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?’
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
|Source of funds||1,430|
|Profit before tax|
|Adjustment for items not involving the movement of funds:|
|Total generated from operations||1,810|
|Funds from other sources|
|Issue of shares for cash||100|
|Total funds generated||1,910|
|Application of funds|
|Purchase of fixed assets||(460)|
|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:|
|Short term investments||50|
|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.
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Richard Murphy is a practising chartered accountant and professor of political economy at City, University of London. He is also director of the Corporate Accountability Network. After twenty years in industry and commerce, he co-founded the Tax Justice Network and Fair Tax Mark before taking his current positions. He co-authored the original...