A solution built on such fragile foundations is bound to collapse. It is built on sand. The question is not “whether” but “when” it will fail.
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WORLD-WIDE FINANCIAL CRISIS
• Governments account largely on a cash basis because governments choose to do so. They take decisions without proper regard to financial consequences because they choose to. They run up large debts and deficits because they choose to do so.
• They make lots of other poor choices.
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WORLD-WIDE FINANCIAL CRISIS• But governments are susceptible to pressure and influence. If the profession really wants to create pressure for a step change in public financial management, reporting and auditing, it can make it happen. It will not be easy, but it is possible.• What it calls for is concerted, co-ordinated action. Every institute, and every firm, reinforcing the same compelling arguments for a step-change – nothing less – in all aspects of public financial management.
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WHAT MAJOR ASSETS MAKE UP A BALANCE SHEET OF NATIONAL GOVERNMENTS?
• As far as the US Federal Government is concerned, the answer is "NONE". The US Federal Government does NOT produce credible balance sheets. Its financial statements are totally misleading and constantly manipulated by politicians and the media, for a variety of purposes.
• The accounts are produced and maintained on a cash basis only. Thus, the (so-called) "deficits" are merely (positive or negative) “cash” (monetery) balances.
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WHAT IS MEANT BY THE “DEFICIT” OF NATIONAL OR FEDERAL GOVERNMENTS?
• The term “DEFICIT” is totally misleading, in accounting terms, because it incorporates (inter alia) expenditure on "fixed assets" and "monetary investments“.
• These would NOT be a part of any “deficit”, if the government followed what are known as "generally accepted accounting principles - GAAP" (in the USA) or International Financial Reporting Standards – IFRS (elsewhere)
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Misleading Accounting Principles and Practices
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Headline: “Governor McDonnell: Virginia is back in the Black –
Estimates show a surplus of $220m for fiscal 2010"
BUTResults derived only from Cash Flows
are inherently unreliable (and may easily be misleading,
fraudulent or politicized)
Misleading Accounting Principles and Practices
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The Governor states: • The Commonwealth will also defer $620 million in payments toward the Virginia Retirement System (VRS), the state's $50 billion employee retirement fund, in fiscal 2011 and 2012, a deferment to be paid back over 10 years at a 7.5 percent interest rate. • The state deferred nearly $140 million in VRS payments in the fourth quarter of 2010.
Misleading Accounting Principles and Practices
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Discussion with a former State Legislator: • The budget must always balance – every year!• It is HOW the budget is made to balance that is most important!
Reflection on the above statement:
• Does anyone…anywhere…understand what is going on? Does anyone “GET IT?”
Misleading Accounting Principles and Practices
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• Long term borrowing to cover expenditure that is not capital expenditure is likely to be unconstitutional. Even if not, one can claim, with some authority, that it is imprudent and likely to be inconsistent with generally accepted accounting practices.
• It is, also, inappropriate (and often illegal!) for a municipal government to raise long term loans to re-finance short-term indebtedness caused by an accumulated general fund deficit (NEGATIVE RESULTS)
• In the notorious case of WorldCom, people have gone to prison, for a very long time, for accounting fraud that included the charging of operating expenditures as capital expenditure – so as to, unlawfully, increase stated profits! The comparison should be obvious! [RESULTS accounted for as RESOURCES]
Misleading Accounting Principles and Practices
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• These principles are embodied in much local government legislation, world-wide. As a “golden rule,” they require long term borrowing to be only for capital expenditure, resulting in the creation, or acquisition, of community assets. Borrowing is typically subject to stringent external controls, such as central (or state) government approval or (as often, in the USA) a referendum procedure.
• The subsequent levying of taxes and charges, to cover the resulting debt service, is one way of ensuring that beneficiaries from the use of each asset (RESOURCES) will pay for this, during its useful life.
• These positions have been widely promulgated by the former US Comptroller General, Mr. David Walker, of the Peter G. Peterson Foundation.
• In addition, money borrowed would NOT add to the surplus (nor diminish the deficit) because it would, merely, add to the government's liabilities.
• For the same reason, money used to repay loans would NOT add to the deficit (nor diminish the surplus), because it would, merely, diminish the government's liabilities.
• (The INTEREST part of debt service WILL add to the deficit!).
24WHAT IS MEANT BY THE “DEFICIT” OF NATIONAL OR FEDERAL GOVERNMENTS?
• The U.S. government started its 2015 budget year with a deficit in October, although the imbalance was worsened, by a calendar quirk.
• The Treasury Department says the October deficit totaled $136.5 billion, up 12.2 percent from October 2014.
• In both years, Nov. 1 fell on a weekend, which required the government to mail out November benefit checks in October. That shifted $49 billion in payments into October, this year.
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A CALENDAR ODDITY SWELLS THE DEFICIT (1)
• The “shifted” $49 billion in payments, into October, 2015, was up from last year’s $41 billion payment shift.
• The government’s budget year begins on Oct. 1.• For the 2015 budget year, which ended
Sept. 30, the annual deficit fell to $438.9 billion, its lowest level in eight years,
• This was spurred by gains in tax revenue that outpaced greater government spending.
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A CALENDAR ODDITY SWELLS THE DEFICIT (2)
• This kind of information, in terms of credible accounting, is useless and misleading.
• Reporting the information, in this manner, is quite silly and completely meaningless.
• It does, however, create opportunities for the media and politicians to make declarations (and to express opinions) which are, in effect, dishonest and even, possibly, fraudulent.
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A CALENDAR ODDITY SWELLS THE DEFICIT (3)
FISCAL BALANCE V. PHYSICAL DEFICIT
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• As a result of these concerns, a phenomenon is created whereby “cash-based” or other financial budgets may be "balanced," perhaps by legal or administrative mandate (fiscal balance).
• However, there may be significant actual or potential deficits hidden away within under-maintained assets (e.g. property and/or infrastructure), or lower productivity of services (physical deficit).
FISCAL BALANCE V. PHYSICAL DEFICIT
• Thus, not only does the property suffer from delayed and inadequate care, renewal and expansion,
• It, also, steadily develops a permanent status of inefficient operation and physical shabbiness, from which it becomes impossible to recover, except at later – and much higher – cost.
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FISCAL BALANCE V. PHYSICAL DEFICIT
• Thus, typically, immediate & operationally intensive expenditures are favored over those that are maintenance-intensive.
• For example, it is always more urgent to
pay teachers than to maintain schools, important though the latter may be.
• Roads are increasingly left with unrepaired potholes, instead of being fully maintained.
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FISCAL BALANCE V. PHYSICAL DEFICIT
• Bridges maintenance is routinely ignored, until they collapse, with multiple injuries.
• Railway track maintenance is routinely ignored, until a train is derailed, at high speed, with multiple deaths and injuries.
• Funds are taken (i.e. misappropriated) from (or under-contributed to) pension, or other “trust” funds!
• Whilst politicians boast that:
“We have a balanced budget”
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MINNESOTA BRIDGE COLLAPSE (AUGUST 2, 2007)
A Catastrophic FailureBy Eugene Robinson
(Washington PostFriday, August 3, 2007)
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MINNESOTA BRIDGE COLLAPSE (AUGUST 2, 2007)
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MINNESOTA BRIDGE COLLAPSE (AUGUST 2, 2007)
• As always, …we don't spend nearly what we should on maintenance and repair, [replacement and renewal]
• Bridges [are] actually deemed to be in better shape than dams, roads or the power grid.
• But the civil engineers estimated that it would cost $9.4 billion a year for 20 years “to eliminate all bridge deficiencies.”
• That's not a lot of money in the context of a $13 trillion economy. But does anyone think we're going to make infrastructure a national crusade?
• Of course not. Infrastructure is boring!
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MD., VA. DIVERTED BRIDGE MONEYFUNDS WERE USED TO WIDEN ROADS, FIX STREETLIGHTS
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• Virginia and Maryland officials used more than $30 million from the federal government's main bridge repair and replacement fund on projects that weren't bridges, according to interviews and government documents tracking spending over the past four years.
• The federal bridge money was transferred to general transportation accounts that funded such things as streetlights in suburban Maryland and the widening of Ox Road in Fairfax County and King Street in Leesburg.
MD., VA. DIVERTED BRIDGE MONEY[FUNDS WERE USED TO WIDEN ROADS, FIX
STREETLIGHTS]
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Federal dollars might have been diverted to projects other than bridges …, but federal and state officials say “their accounting systems are not set up to track which projects eventually got the money.”
[This is Complete Nonsense!]
Accounting and Accountability (UK)
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Public Accounts Committee chairperson,* Meg Hillier, has called on the government to “up its game” on transparency and produce more accessible information from across government to improve clarity on public spending.
[*The Chair of the committee is always drawn from the main opposition party and is usually a former senior Minister.]
Accounting and Accountability (UK)
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• Hillier was speaking as the Institute for Government published its annual Whitehall Monitor report, which found that the Treasury (Finance Ministry!) was among the least transparent departments.
• Although technology was beginning to affect the way citizens accessed public services, government, as a whole, was bad at explaining key data, the report concluded.
Accounting and Accountability39
This kind of “half-baked” accounting and accountability has gone on for
so long, that the public and the media have become conditioned to
believing (and reporting) that:
“Bad is Good!”“Right is Wrong!”
“Down is Up!”“Upside Down is Right Way Up!”
UPSIDE DOWN IS RIGHT WAY UP40
TRUST• Confidence; a reliance or resting of the
mind on the integrity, veracity, justice, friendship or other sound principle, of another person, entity or fund.
• Honesty, reliability & certainty of outcome.
• He or that which is the ground of confidence.
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ACCOUNTING AND ACCOUNTABILITY
We have erred and strayed from Thy ways like lost sheep. And there is no health in us!
[Anglican Book of Common Prayer – 1662]
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WORLD-WIDE FINANCIAL CRISIS• Recently, the Financial Times published a letter from Ian Ball, then, the chief executive of the International Federation of Accountants. Ian has spent a career driving the argument for accrual-based accounting and modern international standards for public sector financial reporting. • His letter reminded politicians in the European Commission that the most serious accounting and auditing issue facing them is not the governance arrangements of the International Accounting Standards Board nor the market structure of the audit profession. • On the contrary, the elephant in the Commission room is the quality and reliability of the financial statements of its own member states.
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44
Financial Reporting and Accountability
Disclosure of Public and Private Utilities: Mechanisms for Legal, Financial, and
Accounting Reporting
Understanding the purpose and methods of disclosure
Financial reporting and composition of disclosure
material under the International Accounting Standards Board (IASB)
David C. Jones CPFA, FCCA (UK)
IASB chairman discusses the future • If we move to principle-based standards, those students are going to have to come back and say,
‘Well, how do I do this?’ • When I was a young accountant, we didn’t have any
standards in the U.K., so you were on your own. And it was the old partner, with a lifetime of experience and judgment, who was the person who got you
through the challenges of practice.
