Paul on John

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John Maynard Keynes
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Paul Krugman

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Privatization in the UK

To be, or not to be, that is the question

–  Hamlet, William Shakespeare

Recently I have been reading about how the government should tackle our debt problem, many are clamouring for privatisation, citing Mrs Thatcher as an example a champion of free markets, a heroin, which we know the present Prime Minister wishes to emulate, selling our public companies to raise money to pay off the debt.  I thought country must be in deep trouble to start thinking about selling family silver.

I decided to look at the problem and came across an interesting chart given below which gives the scale of UK’s national debt on Wikipedia.

800px-UK_GDP

 

Major Peaks

1812 – Britain is fighting war with US and France. Period of Napoleonic Wars 1803 to 1815.

1912 to 1952 – Debt taken to fund the two world wars

If you take a moment you will notice that during the last 300 years our debt levels have been over the present levels for most of the time.

Then why so much clamoring about cost cutting about privatization about job cuts about austerity.

Arguments for Privatization

In favour Against
Raise government revenue Yes, it is like killing the golden goose and taking all the eggs in one day. As the sale proceeds received one year and all dividends lost for ever.
Pay off public sector borrowing Good deed but will this reason suffice for the public inconvenience for higher charges charged by private players in their pursuit of ever increasing quick rich schemes.
Efficiencies which will be pass on to the consumers in forms of lower prices and better service As our experience suggest, utilities privatised , indeed create better services but higher prices as well and if not regulated properly, will soon become a menace to society

 

What it seems like it is a matter of choice.

 

Major companies privatised and then what happened to them

British Petroleum October 1979 – While in government hands, British Petroleum paid too little attention to profitability, constrained by its need to please elected officials who often cared more about keeping energy cheap and employment high. But in private hands, it may have cared about profits far too much, at the expense of other objectives. “BP veered from being a company that made sure nothing blew up to one focusing on cost-cutting at all costs,” Professor Fisman #.I read somewhere that BP came up with a concept called self insurance
British Aerospace February 1981 Still struggling, even after year on year support through Government contracts. Last I heard about this company was regarding a failed deal with EADS of France.
Cable & Wireless October 1981  Sucked by all, lastly by John Pluthero and at last sold to Vodafone
Amersham International  February 1982 It went all right, acquired by GE in 2003.
National Freight Corporation February 1982
Britoil November 1982 Bought out by BP
Associated British Ports February 1983 No news
Enterprise Oil July 1984 Bought out by Royal Dutch Shell
Jaguar August 1984 Loss making for a longtime, turnaround in 2008 under ownership of Tata Motors an Indian Company.

#“The Org: The Underlying Logic of the Office,” a book by Ray Fisman, a professor at Columbia Business School, and Tim Sullivan, the editorial director of Harvard Business Review Press.

 

 

 

British Telecommunications December 1984 Doing alright now
British Shipbuilders 1985 onwards Ceased , in 2013 all liabilities passed back to the Government
British Gas December 1986 Doing well
British Airways February 1987 
Rolls-Royce May 1987 Doing well
BAA July 1987 Under Spanish ownership
British Steel December 1988 Did badly, ultimately bought by Tata Group of India , many plants closed or mothballed.
Water December 1989 Majority in private ownership, customer suffering from low service and increasing bills
Electricity 1990 Majority in private ownership, customer suffering from low service and increasing bills

 

All the privatisations focused on cost cutting mainly by cutting staff numbers and their benefits mainly pensions and sky rocketing in executive pay.

What’s next

Royal Mail                               German’s have showed us that it can be successful in form on DHL

NHS                                           Private sector wants a pie of this, PPP experiement shows that                                                                private partnership in not viable

Courts and Police               Cannot think how this will work !

 

Paradoxes

Young are unemployed and old are suffering for want of care !

Only if we could convince our government that money , savings and debt are just Maya all to be utilised and manipulated in a way to create full employment and to increase the standard of living of its citizens rather than safe guarding the indefensible mark of AAA from some obscure rating agencies which have already shown their competency in the fore play of financial crisis.

That we will again proceed on a path of recovery and happiness.

IFRS in brief

All listed Co’s in European Union needs to comply with them since 2005

Fundamental Principles
Going concern
Consistency
Accrual
Materiality

Framework
Objective of these standards – it to provide information on

                                                                  Simply
– financial position                        Balance sheet
– financial performance             Profit and Loss account

which is useful to a wide range of users like share holders, debt holders ,employees and Government etc.

Characteristics of financial statements prepared using IFRS
Understand ability                                       Easy to understand
Relevance                                                          Relevant information provided
Reliability                                                          People can trust the information provided
Comparability                                                 Information provided is comparable year to year ie.                                                                                        with the last year’s accounts and compare it with                                                                                             accounts of similiar companies.

Complete set of financial statements include :
Balance sheet
Profit and loss account
Statement of change in equity
Notes to accounts

IAS 7 : Cash flow statement
Three sections :
Operating. – tax
Investing
Financing

Cash includes any instrument maturing in next 3 months.

IAS 8: Accounting policies , errors and estimates

Accounting policies and errors – retro perspective
Estimates – prospective

IAS 10 : Events after balance sheet date

Conditions Adjustment
Both Favorable or Unfavorable Exists Yes
Not existed No but disclose

Dividends proposed/declared after 31March – no adjustment.

Only exception – Going Concern.

IAS 12 : Income tax
Temporary timing difference – recognized at the rates expected to be paid.
Not discounted.

IAS 17 : leases
Finance lease – risks and rewards
Examples – full  economic life of the asset, lease payments equal to fair value of the assets.

IAS 21 : FX
Functional currency : Primary economic environment

Translation :
During the year – transaction date
Year end :
Fixed assets – historical costs , transaction rate
Current assets – closing rate

Presentation currency usually should be functional currency , but can be other as well but no FX loss is recognized due to translation.

IAS 27 : Consolidated
Financial statements are presented as a Single entity.
No exceptions – different lines of business etc.

IAS 32: Financial instruments : Presentation
Substance over form
Classification made at issue

IAS 33: EPS
= Income – all expenses – tax – NCI – Pref dividends
————————————————-
Weighted average no. of shares

IAS 38:  Intangibles
Purchased or self certified

Research cost – expenses
Development cost – capitalized after tech and commercial feasibility established.

IFRS 2 : Inventories

Lower of cost of net realizable value
FIFO/Weighted Average ok
LIFO not ok

IFRS 5 : Held for Sale
Disclosed separately
No deprecation
Lower of fair value or carrying value
Fair value = sale value

Note : fair value can be two things
1 Sale value
2 Discounted future cash flows – value in use.

IFRS 7 : financial instruments disclosure
Enable users to understand:
Significance
Nature and extent of risks
How the entity manages the risks

IFRS 8 : Operating Segments
Threshold.  10 %
75% of entity’s revenue , products ,services ,geographies, assets.
must be included in reported segments.
Major external customers >10%

Hierarchy of guidance
IASB standards
Framework
Others – other standard setters, accounting literature, industry practice.