Accounting for Growth: Stripping the Camouflage from Company Accounts

235 Pages·1992·6.29 MB·English

by  SMITH, Terry

ACCOUNTING
FOR GROWTH
For
Katy andEmily
ACCOUNTING
FOR GROWTH
Stripping the Camouflage
from Company Accounts
Terry Smith
c
CENTURY
BUSINESS
Copyright © Terry Smith1992
The right ofTerry Smith to be identified asthe author ofthis work has been
asserted by him in accordance with the Copyright, Designs and Patents Act 1988
First published in 1992in Great Britain by
Century Business
An imprint ofRandom House UK Limited
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Contents
Acknowledgements VI
PART I
1 INTRODUCTION 3
2 How COULD IT HAPPEN? 7
PART 11
ACCOUNTING TECHNIQUES: ACQUISITION AND DISPOSAL
3 THE 1980s - DECADE OF THE DEAL 15
4 THE PRE-ACQUISITION WRITE-DOWN 22
5 DISPOSALS 37
6 DEFERRED CONSIDERATION 52
PART III
OTHER ACCOUNTING TECHNIQUES
7 EXTRAORDINARY AND EXCEPTIONAL ITEMS 63
8 OFF BALANCE SHEET FINANCE 76
9 CONTINGENT LIABILITIES 92
10 CAPITALISATION OF COSTS 101
11 BRAND ACCOUNTING 116
12 CHANGES IN DEPRECIATION POLICY 126
13 CONVERTIBLES WITH PUT OPTIONS AND AMPS 137
14 PENSION FUND ACCOUNTING 148
15 CURRENCY MISMATCHING 169
PART IV
16 MAJOR COMPANIES ACCOUNTING HEALTH CHECK 183
17 SURVIVAL TECHNIQUES IN THE ACCOUNTING JUNGLE 193
APPENDIX I COLOROLL 206
APPENDIX 11 BRITISH & COMMONWEALTH 211
APPENDIX III POLLY PECK 221
Index 224
Acknowledgements
Without engagingin wordy platitudes, it isnecessary for me to express my
indebtedness to my colleagues in the UK Company Research Department
ofUBSPhillips & Drewfor their help incompiling theinformationfor this
book. Apart from widespread help in compiling the examples and
completing the Major Companies Accounting Health Check, special
mentionshouldgo to RichardHannah, the ShippingandTransportanalyst,
who co-authored the original Accounting for Growth research report. The
otherindividual who must be singled out for mentionismy assistant Sally
Dell who prepared the manuscript, and patiently accepted my corrections,
changes and handwriting. Ifully acknowledgethat thecommentsexpressed
in this book are my opinions, and I am not suggesting that the practices
analysed are illegal, or that they even contravene Generally Accepted
Accounting Practice (alsoknown as'GAAP') or that the various companies
and accountants mentioned did not have valid reasons for using these
techniques. I am more interested in the impact ofthese practices upon the
clarity offinancial information than in whetheror not they satisfy theletter
ofthe law or regulation. I believe that it is in the public interest for these
issues to be discussed. Finally, I wish to acknowledge the help ofallthose
companies who gave permission for reproduction ofparts oftheir Annual
Report and Accounts to illustrate this book.
TCS
May 1992
vi
Part I

1
INTRODUCTION
Definition ofa recession: A time when money is returned to its
rightful owners
Anon
Why write another book on accounting? A visit to the Business section of
any bookshop reveals a wealth of textbooks on the subject. There are
several reasons for writing this particular book:
Since I began working in finance during the Secondary Banking Crisis
and recession of 1973-75 I have continually been challenged by friends
outsidethe Citywithaquestionwhichgoes somethinglike'XYZcompany
wentbustlast week, butit was making profits. Howcan.thathappen?'The
first example ofsuch questions I can recall was the collapse ofa retailer
calledBrentfordNylons in February1976.The companyhad ahigh profile
as a cut-price high street retailer whose TV advertising featured a well
known discjockey, Alan Freeman, so its collapse attracted attention from
many people outside the financial services industry. It is to those people in
part that this book is directed- to help answer the question so often posed
ofhowacompanyreportingprofitscanstillgo bust. BrentfordNylonswas
a private company. Its last accounts prior to going into receivership were
for 1974,when profits of£130,000 were recorded, but only after a special
credit of£550,000 in respect ofa claim against a supplier, and receipt ofa
regional development grant of £180,000. There is nothing new about
creative accounting. Incidentally, for antiquarians amongst you, Brentford
Nylons was ultimately taken over by Lonrho.
Secondly, itbecameapparent that the recession of1990-91 was producing
asimilar effectin that somecompaniesreporting record profitswerealmost
simultaneously going into administration. Probably the most dramatic
example from the point ofview ofthe speed ofthe collapse is Polly Peck,
whichisdealt within the following section, 'Howcouldit happen?' and in
more detail in Appendix Ill. And there are plenty of other examples of
companies going bust in this recession which reported 'profits' in their last
results announcements and accounts - British & Commonwealth, BCCl,
Maxwell Communications. To deal with some ofthe issues ofaccounting
3