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David C. Jones CPFA, FCCA (UK)
IASB chairman discusses the future of IFRS, U.S. GAAP and the global accounting profession
• If we move to principle-based standards, those students are going to have to come back and say, ‘Well, how do I do this?’
• When I was a young accountant, we didn’t have any standards in the U.K., so you were on your own. And it was the old partner, with a lifetime of experience and judgment, who was the person who got you through the challenges of practice.
• As we start pressing on judgment, we’re going to bring the
professionalism back. I don’t think we’re “professional” enough in the accountancy profession, because we ask our colleagues to learn a huge amount of rules. And a lot of them don’t make sense.
• The question ‘Where does the profession go from here?’ is one that we need to confront now. I don’t think we can continue going in the direction we’ve been traveling for many years.
46
IASB chairman discusses the future of IFRS, U.S. GAAP and the global accounting profession
• As, then, chair of the London-based International Accounting Standards Board, Sir David Tweedie was championing an effort to develop a single set of global financial reporting standards that will be both, standard and enforceable.
• The scandals that we have seen in recent years are often attributed to accounting, although, in fact, I think the U.S. cases are corporate governance scandals involving fraud. If anything, however, the scandals have made accounting more exciting to people.
• Where I take issue with universities is in their teaching of accounting standards. They do that to help their students with their professional training. I think the universities should be teaching them to think. I see all these kids learning all the rules about leasing and I think, some day soon, we’re going to get rid of all those rules.
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CASH MANAGEMENT – IS IT ENOUGH?
PRINTING MONEY
CASH RESERVESGOLD RESERVES
48
CASH MANAGEMENT – IS IT ENOUGH?
Reflect, discuss and report important reasons why you
consider that accounting ONLY for
CASH MANAGEMENT may not be enough!
[Is (Walker!) therapy required?!]
Let’s walk
before we run?
49
THE WALKER SLIDES
David Walker (abolitionist)David Walker (September 27, 1785 – June
28, 1830) was an outspoken American activist who demanded the immediate end of slavery:
[To an overwhelming and obsessivereliance upon cash-based accounting?!]
50
THE WALKER SLIDES
On, March 12, 2008, David M. Walker, resigned as Comptroller General of the United States (head of the GAO) and
accepted the position of President and Chief Executive Officer of the newly established “Peter G. Peterson Foundation.” He later founded the “Comeback America Initiative
(CAI)”
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THE WALKER SLIDES
52
Failure to firmly grasp the walker – or the “Walker rules” - will inevitably cause
a slide! [In accounting standards & practices]
THE WALKER “SLIDE”
Ending with a faint whimper rather than a bang, the Comeback America Initiative (CAI), founded by former U.S. Comptroller General David Walker and dedicated to getting America's fiscal house in order, abruptly closed up shop. Mr. Walker said his organization was discontinuing operations so he could "spend some time with my family and consider future options."
53
THE WALKER “SLIDE”
“The voice of one crying in the wilderness… ...make his paths straight.”
BUTNobody is listening or paying attention! Short-
term, cash-based, politically expedient, fixes are the name of the game! What a mess!
THUS[I stick by my claims about the inadequacy of
the funding of pensions and the dishonest accounting, thereof.]
54
Accounting Principles and Practices
55
Accounting is NOT Rocket ScienceThere are Only
14 Types of Cash Flowsand
30 Types of Other Entries(TWICE as Many Types of Other Entries
as Cash Flows!)
Moral: Results derived only from Cash Flows are inherently unreliable
(and may easily be misleading, fraudulent or politicized)
THE COMPETITION FOR CASH
THE POOLOF CASH
CHARGES,FINES &
INTEREST
GRANTS &TRANSFERS
MAJOR POLICY ISSUES
ACTIVITY & SERVICES
INTERESTON DEBT
LONG-TERMLENDING
TEMPORARYBORROWING
(INTERMEDIATE)DEPLETIONS
(SAVINGS)WITHHOLDINGSUPPLIERSPAYMENTS
CAPITALINVESTMENT
LONG-TERMBORROWING
GRANTS &TRANSFERS
(INTERMEDIATE)ENHANCEMENTS
(DIS-SAVINGS)
(PRIMARY) SOURCES
"F.C.W.A.T!
INVENTORY
DEBTORS(GRANTINGOF CREDIT)
MONETARYINVESTMENT
(DEPOSIT)
MONETARYINVESTMENT
(WITHDRAWAL)
SALES OFASSETS (INCL.PRIVATIZATION)
MONEYCREATION(NATIONAL
GOVERNMENT)
TAXATION
(FINAL) USES & ABUSES
MAJOR POLICY OUTCOMES (OR LOSSES)
56
"F.C.W.A.T!" 57
STANDARD ACCOUNTING CHART AND
CODING STRUCTURE
KEY CONTROL & MANAGEMENT COMPONENTS
ACCOUNTING & BUDGETARY
CONTROL FRAMEWORK*
FINANCIAL REGULATIONS
& INTERNALCONTROLS
* = COMPUTERIZATION PRIORITY
FRAUD CORRUPTION WASTE ABUSE THEFT
} =
LOSSES OF CASH, CONFIDENCE,
CREDIT RATING, CONTROL AND CREDIBILITY
REPUTATION AS A MARKET FACTOR 58
Quality
P
E
A
0
C
• Interest rates.
• Search costs for capital funding.
• Regulation & loan conditions.
• Choice of Public and/or Private Financing or Implementation Entity Partners
B
D
Reputation >
(Poor reputation = High costs)
(Good reputation = Low costs)
COSTS
Selection of Ledger Accounts59
Accountability
60
“Fair Value Accounting is causing a large part of the problem at this
moment…”
Steve Bartlett, President and CEOFinancial Services Roundtable
Testimony to: U.S. House of RepresentativesFinancial Services Committee
18 November, 2008
David C. Jones, CPFA, FCCA (UK), had heard this statement, when listening to his car radio. He was so astonished that he nearly crashed into a tree!(Not believing his ears, he later needed to verify it from the C-SPAN web-site, which carried the hearing of the US House of Representatives Financial Services Committee!)
61
“I’m as mad as Hell and I’m not going to take this any more”
(From The Film “Network” [1976] Howard Beale is ‘Mad as Hell’
62
ACCOUNTABILITY63
The determination of “Fair Value” can be done only through the full and correct application of basic
principles of accounting. These are explained, and are also much more
fully illustrated, in this detailed PowerPoint slide show.
[The slideshow is merely a snapshot of the standards that will require a significant amount
of work by entities, simply to understand the nature of the principles and concepts involved.]
• Stewardship of Public Funds
• Performance in Delivery of Public Services
• Control over Assets, Liabilities and Funds
• Debits always equal Credits [So what?]
• Resources always equal Results
ACCOUNTABILITY
64
International Accounting and Reporting Standards are fully consistent with these
theories?[They are the only ones that make sense!]
65
IN THE “PLAIN ENGLISH” OF ACCOUNTING• If you are a credit to your organization – you are
NOT an asset; you are a liability! [liabilities are shown as credits in the accounts!]
• If you credit money to your bank account, it is NOT a credit; it is a debit, in your accounts.
• BUT – if your bank sends you a statement, THEN it IS a credit; because to the bank, YOU are a liability!
Excuse Me? [At present - BANKS are NO CREDIT to anyone!]
RESOURCES & RESULTS66
RESULTS
RESOURCES
ADDITIONSCASH RECEIPTS
INVESTMENTSAVING
ACQUISITIONPURCHASES
CONSERVATIONLENDING
GRANTING CREDITADDING INVENTORY
DEPLETIONSCASH PAYMENTSCONSUMPTION
USAGEDISPOSAL
USE IN PRODUCTIONSALES
WASTE AND FRAUDBORROWING
INCURRING DEBT
ACTIVITYOPERATIONSWORK, SKILL
CRAFTINNOVATIONINVENTION
PUBLICATION
LOSSESEXPENSES
COSTS(OPERATIONAL)
CAPITAL DEPLETION(PHYSICAL)
BENEFITSGAINS
PROFITSSURPLUS
CAPITAL INCREASE(EXTERNAL)
DEBIT
DEBIT CREDIT
CREDIT
Comprehensive AccountabilityWhatever the accounting systems, virtually every public,
private or voluntary entity: • receives and pays cash;• holds cash and bank accounts;• owns fixed and current assets (property, plant and
equipment); • incurs long-term and/or short term indebtedness;• supplies or purchases goods and services on credit;• creates and manages separate funds for special purposes;• makes and/or liquidates monetary investments; • purchases, stores and uses inventories of:
– equipment, or – goods, – spare parts;
• accrues revenues (has cash owing to it); • incurs expenses, for goods and service delivery; and, • acquires, uses, consumes, damages and/or destroys
resources.
67
Comprehensive AccountabilityActivities, moreover, normally take place in
changing monetary values. The extent to which the resources, obligations, activities or values are not accounted for, is the extent to which the (private, public or voluntary) entity is not, completely or transparently, accountable to its: owners, benefactors, donors, taxpayers, electorate, beneficiaries, investors, customers, general public, employees, or other stakeholders.
68
Principles of Accountability for Stewardship
• Credibility• Compliance• Conduct• Comprehensiveness• Comprehension
• Competence• Certifiability• Coherence• Consistency• Confidence
69
Principles of Accountability for Quality Performance
70
• Economy• Efficiency• Effectiveness• Excellence• Equity• Ethics• Exposure
• Explanation• Enjoyment• Empathy• Energy• Enthusiasm• Ecology• Exchange
OMAR’S CAR RUNS WELL
71
OMAR’S CAR
OMAR’S CAR RUNS WELL 72
SERVICECHARGES
OPERATION
INTERESTDIVIDEND &RETAINEDEARNINGS POLITICAL
(POLICY)DECISIONS
INTERNALFINANCING
ADJUSTMENT OF VALUE
CONSUMPTION OF CAPITAL
RENT
ADMINISTRATION(INCLUDING TAXES)
MAINTENANCE
WELFAREENVIRONMENT
LATITUDELUXURY
TAX REVENUES(BAILOUTS?)
