Accounting Standards

Income trusts get distributable cash standard

Canada’s CAs have announced guidance for a key metric of income trusts, that of distributable cash.

The term ‘distributable cash’ generally refers to the cash that an income trust could potentially distribute to unit holders. Investors use this information when assessing the entity’s ability to fund future distributions and to help value their investments.

But the problem with the measure is that investors had no way of knowing where the cash had come from: general operating activities, or selling off productive assets and related future capacity. There was no way to compare across trusts since they all defined the term differently, or even to compare the same trust year over year. The CICA recommendations seek to remedy this:

The CICA guidance recommends that income trusts report a new measure called “Standardized Distributable Cash” to improve consistency of reporting and comparability between entities. Together with other disclosures recommended in the framework, the new measure gives the industry a common methodology for providing investors with information.

Standardized Distributable Cash is defined as cash from operations, after adjusting for capital expenditures, restrictions on distributions due to debt covenants, and minority interests.

The recommendations are not without criticism, however.

Independent investor advocate Diane Urquhart noted that the new CICA measure of distributable cash is not an addition to generally accepted accounting principles and will appear only as part of management’s discussion and analysis. […] “It’s ugly,” declared Al Rosen of forensic accountants Rosen and Associates. “When you needed this – and in a tougher form – would have been at least five years ago.”

I believe those are the biggest criticisms of it: the “standard” isn’t part of GAAP officially, but merely guidance to help trusts provide investors with higher quality information, and the recommendations are a little late in coming.

Better something than nothing, and better late than never.


Simplifying VAT in the UK compared to GST in Canada

This recent post on the SME Blog talks about the recent changes the UK has made to VAT, in that they are now offering small businesses the ability to account for and remit VAT on a cash basis, rather than accrual:

The VAT cash accounting scheme allows you to account for VAT (output tax) on your sales on the basis of payments you receive, rather than on tax invoices you issue. However, if you choose to use the scheme, you can only reclaim the VAT incurred on your purchases (input tax) once you pay your supplier.

This is good news for businesses with large trade debtors and good news generally for cashflow.

The equivalent value-added tax in Canada, the GST, requires businesses use only the accrual method, which means even if you haven’t collected the tax on sales, you have to remit. That being said, you still get to claim the GST you haven’t yet paid on purchases against those credit sales, minimizing the timing difference impact.

In Canada, small businesses are also able to use the quick method to calculate their remittance, or the simplified method to calculate their GST owed (known as input tax credits).

Both methods simplify the accounting but do not address the cash flow problems in the same way the UK has done with their cash scheme.

So what is better? Helping small businesses save time and money accounting for their tax remittances, or helping small businesses match the timing of their cash inflows and outflows from sales and purchases to tax remittances? I’m inclined to think the latter is more helpful.

Personal Finance

Always have exact change

CoinsThis struck me as sort of interesting, possibly useful, and probably a little compulsive. One blogger’s way of slowly using change is to carry the optimal number of each denomination of coin in his pocket.

Everyone has coins they want to get rid of. I randomly thought of an easy way to carry change and always have enough change for a purchase. For the sake of this article, I consider change to be less than $1 of coins. To be able to make any change combination, you need to carry $0.99 of change through 10 coins…

I almost never pay with exact change, but that’s probably because I find a sick satisfaction in rolling my coins every few months and taking them to the bank. I crave that big mountain of coins because when I was a kid it was easy to imagine a big pile of coins were treasure.

(Via Lifehacker.)


The other upside to income trusts

Bell logoI wrote a post about BCE converting from a corporation to an income trust a couple days ago that set off a veritable firestorm of comments from a few readers. It quickly became the most commented on post here, which is pretty cool.

So with that in mind I jumped at the chance to blog about this article in the Globe and Mail, which talks about the other advantage of income trust conversion:

They function as a kind of a leash on executives bent on sacrificing upfront, predictable profits in their core business in favour of empire-building or diversification. Because trusts pay out the bulk of their cash to unitholders, they are forced, in essence, to ask permission from investors every time they want to raise money for a large acquisition.

BCE has a long history of making big acquisitions that have led to huge losses. The temptation of management to reinvest profits from their core business into diversified ventures has repeatedly destroyed millions (billions?) in shareholder value.

Since the conglomerate enterprise was established during the early 1980s, BCE has got into and out of businesses as diverse as pipelines, packaging, commercial property, a trust company and a television network, frequently generating losses in the hundreds of millions of dollars on its investment miscues.

This is a common problem it seems with large corporations. They diversify to manage risk, ignoring the fact that investors already diversify their portfolios to manage the same risk. The only time it makes sense for a corporation to invest profits into a new venture is when it is so closely related to their core business that they can generate higher returns than an individual (or institutional) investor could by taking their share and investing it in the venture themselves.

This has very rarely been the situation for BCE’s investments, and that’s another reason, and potentially more lucrative than the tax savings, why income trust conversion is a good move for BCE shareholders.


Google the mutual fund company

No, Google isn’t managing investments. They’re still devoted to “organizing the world’s information,” but that doesn’t matter to the SEC. A rule enacted in 1940 could cause increased regulatory headaches for the company.

Companies whose securities make up more than 40 percent of their assets can fall under restrictions that govern the mutual fund industry.

Google apparently is still awash in IPO cash, prompting the question – why did they have it if they weren’t raising funds for something? They’ve got nothing better to do than sit on $9.8-billion, which makes up nearly 70% of their total assets?

It would be “extremely onerous” for a company whose main business involves anything other than managing money to be regulated as a mutual fund, said Kenneth Berman, a former associate director in the SEC’s investment management division. For example, the 1940 law restricts companies’ ability to borrow money as well as issue stock options.

This is kind of telling, now isn’t it? Stock options are bread-and-butter compensation for tech companies, including Google. Case in point, Microsoft and Yahoo had to apply for the exemption from the rule that Google is now applying for.

The SEC will provide an exemption to companies that can show their primary business is other than investing, owning and trading securities. Google’s application said the company’s Internet, advertising and new media operations accounted for 92 percent of net income in 2005.

I don’t think there’s much of a chance that Google isn’t going to be granted the exemption. It sounds like the threshold is pretty low for justifying that the business doesn’t qualify for the regs. And the numbers back it up.

Google has a problem though, and that is what to do with all that cash. Some have already begun speculating what would happen if Google wasn’t exempted from the rules:

Google would be more likely to expand its infrastructure than spring for a large company… Google’s acquisition history shows that the company sticks to smaller companies… They’re going to continue to focus on smaller acquisitions that are predicated on proprietary technology and talented developers and engineers.

Dividends are out of the question strategically, although they are technically an option. Once dividends are paid, the expectation is they will continue to be paid in the future and the market does not look favourably on companies that buck the trend. But then, there was this about a week earlier:

On its India web site, Google has invited applications from people who can “identify and evaluate acquisition opportunities across existing and future market opportunities, drive management team decisions, lead deal execution, and help manage post-acquisition integration and performance evaluation in the South Asia Region.”

So it looks like Google might have some takers for that cash after all. Investing in India is a smart move as well. What do you think Google should do about its abundance of cash?