Accounting #4 - Performance measurement
No, nothing to do with stamina or energy drinks alas since doing readings were hard going and involved a lot of sneak trips to the kitchen to raid the dried cranberry stash - seriously, people call them craisins? It sounds like a combination of raisin and craven - bad trademark Ocean Spray, just bad.
Team reduced by one member as K. withdrew. We got our first team exercise results back: 63% is not awesome so I’ve asked for a high scoring worked example because I’m not sure I could do better if given a similar exercise again. We also did our first test and got 75% / 80%. It’s done on a similar basis to Org. Behaviour except the weighting is 10 individual / 10 team rather than 5 individual / 20 team - this is no doubt some sort of Accounting thing :p
Why do we measure financial performance (not comprehensive)?
There is also this thing called Other Comprehensive Income
What is Revenue? Gross inflows of economic benefits during the period arising in the ordinary activities of an entity when those inflows result in increases in equity, other than those relating to contributions from equity participants. (AASB 118) In English this means benefits that you got from regular business (not random activities like spontaneously selling a warehouse to increase your cash) but also not counting it if an investor decides to sink more cash into the business.
Income = Revenue (normal business) + Gains (everything else)
When is revenue recognised? Where 'recognised' means recorded on a financial statement. More importantly, why do we care and the answer is that when you record revenue can either make you look good, or not so good so the rules for when you do it have to be reasonably comprehensive.
Contemporary Accounting has a very cool diagram showing the various stages you might go through and where you might recognise revenue depending on what type of business you're in. We briefly covered airlines (Qantas), mobile telephones (Apple iPhone), Mining (Gold), Woolworths, and the construction industry talking about the point you can consider yourself to have an actual, recordable revenue.
Pause for discussion activity on how to record someone 'selling' an 80k asset for 200k on 20th June (Australian financial year runs from 1 Jul - 30 Jun) then buying it back 2 months later for 220k. It could be made to look like a fabulously successful sale for the previous financial year instead of the loan it actually is.
What are expenses? Decreases in economic benefits during the accounting period in the form of outflows of depletions of assets or incurrence of liabilities that result in decreases in equity other than those relating to distributions to equity participants. Not going to try and translate this into English because it actually makes sense to me.
When are expenses recognised?
i.e. Payment of wages, Use of electricity, purchase of a machine, purchase of goods for resale.
We can use more generic descriptions
The beauty of this is that something can be an asset or an expense depending on how you classify it which is deeply attractive if you're wanting to reassure people the entity is solvent and will remain so, or if you want to assure an bonus for high performance. See Worldcom whose former CEO Bernard Ebbers is serving a 25 yr term for fraud and conspiracy.
The key thing to remember when trying to determine whether a transaction is an asset of an expense is the timing of the benefit related to that transaction. Is the transaction one that will result in past or future benefit?
Pause to work through some practice questions in class.
Earnings Management is the way the choice of accounting policy and presentation of transactions can influence perceptions about performance of entity.
What is the Statement of Changes in Equity?
Pause to discuss Woolworths Consolidated statement of changes in equity as at 30 June 2009.
Time revealed to be 9:02pm and mass stampede for car park ensued. This entry was originally posted at http://samvara.dreamwidth.org/454950.html, where there are
comments.
Team reduced by one member as K. withdrew. We got our first team exercise results back: 63% is not awesome so I’ve asked for a high scoring worked example because I’m not sure I could do better if given a similar exercise again. We also did our first test and got 75% / 80%. It’s done on a similar basis to Org. Behaviour except the weighting is 10 individual / 10 team rather than 5 individual / 20 team - this is no doubt some sort of Accounting thing :p
Why do we measure financial performance (not comprehensive)?
- Investors can decide whether to invest
- Managers can make strategic decisions
- Bonuses are paid for performance! (Public sector has KPIs) - which pretty much explains 90% of fraud :p
There is also this thing called Other Comprehensive Income
- Items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other Australian accounting standards. i.e. Cash Flow Hedge (PDF) Hedge Accounting.
- Total Comprehensive Income = Other Comprehensive Income + Profit or Loss
What is Revenue? Gross inflows of economic benefits during the period arising in the ordinary activities of an entity when those inflows result in increases in equity, other than those relating to contributions from equity participants. (AASB 118) In English this means benefits that you got from regular business (not random activities like spontaneously selling a warehouse to increase your cash) but also not counting it if an investor decides to sink more cash into the business.
Income = Revenue (normal business) + Gains (everything else)
When is revenue recognised? Where 'recognised' means recorded on a financial statement. More importantly, why do we care and the answer is that when you record revenue can either make you look good, or not so good so the rules for when you do it have to be reasonably comprehensive.
- Increases in assets or reduction of liabilities have probably resulted from inflows of economic benefits and
- These movements can be reliably measured
- Earnings process is substantially complete (and measurable)
- Receipt of payment of goods and services is reasonably certain
- Critical event
Contemporary Accounting has a very cool diagram showing the various stages you might go through and where you might recognise revenue depending on what type of business you're in. We briefly covered airlines (Qantas), mobile telephones (Apple iPhone), Mining (Gold), Woolworths, and the construction industry talking about the point you can consider yourself to have an actual, recordable revenue.
Pause for discussion activity on how to record someone 'selling' an 80k asset for 200k on 20th June (Australian financial year runs from 1 Jul - 30 Jun) then buying it back 2 months later for 220k. It could be made to look like a fabulously successful sale for the previous financial year instead of the loan it actually is.
What are expenses? Decreases in economic benefits during the accounting period in the form of outflows of depletions of assets or incurrence of liabilities that result in decreases in equity other than those relating to distributions to equity participants. Not going to try and translate this into English because it actually makes sense to me.
When are expenses recognised?
- when it is probable that the decrease in economic benefit has occurred and
- the amount can be reliably measured
i.e. Payment of wages, Use of electricity, purchase of a machine, purchase of goods for resale.
We can use more generic descriptions
- Costs of this year are expenses of this year
- Costs of earlier years are expenses of this year (wholly or partially)
- Costs incurred this year which are expenses of later years
The beauty of this is that something can be an asset or an expense depending on how you classify it which is deeply attractive if you're wanting to reassure people the entity is solvent and will remain so, or if you want to assure an bonus for high performance. See Worldcom whose former CEO Bernard Ebbers is serving a 25 yr term for fraud and conspiracy.
The key thing to remember when trying to determine whether a transaction is an asset of an expense is the timing of the benefit related to that transaction. Is the transaction one that will result in past or future benefit?
- Car: benefit arises in future = asset
- Car rental: if benefit in current period = expense, if benefit in future period = asset
- Wages: benefit already provided = expense
- Wages in advance: benefit in the future = asset
Pause to work through some practice questions in class.
Earnings Management is the way the choice of accounting policy and presentation of transactions can influence perceptions about performance of entity.
What is the Statement of Changes in Equity?
- reports all owner changes from balance sheet
- total comprehensive income from SOCI included
- used to observe overall changes in equity for a period
Pause to discuss Woolworths Consolidated statement of changes in equity as at 30 June 2009.
Time revealed to be 9:02pm and mass stampede for car park ensued. This entry was originally posted at http://samvara.dreamwidth.org/454950.html, where there are
comments.