SURPLUS(SAVING)
RETURN ONINVESTMENT
SURPLUS(LOSS)
RISKUNCERTAINTYNEW ACTIVITY
STABILITY
FUNDAMENTAL ACCOUNTABILITY REQUIREMENTS
• Retain (real) net capital intact [including non-monetary capital!].• Maintain inter-generational equity (current users bear their fair
share of all costs, including capital financing costs)• Compute “Omar’s Car Runs” costs
• Operation• Maintenance (routine, preventive and remedial)• Administration & Taxes• Rent:
– Consumption of capital (depreciation)– Adjustment of value (fixed asset valuation)– Return on investment (interest, dividends, retained
earnings)• Surplus (to cover):
– Risk– Uncertainty– New activities– Stability
• Fully utilize “Churchill Chart” of accounts (see next page)– “Pray let me have, by this evening, on one page, the status
of our tank deployment…” [Winston Churchill, British Prime Minister – World War II]
73
} If you deal with the lowest bidder, it is well to add something for the risk that you run. And if you do that you will have enough to pay for the “something better” (See Slide 78)
Churchill Chart 74
TRADINGMANUFACTURE
OROPERATINGACCOUNT
PROFITAND LOSS
-------------------------INCOME AND
EXPENDITURE
NETEARNINGS
-------------------------GENERAL FUND
SURPLUS
EXPENSES
CASHAND
BANK
DEPRECIATION ORCAPITAL FINANCING
RESERVE--------------------------
FIXEDASSETS
STOCK OF
GOODS ANDMATERIALS
SALES
--------------------------REVENUEINCOME
SPECIALFUNDS
--------------------------PROVISION
FOR EXPENSES
LOANS
MONETARYINVESTMENT
DEBTORS(RECEIVABLES)
CREDITORS(PAYABLES)
SHAREHOLDERS(STOCK
HOLDERS)
CAPITAL &RESERVES (INCLUDING
FIXED ASSETREVALUATION)
1211
7
5
3
20
16
8
25
13
1026
14
9
24
19
1 2
21 4
8
4
9
5
6
23
23
1517
22
6
6
14
12
13
10
3
6
7
18
21
11
29
30
27 28
NOT ALL THERE
IS TO IT!
2728
Metro “Fair” Fare Chart
75
OPERATING [INCOME & EXPENDITURE]
ACCOUNT
PROFIT OR LOSSFROM
INCOME ANDEXPENDITURE
NETEARNINGS
-------------------------GENERAL FUND
SURPLUS
OPERATION ANDMAINTENANCE
EXPENSES
CASHAND
BANK
DEPRECIATION ORCAPITAL FINANCING
RESERVES--------------------------
FIXED ASSETS [TRACK, STATIONS, TRAINS, ETC.]
STOCKSOF SPARE PARTS AND MATERIALS
TICKET SALES--------------------------
OTHER REVENUE & SUBSIDY INCOME
SPECIALFUNDS
--------------------------PROVISION FOR
FUTURE EXPENSES
LOANS FROMGOVERNMENTS
& BOND-HOLDERS
MONETARYINVESTMENT FOR
FUTURE ACTIVITIES
DEBTORS(RECEIVABLES)
CREDITORS(PAYABLES)
SHAREHOLDERSSTAKEHOLDERS
& TAXPAYERS
CAPITAL &RESERVES (INCLUDING
FIXED ASSETREVALUATION)
1211
7
5
3
20
16
8
25
13
1026
14
9
24
19
1 2
21 4
8
4
9
5
6
23
23
1517
22
6
6
14
12
13
10
3
6
7
18
21
11
27
28
27 28
NOT ALL THERE IS
TO IT! [WHAT’S BEHIND
THE TRAINS?]
75
WHAT’S BEHIND IT? 76
NOT ALL THERE IS TO IT! [WHAT’S BEHIND
THE RAINS?][CLIMATE,
FLOOD CONTROL, AGRICULTURE]
NOT ALL THERE IS TO IT! [WHAT’S BEHIND
THE PAINS?][HEALTH
SERVICES]
NOT ALL THERE IS TO IT! [WHAT’S BEHIND
THE DRAINS?] [SEWERAGE &
STORM DRAINAGE]
NOT ALL THERE IS TO IT! [WHAT’S BEHIND
THE GRAINS?][AGRICULTURE &
BIOFUELS]
NOT ALL THERE IS TO IT! [WHAT’S BEHIND
THE CRANES?][CONSTRUCTION]
NOT ALL THERE IS TO IT! [WHAT’S BEHIND
THE BRAINS?][EDUCATION]
NOT ALL THERE IS TO IT! [WHAT’S BEHIND
THE MAINS?] [WATER]
NOT ALL THERE IS TO IT! [WHAT’S BEHIND THE
TRAINS?] [RAIL, ROAD & OTHER
TRANSPORT]
($) CASH ($)AND
($) BANK ($)
NOT ALL THERE IS TO IT! [WHAT’S BEHIND THE STAINS?
[FRAUD & CORRUPTION]
NOT ALL THERE IS TO IT! [WHAT’S BEHIND
THE LANES?][ROADS & PATHS]
NOT ALL THERE IS TO IT! [WHAT’S BEHIND
THE PLANES?][AIRPORTS]
NOT ALL THERE IS TO IT! [WHAT’S BEHIND THE
GAINS?][UTILITY REVENUES]
Cost Cutting at Metro (and Elsewhere)
77
Assertion• This (proposed Congressional) bill would do little
more than reward poor performance with an unprecedented taxpayer bailout.
• Congress should force fundamental market-based reforms on Metro.
• By linking the continuation of the system's existing federal subsidies to: • reductions in operating costs;• improvements in service; and, • an aggressive program of competitive contracting,
similar to the successful reforms implemented elsewhere, in several of the major metropolitan areas of Europe.
Ronald D. Utt, Ph.D.The Heritage Foundation.
ECONOMICS• All have learned from economics studies
that: “The Consumer is King."
• There is also “Consumer is Queen" economics: "Quality Undermines Economic
Equilibrium Neutrality*.
78
**Equilibrium Neutrality = “Nash Equilibrium” [Promulgated by Nobel Laureate John Nash]
QUALITY UNDERMINES ECONOMIC EQUILIBRIUM NEUTRALITY
• Quality costs money – it may reduce profits.• Economic “winners” may be the producers of
lowest quality products at the highest profits or the leanest public budgets.
• Ability to achieve this depends on the degree of opportunism and the extent of influence over decisions [authority or lobbying].
• Opportunism is influenced by information asymmetry and bounded rationality of choice - (deciding on the basis of limited information, or the extent of concern or potential suffering).
• A limiting (& disturbing) case is competition based on lower “short run marginal cost prices” v. a necessity for higher “long run marginal costs.”
79
SUPPLY AND DEMAND80
PRICE&
COST
QUANTITY
P
Q0
D
D
SQ
SQ
SN
SN
QNQQ
PQ
PN
LESS OF A QUALITY PRODUCT AT A HIGHER
PRICE & COST
ECONOMIC EQUILIBRIUM [A NON-QUALITY
PRODUCT AT A “NORMAL” PRICE & COST]
• Quality is like buying oats. If you want nice, fresh, clean oats, you must pay a fair price.
• However, if you can be satisfied with oats that have already been through the horse .................that comes a little cheaper!
QUALITY OVERLY ASSERTIVE TRADING SLOGANS (OATS)
[e.g. “Magic of the Market-place!”]
81
• “It is unwise to pay too much, but it is worse to pay too little. When you pay too much, you lose a little money ..... that is all. When you pay too little you sometimes lose everything, because the thing that you bought was incapable of doing the things it was bought to do.
• The common law of business balance prohibits paying a little and getting a lot .... it cannot be done! If you deal with the lowest bidder, it is well to add something for the risk that you run. And if you do that you will have enough to pay for the something better”
[John Ruskin (1819 - 1900)]
LEAST-COST FEASIBLE SOLUTION82
CONFLICTING CONCERNS[Choose any Two of Three!]
83
COST & PRICE OF PRODUCT
QUALITYOF PRODUCT
QUANTITYOF SALES
Transport Privatization in Europe• British Rail, once a wholly owned public railway, has been
sacrificed to “gods of privatization”. Instead of one publicly-owned railway, privatization gave Britons 25 new railways. These, Britons were assured, would provide improved service, healthy competition, lower fares and further delights.
• The result has been chaos. Apart from much plastic speech, there was an awesome decline in the quality of passenger service, frequent delays and cancellations, not to mention the increased danger to life and limb now provided by a public service driven by the lust for private profit.
• And profits there are; privatized railroading has proved a gravy train for the investor. As for the public, its rewards have been few and, of course, the government is still shelling out millions of pounds in subsidy for maintenance and other infrastructure costs.
• British experience speaks eloquently to the high public cost of free market capitalism. The rail system has, NOW, effectively, been re-nationalized.
[Sunday, January 14, 2001 in the Toronto Star]
84
84
Transport Privatization in Europe
Metronet's bankruptcy highlights the flaws in the [London] Tube contracts
• IT WAS like watching a train crash in slow motion. Metronet, one of the two firms charged with upgrading London's rickety old underground network under a multi-billion-pound public-private partnership (PPP) deal, had been in trouble for months. A dispute with Transport for London (TfL), the city's transport authority, over who was to blame for £1 billion of projected cost overruns on three of the lines it was renovating, went to arbitration last month.
• The decision was expected to take a year; in the meantime, with its shareholders and banks refusing to release any more cash, Metronet had asked for an extra £551m of taxpayers' money. On July 16th Chris Bolt, the PPP arbiter — the referee for such disputes — awarded it just £121m.
• Two days later, it admitted that it was bankrupt.Jul 19th 2007: from The Economist print edition
85
85
PUBLIC TRANSPORTATION SERVICES 86
• In the same way as for other utilities, transport services are related to fixed asset use and maintenance.
• Thus, it is necessary to examine the systems from the perspective of full-cost recovery, in accordance with standard practices for cost accounting and financial analysis for utilities.
• This must conform to Fundamental Principles of Cost Accounting. [Principles of “OMAR’S CAR RUNS WELL”.]
• These principles are necessary, to provide a useful starting point for getting urban transport operating costs under control, by: • setting hard budget constraints; and,• providing for the revenues to achieve this.
• By themselves, these principles are not sufficient to deal with fares.
• Computation of fares requires:• financial and economic analysis; and,• forecasts of future passenger loads, and of annual costs and
revenues, together with economic externalities.
87
• Tesco overstated it profits by £250m after revenue recognition irregularities were spotted in its half year results, knocking its share price back 10%.
• Tesco said it discovered the overstatement of its figures, as part of a 29 August profit warning, during preparations for its forthcoming interim results.
• It predicted, at the time, that its half-year trading profit would be around £1.1bn, but this figure has now been cut back by £250m.
• The figures, which were overseen by the board, revealed that accruals were carried back into the current financial period and liabilities deferred later, to dress up the interims, by £250m.
TESCO ACCOUNTING GAFFE EXPOSED
88
Crawford Spence, a professor of Accounting at the Warwick Business School, commented:• This revelation should be interpreted as a
sign of distress. Tesco has essentially tried to recognize revenue too early and delay the recording of costs until a later date.
