Mafia Buzz Issue 3

Accounting SA

Elmar Venter discusses accounting for pre-extraction costs in the mining industry. Some problems I have with this discussion are:

1. 
   The prudence concept, which is mentioned twice, is no longer a concept of GAAP.
   
2. 
   The deferral of exploration costs will not be a first in GAAP. Go to the leasing statement and you will see examples of deferrals there.
   
3. 
   I cannot understand why one would expense prospecting costs but capitalise exploration costs under existing GAAP. Both involve searching for knowledge. Prospecting is searching for suitable areas and exploration is searching the areas identified.
   

Elmar is correct in saying that we need a statement for the mining industry. We needed this statement 50 years ago. My guess is that when all the resources have been mined, we will get our first definitive statement. (Page 2)

Glen Mouton says that there are two actions companies take when faced with fraud: they either hush it up or they take action against the perpetrator. He believes that companies should have a contingency plan in place to handle fraud. The company’s ethics policy should state that it is open and honest in all dealings, internally and externally, valuing integrity and effort, and not merely financial performance. There should be rules such as restricting authority of employees to transact on the company’s behalf, not accepting gifts from customers outside certain limits, maintaining a duty of confidentiality to the company and clients and reporting any suspicion of fraud to enable action to be taken. (Page 7)

Steven Firer asks the question “What are your intellectual assets worth?” I ask “Why do we have to try to measure everything? Why don’t we get on with the job of creating our intellectual assets and putting them to good use? Why do we have to try to measure everything? What is life worth? What is love worth? What is your wife worth?” Some things should be measured to enable us to manage them. But any attempt to measure things like your knowledge serves no purpose. (Page 8)

Willi Coates sets out the work that SAICA is doing to salvage the profession’s reputation after all the accounting scandals that have taken place overseas and in our country. (Page 13)

Annette Heiber says that poor quality data is a concern if the Basel 11 Capital Accord is to be met in four years time. 90% of banks surveyed believe that poor management of credit risk is a real threat to their organisations. (Page 15)

Jan Conradie and Herman Schutte have written an excellent detailed article on the measurement of performance in municipalities. (I would say that one of the first priorities, before trying to measure performance, is to get a system of credit control operative – witness the billions of unpaid debtors that the Johannesburg Municipality had to write off recently.) (Page 17)

My article was on the accounting standard for recognising and measuring employee pension fund costs. (Page 29)

Penelope Webb’s article was on the risk that tax advisors face and how they try to protect themselves against actions by placing limits on their potential liability, whether or not this will be effective. (Page 31)

Citigroup Circular

Warren Buffett does not believe that equities are undervalued generally. Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, he still finds few that interest him. In his view this is testimony to the insanity of the valuations reached during the Great Bubble.

Economist

Royal Ahold, a Netherlands company, the world’s third-largest grocer has admitted to overstating its profits by $500 million. It booked unearned revenue, entered into illegal transactions and consolidated a company it did not control. (Not much of an advert for principle based GAAP!) (2^nd)

Financial Mail

Malcolm Segal of the SA Venture Capital and Private Equity Association says that SAICA has lost sight of the fact that private equity companies do not earn their revenues by raising capital and giving advice but by formulating an exit strategy and selling their holdings at a profit. It is, therefore, illogical to equity account private equity investments. (Of course, Malcolm is right. But whenever did GAAP try to be logical? One of the proposed changes to AC110 is that equity account will not apply to such investments. Hang in there Malcolm.) (14^th, page 18)

Empowerment players are drawn to the asset management industry because this is where the purchasing power sits. It is a perfect foot in the door to commence building an empire. (This is a terrible thought – use other people’s hard-earned money to serve their own purposes? Another reason to DIY.) (14^th, page 45)

Warren Buffett is of the opinion that derivatives are time bombs that could bring Armageddon to the world financial system. (21^st, page 8)

Ever expanding regulation is creating an environment in which it is difficult for entrepreneurs and SMEs to survive, let alone flourish. The cost of compliance is high and the regulations numerous and complex. If government is serious about promoting business, it needs to do something about this. (Brian Goodall MPL, leader of the DA, Gauteng) (Great to see this kind of comment last! Maybe there IS hope for baby gaap.) (21^st, page 11)

FM is offering an eight-week course for middle, junior and supervisory mangers on risk, ethics and governance – cost R500. (We need this sort of thing in RSA.) (21^st, page 12)

Cytech, which was “worth” R5 million in 1999, was valued by an auditing firm at R150 million based on projected future cash flows when it had not achieved anything at that point. It was then valued to R228 million in 2001 through the income statement. The projected cash flows did not materialise so the investment was written down, not through the income statement but directly to reserves as they changed their basis of accounting to equity accounting (the company had a 47% stake in Cytech). (Question: how can one value a company that has achieved nothing – it merely has a business plan – at R150 million? I do not believe that the valuer asked the critical valuation question: “Exactly what am I valuing?”) (21^st, page 24)

The Johannesburg city council has hauled its skeletons out of the closet and provided for a R3,9 billion deficit – R1,5 billion unfunded pension plan, unrecoverable debt of R1,5 billion and “unreconcilable items” of R0,9 billion. (The time bomb is being fused!) (21^st, page 29)

Merrill Lynch believes that the Rand could be R7 to the $ by the this time next year. (21^st, page 31)