Mafia Buzz Issue 3

Accountancy SA

Note: I do not summarise these articles because you should read them yourself.

Page 4: An amendment to the headline earnings circular now requires that the expensing of BEE credentials must be included in headline earnings. No wonder headline earnings is losing its relevance! If you create an asset called BEE credentials you have to expense it as part of headline earnings but if you buy it as part of a business combination it is called goodwill and any impairment of this asset is outside headline earnings. It is becoming more and more imperative that companies publish alternative results to IFRS/GAAP results – management has an obligation to inform shareholders. GAAP/IFRS has lost its relevance!

Page 4: IFRIC 9 states that reassessment of an embedded derivative in a contract is prohibited unless “there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required.”

Page 4: I get the impression that the exposure draft on IAS1 is merely fiddling with the set-out of the financial statements. It looks like they are reverting back to where we were 25 years ago!

Page 7: The IASB and FASB have developed a roadmap to remove the reconciliation requirement for non-US companies that use IFRSs and are registered in the US and to identify areas for improvement in accounting standards.

Page 8: Phil Gott gives ideas on how to get more out of professional staff. He believes that professional service firms should move beyond classifying their staff into finders (those who win new clients), minders (those who look after the clients) and grinders (those who do the work).

Page 13: Dave Thayser looks at the possible negative effects that IAS38 could have on merger and acquisition activities. He seems to support a growing trend among preparers, which is to encourage companies to “make the market aware as soon as possible of any adverse accounting consequences” to avoid good deals being turned down for the wrong reasons. [It really is sad that IFRS has come to this.]

Page 16: Pieter Buys looks at certain strategic costing techniques.

Page 18: Garth Coppin, whom I highly respect, has tried to defend the indefensible. I will, hopefully, be addressing some of the issues he raises in my new suite of articles I will be writing in the coming months. An interesting comment I would like to draw your attention to in the meantime is: “The one consolation is that if companies really believe their results do not reflect economic reality in the manner required by accounting standards, they at least have the opportunity to supplement their financial statements with additional information when they believe it appropriate. Herein lies the strength of corporate reporting. Financial statements are only one section of the annual report. Commentary by management in the remainder is equally as important to understand the company.” Garth is from E&Y. I have had feedback from clients of the other big four that they will not tolerate this approach. Standard Bank publishes a separate document “normalising” its financial position and performance.

Page 22: Estienne de Beer writes that positive thinking is not the beginning and end of success. [In my opinion it absolutely essential for success – no compromise!]

Page 26: Stephen Coetzee resurrects an old concept called “fund accounting” for charities. I believe that this method of accounting is brilliant but it was rejected by the IASC at the time.

Page 28: John van Wyk of Barloworld writes about inventory management.

Page 29: My article was on the element called “beta” used in valuations.

Page 39: SAICA writes about the TOPP programme. In my opinion this was a sound idea but was ahead of its time. After seven years only 87 candidates ended up writing. Clearly, something went wrong. With the potential demise of the small company audit, this will be one of the practical ways university graduates will be able to become CAs if they do not get into one of the big four or mid-tier firms. So, TOPP, hang in there.

CFA Institute

The Securities and Exchange Commission is investigating the back-dating of stock option rewards to management by US companies. [It has been found that companies wait for favourable news to be reflected in share prices and then grant options at an earlier date based on exercise prices at the lower share price. It is happening in RSA as well.]

Citizen

Mr Vuyani Ngalwana, the Pension Fund’s Adjudicator, has warned trustees to stop the process of churning, i.e. changing one policy for another purely to generate fee income. [He should look into the process of changing from one fund to another and changing one investment for another. A massive amount of wealth is destroyed for investors because of this churning process.] (15^th)

It was really super to see that Mr Bill Lynch was recognised for his entrepreneurship by being awarded the prestigious Ernst and Young World Entrepreneur of the Year. The down to earth Mr Lynch gives us some of his “secrets” of success:

1. 
   Life is not easy – hard work is rewarded.
   
2. 
   One needs a high dose of ambition sprinkled with integrity, honesty, frugality and enthusiasm for real success.
   
3. 
   You must learn to take decisions. You have to commit yourself – get on with it – do not hesitate and procrastinate.
   
4. 
   Nothing happens over night – you should look at a 50 year time frame to build the sort of business that Imperial became.
   
5. 
   You should not be shy about borrowing to fund a good business idea.
   
6. 
   You must surround yourself with the right people.
   

[Internalise these home truths your future Bill Lynches!] (15^th)

Economist

It appears as if companies in the US are backdating options given to management after share prices increase. The exercise prices are based on the price before the increase. SEC is onto this and so far at least 20 companies are being investigated. We must put a stop to backdating! Auditors will be implicated if they are not vigilant. (3^rd, page 60)