“The chief enemy of creativity is good sense.” – Pablo Picasso

Well, well, Mr. Picasso. You aimed that at accountants, didn’t you?

For an accountant, creativity and good sense simply don’t go together. They are indeed mortal enemies. (See how I killed that beautiful quote with my unimaginative clarification? This is one of the exasperating things that accountants do, unfortunately!)

Back to the topic – Who wouldn’t like to be creative? I feel awe and more than a tinge of envy when I meet a truly creative person or come across some inspired piece of work.

But for an accountant, creativity is considered bad. Really bad. And that is not necessarily because

“Creativity is intelligence having fun.”

as Albert Einstein apparently said, irrespective of what you think about accountants and fun.

Pablo Picasso once, very dramatically, pointed out that

“everything you can imagine is real.”

Accounting is definitely one place where you don’t want that. Nor the other way round, i.e., you don’t want anything real to vanish due to an accountant’s imagination. Hence, anything to do with imaginative bends and creative mindsets and artistic tendencies – when it comes to accounting – please leave them at the door, thank you very much.

Or handle with super-extreme care and caution.

Which is why creative accounting and ‘window-dressing’ are such dirty words.

‘But if double-entry book-keeping is pure science, where is the scope for creativity in accounting?’ – you may ask.

The answer lies in the ‘some more’. Remember the definition of accounting in Part 1 of this series?

Accounting = book-keeping + some more

Alright, so let’s explore the ‘some more’ some more.

Actually, an accountant sets the ground work before the bookkeeping begins; and then continues from where the bookkeeper’s job ends. Hence, the definition should more logically be something like:

Accounting = some + bookkeeping + some more

Let’s first look at the initial ‘some’.

Even before a bookkeeper sits down to record a transaction, there are a number of questions to be answered. Such as,

Which transaction(s) should I record?
When, i.e., in which period, should I record them?
At what amounts should I record them?
Hidden in these questions are many ways in which accounting could possibly be “managed.”

Say, there’s a legal case against your company and it looks like you may end up paying some hefty fines which could range anywhere from $100 million to $500 million. (With the amounts of fines that the likes of Facebook and Google are paying, this is not unrealistic at all.)

(“Also, technically, this is an event, not a transaction. Accounting is recording not just transactions, but also events.” – Clarification from my boring accountant self)

Back to the case at hand – The first dilemma from an accounting point of view is when should you record this fine in your accounting books. Do you record it only if and once the court has ruled on the amount of the fine? If yes, what if you decide to appeal? Would you delay it further? Alternatively, do you record the fine when you know there is a likelihood to be slapped with one? If yes, what level of likelihood should you consider? How do you measure that likelihood?

Remember – recording that fine means a serious dent to your profit especially if you are having a bad year already.

So, a creative accountant will try to push that into another year – at least partly. This is one of the games that creative accountants love to play. Push entries into or pull entries from another year depending on how you ‘want’ your numbers to look this year.

Yes, that’s right. Creative accountants always play with a purpose. No wonder Abraham Maslow said that

“Almost all creativity requires purposeful play.”

And almost always, the purpose is to show the company in better lights – hence, the term ‘window-dressing.’

Accounting standard setters tend to be rather prudish and prudent about such things. Hence, they will try to force you to record such fines earlier rather than later. But therein lies the next dilemma. Until the court decides, you may not know exactly how much is the fine. So what amount do you record?

In these and similar dilemmas lie plenty of opportunity for dazzling displays of creative skills by the fun-loving super-intelligent accountants.

Like the opportunities to decide:

– when to record an income,

– when to record an expense,

– whether to record an item as an asset or expense,

– whether to record an item as an income or liability,

– whether to record a transaction at all or keep it out of the books,

– whether to write off something,

– whether to write back something,

– how much to record,

– etc. etc. etc.

Mind you, the bookkeeper hasn’t even begun his/her work yet.

And the creative accountant has only begun… because, the ‘some more’ is still waiting.

Lurking gleefully. Just around the corner.

In the next part of this series, we will explore the ‘some more’ opportunities for the creative accountants to enjoy themselves…

Meanwhile, if you are one of those who struggle (or don’t care) to understand accounting, know that you are not alone. Such apathy and ignorance are common enough and that’s why firms like ours are in business. Whether you are a small or large company and whether you are a start-up or well established, we are just a phone call or email away if you need any guidance, support or assistance with any aspects of accounting or bookkeeping. In fact, call us even if you are not sure what it is exactly that is bothering you. We are experts in diagnosis, detection, prevention and treatment of all your accounting issues. We promise not to act elitist when we speak to you. We will step down to your level, and won’t show our innate arrogance and “know-it-all” attitude one bit! In fact, our modesty will blow your minds away – just give us a try.