• Accounting is not a hard science and some of this behavior is acceptable, within limits. What Tesco appears to have done is push the boat out a bit too far, ending up with revenue that hadn't really been earned yet and costs that probably should have been booked earlier.
Tesco accounting gaffe exposed
89
• It is a classic 'earnings management' issue. Firms quite legitimately play around with their revenue and expenses all the time.
• However, when they do so aggressively, as Tesco appears to have done, this is usually because the firm is under pressure.
• In Tesco's case, it has been losing market share to its competitors steadily in recent years and losing value quite dramatically in its share price in recent months.
TESCO ACCOUNTING GAFFE EXPOSED
90
• To Tesco’s credit, however, it has flagged this up internally and is doing something about it. This suggests that there are probably no other big accounting shocks, hidden away.
• Given that this has been flagged up and dealt with internally, it is unlikely any court proceedings will occur. Tesco could be fined by the authorities, but they will most likely wait to hear what the auditors, Deloitte, uncover, first.”
TESCO ACCOUNTING GAFFE EXPOSED
COOKING THE BOOKS!91
EXPENDITURE
INCOME
PROFIT!
?
KICK THE CAN DOWN THE ROAD
92
93
• Tesco has named Deloitte as its new auditor, ending its relationship with PricewaterhouseCoopers (PwC) after an accounting scandal.
• The scandal led to the suspension, then exit, of several senior executives, and sparked investigations by the Serious Fraud Office (SFO), accounting watchdog, the Financial Reporting Council (FRC) and a grocery industry watchdog. It could also prompt investor lawsuits both in Britain and the US.
• PwC has been Tesco’s auditor for 32 years, since 1983. Its auditing of the supermarket’s 2014-15 accounts was its final act for the company.
TESCO NAMES DELOITTE AS NEW AUDITOR AFTER ACCOUNTING SCANDAL
“COST” CUTTING – BY WOLFGANG AMADEUS MOZART (“W.A.M.” PRINCIPLES)
94
Conversation
Emperor of Austria to Mozart: Methinks your symphony is a trifle too long, young sir! There are too many notes!
Mozart: Indeed your Majesty, and precisely which notes would you have me remove?
[“Amadeus”-Movie]Conclusion
It really is not about numbers, or size or length, or appearance, is it?
It is, I think, about depth. Depth of perception, depth of appreciation, depth of acknowledgement of the sheer
vastness of what we do not 'know” - yet - but would 'love or like' to know.
“Cost” Cutting by
Wolfgang Amadeus Mozart (“W.A.M.” Principles)
95
• WIZE• ACCOUNTABLE• MANAGEMENT
RESULTS OF ACTIVITY – A SYMPHONY OF OUTCOMES
COMMERCIAL,SOCIAL &
ECOLOGICAL
RETURN &REINVESTMENT
WASTE, DAMAGE& DESTRUCTION
INNOVATION - CONSUMER SATISFACTION ,REINVESTMENT & PRODUCT DEVELOPMENT
COMMERCIAL,SOCIAL &
ECOLOGICAL
CONSUMPTION(SATISFACTION)
COMMERCIAL,SOCIAL &
ECOLOGICAL
(“W.A.M.” PRINCIPLES): IMPORTANT NOTES - SUCCESS CRITERIA AND PRINCIPAL FOCUS OF ATTENTIONTO CUT “COSTS”: WHICH OF THESE NOTES WOULD YOU LIKE US TO REMOVE, OR DIMINISH – MR. MAYOR
(PRESIDENT, GOVERNOR, MANAGER)?
PERFORMING USEFUL & HIGH-QUALITY ACTIVITIES AT APPROPRIATE PLACES AND TIMES
LONG-TERM OPTIMIZATION OF RESOURCE USE(PRODUCTIVITY & WASTE CONTROL) DEBT SERVICE
QUALITY OF ENVIRONMENT
PAYMENTOF TAXES
BALANCED (FLAT) CURRENT BUDGET
QUALITY OFSOCIAL LIFE
(SHARP) OPERATIONALRELIABILITY
WASTE DISPOSAL
PRODUCT &SERVICE QUALITY
QUALITY OFLABOR LIFE
DAMAGERECTIFICATION
Cost v Quality of Service♯ ♫♪♫
♯♫ ♫
♯
♭
♫
♫
♫
♫
♫ ♫
♫
♫
♫
♫
♫
♫♫
♫♫
♫
♫
♫
♫
♫ ♫♫
♫♫ ♫♫ ♫ ♫♫
♫
♫
♯ ♫♪♫96
Churchill Chart 97
TRADINGMANUFACTURE
OROPERATINGACCOUNT
PROFITAND LOSS
-------------------------INCOME AND
EXPENDITURE
NETEARNINGS
-------------------------GENERAL FUND
SURPLUS
EXPENSES
CASHAND
BANK
DEPRECIATION ORCAPITAL FINANCING
RESERVE--------------------------
FIXEDASSETS
STOCK OF
GOODS ANDMATERIALS
SALES
--------------------------REVENUEINCOME
SPECIALFUNDS
--------------------------PROVISION
FOR EXPENSES
LOANS
MONETARYINVESTMENT
DEBTORS(RECEIVABLES)
CREDITORS(PAYABLES)
SHAREHOLDERS(STOCK
HOLDERS)
CAPITAL &RESERVES (INCLUDING
FIXED ASSETREVALUATION)
1211
7
5
3
20
16
8
25
13
1026
14
9
24
19
1 2
21 48
4
9
5
6
23
23
1517
22
6
6
14
12
13
10
3
6
7
18
21
11
29
30
27 28
NOT ALL THERE
IS TO IT!
2728
The Balance of Accounting
98
RESOURCES
RESULTS
DEBIT
DEBIT
CREDIT
CREDIT
Resources [Symbols with straight lines]always equal
[Symbols with curved lines]
Results
Accounting Chart 1. The attached chart illustrates the working of the entire accounting system of any
financially autonomous entity, keeping its accounts on an accrual basis. It can be applied to private sector, public utility, enterprise or municipal accounting systems.
2. It is probable that well over ninety-five percent of accounting entries, for any kind of business, are represented by the fourteen cash-flows and twenty-eight other book entries represented on the chart. Thus, forty-two entries cover virtually all transaction types.
3. Each class of account has been given a separate symbol. In the “Keys to Symbols” box, those on the left represent “personal” accounts (debtors and creditors). Those on the right represent “real” accounts (cash, stocks of goods / materials and fixed assets) and “nominal” accounts (gains and losses - income and expenditures). Furthermore, the symbols with straight sides (squares and triangles) represent resources (assets and liabilities), whilst the circles represent the analysis of results (gains and losses).
4. Each line represents a class of business transaction or a generally recognized accounting adjustment. Where a line touches the left-hand side of an accounting symbol, it represents a debit entry to that class of account. Conversely, a line touching the right-hand side represents a credit. Solid lines represent cash flows and broken lines represent accounting entries not directly related to cash transactions.
99
Accounting Chart
5. The arrows on the lines are somewhat arbitrary. However, they attempt to show the direction in which each transaction is normally understood to flow. The entries are conceptual, not legal. For example, the transfer of extra-ordinary losses (and fixed asset revaluations) direct to “Capital and Reserves” is regarded as bad accounting practice in many systems but is acceptable in others. In this chart, they have been shown as direct transfers to “Capital and Reserves,” merely for simplicity.
6. The chart indicates that an accounting system, whilst complex, is bounded and closed. For accountants, it may assist in systems and computer work. For non-accountants, it may be useful in understanding what accountants are doing (or supposed to be doing) and may also help to develop an appreciation of what can and should be expected from an accounting system. For students of accounting, the chart may represent a useful learning tool, to be used in conjunction with other teaching materials.
7. The chart covers most accounting procedures likely to be encountered. It includes, moreover, the two main entries concerned with the conversion of historical cost accounts to current values. This is still a matter of uncertainty and contention among accountants and is not practiced in all systems. However, unless recognized, especially where high rates of inflation exist, fixed asset (and other non-monetary asset) values, based only on historical costs, become increasingly meaningless. Furthermore, depreciation (and other capital charges) based of these historic values will cause the under-statement of costs and a corresponding over-statement of profits.
100
Cash and Accrual AccountingCash Flows
1. Cash Purchases - Stock (Inventories)
2. Cash Sales or Revenue Income
3. Cash Settlement - Creditors (Payables)
4. Cash Settlement - Debtors (Receivables)
5. Dividends or Share (Stock) Repayment
6. New Share Capital7. Payment from Funds8. Investment Withdrawal9. Cash Expenses10. Investment of Cash in
Monetary Instruments11. Loan Repayments12.Loans Raised13.Capital Expenditure14.Sales - Fixed Assets
101
Cash and Accrual AccountingAccounting Flows
1. Use of Stocks (Inventories)2. Sales Income3. Expenses (Trading, Operations,
Manufacturing)4. Revenue (Recurrent) Income5. Credit Purchases6. Cash Discount Received7. Gross Profit (Trading, Operations,
Manufacturing)8. (Sales & Operational) Income
Recoverable9. Taxes Now Payable10. Expenses (Profit and Loss or Income
and Expenditure)11. Net Loss or Net Expenditure12. Net Earnings or Net Income13. Allocated or Declared Dividends14. Transfers to Reserves15. Capital Repayable
16. Surplus on Investments (Credited as Income)
17. Future Income or Corporation Tax (Provision)
18. Extra-ordinary Losses19. Expenses Paid in Advance20. Surplus on Investments (Credited as
Capital)21. Bad Debts or Discounts Allowed22. Transfer of Expenses23. Accrued Expenses24. Transfers to Special Funds/Provision for
Expenses25. Investment Losses26. Depreciation (Commercial or Enterprise
Accounts) & Capital Financing Reserve - by Loans Repaid, Revenue Contributions to Capital or Special Funds Applied (Municipal - Public Sector - Accounts)
27. Interest Receivable [e.g. from Investments]28. Interest Payable [e.g. on Loans]29. Revaluation of Fixed Assets30. Revaluation of Accumulated Depreciation
102
Churchill Chart – Production v. FinancingTRADING
MANUFACTURE OROPERATING
CASHAND
BANK
FIXEDASSETS
--------------------------DEPRECIATION
STOCK OF GOODS ANDMATERIALS
SALES--------------------------
REVENUEINCOME
103
LOANS & CREDIT
EQUITY CAPITAL
FINANCIAL MANAGEMENT(& MISMANAGEMENT)
PRODUCTION SELLING &
MARKETING
EARN
ING
S
INTEREST RECEIVABLE
INTEREST PAYABLEEXPENSES
PROFITS & LOSSES
RECEIVEABLES & INVESTMENTS
Resources and ResultsThe concepts of “Resources” and “Results,” when applied to accounting principles, were originally devised, for teaching and illustrative purposes, by David C. Jones.. In his definitive textbook “Municipal Accounting for Developing Countries,” the following appears (page 2):
“An accountant records and interprets variations in financial position. He records, in money values, the results of variations during any period of time, at the end of which he can always balance Net Results (of past operations) against Net Resources (available for future operations)”.
