My claim to fame is translating financial statements into a “language” that the average businessperson can understand. This involves a conversion of the complex into the somewhat simplified.
To help translate complex financial statements, I have developed an Excel cheat sheet that goes through the income statement and the balance sheet line by line. The cheat sheet explains in layman’s terms what the accountants are reporting.
Some insights from the development of the cheat sheet:
1. Consistent formatting and terminology are a myth.
2. Detailed explanations in the notes are a joke.
3. Annual financial statements are more about compliance than reporting business performance.
4. The walls surrounding the accounting ivory tower are regularly increased in height.
5. Companies make it as hard as possible to access their accounting data in a format other than locked pdf files.
To shine a light on Right-of-use assets and Lease liabilities, I took a deep dive into the Shoprite reporting.
The inclusion of Lease liabilities in annual financial statements is an effort to report on the future obligation to pay rent. In the past, we might have called this a contingent liability, a liability that is not reflected in the financial statements but is an obligation to make future payments.
Here is a simplified example: You enter a 36-month lease to rent a house. You agree to pay a monthly rental of R10,000. You have committed to pay R360,000 over three years. Accountants call this a lease liability. At the same time, when you signed the lease, you acquired the right of use of the house. Accountants call this a right-of-use asset. The asset equals the liability, and the balance sheet balances.
On the surface, this appears to be a good idea. Shouldn’t the shareholders and potential investors in a company be aware of the company’s contractual commitment to pay rent in the future, especially in a retail company like Shoprite, which has a significant exposure to lease contracts? Or you could list the lease commitments in the notes and not add them to the balance sheet. That would be way too easy.
The cynic might ask, isn’t the employment contact the same thing? Shouldn’t companies also report on the liability that is future salaries? The asset would be the right to use an employee’s time. Where should we draw the line on future obligations? The list is long.
My deep dive into Shoprite’s lease liability reporting revealed a level of complexity that is incomprehensible for a mere mortal. The walls around the ivory tower were made higher with this IFRS addition. More training is required for accountants. Another person on the audit team. Further entrenchment of a company’s reliance on its accountants in the ordinary course of business.
Adding value does not appear to be the intention behind the accounting function. But adding complexity is.