Cheers

Nish

For Part I of the series, go to Do You Really Understand the Language of Business?

For Part II of the series, go to The Science of Bookkeeping.

Note: My blogs are also published in my Linkedin Page. 

• We don’t want to do it ourselves
• We don’t know how to do it ourselves, or we don’t know it well enough
• We don’t have the time to do it ourselves

Once we have decided to utilise someone else to do something for our business for one or more of the above reasons, an important question that we should ask ourselves is whether we prefer to recruit an employee or to outsource. A number of factors are important in this decision. Here I have listed, based on our experience, a few factors that I think you should be considering with specific focus on accounting.

• Quantum of work – do you have enough work to justify one or more full time employees
• Cost to hire vs cost to outsource accounting – hiring typically means additional fixed costs. Depending on the jurisdiction, this might include, in addition to salaries and other direct employee benefits, costs directly related to hiring such as recruitment, visa, end of service benefits, medical and other insurance coverage and payroll related taxes. Besides, there are indirect costs such as occupancy costs and IT equipment costs. Outsourcing on the other hand simply means a fixed retainer or a time-based payment made to a third party.
• Nature of work – does the job need expert knowledge or basic skills or a combination of these? In the case of accounting, for example, this may range from data entry which requires fairly basic skillset to higher level accounting and tax judgements which need expert knowledge and experience. Once you assess the nature of work, the next question is whether the person(s) that you hire can provide the range of skills required. An outsource firm may have the advantage of having people specialized in the range and type of skills required.
• Risk – when you employ one single person to do all of your accounting which happens a lot in the case of small companies, there is a risk of over-dependence. What happens if that person leaves? I have personally seen cases where company managements have lost access to their own valuable data as they don’t have the password to access their own accounting system! When you outsource to a firm, you are not dependent on one person, but on an organisational system which is likely to be more reliable and stable.
• Time frame – if the work is only for a short-term, outsourcing is more suitable as it provides much more flexibility than recruiting someone.

Based on our experience, below are some of the factors you must keep in mind should you decide to outsource.

• Cheapest many not always be the cheapest – Many companies hire the cheapest accountants available in the market. Proper accounting requires ticking and tying all loose ends. There are plenty of cases where the resource employed has not done the job properly, with the result that despite hours of work, there’s nothing to show. Valuable time and resources are then needed to fix the data, and sometimes it may even become impossible to fix it. Lack of complete and accurate data can result in direct and indirect financial losses to the business through penalties for regulatory non-compliance and outcomes of poor decision-making based on unreliable and/or non-existent data.
• Ensure you have access to data at all the time – you must do this irrespective of whether you are insourcing or outsourcing so that you don’t carry the risk of losing the data. With the availability of cloud- based accounting packages, this is now much easier than before.
• Expertise and professionalism– do look for companies or persons with proven expertise in the relevant areas and professionalism.
• Trust – I would suggest you go with someone you inherently and intuitively trust. Remember that you are handing over some of your most important data to them. You need them to handle it with the care and the attention and confidentiality it deserves. Further, and particularly if you don’t understand accounting well, then you could also be relying on their advices for some really important business decisions. Compare going to an accountant you don’t trust to going to a doctor you don’t trust – would you take that risk?
• Systems used – there are quite a few accounting packages available in the market. Some can be purchased outright while others can be used on a subscription basis. I suggest you invest in a system which is good and user-friendly. The extra money, if any, that you have to shell out will be more than compensated by the increase in efficiency and the quality and versatility of reports. There are also some really nifty apps that come with some of these accounting systems to make your life so much easier.
• What to outsource and how much to outsource – You may decide that you want to insource some activities and outsource others. You may also decide to outsource whole or part of the activity temporarily to a third party. There is no one-size-fits-all solution here. The right solution will depend on various factors like the size and nature of your business, your business culture and mode of operations, your own personal comfort level etc.

If your outsourced firm is good, they should help you:

• Determine the right mix of in-house and outsourced work;
• Agree and adhere to a communication and reporting plan that is aligned with your business and your business requirements; and
• Guide you through all relevant aspects of accounting and will offer you the choices and risks at every stage so you can make the appropriate decision. This may be for matters such as the right mix of in-house and outsourced work, accounting judgements, tax and compliance matters, use of technology and apps, communication systems and reporting etc.

Lastly, outsourcing of accounting is not just for small organizations. Even large companies can and do outsource whole or part of their accounting needs, for short or long terms in order to make use of the expert knowledge and experience, and even the cost benefit, that a good outsourcing firm will offer.