Net Results are the “way of being” of the world, after the performance of Activity to earlier Net Resources.
104
Municipal Accounting for Developing Countriesby
David C. Jones, CPFA, FCCA (UK)
105
[900 pages; © Chartered Institute of Public Finance and Accountancy and The World Bank]
Resources and ResultsThese principles, developed by the author, are grounded in theories enunciated by (inter alia) eminent British writer and (government) district auditor, Carson Roberts and from a US book, 'Accounting Principles and Practice', by Hatfield, Sanders and Burton. They have also been interpreted by a former president of the Chartered Institute of Public Finance and Accountancy, Mr. J.B.Woodham, Borough Treasurer, and later Chief Executive, of Middlesborough and of Cleveland County, England.
106
Resources and ResultsMr. J.B.Woodham, Borough Treasurer, (and later Chief Executive), of Middlesborough and of Cleveland County, England, refers to “Resources” as “What” accounts (what one owns and what one owes) and “Results” as “How” accounts (how the changes in resources came about). The concepts fit very neatly with those relating to (on the one hand) balance sheets and (on the other hand) income and expenditure accounts.
International Accounting Standards, International Public Sector Accounting Standards and International Financial Reporting Standards are all fully consistent with these principles.
107
BASIC RULES FOR ACCOUNTING[From “Municipal Accounting for Developing
Countries” by David C. Jones, CPFA, FCCA (UK)]
108
"An accountant records and interprets variations in financial position. He or she records, in money values, the results of variations, during any period of time, at the end of which they can balance net results (of past operations) against net resources (available for future operations)".
BASIC RULES FOR ACCOUNTING
109
Rule 1 The ledger system as a whole must always be in balance, otherwise it is not correct. The total of all debit entries (or debit balances) must always agree with the total of all credit entries (or credit balances).
BASIC RULES FOR ACCOUNTING
110
Rule 2 To ensure that the ledger is always in balance, every change in the financial position must be recorded in the form of debit and credit entries of equal value. For all debit(s) there must be equal credit(s).
BASIC RULES FOR ACCOUNTING
111
Rule 3 There are two main classes of ledger accounts, with related, but quite different, purposes:
(a) accounts dealing with assets and liabilities (resources); and(b) accounts dealing with gains and losses (results). The net balance of assets over liabilities (resources) will always equal the net balance of gains over losses (results):
BASIC RULES FOR ACCOUNTING
112
Rule 4 In accounts dealing with assets and liabilities, all assets are recorded as debits, and liabilities as credits. It follows from this that:
(a) increases in assets (positive resources) are DEBITS;(b) decreases in assets (positive resources) are CREDITS;(c) increases in liabilities (negative resources) are CREDITS; and(d) decreases in liabilities (negative resources) are DEBITS.
BASIC RULES FOR ACCOUNTING
113
Rule 5 In accounts dealing with gains and losses, all gains are recorded as credits and all losses as debits. It therefore follows that:
(a) increases in gains or surpluses (positive results) are CREDITS;(b) decreases in gains or surpluses (positive results) are DEBITS;(c) increases in losses or deficiencies (negative results) are DEBITS; and(d) decreases in losses or deficiencies (negative results) are CREDITS.
Accounting Flow Chart (Cash)
KEY TO SYMBOLS ___________ Cash Flows ------------- Accounting Flows
Legal Claims by the Entity
Debit Amounts Claimed Tangible
Assets
Debit Increases in Assets
Credit Amounts Settled Credit Decreases in
Assets
Legal Claims against the
Entity
Debit Amounts Settled
Gains and Losses Debit Losses or
Expenses Credit Amounts
Claimed (Income and
Expenditures) Credit Gains or Income
114
THE BALANCE OF ACCOUNTING
EINSTEIN’S THEORY OF RELATIVITY
115
E = MC2
Energy [E] = Mass [M] Times the Square of the Speed of Light [C2]
OMAR’S THEORY OF RELIABILITY
√E3 = (MC)3
The Root of Economy, Efficiency and Effectiveness [E3] = Maintenance of
Capital: Promptly, Properly and Periodically [(MC)3]
116
OMAR’S CAR RUNS WELL[IT IS WELL-MAINTAINED]
117
OMAR’S CAR
OMAR’S CAR RUNS WELL[Direction, Policy, Activity,
Outcome, Driver Practices]
118
OMAR’S CAR
IT IS WELL-MAINTAINEDCredibility, Compliance,
Competence, Consistency, Standard Practices
FINANCIAL MANAGEMENT [Direction, Policy, Activity, Outcome,
& Company Practices]
119
OMAR’S CAR COMPANY
ACCOUNTING & ACCOUNTABILITY[Credibility, Compliance, Competence,
Consistency, & Standard Practices]
THE COMPETITION FOR CASH
THE POOLOF CASH
CHARGES,FINES &
INTEREST
GRANTS &TRANSFERS
MAJOR POLICY ISSUES
ACTIVITY & SERVICES
INTERESTON DEBT
LONG-TERMLENDING
TEMPORARYBORROWING
(INTERMEDIATE)DEPLETIONS
(SAVINGS)WITHHOLDINGSUPPLIERSPAYMENTS
CAPITALINVESTMENT
LONG-TERMBORROWING
GRANTS &TRANSFERS
(INTERMEDIATE)ENHANCEMENTS
(DIS-SAVINGS)
(PRIMARY) SOURCES
MAINTENANCE OF FIXED ASSETS
INVENTORY
DEBTORS(GRANTINGOF CREDIT)
MONETARYINVESTMENT
(DEPOSIT)
MONETARYINVESTMENT
(WITHDRAWAL)
SALES OFASSETS (INCL.PRIVATIZATION)
MONEYCREATION(NATIONAL
GOVERNMENT)
TAXATION
(FINAL) USES & ABUSES
MAJOR POLICY OUTCOMES (OR LOSSES)
120
BUSINESS ACTIVITY (OMAR’S CAR RUNS) 121
SERVICECHARGES
OPERATION
INTERESTDIVIDEND &RETAINEDEARNINGS POLITICAL
DECISIONS
INTERNALFINANCING
ADJUSTMENT OF VALUE
CONSUMPTION OF CAPITAL
RENT
ADMINISTRATION(INCLUDING TAXES)
MAINTENANCE
LOSS(SUBSIDY)
SURPLUS(SAVING)
RETURN ONINVESTMENT
SURPLUS(LOSS)
RISKUNCERTAINTYNEW ACTIVITY
STABILITY
TAX REVENUES(BAILOUTS?)
BUSINESS ACTIVITY (OMAR’S CAR RUNS WELL) 122
SERVICECHARGES
OPERATION
INTERESTDIVIDEND &RETAINEDEARNINGS POLITICAL
DECISIONS
INTERNALFINANCING
ADJUSTMENT OF VALUE
CONSUMPTION OF CAPITAL
RENT
ADMINISTRATION(INCLUDING TAXES)
MAINTENANCE
WELFAREENVIRONMENT
LATITUDELUXURY
TAX REVENUES(BAILOUTS?)
SURPLUS(SAVING)
RETURN ONINVESTMENT
SURPLUS(LOSS)
RISKUNCERTAINTYNEW ACTIVITY
STABILITY
GENEROSITY ENCOURAGED123
• Remember this: Whoever sows sparingly will also reap sparingly, and whoever sows generously will also reap generously.
• Each of you should give what you have decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver.
• And God is able to bless you abundantly, so that in all things at all times, having all that you need, you will abound in every good work.
• As it is written: “They have freely scattered their gifts to the poor and their righteousness endures forever.”
[2 Corinthians 9: 6-9]
BUSINESS ACTIVITY (OMAR’S CAR RUINS) 124
SERVICECHARGES
OPERATION
INTERESTDIVIDEND &RETAINEDEARNINGS POLITICAL
DECISIONS
INTERNALFINANCING
ADJUSTMENT OF VALUE
CONSUMPTION OF CAPITAL
RENT
ADMINISTRATION(INCLUDING TAXES)
MAINTENANCE
LOSS(SUBSIDY)
TAXREVENUES
SURPLUS(SAVING)
RETURN ONINVESTMENT
SURPLUS(LOSS)
RISKUNCERTAINTY
INTERNALIZATIONNEW ACTIVITY
STABILITYPotential Financial Trade-off
BUSINESS ACTIVITY (OMAR’S CAR LEASED)[OPERATING LEASE]
125
OPERATIONS*
RENT*
SURPLUS ORLOSS)**
CASH**
LEAVE EXPENDITURE AS STATED – EQUAL TO DISBURSEMENT
** BALANCE SHEET [BUT ONLY INDIRECTLY – IN TOTAL ONLY]* ON THE PROFIT AND LOSS STATEMENT
IS THIS ALL THERE IS
TO IT?
Dr. Cr.
BUSINESS ACTIVITY (OMAR’S CAR LEASED)[OPERATING LEASE]
126
OPERATIONS*
RENT*
SURPLUS ORLOSS)**
CASH**
LEAVE EXPENDITURE AS STATED – EQUAL TO DISBURSEMENT
** BALANCE SHEET [INDIRECTLY – IN TOTAL ONLY]* ON THE PROFIT AND LOSS STATEMENT
NOT (QUITE) ALL THERE IS
TO IT!
Dr. Cr.
THE BALANCE OF [LEASE] ACCOUNTING
127
RENTCASH
OMAR’S (LEASED)CAR(OFF THE BALANCESHEET!)
?
The Balance of [LEASE] Accounting128
OMAR’S (LEASED)
CAR(OFF THE BALANCE
SHEET!)
?WHERE IS ITACCOUNTED
FOR?
ANSWER = IN THE ACCOUNTS OF THE LESSOR!!( FOLLOWING PRINCIPLES OF OMAR’S CAR RUNS!)
LEGALLY CORRECT BUT
PERCEPTIVELY INCONSISTENT
BUSINESS ACTIVITY (OMAR’S CAR LEASED)[CAPITAL (OR FINANCE) LEASE]
129
OPERATIONS*
RENT*
SURPLUS ORLOSS)**
CASH**
LEAVE EXPENDITURE AS STATED – EQUAL TO DISBURSEMENT?
** BALANCE SHEET [INDIRECTLY – IN TOTAL ONLY]* ON THE PROFIT AND LOSS STATEMENT
ALL THERE IS
TO IT?
Dr. Cr.
BUSINESS ACTIVITY (OMAR’S CAR LEASED)[CAPITAL (OR FINANCE) LEASE]
130
OPERATIONS*
RENT*
SURPLUS ORLOSS)**
CASH**
LEAVE EXPENDITURE AS STATED – EQUAL TO DISBURSEMENT?
