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Making the case for SSAP 10: Did we make any money?

With a deep misunderstanding of the term profit among the profession, Richard Murphy laments the demise of an accounting standard which could answer the question ‘did we make any money?’

9th Jan 2020
Founder and blogger Tax Research UK
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I don’t wish to knock profit. It’s important. But I also suspect that most users of accounts really do not know what it is.

Some might think it’s something tangible that they might see, or even physically count. But of course, it is not. It’s a residual. That’s because it is the difference between income and expenditure. And those two terms are themselves deeply subjective, and what constitutes them depend upon whatever accounting rules are in use for the entity that is reporting.

The fact is that very few people really understand those rules in detail. The consequence is deep misunderstanding of the key figure (profit) that most accounts focus upon. Most clients don’t talk about it as a result.

I’d venture a guess that almost every financial accountant knows this is true. After all, the two most common questions a client might ask of their accounts are ‘did we make any money?’ and ‘do we owe any tax?’

FRS 102, which governs the reporting lives of so many, now has little or nothing to say on either issue. I will leave tax aside for now. Let me talk cashflow instead.

The demise of SSAP 10

Being of a certain age (61) I have seen quite a lot of accounting standards come and go throughout my career. There is one whose demise I regret, deeply. That is Statement of Standard Accounting Practice 10 (SSAP 10) on the Source and Application of Funds.

This ceased to apply as long ago as 1990, when it was replaced by FRS 1 on cashflow statements, which has now in turn been subsumed in FRS 102. But I think that any accountant with an interest in helping their clients understand the accounts that they present to them might want to consider using it.

A Statement of Source and Application of Funds was not a cashflow statement, as such. It was, instead, a statement that showed the movement in the liquidity of a business between one balance sheet and the next. What it did, then, was show how the business used the profit (or funded the loss) that it made. And by doing so a SSAP 10 statement of source and application of funds answered the question ‘did we make any money?’

SSAP 10 suggested a layout that looked like this:

Statement of source and application of funds

  £’000 £’000 £’000
Source of funds     1,430
Profit before tax      
Adjustment for items not involving the movement of funds:      
                 Depreciation     380
Total generated from operations     1,810
       
Funds from other sources      
Issue of shares for cash     100
       
Total funds generated     1,910
       
Application of funds      
Dividends paid   (400)  
Tax paid   (690)  
Purchase of fixed assets   (460)  
      (1,550)
Net funds generated     360
       
Increase / decrease in working capital      
Increase in stocks   80 80
Increase in debtors   120 120
(Increase) / decrease in creditors excluding tax and dividends   115 115
Movement in net liquid funds:      
       Cash balances ( (5)  
       Short term investments   50  
      45
Net increase in working capital     360

The benefits of SSAP 10

What’s the advantage of this? I suggest that it is simply that this statement – which takes minutes to produce and need not be in the statutory accounts – explains in a way that nothing else can whether or not cash was generated in the year, and if it was not, how funds were alternatively put to use.

Suddenly the balance sheet – which is the least understood by far of all accounting statements – begins to have a purpose because discussion can now take place on whether or not fixed asset investment was wise, debtor days are under control, and whether in the circumstances the dividend was wise. Neither the profit and loss account or balance sheet in isolation permit that. Indeed, as SSAP 10 states:

“For a fuller understanding of a company’s affairs it is necessary to identify the movements in assets, liabilities and capital which have taken place during the year and the resultant effect on net liquid funds. This information is not specifically disclosed by a profit and loss account and balance sheet but can be made available in the form of a statement of source and application of funds.

“The fund statement will provide a link between the balance sheet at the beginning of the period, the profit and loss account for the period and the balance sheet at the end of the period. The figures from which a funds statement is constructed should generally be identifiable in the profit and loss account, balance sheet and related notes.”

In other words, statements of source and application of funds are intended to help a user understand accounts. Shouldn’t that be what an accountant wants to do? And isn’t that a definition of added value? And it so happens they can be prepared really easily.

NOTE: My thanks to the ICAEW Reporting Faculty for funding me a copy of SSAP 10.

Replies (14)

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By AndyC555
11th Jan 2020 12:47

"With a deep misunderstanding of the term profit among the profession"

Thank goodness we have Mr Murphy around to explain it to us. How the accounting profession and all its clients have gotten by all these years without understanding what profit is must be one of the great mysteries of our time.

"I have seen quite a lot of accounting standards come and go throughout my career."

My old favourite was IAS 14 which dealt with financial geographical segment reporting, or what these days is called 'country by country reporting' (showing that there's nothing new in that). IAS was first drafted in 1980 and was still an IAS in 2006 (when it was replaced by IFRS 8) so I'm sure any accountant operating at that time would have been aware of it.

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Hallerud at Easter
By DJKL
14th Jan 2020 16:18

That is harsh, whilst discussions between accountants about profit have meaning (Auditor to FD etc) those with smaller clients tend not to be understood , even those non accountants in business for year tend to glaze over as you explain prepayments and provisions-frankly cash is what they are interested in and SSAF was a decent way of showing what had happened to the dosh.

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By C.Y.Nical
15th Jan 2020 10:18

I think many private investors would agree 100% with Richard Murphy. More and more commentators are saying that accounts for public companies no longer help investors decide how to price shares.
I have insisted on cash flow statements being included in the accounts for 2 private companies where I am a substantial shareholder. Perhaps a Source & Application of Funds statement would be even better, although it would amount to little more than a re-arrangement of the same information.
Why was SSAP 10 abolished?