If you are looking to outsource your accounting and tax needs in the GCC, you are in the right place. Please refer to our list of services here. Our contact details are available here. 

Note: My blogs are also published on my Linkedin Page. 

It is an established corporate ritual for public companies to announce their financial results on a periodic basis. Almost all public companies also publish their annual reports and other periodic performance reports online, a key component of which is the set of financial statements.

Despite the fact that these financial statements run into tens, and even hundreds, of pages, most people do not bother looking beyond the reported key figures such as revenue, net profit and net equity when evaluating performance of companies. A few curious ones may take the pains to glance through the income statements and balance sheets, but very few venture further.

Mixed attribute model

The reality is that, even though numbers portray a sense of absoluteness, accounting is not an exact science. The accounting figures are often arrived at using several judgements and estimations. Further, the use of multiple valuation bases – referred to in accounting parlance as the ’mixed attribute’ model – is a common feature of an accounting balance sheet. The mixed attribute model basically means that some assets and liabilities on a balance sheet are valued on a historical cost basis, while others are valued using various market-based valuation models.

VALUATION OF ASSETS AND LIABILITIES ON BALANCE SHEET

Though historical cost is a definitive number in itself, assets are seldom valued using pure historical cost – their values often have to be adjusted using relatively simpler estimates such as depreciation to account for usage and more complex estimates such as impairment to account for perceived diminutions in value. In the case of market-based valuation models, there are multiple variants depending on the nature of the assets –  some mandatory under accounting standards, others optional. Some investments, for example, have to be measured at ‘fair value’. Inventory, on the other hand, has to measured at ‘net realisable value’ only if it drops below the cost. In the case of fixed assets, an entity can measure them using ‘revaluation’ model instead of a cost-based model if it so chooses.

All of these values have to be derived from or with reference to the market. Such market-based values could be easily obtainable in some cases (such as investments in listed securities). But in other cases (such as investments in unlisted securities or fixed assets), measurement is unlikely to be straightforward and quite often is barely better than guesstimates. In general, the more the accounting judgements and estimations involved, the higher the inter-period volatility as well as the variability across companies for the reported figures. Further, the likelihood of bias and error in those figures increases.

OFF-BALANCE SHEET ITEMS

Thus far, we discussed about the items which are on the balance sheet. Now let us focus a bit on those resources and obligations which can have significant economic implications for an entity, but do not find their way into the balance sheet simply because they do not meet the accounting definitions of assets and liabilities. For example, a company’s own brand name and human resources may be the core factors driving its success, but these are not included on a typical balance sheet. Over the last couple of decades, accounting standard setters have brought many off-balance sheet obligations on to the balance sheet as liabilities – the latest addition being operating lease arrangements (from 2019 onwards), but there are still some commitments and guarantees which are allowed to be kept off-balance sheet for various reasons.

WHAT DOES ALL OF IT MEAN THEN?

Considering all of the above, it is an interesting exercise trying to step back and make sense of what the value of each asset on the balance sheet truly represents. Is it the amount that the business will generate if that asset is sold? Or is it the value that the business could generate if it continues to hold and/or use those assets? Similarly, if reported assets and liabilities in the balance sheet are incomplete, are based on different valuation models and are littered with accounting judgements and estimates, then what does the net equity figure practically represent? All of these are questions which quite often have no clear or easy answer. In other words, the numbers presented in a set of financial statements and their connotations are not necessarily absolute in any sense of the word.

IMPACT ON PROFIT

Last but not the least, let us not forget that many (though not all) movements in the values of assets and liabilities are routed through the income statement. This means the valuation methodologies used for the assets and liabilities also impact the reported profit (or loss). The evaluation of a company’s performance based on the reported profit/loss should therefore be done with caution as those numbers could be highly impacted by ‘guesstimates’ and ‘unearned’ incomes and losses arising purely out of market movements upon which management has little control.

DOES IT MEAN ACCOUNTING NUMBERS ARE USELESS?

While the use of accounting judgements and estimates in preparing financial statements is unavoidable to some extent, one may rightly start pondering about the logic of using multiple valuation bases and whether market-based valuation model or historical cost-based model is better. That requires an extensive analysis in itself which I will not endeavor to do at this time. But for now, let us consider a more practical question – do all of these mean that the reported accounting numbers are useless, meaningless and unreliable? Not really. With all its limitations, the accounting results still remain the most relevant and useful –and most oft-used – basis to evaluate an entity’s and its management’s performance.

The bottom line is, however, if you intend to act on the basis of those reported numbers, just don’t forget that pinch of salt.