** BALANCE SHEET [INDIRECTLY – IN TOTAL ONLY]* ON THE PROFIT AND LOSS STATEMENT
NO!NOT ALL THERE IS TO IT!
Dr. Cr.
BUSINESS ACTIVITY (OMAR’S AIRPLANE LEASE)[CAPITAL (OR FINANCE) LEASE
131
AIRPLANE
ACCOUNTING forINTERNATIONALREPORTING
POSTULATE*LIABILITY &ASSET – NOT asEXPENSING* “PRETEND”
The Balance of [LEASE] Accounting132
DEBITCREDIT
ALL OBLIGATIONS OF THELEASE
CONDITIONALRIGHTS OF USE& OPERATION
UNDER THE LEASEAGREEMENT
“RESOURCES”
“PHANTOM”LIABILITY
“PHANTOM”ASSET
NOT LEGAL OWNERSHIP NOR LIABILITY
“OMAR’S AIRWAYS”133
DEBITCREDIT
“RESOURCES”
Dr Property, plant & equipment
Cr Finance lease obligations
BUSINESS ACTIVITY (OMAR’S CAR LEASE) [CAPITAL LEASE – “ON BALANCE-SHEET”]
134
EQUATING to
ADJUSTMENT OF VALUE*
CONSUMPTION OF CAPITAL*
ASSETS*
LIABILITIES*
RETURN ONINVESTMENT*
STEADILY
ELIMINATED*
* ON THE BALANCE – SHEET * ON THE PROFIT & LOSS STATEMENT
BUSINESS ACTIVITY (OMAR’S CAR LEASE) [IFRS “EXPOSURE DRAFT]
135
EVERY
ADJUSTMENT OF VALUE*
CONSUMPTION OF CAPITAL*
ASSET
LET
RETURN ONINVESTMENT*
STAND
EXPOSED*
* ON THE BALANCE - SHEET * ON THE PROFIT & LOSS STATEMENT
BUSINESS ACTIVITY (OMAR’S CAR RUINS) 136
SERVICECHARGES
OPERATION
INTERESTDIVIDEND &RETAINEDEARNINGS POLITICAL
DECISIONS
INTERNALFINANCING
ADJUSTMENT OF VALUE
CONSUMPTION OF CAPITAL
RENT
ADMINISTRATION(INCLUDING TAXES)
MAINTENANCE
LOSS(SUBSIDY)
TAXREVENUES
SURPLUS(SAVING)
RETURN ONINVESTMENT
SURPLUS(LOSS)
RISKUNCERTAINTY
INTERNALIZATIONNEW ACTIVITY
STABILITYPotential Financial Trade-off }
OR
BUSINESS ACTIVITY (OMAR’S CAR RUINS)
[EXPLOITS THE ENVIRONMENT]
137
RISKUNCERTAINTY
INTERNALIZATIONNEW ACTIVITY
STABILITY
ENVIRONMENTALEXPLOITATION
ANDECONOMIC
EXTERNALITY
BUSINESS ACTIVITY (OMAR’S CAR RUINS)
[EXPLOITS THE PHYSICALCAPITAL]
138
RISKUNCERTAINTY
INTERNALIZATIONNEW ACTIVITY
STABILITY
ENVIRONMENTALEXPLOITATION
ANDECONOMIC
EXTERNALITY
WHAT IS CAPITAL?
139
Banks must maintain a pool of money that they own free and clear as a reserve against losses. The ratio of a bank's capital to its loans and other commitments is regarded as a basic measure of the bank's health.
Binyamin Appelbaum (Washington Post: April 25, 2009).
COMPLETE AND UTTER NONSENSE!!
A quote, from Ken Wagstaffe, a British professional colleague, and fellow accountant, who wrote a paper, about this kind of thing:
"......it is based on some completely and fundamentally wrong notions about what accounting is. The level of ignorance about accounting is breathtaking."
140
ACCOUNTING – WHAT IS IT?
WHAT IS CAPITAL?[Accountancy 101]
141
Banks, and all other forms of business organization – partnerships, corporations or non-profit entities – hold Capital as the RESULTS of the net value of the difference between its POSITIVE RESOURCES & its NEGATIVE RESOURCES (a.k.a. Assets minus Liabilities). It may or may not be held wholly or partially as cash. The remainder is held as: • property, plant and equipment; • monetary investments; and, • legal receivables; MINUS: • amounts owed to bankers and all other legal
payables.There may, indeed, be NO cash (or other liquid
assets).[David C. Jones, Chartered Certified Accountant (UK)]
Wrong notions of what accounting is?
The level of ignorance about accounting is breathtaking!
142
ACCOUNTING – WHAT IS IT?
Cassius:"The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.”
William Shakespeare – Julius Caesar
DETAILED PERCEPTION
143
BROADER PERSPECTIVE
144
BALANCE OF ACCOUNTING
Detailed Perception
Broader Perspective
145
What do I know about it?I am just an old book-keeper!
146
Bank Balance Sheet as at 31 December, 2008
Assets
[On the Left, There is Nothing Left!]
Liabilities and Capital
[On the Right, There is Nothing Right!]
“Impact of the credit crunch on the 2008 financial statements: 18 November 2008”
By Willeke Ong en Jens Osinga [©PricewaterhouseCoopers]
TRANSCENDENT TRANSPARENCY[BARE STERNS!!]
147
Bank Balance Sheet as at 31 December, 2008
Assets[Toxic Assets]
Derivatives[MBSs, CDOs, CDSs]
Liabilities and Capital[Precarious Credit]
Overnight loans (repos.)[Renewable daily]
“Be sober, be vigilant; because your adversary the devil, as a roaring lion, walketh about, seeking whom he may devour: Whom resist steadfast in the faith!” [1 Peter 5: 8-10]
[William Cohen: “House of Cards”]
BALFOUR BEATTY ISSUES £75M BLACK HOLE WARNING
148
Beleaguered infrastructure group Balfour Beatty has issued a fifth profit warning after discovering a new
£75m black hole in its UK profits.The news has added to growing concern about the UK
builder, resulting in a sharp fall in the company's shares by more than 20%.
In a statement to the market, Balfour Beatty said it had experienced “further program slippage” and “poor
operational delivery”.The group - which is involved in motorway
construction, power stations and PPP projects around the world - said there would be a further shortfall of £75m this year in its UK construction arm after two
earlier profits warnings this year.
BALFOUR BEATTY ISSUES £75M BLACK HOLE WARNING
149
No doubt the valuations they accrue each period were not being earnestly reviewed and built up, with no one really understanding the accounting or too frightened of the consequences.
Management accountants should have a personality test, to find out that:
a) they are not charlatans that just want to skate on the surface, in meetings; and,
b) they have got the “balls” to lay the law down, no doubt in this case, to aggressive contract and quantity surveying managers.
NEVER MIND!
150
Never mind...there may be 75m missing, but I'm sure their carbon footprint is OK, and the sustainability of their operations
will stand up to ethical scrutiny.
(Wonderful things, these buzzwords.)
PRESENT COMPANY NOT EXCLUDED
[Badly Designed Interim Certificate]
151
COUNT, BADLY AND CHEAT[CHARTERED QUANTITY SURVEYORS]
CERTIFICATE OF COMPLETIONCONTRACT: Petworth Sewerage Project
Value of Prior Work Certified: £3,000Value of Work NOW Certified: £2,000Total of Work Certified to Date: £5,000
FIRST UNIVERSAL BANKALWAYS & EVERYWHERE
PETWORTH RURAL DISTRICT COUNCIL
5,000.00A and B Contractors Ltd.
A.BundanceChief Financial Officer
Five Thousand Pounds
23 April 20_5
ERRONROUS OUTCOME – OVERPAYMENT OF A CONTRACTOR!
£
152
A “Goof” by the Author of These Slides!
BEAN-COUNTERS!(HOW MANY BEANS MAKE FIVE?)
153
= 5[RESOURCES] = [RESULTS]
Dr Cr
BEAN-COUNTERS!(HOW MANY BEANS MAKE FIVE?)
154
= 5[CONCRETE] = [CONCEPT]
Dr Cr
BEAN-COUNTERS!(HOW MANY BEANS MAKE FIVE?)
155
= 5[NET ASSETS] = [CAPITAL]
Dr CrMINUS
LIABILITIES[NEGATIVE
ASSETS]
ACCOUNTANTS!(HOW MANY RESOURCES
EQUAL RESULTS?)
156
[RESOURCES] = [RESULTS]
EQUITYSHAREHOLDERS
(STOCKHOLDERS)
ACCOUNTANTS!(HOW MANY RESOURCES
EQUAL RESULTS?)
157
[RESOURCES] = [RESULTS]
NET ASSETS[RESOURCES]
EQUALCAPITAL
[RESULTS]
ACCOUNTANTS!(HOW MANY RESOURCES EQUAL RESULTS?)
158
EQUITY(RESULTS)
(OWED TO & OWNED BY)SHAREHOLDERS
(STOCKHOLDERS)
CASH & BANKFIXED ASSETS& STOCKS OFMATERIALS
CAPITAL &RESERVES (INCLUDING FIXED ASSET
REVALUATION)
NETEARNINGS
-------------------------GENERAL FUND
SURPLUSEXPENSES LOSSES,
(FRAUD, CORRUPTION,
WASTE & ABUSE)
NOT ALL THERE IS
TO IT!
RESOURCES
LEVELS OF FINANCIAL CONCERN 159
NEW DEBT OREQUITY FINANCE
CAPITAL COST& DEBT SERVICE
ESSENTIALCONCERNS
CAPITALSTRUCTURE
EXPANSION &DEVELOPMENT
SURVIVAL
NEW OPERATING COST & INTEREST
PROFITABILITY- USING“OMAR’S CAR RUNS” COST
SUSTAINABILITY
POTENTIALSFOR DISRUPTION
INSTITUTION
GOING CONCERN(STEADY STATE)
PROJECTS(DISRUPTIVE)
OVERALLACHIEVEMENT
FINANCIALREQUIREMENTS
CASH FLOW
FINANCIAL ANALYSIS LINKS 160
ACCOUNTINGSYSTEM
MANAGEMENTDECISIONS
INSTITUTIONALANALYSISPRICE & SUBSIDY
POLICY(C.R.I.M.O.G.)*
RISK ANALYSIS
REVENUE &BEHAVIOREXTERNALITIES
PROJECTFINANCIAL
ANALYSIS (D.C.F.)
