Mafia Buzz Issue 3

Accountancy SA

Michael Dorfan addresses the problem of accounting for defined benefit plans. His message is to get companies to disclose the true legal liability for defined benefit plans. (Page 4)

Wilna Steyn and Willie Hamman (or is it Pieter von Wielligh?) look at the mistakes companies make when preparing cash flow statements. (From my experience, few preparers, auditors and users understand AC118! Time to throw this cash flow statement out and get something that is more meaningful like the old source and application of funds statement?) Points made in the article are:

1. 
   Only half of the companies have an accounting policy note on what is meant by “cash and cash equivalents”.
   
2. 
   One company says that bank overdrafts are part of cash and cash equivalents and yet includes increases in bank overdrafts as a financing activity.
   
3. 
   Some companies included the current portion of long term borrowings in cash and cash equivalents.
   
4. 
   Some companies have given bonds to the banks in respect of their bank overdrafts and yet show them as part of cash and cash equivalents. (Page 10)
   

SAICA points out that until the Financial Reporting Bill is approved by Parliament (who knows when) SMEs will have to comply with the existing accounting rules, i.e. do not get too excited about differential reporting just yet. (Page 15)

My article was on agricultural futures – looking at whether or not they could be weapons of mass destruction. (Page 18)

45,3% in total passed part 1 of the 2003 Q.E. with a 20,5% pass rate for black candidates. (The apartheid school system is still being felt? Or are they still penalising candidates for not having perfect English – the typical black candidate is writing in his or her second or third language so is at an automatic disadvantage.) (Page 37)

If you failed part 1 of the examination, get hold of this journal and study the examiners’ comments carefully on pages 46 and 47. The sick thing is that every year the same comments are made and every year candidates fall into the same traps. Why can’t people realise that it is so much cheaper to learn from the mistakes of others? I loved the quote at the end of the article: “There are no shortcuts to anyplace worth going.” Investing in the future seems to be foreign to the “now” generation.

Business Day

The JSE listing rules that have just been published will be a windfall for accountants and merchant bankers. (When will the shareholders start objecting to this redistribution of income away from the true owners of the companies?) (27^th)

Business Times

Nigel Scott says that there are two ridiculous myths in the advice game:

1. 
   You can never have too much insurance – you only need enough to settle your liabilities on death. (I have no liabilities so I have no life insurance – and do not try to sell me any!)
   
2. 
   The ideal equity exposure in an investment portfolio is 100 minus your age – you must take all factors into account when doing the allocation step, not just age. (17^th)\
   

Citizen

Michael Lauer, the fund manager of Lancer Management Group (LMG) was charged by SEC for grossly overstating the assets in the fund, thereby attracting investors (shades of our own Jack Milne). He pumped up values to the amount of over $1 billion. One of the RSA funds has taken a major knock on its investment LMG. (I have been waiting for something like this to happen. Are Jackie and Micky only the tip of the iceberg?) (4^th by Shirley Kemp)

Finance Week

Deon Basson states that the large number of exceptional items making up the difference between attributable-profit and headline earnings contributes to a general scepticism about companies’ headline earnings. He states that it is a useless measure on which to calculate the price earnings ratio. (Deon, headline earnings was never meant to be used to assess the real performance of a share. It is merely a measure to compare the trading performances between companies. If you want to value a share using earnings as a basis, you should strive to discover the company’s maintainable earnings, which measure cannot be arrived at by applying a set of rules.) (4^th, Page 12)

The following note appears in the financial statements of Aspen: “For hedge accounting purposes relating to transactions with suppliers that are denominated in foreign currency, the settlement of the creditor is now designated as the hedged item as opposed to the import transaction.” (Nice – pretend that a cash flow hedge is really a fair value hedge! I wonder how the auditors felt about this?) (Page 13)

Financial Mail

Andrew McNulty says that AC133 is introducing greater complexity and less predictability for banking groups. For example, First Rand included a R233 million gain from AC133 in its core operational earnings. He says that because short-term earnings are going to be more volatile, more attention will have to be given to net asset value and return on equity. (ROE is earnings divided by equity – how will this help?) (1^st, page 65)

A research team reviewed the records of workers on a tea plantation in Kenya over five years and found that during the last three years of life, tea pluckers who died of Aids were absent from work almost twice as often as other tea pluckers. (8^th, 43)

Andrew McNulty comments on AC133:

1. 
   It has had a marked influence on balance sheets and income statements.
   
2. 
   The effect on earnings, growth rates and profitability ratios has been positive (I do not know where he gets this from).
   
3. 
   The banks have not been consistent with the application of the statement.
   
4. 
   The current thinking could change.
   

One inconsistency between banks is the treatment of impairment. Previously, banks used to make two provisions, a specific provision and a general provision. Only a specific provision is now permitted based on a projection of future cash flows expected from debtors. Standard Bank released R499m from general provisions to the opening balance of retained income. Nedcor released R1,72bn of the general provision and created an additional R1,13bn additional specific provision leaving R585 million which was released. (Apparently, the profession is insisting now that these releases go to income and not to the opening balance of retained income. GAAP gone totally mad!) (22^nd, page 48)