And better still, carry a spade too. To dig deeper if needed.

My blogs are also published on my Linkedin page. 

For our accounting and tax related services, please visit here. 

I live in a leased townhouse and run my business from a leased office. This is likely to be the story of many people and businesses in this region. Hence a genuine question arises for such businesses that have offices, warehouses, staff accommodation and/or other properties on lease about the implications of IFRS 16 for leases applicable from January 1, 2019 in their accounting.

“One of my great ambitions before I die is to fly in an aircraft that is on an airline’s balance sheet,” Sir David Tweedie, former Chairman of the IASB (International Accounting Standards Board), said famously in 2008.

Not quite convinced? How about this:

Wow! Good ol’ double-entry bookkeeping!

I say ‘good’ because there is nothing but good in double entry bookkeeping. And I say ‘old’ because it was invented all the way back in the 15th century. Yes, it has been around for more than half a millennium – unchanged and unchallenged!

(Note: I am going to repeat the word double entry bookkeeping so much today, so just to make it a bit less sickening, I will shorten it to ‘DEB’ in the rest of this article).

In my earlier column, I promised I would write next about the art and science of accounting. Let’s start with the science – DEB is nothing but pure science. But before I venture on any further, if you are are wondering what the difference between ‘bookkeeping’ and ‘accounting’ is, let me give you a simple formula which should be easy to remember:

Accounting = bookkeeping + some more

(to answer your yet unformed question, yes, the next few articles will focus on the “some more.”)

So what exactly is DEB? Bookkeeping simply means maintaining the financial records of the business. Double-entry means you record both aspects of a transaction – by debiting one aspect and crediting the other.

What do I mean by two aspects of a transaction?

Say, you bought a car and paid fully in cash. This transaction has two sides:

1. You got a car

2. You paid money

In DEB, you would record both these aspects like this:

Debit Car, Credit Cash

Now, let’s say you bought the car on credit instead. Then the two sides are:

1. You got a car

2. You incurred a liability to be settled in the future.

Here, DEB would record both the car and the liability like this:

Debit Car, Credit Liability

You get the general idea.

There have been other methods of bookkeeping (the equally uncreatively named ‘single-entry’), but these are not much used in practice and do not provide the comprehensive information that DEB does. Whether you use the 19th century journals or you account on the cloud, whether you use Oracle or SAP or Sage or Quickbooks or Xero or Tally or any other countless accounting software out there, each and every one of these is based on DEB. DEB can, thusly, be said to be the foundation of virtually every piece of financial information out there.

Okay, so why do I call it a science? It is because there is a precise logic to DEB in terms of what to debit and what to credit, and you have to follow it correctly, otherwise you end up with pure nonsense. Think of how two molecules of hydrogen and one molecule of oxygen make water. It has to be that way; if it is any other way, you don’t get water, you get something else. DEB is kind of like that. You have to debit what you have to debit and you have to credit what you have to credit. If you do it the other way round or you debit/credit something else, you get a very different result.

In my long career as an auditor, I have seen many things – not least how some bookkeepers muddled their bookkeeping and got some horribly botched results. Like that time when one poor chap had debited “expense” instead of “advance” for an amount paid as advance to supplier. The transaction was incorrectly recorded as an expense meant there was a real risk that the company management might forget about the existence of this advance – potentially resulting in a real loss of real money. (Too many “reals”? That was deliberate, just to bring home how really important all this is).

I close this article with an expansion of Charles Munger’s quote,

"Double-entry bookkeeping was a hell of an invention. And it's not 
that hard to understand...."

Well, he can say that, but I know for a fact that many people think otherwise. I suspect the general perception that accounting is boring has something to do with this, but hey, all that’s good is generally boring!! If you are one of those who struggle (or don’t care) to understand bookkeeping, know that you are not alone. Such apathy and ignorance are common enough and that’s why firms like ours are in business. Whether you are a small or large company and whether you are a start-up or well established, we are just a phone call or email away if you need any guidance, support or assistance with any aspects of accounting or bookkeeping. In fact, call us even if you are not sure what it is exactly that is bothering you. We are experts in diagnosis, detection, prevention and treatment of all your accounting and bookkeeping issues. We promise not to act elitist when we speak to you. We will step down to your level, and won’t show our innate arrogance and “know-it-all” attitude one bit! In fact, our modesty will blow your minds away – just give us a try.

Till the next one,

Cheers!

Nish

This article is part of a series – for the previous article, go to Do you really understand the language of business?

For Part 3, please go to Creativity and Art in Accounting. 

My blogs are also published on my LinkedIn page. 

Nishe is an accounting and consulting firm based in Dubai. Please visit here for a list of our services. 