ENTITYFINANCIAL ANALYSIS
(ACCOUNTS)
ECONOMICANALYSIS
COMPARISONS& CONTRASTS
FINANCIALACCOUNTING
(ENTITY)
COSTACCOUNTING(ACTIVITIES)
AUDITEDFINANCIAL STATEMENTS
PLANNING& BUDGET
ENGINEERINGECONOMY
FINANCIALINFORMATION
RISK ANALYSISMARKET-PLACE
(SUPPLY & DEMAND)
* CHANGING the RULES IN the MIDDLE OF the GAME
USE OF ECONOMIC RESOURCES
RESULTS
RESOURCE MOBILIZATION
CAPITAL CONTRIBUTIONS ASSET SALES LONG-TERM DEBT TEMPORARY DEBT SUPPLIERS (CREDIT)
RESOURCE ACTIVATION
INFORMATIONRAW MATERIALSSERVICESENERGYLABORCUSTOMERS & CLIENTS
THE COMMON WEALTH
NATURAL RESOURCES
MONETARY INVESTMENT
INVENTORIESWORK IN PROGRESSCUSTOMERS (CREDIT)CASH
RESOURCE ALLOCATION (& RESOURCE CONSERVATION)
LANDPERMANENT WORKSBUILDINGSEQUIPMENT & MACHINERY
RESOURCE UTILIZATION
PRODUCTIONDISTRIBUTIONOPERATIONMAINTENANCEADMINISTRATIONTAXESDEPRECIATIONINTERESTDIVIDENDRETAINED EARNINGSPROPERTY DISPOSAL
HUMAN CAPITAL*MANAGEMENT (ENTERPRISE)*
* CREATIVE, INNOVATIVE(RIGHT-BRAIN) TALENT
COMMERCIAL,SOCIAL &
ECOLOGICAL
RETURN &REINVESTMENT
WASTE, DAMAGE& DESTRUCTION
COMMERCIAL,SOCIAL &
ECOLOGICAL
CONSUMPTION(SATISFACTION)COMMERCIAL,
SOCIAL &ECOLOGICAL
STIMULATION
161
RESULTS OF ACTIVITY (USE OF RESOURCES)
COMMERCIAL,SOCIAL &
ECOLOGICAL
RETURN &REINVESTMENT
WASTE, DAMAGE& DESTRUCTION
INNOVATION - CONSUMER SATISFACTION ,REINVESTMENT & PRODUCT DEVELOPMENT
COMMERCIAL,SOCIAL &
ECOLOGICAL
CONSUMPTION(SATISFACTION)
COMMERCIAL,SOCIAL &
ECOLOGICAL
IMPORTANT SUCCESS CRITERIA AND PRINCIPAL FOCUS OF ATTENTION
PERFORMING USEFUL & HIGH-QUALITY ACTIVITIES AT APPROPRIATE PLACES AND TIMES
LONG-TERM OPTIMIZATION OF RESOURCE USE(PRODUCTIVITY & WASTE CONTROL) DEBT SERVICE
QUALITY OF ENVIRONMENT
PAYMENTOF TAXES
PROFIT (OR BALANCED CURRENT BUDGET)
QUALITY OFSOCIAL LIFE
OPERATIONALRELIABILITY
WASTE DISPOSAL
PRODUCT &SERVICE QUALITY
QUALITY OFLABOR LIFE
DAMAGERECTIFICATION
RESOURCE CONSUMPTION V. RESULTS
TRADE-OFFS
TRADE-OFFS
162
RESPONSIBILITY ACCOUNTING 163
PROFITABILITY*
OPERATIONALRELIABILITY
Typically, operationally intensive expenditures are favored over those that are maintenance-intensive. For example, it is always more urgent to pay schoolteachers than to maintain schools, important though the latter may be. Thus financial budgets may be "balanced," perhaps by legal mandate (fiscal balance), whereas there may be significant actual or potential “deficits” hidden within under-maintained assets or lower productivity of services (physical/social deficit).
* Operating Surplus
FISCAL BALANCE V. PHYSICAL DEFICIT164
FISCAL BALANCE*
PHYSICAL DEFICIT(RELIABILITY)
Financial budgets may be "balanced," perhaps by legal mandate (fiscal balance), whereas there may be significant actual or potential “deficits” hidden within under-maintained assets, physical breakdowns or lower productivity of services (physical – or operational) – deficit .
UNDER-MAINTAINEDASSETS: MANAGEMENT
INCOMPETENCE!
Financial Statements of Resources & Results TRAMBUS TRANSPORT COMPANY BALANCE SHEET AS AT .... $m $m $m $m
Fixed Assets Property, Plant and Equipment Current Assets Inventories Receivables Cash
15 9
222 -----
1,250
246 ----- 1,496 =====
Equity Contributed Capital Retained Earnings Long Term Debt Loans Outstanding
400 216
-----
616
880
----- 1,496 =====
TRAMBUS TRANSPORT COMPANY INCOME AND EXPENDITURE STATEMENT For the Period Until .... $m $m $m $m
Expenditures Operating Expenses Interest on Debt Balance C/fwd. Retained Earnings Balance C/fwd.
243 97 216
----- 556
=====
216
Income Operating Revenues Retained Earnings Balance B/fwd.
556
----- 556 =====
216
165
RESOURCES
RESULTS
ASSET AND LIABILITY MANAGEMENT INFRASTRUCTURE, PROPERTY, PLANT AND EQUIPMENT MONETARY INVESTMENTS
LONG-TERM LOANS OUTSTANDING
:
RENT OF PROPERTY
ADMINISTRATION
MAINTENANCE
OPERATIONS
ADJUSTMENT OF VALUE
RETURN ON INVESTMENT
(DEPRECIATION)
INVENTORIES
CAPITAL - SURPLUS
RECEIVABLES ANDCASH
PAYABLES ANDTEMPORARY LOANS
CAPITAL CONS.
166
MAIN CASHIERFOR COLLECTIONS(CHIEF CASHIER)
GOVERNMENTUNIT’S BANK
MAIN CASHIERFOR PAYMENTS
(CHIEF PAYMASTER)
PAYERSOF TAXES, FEES
& CHARGES
BRANCH CASHIERS (DISTRICT OFFICES) BORROWERS
& INVESTMENT RECIPIENTS
LENDERS(BANKS &
BONDHOLDERS)
BRANCH CASHIERS (IMPREST HOLDERS)
CENTRAL GOVERNMENT PUBLIC AUTHORITIES THE GENERAL PUBLIC& CAPITAL MARKETS
SUPPLIERS CONTRACTORS& EMPLOYEES
MAIL & ELECRONIC TRANSFERS
MAIL & ELECRONIC TRANSFERS
INFORMATION & INSTRUCTIONS
BRANCHBANKS
BRANCHBANKS
“SWEEPS”
CASH FLOWS
167
ECONOMY, EFFICIENCY & EFFECTIVENESS
ACTUALOUTPUT
PLANNEDOUTPUT
TECHNICALEFFECTIVENESS
ACTUALEFFICIENCY
ACTUALINPUT
EFFICIENCYIMPROVEMENT
ECONOMYPLANNEDINPUT
PLANNEDEFFICIENCY
ACTUALOUTCOME
POLICYEFFECTIVENESS
PLANNEDOUTCOME
ASSESSMENT
168
FINANCIAL CONTROL 169
EXTERNALFINANCIAL CONTROL
VOTING INELECTIONS
EXAMINATION OFPUBLIC DOCUMENTS
EXTERNAL AUDIT AND REPORTING
ATTENDANCE ATPUBLIC HEARINGS
INTERNALFINANCIAL CONTROL
GOVERNMENTALREGULATION
LEGISLATIVEREQUIREMENTS
COMPETENT CHIEFFINANCIAL OFFICER
COMPETENTFINANCIAL STAFF
INTERNAL CHECKS &INTERNAL AUDIT
CONCERNED TOPMANAGEMENT
DESIGN OF SYSTEMS & PROCEDURES
BUDGETARY ANDCOST CONTROLS
170INTERNAL & EXTERNAL CONTROLS
Price ofInputs
Purpose
Quantityof Inputs
Questioning Capacity
Pay
Inputs Expenditure(Production)
Permission
Prestige
Quality of inputs
Productivity
Probity PublicityProcedures
Questing Intensity
Power
Production
Category – Characteristics of Activity
P
PQ
P2Q
P3Q
P4Q
Transparency of activities is reflected in (but is not limited to) information disclosed in financial statements. This information must, moreover, address a great variety of inputs.
One structured methodology for this can be in the form of the following (polynomial) “pseudo-equation.”
171
S = f (P4Q + P3Q + P2Q + PQ + P)Where: “S” represents a degree of total satisfaction and symbols “P” and “Q” designate inputs, necessary to achieve this satisfaction
INTERNAL & EXTERNAL CONTROLS
THE "EIGHT Ls" PRINCIPLES OF BORROWING172
AS
LICENSE LUCK* LIFE-MATCH
AS POSSIBLE(OR
NECESSARY)
SUBJECT TO
LIQUIDITY
LATE LONG LOW-COSTLITTLE
* LUCK = LIKELIHOOD OF OUTCOME
EIGHT PRINCIPLES OF INVESTING*173
AS
LICENSE LUCK** LIFE-MATCH
AS POSSIBLE(OR
NECESSARY)
SUBJECT TO
LIQUIDITY
EARLY SHORTTERM
HIGHRETURNMUCH
** LUCK = LIKELIHOOD OF OUTCOME [INCLUDING SAFETY]
*“CASH”: Capital Appreciation v. Safe Haven!
CASH FLOWS - LOCAL GOVERNMENTS & ENTERPRISES
HOUSEHOLDS , BUSINESSES AND DEVELOPERS(INCLUDING FOREIGN LENDERS)
CENTRAL/STATE GOVERNMENT LOANSRAISED
CAPITALFUNDING
BUDGETARY CONTRIBUTIONOPERATING(RECURRENT)
FINANCEFOREIGN
CURRENCYRESERVES
BUDGETARYSUPPORT
TAXESFEES
CHARGES &PRICES
CAPITALCONTRI-BUTIONS
CAPITALGRANTS& LOANS
DEBT SERVICE
LOCAL GOVERNMENT
& PUBLICUTILITIES
SPECIAL FUNDS(INCLUDING
CONSOLIDATEDLOANS FUNDS)
CAPITAL INVESTMENT & USAGEEXPENDITURE
ON (COSTS OF) SERVICES
NETFOREIGN
EARNINGS(COMMERCE
ANDINDUSTRY)
WORKING CAPITAL
CONTRIBUTIONS (**)
SINKINGFUNDS (***)
LOANSREPAID
CAPITALMARKETS
DEFICIT FINANCING (*)
(**) = INCL. DEPRECIATION (RETENTION) OR RENEWALS FUNDS(*) = UNSATISFACTORY PRACTICE
174
FINANCIAL RAPE!(Deficits Don’t Matter!)
