Another reason to push for common accounting standards

A recent study done by researchers at the University of Arkansas and the University of Missouri shows the effect of having different accounting standards in different countries on mergers and acquisitions. The lack of same or similar standards is a deterrent for companies to merge. The CFO’s have more confidence in reviewing the numbers of the prospective entity to merge with if the acquirer uses similar accounting standards as the acquiree.

Based on M&A deals in 32 countries between 1998 and 2004, the study found that differences in versions of generally accepted accounting principles used by acquirers and potential targets in different countries can decrease the number of mergers. When both companies target and the acquirer used GAAP or IFRS or similar versions of accounting principles, the mergers or acquisitions were more likely to occur.

In that line of thought, high number of transactions occurred between US and UK based entities, as both the countries have similar accounting standards. During the survey’s sample period, there were 1,980 U.S. cross-border M&A transactions targeting UK companies, worth a total of $175 billion. In contrast during the period studied, U.S. companies merged with or acquired only 877 German companies (worth $79 billion in all), due to the dissimilarities in the accounting standards of the two countries.

Another reason for the authorities world over to think about working towards common accounting standards.

Racing towards financial problems

The Cayman Track Limited, a governmental authority that runs the horseracing tracks in Jamaica, has come under the radar for its improper accounting practices. An audit was commissioned by the Ministry of Finance to look into the reasoning behind the entity getting into a financial mess.

The audit found that the payables accounting is highly flawed. There is lack of required documentation for payments to be made; which is a direct contravention of the Financial Administration and Audit (FAA) (Instructions) Act. The law states that “each payment of public money must be supported by a payment voucher or a claim which incorporates the details required for a payment voucher”. CTL allegedly breached the law as the name and address of payee were not available or documented on the payment voucher or on any supporting document attached. Several payment vouchers did not include information regarding the work performed, services rendered or details of goods received.

When payments are made CTL is required to rubber stamp the bills/invoices and supporting documents as “paid” and an authorized official should certify it, but there were multiple payment documents that were found without the stamp. This could easily lead to multiple payments to vendors or worse lead to misappropriations of funds.

CTL is also charged of not following the FAA Act on another issue. The inventories or stores ledgers recording the cost and dates of acquisition of all public property must be properly maintained to support the write-off of any losses or deficiencies, which the company failed to do. A case in point was that a generator was stolen in 2009-2010 but there was no documentation of the generator on the fixed asset register. This is again something that could lead to misuse of the assets of the company. If the asset is not on the books it could very easily be sitting at an employee’s house!

To lease or not to lease

When a company leases a piece of equipment, it has two choices, either to report it on the Balance Sheet (capital lease) or not to report on Balance Sheet if it is an Operating Lease. The  International Accounting Standards Board (IASB) and America’s Financial Accounting Standards Board (FASB) say a lease is like incurring debt and hence should be on your balance-sheet. This new rule, proposed last week by the two regulators is up for public comment until December, but could be enacted as soon as June.

Per the new rule all leases will be put on the Balance Sheet, the right to use the leased item in the assets column and the associated obligation to pay for it would go in the liability column. This would add to the debt of these companies, leading to an increase on the average interest bearing debt and hence the interest on the Income Statement.

But on the other hand, since no rent will be paid of the asset, the operating earnings would be so much higher. But many companies are close to their maximum debt limits, and the new rules could push them over the edge. The effect of the change will vary depending on the type of industry the company is, for industries like retail and airlines which lease most of their property and airplanes respectively, it will not be a bigger effect.

With the state of the economy, this effect will be felt even more so. So if we see the Airline travel getting more expensive we know who to blame this time!