In case you are unsure as to what I meant, that is how we – the accounting elite – refer to all of you ordinary human beings, who don’t understand the complex art and science of accounting. Yes, accounting is both art and science. And yes, it is complex. And if you don’t understand it and are unable to discern that thin grey line where the science stops and the art begins, it follows that you won’t understand the most important language of business. If it seems like I’m exaggerating, listen to the great business guru Warren Buffet:

“Accounting is the language of business, and you have to learn it like a language… To be successful at business, you have to understand the underlying financial values of the business.”

Though there are people out there who are “in the know” propagating the idea that accounting is deliberately made overly complex by us avaricious accountants so that we can amass large amounts of money; don’t buy into that slander one bit. Accounting is complex because the underlying business that it is trying to capture is complex, period!

So that the true complexity of ‘accounting language’ can be better appreciated, allow me to establish here some ‘advanced’ basics of accounting.

Have you heard of GAAP and ever wondered what that means? GAAP stands for generally accepted accounting principles. In simple terms, GAAP provides guidance on the 5W1H* questions for accounting of just about anything under the sun. For instance, say you were to ship 10 widgets to a customer (note: I honestly don’t know why we accountants speak in context of widgets when we give examples, but that appears to be the convention followed, so I will adhere to it). In this example, the question arises as to when it is appropriate to record the sales – is it when: – The order is received, – The order is confirmed, – The goods are shipped, – The goods are delivered, or – The money is received?

Vexing question, isn’t it? Accounting standard on revenue will give you guidance on what needs to be done. Mind you, this is a very simple example. Accounting standards on revenue will also tell you how the revenue should be measured, how it should be presented in your company’s financial statements, what details should be disclosed about it and so on. A typical GAAP will have accounting standards on a plethora of areas such as inventory, share options, derivatives, agriculture, intangible assets, government grants, leases and so on and so forth. I’ve deliberately mentioned a mix of topics here to give you an idea of what comes under the umbrella of accounting standards.

Not so long ago, in a non-globalized world, many countries developed their own individual GAAPs. Like everything else homegrown, they all had their own distinct quirks, tastes and flavors. These worked reasonably well until globalization introduced the need for a common business language so we could all better understand each other. Unlike cultures or cuisines where the regional differences made the world a richer and more interesting place to live, the differences in accounting proved rather limiting for global trade and investments. How do you compare the profits of two similar companies based in two different countries when you know that they have not been calculated in the same manner? How does one make decisions based on such inconsistent information? This inconsistency necessitated some lengthy and painful reconciliation exercises to be done when, say for example, a company based in Europe wanted to list its shares in the US.

Enter the International Accounting Standards Board (IASB). IASB (and its predecessor body) brought in a set of accounting standards for global application (known as International Financial Reporting Standards or IFRS) and is still developing more and more of them. A large number of countries have now either adopted IFRS or converged their own national GAAP with IFRS. This process is still an ongoing one.

And all these GAAPs are by the way, just relating to external financial reporting (i.e. reporting to parties outside the company such as shareholders, banks, etc.). The information that management requires to run their businesses may be different from what the external parties need and invariably much more detailed – and that brings other concepts such as management reporting, cost accounting etc. into play.

And underlying all this is the bookkeeping function – the function that ensures that all transactions in a company are recorded accurately, completely and to the required level of detail. Those records then form the basis of further synthesis and analysis and reporting. Suffice it to say that a flawed bookkeeping function cannot deliver reliable outcomes and reports. Garbage in, garbage out – as we accountants are fond of repeating every now and then.

So where is the art and where is the science in all of these? That’s what my next column is going to be about.

And of course, if you’re struggling with any aspects of capturing, understanding and making sense of this important language of your business, know that you are not alone. It is a common enough affliction and that’s why firms like ours are in business. Regardless of whether you’re a small, mid-sized or large company, or whether you’re a start-up or well-established, we’re just a phone call or email away if you need any guidance, support or assistance with any aspects of accounting. In fact, call us even if you are not sure what it is exactly that is bothering you. We’re experts in diagnosis, detection, prevention and treatment of all your accounting issues. We promise not to act elitist when we speak to you. We will step down to your level, and won’t show our innate arrogance and “know-it- all” attitude one bit! In fact, our modesty will blow your minds away – just give us a try.

Till the next one,

Cheers!

Nish

This is the first part of a series. For Part 2, please go to The Science of Bookkeeping. 

For Part 3, please go to Creativity and Art in Accounting. 

For a list of our services, please go here. 

If you wish to contact us, please visit here. 

My blogs are also published in my Linkedin Page.