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Replying to C.Y.Nical:
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By bobsto12
15th Jan 2020 11:34

As an accountant in large companies I think cash flow statements tell you most of what you need to know for good governance. The lines on movement in working capital highlight clearly the effect on cash of working capital management and as a whole it explains the relationship between profit and cash.
Reintroducing funds flow statements would just confuse things. I've never found senior non finance managers struggle to understand profit as a concept and suggesting they need to have it explained to them by fundamentalist accounting zealots and yet more reporting is patronising and wrong.

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Replying to bobsto12:
Hallerud at Easter
By DJKL
15th Jan 2020 12:08

But that is large companies, within these the directors may have read books on accounts for non accountants or been sent on courses, they likely as they ascended the greasy pole had to control budgets for projects or divisions- the issue imho tends to be further down the business food chain, a lot of owners of smaller private companies/the self employed ,which do not have an active board with meetings to attend, really do not understand the figures given to them.

The prime example of how people generally understand accounts is observe the comments from the floor when say a Club has its AGM and presents its accounts to the members; there often is little understanding and these Club members may well be self employed/run their own business entities. (I was at one last week where, based on his observations, a member who in his day job is an advocate singularly failed to understand what he was reading in the accounts)

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By EASTIE
15th Jan 2020 10:51

Great article. SSAP 10 was before my time (but only by a few years). When I was training with a Big 4 we were made to be familiar with SSAP10 even after FRS1 was released.....I use a form of SSAP 10 for certain clients.....

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By dgilmour51
15th Jan 2020 11:11

I'm 100% with you on this one.
We've lost sight of the fact that 'the accounts' were/are a useful tool in managing even a small business and not just a record for the purposes of tax and other regulatory stuff.
Personally, I think basic book-keeping should be a 'main exercise' in schools' teaching of arithmetic - in my experience most small businesses cannot actually 'see' what the books are telling them, and even with hand-holding whatever you tell them remains one of life's mysteries.
Its not that they are necessarily arithmetically incompetent, but they have no interpretive eye.
All really they want to know is what's the tax and then what can they spend?

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By unclejoe
15th Jan 2020 11:49

My first thought was "who is this guy coming on here and insulting accountants?" But he does have a point, of sorts. We all know what profit is and what a balance sheet tells us. The Source and Application of Funds is just a bit of rearrangement that I suggest any serious investment analyst will do. We don't understand accounts because so many corporate accounts are opaque. Annual reports are designed to be marketing documents, rather than to genuinely inform investors in an honest way. We don't understand balance sheets, not because we do not know what the figures mean and how they relate, but because it is impossible to verify whether the stated figures are realistic or not. And to be honest, as an investor, I sometimes think the accounting standards setters collude with industry to make new standards even more opaque. If the professor can suggest ways the profession might address that he might be worth reading.

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By johnt27
15th Jan 2020 12:26

As someone who both understands what profit is and how the various accounting standards manifest themselves to provide the aforementioned should I point out, somewhat glibly, that instead of producing an indirect cashflow statement (the common way to present a cashflow in most cases) that instead the direct cashflow statement is prepared instead - both options in FRS 102 and IFRS.

This does, afterall, look surprisingly like a source and application of funds statement just a bit cooler and more modern for those of us in primary school when SSAP 10 was killed off (for good reason)...

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Replying to johnt27:
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By C.Y.Nical
16th Jan 2020 11:20

johnt27 wrote:

.... when SSAP 10 was killed off (for good reason)...


May I repeat my earlier question. Why was SSAP10 (specifically the Statement of Source & Application of Funds) abolished?
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Replying to C.Y.Nical:
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By johnt27
16th Jan 2020 12:49

Pages 56 and 57 explain why SSAP 10 was replaced https://www.frc.org.uk/getattachment/c30fb305-6f0f-4841-8fa7-8e82011a13f...(Revised-1996)-Cash-Flow-Statements-Oct-1996.pdf

The author's question was: has the business made any money? And the answer is - not really IMO - cash went down by 5, albeit 50 was invested in short term investments (the definition of which changes with the wind), but this had to be funded by 100 of share issue.

If you produced a cashflow for the same numbers the result is much more positive - operating cashflows are 805 and this enabled the business to invest in FA and payout dividends.

Maybe it's in the interpretation, but I know I can make a funds flow statement look positive even when the underlying business is on it's knees - you can't do that with a cashflow statement...

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Replying to johnt27:
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By C.Y.Nical
17th Jan 2020 15:06

Thanks for that.

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By KB Powers
15th Jan 2020 13:04

I'm in total agreement here - perhaps because I'm of a similar age. I used to use the source and application of funds statement to explain accounts to my (SME) clients and they generally understood what I was getting at. The only interest in the 'profit' is because it determines how much tax there will be. What my clients ask is "if you say I've made this profit, where's the cash? "

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By ASF
15th Jan 2020 16:40

I too am of a certain age, and I don't know, but I always felt accounts were being prepared by accountants for users who are (in the main) not accountants. Our role is to be able to communicate information to owners and other users. Merely preparing them is surely only half the story. I have found that SME owners understand cash in a way that they don't really understand the term profit, to the same degree. Therefore, being able to say how they have accumulated and paid out cash, in arriving at the cash they have at the end of a reporting period feels like a rather good wheeze to me. Of course they can understand profit, but my experience tells me it tends to lack the "tangibility" that "cash" has for them! Understand fully the theoretical benefit of having a cash flow statement produced using the direct method, and the improvement that can give over the indirect (Balance Sheet movement) approach, but as one who has also struggled for years with large company accounting systems inability to track the other side of the transactions to allow them to arrive at direct movements, I too know the difference between theory and reality. More recent developments in accounting software may well improve things, but it seems that large-company systems do not seem to move at the same pace as those such as Zero, QB, etc. Until they can, the indirect method is often all we have. Anyway, I shall hoist a glass and lament the passing of another SSAP, whether that makes me "old-school" or not! Nice article.

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