175
CAPITALFUNDING
BUDGETARY CONTRIBUTIONOPERATING(RECURRENT)
FINANCE
WORKING CAPITAL
DEFICIT FINANCING*
* “No!” means “No!”
CAPITALGRANTS& LOANS
FUNDAMENTAL ACCOUNTABILITY REQUIREMENTS
• Retain (real) net capital intact [including non-monetary capital!].
• Maintain inter-generational equity (current users bear their fair share of all costs, including capital financing costs).
176
STRUCTURE OF INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRS)International Financial Reporting Standards (IFRS)
are:
"principles based“
in that they establish broad rules
as well as dictating
specific treatments.
177
STRUCTURE OF IFRSInternational Financial Reporting Standards comprise:
• International Financial Reporting Standards (IFRS) - standards issued after 2001
•International Accounting Standards (IAS) - standards issued before 2001
•Interpretations originated from the :
• International Financial Reporting Interpretations Committee (IFRIC) - issued after 2001
• Standing Interpretations Committee (SIC) - issued before 2001
178
UNDERLYING ASSUMPTIONS
The underlying assumptions used in IFRS are:
Accrual basis - the effect of transactions and other events are recognized when they occur,
not as cash is gained or paid.
Going concern - an entity will continue in operation for the foreseeable future.
179
QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS
• Understandability• Reliability• Comparability• Relevance• Materiality• Prudence• Substance over
form• Completeness
180
ELEMENTS OF FINANCIAL STATEMENTS
The financial position of an enterprise is primarily provided in the Statement of Financial Position.
The elements include:
1. Asset: An asset is a resource controlled by the enterprise as a result of past events, and from which future economic benefits are expected to flow to the enterprise.
2. Liability: A liability is a present obligation of the enterprise arising from the past events, the settlement of which is expected to result in an outflow from the enterprise' resources, i.e., assets.
181
ELEMENTS OF FINANCIAL STATEMENTS
The financial position of an enterprise is provided in the Statement of Financial Position. In addition to Assets and
Liabilities – Resources – the elements include accumulated Results.
3. Equity: Equity is the residual interest in the accumulated results of the assets of the enterprise after deducting all the liabilities. Equity is also known as “owner's equity”.
[The financial performance of an enterprise is primarily provided in an income statement or profit and loss account. The net total of the elements of an income statement – or the elements that measure the financial performance – results – are added to (or subtracted from) that part of the equity described as “retained earnings” – or a similar expression].
182
ELEMENTS OF FINANCIAL STATEMENTS
The financial performance - results - of an enterprise is primarily provided in an income statement or profit and
loss account. The elements of an income statement or the elements that measure the financial performance are as
follows:
4. Revenues: increases in economic benefit - positive results - during an accounting period in the form of inflows or enhancements of assets, or decrease of liabilities that result in increases in equity. However, it does not include the contributions made by the equity participants, i.e., proprietor, partners and shareholders.
5. Expenses: decreases in economic benefits - negative results - during an accounting period in the form of outflows, or depletions of assets or incurrences of liabilities that result in decreases in equity.
183
ELEMENTS OF COST STATEMENTSThe financial performance – the cost – of an activity is
primarily provided by a detailed analysis of the expenses in an income statement or profit and loss account. The cost elements of an income statement are the elements
that measure the financial performance of an activity as to the following:
A. Expenses: are decreases in economic benefits – negative results – during an accounting period in the form of outflows, or depletions of assets or incurrences of liabilities that result in decreases in equity. WHEREAS:
B. Revenues: are increases in economic benefit – positive results – during an accounting period in the form of inflows or enhancements of assets, or decrease of liabilities that MAY OR MAY NOT result from the expenses incurred at “A” (above.) They DO NOT form part of the analysis of the expenses .
184
REQUIREMENTS OF IFRSIFRS financial statements consist of (IAS1.8):
• Statement of Financial Position
• Comprehensive Income Statement
• Either a Statement of Changes in Equity (SOCE) or a Statement of Recognized Income or Expense (SORIE)
• Cash Flow Statement or Statement of Cash Flows
• Notes, including a Summary of the Significant Accounting Policies
Comparative information is provided for the previous reporting period (IAS 1.36).
185
REQUIREMENTS OF IFRS [On 6 September 2007, the IASB issued a revised IAS 1]
These require that an entity must:
• Present all non-owner changes in equity (that is, 'comprehensive income') either in one statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income). [Components of comprehensive income may not be presented in the statement of changes in equity].
• Present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period in a complete set of financial statements when the entity applies an accounting of its activities.
186
REQUIREMENTS OF IFRS [On 6 September 2007, the IASB issued a revised IAS 1]
These require that:
• ‘balance sheet' will become 'statement of financial position'
• ‘income statement' will become 'statement of comprehensive income'
• 'cash flow statement' will become 'statement of cash flows'.
The revised IAS 1 is effective for annual periods beginning on or after 1 January 2009. Early adoption is permitted.
187
“P.O.P.” APPROACHES TO MONITORING OF QUALITY
• Profit over People• Profit over Prevention• Predatory Oil Production• Pricing on Pumps• Poor Operational Preservation
188
WITH EYES ON GULF, BP ALASKA PIPES REMAIN AT RISK
189
The extensive pipeline system that moves oil, gas and waste throughout BP's operations in Alaska is plagued by severe corrosion, according to an internal maintenance report generated four weeks ago.
The document, obtained by the journalism group ProPublica, shows that as of Oct. 1, at least 148 BP pipelines on Alaska's North Slope received an "F-rank'' from the company.
WITH EYES ON GULF, BP ALASKA PIPES REMAIN AT RISK
190
According to BP oil workers, that means inspections have determined that more than 80 percent of the pipe wall is corroded and could rupture. Most of those lines carry toxic or flammable substances. Many of the metal walls of the F-ranked pipes are worn to within a few thousandths of an inch of bursting, according to the document, risking an explosion or spills.
WITH EYES ON GULF, BP ALASKA PIPES REMAIN AT RISK
191
BP oil workers also say that the company's fire and gas warning systems are unreliable, that the giant turbines that pump oil and gas through the system are aging and that some oil and waste holding tanks are verging on collapse.
MINE SAFETY IN AMERICASAFETY SYSTEM DYSFUNCTIONAL BEFORE MINE BLAST
192
NPR NEWS INVESTIGATION: Legally required water systems at Massey Energy's Upper Big Branch coal mine in West Virginia were not functioning properly before the April 5 explosion that killed 29 mine workers. Some experts say these systems might have helped prevent the disaster if they had been working properly.
STANDARD MACRO-ECONOMICS[GLOBALIZATION]
193
GNP - NFER = GDP
GROSSNATIONALPRODUCT
NET FOREIGNEARNINGS andREMITTANCES
(From Labor & FromCapital Investment)
GROSSDOMESTICPRODUCT
ENVIRONMENTAL ECONOMICS
194
GNP - NFER = GDP!
GROSSNOW!
PRODUCT
GROSSDEPLETED!PRODUCT
NET FUTUREENVIRONMENTAL
REQUISITIONS
ENVIRONMENTAL ECONOMICS
GNP + NFER = GDP!
GREED,NEED &
POPULATION GROWTH
NO FARSIGHTEDENVIRONMENTALRESPONSIBILITY
GRAB,DESTROY
& POLLUTE
195
RISING VALUES DUE TO SCARCITY
SUPPLIES - FOR PARTICULAR PLACES
AND TIMES:OF EARTH (LAND), AIR
FIRE (ENERGY) AND WATER
LIMITS OF SUPPLY
COSTS OF SUPPLY
AND DEMAND
ENVIRONMENTAL RENT(Adjustment of Value)
196
Air & Water
RenewableNatural ResourcesBasic Land Use
UnusedLand + Mineable & Other
Energy Resources
ENVIRONMENTAL RENT(Return on Investment)
197
Basic Land Use
POLLUTION
ENCROACHMENT and EXTRACTION
DESTRUCTION
POLLUTIONENCROACHMENT} ENVIRONMENTAL
DISINVESTMENT
RenewableNatural Resources
Air & Water
Unused Land + Mineable & OtherEnergy Resources
ENVIRONMENTAL RENT(Return on Investment)
198
=
DESTRUCTION
GLOBAL SUPPORT FOR CARBON PRICING
199
As government and business leaders gathered in Paris, in December 2015, they sent a clear message to the world that climate change is a risk that cannot be ignored, and that they are ready to work together, to bring down emissions.
ENVIRONMENTAL RENT THE ACCOUNTANT'S RESPONSIBILITY
200
• Accounting training is, hopefully, more than just an education, merely to do a job or to earn a living. There must be a duty, a civic trust.
• This responsibility must extend to the obligation for
accounting for the environment. Never were the combined qualities of competence and humility more important.
• These are not intended as moralizing or religious precepts but as necessary contributions to continuance of meaningful and harmonious living on our planet.
ENVIRONMENTAL RENT THE ACCOUNTANT'S RESPONSIBILITY
201
• To quote the Dalai Lama: "Taking care of our planet is nothing special, nothing sacred or nothing holy. It is just something like taking care of our house. We have no other planet - no other house - except this."
• In this house, therefore, let us take care of our family, using wise budgeting and sharing of resources.
• Let us support and sustain our Mother, the Earth, so that Universal Intelligence, will not, in exasperation, devastate, ruin or destroy us.
ENVIRONMENTAL RENT THE ACCOUNTANT'S RESPONSIBILITY
202
More professionally, as accountants, let us live in constant fear and respect of the ruthless discipline which can be imposed upon us by our Universal External Auditor.
ENVIRONMENTAL RENT
203
• So far as is known, very few people, indeed, have lived otherwise than upon our Earth. They are the astronauts and cosmonauts!
• From the very beginning of space travel, these privileged people have been able to view our Earth, from afar, in ways not shared by those billions of others of we and our neighbors, who live upon it.
• Virtually all of them have regarded the Earth with awe! We are responsible – and privileged – to follow their example. If we do not, we are all lost – for ever!
"Keep it simple" is often the distracting and disarming slogan.
Yet, those who urge this precept upon (say) accountants and economists, would almost certainly renounce it for (say):
• surgeons operating on them or their loved
ones,• architects designing or building their houses.
The contrast between the scalpel and the meat-axe is perhaps an appropriate analogy, applying equally to financial information!
204
Fifty years ago, at a banquet in the Mansion House, London, UK, celebrating the centennial of
Britain's “Chartered Institute of Public Finance and Accountancy,” the Chaplain to the Lord
Mayor of London prayed the following grace:
"Oh Lord, bless this meal and all those who are engaged in the profession of
public finance, remembering that, in the end, we are all accountable to Thee!"
ULTIMATE ACCOUNTABILITY205
ULTIMATE ACCOUNTABILITY
206
While putting away lying, speak every man truth with his neighbor:
for we are all members one of another.
[Ephesians 4:25]