Who's being held accountable?

So it seems I am not great at regularly updating this blog but I am on holiday so I have no excuse now. I was hoping to venture away from hardcore theory that is only digestible for Commerce graduates but this topic has been grating at me for some time. What it comes down to is the dishonesty of IFRS accounting.

Any student of accounting will have been told about the various users of accounts but I think this is where the deception begins. If we take a second to think we see that management use management accounts because it's important that they know what's going on in their business and the tax-man has his own rules because he wants to get the right money out of it. So creditors and investors are left to use the things as per IFRS and invariably have to spend a lot of effort (not to mention the tertiary education required) interpreting them, fiddling with them and then some guesswork to get anything valuable out.

Lets focus on investors.

All these guys want is information that represents the economic substance of the business in question. Instead the IASB (and FASB) have decided it's more fun to torment people by leaving the economic substance at the end of an unpleasant maze. I am not even talking about the controversial issue of fair value of financial instruments (don't get me started on this) but I will list some other heinous examples of "The Board's" tomfoolery.

Share Based Payments (IFRS 2 I think) : Put simply I can issue shares to the value of $1billion to buy a single can of Coke and it'll show up on my balance sheet as an asset worth whatever Cokes normally sell for. The Board will say "ah but it will show up in the notes and there'll be hints in the Statement of Changes in Equity" but I don't want to have to read a book to find every answer. This approach is much like a newspaper publishing a defamatory article boldly on the front page and then printing the retraction somewhere amongst the adverts for adult entertainment that no-one wants to be seen lingering on. Leases are now getting the same treatment as the Board attempts to plug the holes in the accounting system using an axe.

Even consolidation is flawed in the way it ignores separate legal personality (especially obvious with liabilities). I won't go on because most readers haven't made it to this point without getting bored.

My solution is toss the lot out and start from scratch. that's not really possible but the IASB have decided that a good step is to change the framework (the principles upon which the standards are built). This was the good bit and now that the cockamamie system is falling apart they seem to want to make the whole thing cockamamie.

Anyway if you're reading this and want to develop a new set of standards just comment and we can get in touch. I hope your holiday season is treating you well! I may elaborate on this with a discussion on the role of auditors but probably not.

Cheers

Edna

My First Blog and First Disagreement with Buffett

I am finally writing something for this damn blog of mine. The reason I have started this is because I frequently have opinions (mostly around business and politics) that I feel are wasted in my head or restricted to my housemates. Is that arrogant? If you think so just give me a piece of your mind in the comments section below.

Now I have been a student of finance and have paid careful attention to Warren Buffett (as anyone who wants their money to work for them should) but I found myself disagreeing with him for the first time recently. Much like many of my other thoughts, this isn't thoroughly thought out but again that's what the comments section is for. I hope to encourage conversation over things on my mind more than impose my views on the world, I'll leave that to the print media.

In short I challenge the effectiveness of value investing. It is clear to anyone looking that Buffett has outperformed the world when it comes to investing. But this is not based on personal success but just on what makes sense. Buffett firmly believes that one should focus entirely on the fundamental business case for each investment irrespective of whether you are buying the entire firm or a single share (an amusing concept given Berkshire's $120 000/share price tag). Furthermore, one should ignore "Mr Market" as if he is some eccentric informal trader. To my mind this works well where you are buying a significant share in the firm and where you are trading in a relatively "private" market. But for the rest of us that struggle to scrape together the $500 needed to own a share in Google, we would be exposing ourselves to significant risk if we were to disregard Mr Market's eccentricities. The variations as a result of speculation and market interpretations of value are far more severe than most changes in cash flows, especially when discounted from way into the future.

This is then exaccerbated by the fact that these investments may be part of our resources that we may need to utilise to live. Not by necessity but when your investment is worth the same as a plasma-screen-TV then it is automatically more liquid than a multi-billion dollar stake in Coca-Cola.

Now i don't want this to get too long and any more boring but my main concern comes with market pre-conceptions about industries or other permanent determining factors. For example one company in an industry trading at 6x earnings will be cheaper than another at 20x the same earnings without fundamental differences merely because of the industry. These things don't change and although eccentric are going to affect the future value of your investment.

So Buffett is just about always right and following his methodology should save us from getting things too wrong but sometimes I think we need to remember that he is a billionaire in any currency and most of us aren't. I hope you read again, I am sure my grammar and humour should improve and if hits are low I will stoop to trashy reporting on celebrities and my own sex life.

I am not qualified or authorised to give financial advice so what I write here is merely commentary for your and my amusement.