The Big Deal

5 Min 10 Sec Read

This week we take a look at IAS 16: Property, Plant and Equipment and its outline of depreciation and cost volume profit analysis for management accounting.

We also cover one of the promising career paths available to chartered accountants, after taking a look at the Capital One takeover of Discover Financial.

Financial Accounting

IAS 16: Property, Plant and Equipment

Depreciation

This weeks financial accounting topic is IAS 16: Property, Plant and Equipment, and more specifically how the standard outlines how assets should be depreciated once recognised by an entity.

The Key Definitions:

Some other key factors to consider:

• Residual value must be reviewed at the end of each financial year

• Useful life must be reviewed at the end of each financial year

• Depreciation is charged to profit or loss unless the depreciation accumulated as a result of the relevant asset being used to construct a new asset, then it may be added to the cost of the newly constructed asset

• If an asset consists of multiple ‘significant’ parts, each part must be depreciated separately; For example planes and their engines.

Management Accounting And Decision Making

The Basics Of Cost Volume Profit

In the world of business, an important factor especially for many new business, projects and operations is the affect of fixed costs. These can often make up a hefty chunk of the monthly expenses an entity faces. This is where CVP(Cost volume profit) comes into play.

CVP acts as a planning measure that helps a business clearly determine where their sales needs to be in order for them to become profitable in operations, in a routine manner.

Lets take a look at some definitions important to the concept below.

Contribution Margin

Contribution margin is the proportion of sales income received which can be used toward covering fixed costs, and later accumulating profit.

The contribution margin can be calculated either per unit or for the total units sold.

The formulas for calculating contribution margin are:

• Contribution Margin = Sales Revenue - Variable Costs

  • Returns an absolute ‘money’ based value eg. R5

• Contribution Margin = (Sales Revenue - Variable Costs) / Sales Revenue

  • Returns a percentage/ration based value eg. 25%

Break-Even Point

A company’s break-even point is the point where their fixed costs have been covered by their sales, and thus where they are at neither a loss or profit(i.e. profit/loss = 0).

Formulas for calculating break-even point:

• Break-Even Point(Units) = Fixed Costs / Contribution Margin Per Unit

  • Returns the amount of units required to be sold to reach break- even

• Break-Even Point(Rands) = Fixed Costs / Contribution Margin Ratio

  • Returns the amount of sales income required to reach break-even

    OR:

• Break-Even Point(Rands) = Break Even Units x Selling Price

  • Returns the amount of sales income required to reach break-even

Target Profit

Setting goals is an important aspect in any area of life, business is no different. While the obvious answer is that the business should aim for the most profit possible, its important for the owner/management team to set a tangible goal as it gives initiative and an actionable achievement allowing for better planning and ultimately better performance.

Units to be sold to obtain target profit:

• Target Sales Units = Fixed Costs + Target Profit(Before Tax) / Contribution Per Unit

Margin Of Safety

The margin of safety calculation helps determine how much sales can decrease before the business incurs a loss.

Formulas for calculating margin of safety:

• Margin Of Safety Ratio(%) = Expected/Actual Sales - Breakeven Sales / Expected/Actual Sales

  • Returns the percentage decrease of sales before a loss is made.

• Margin Of Safety(Units) = Expected/Actual Sales(in units) - Break Even Sales(in units)

  • Returns the number of units that sales needs to decrease by before a loss is made.

Assumptions Of Cost Volume Profit

When using CVP it is also vital to acknowledge that no method of analysis, especially with a predictive manner, is completely flawless.

Thus when using CVP one should be informed about the following assumptions:

1. All other variables remain constant.

2. The business has a single product or constant sales mix(items sold regularly together; coffee and muffins).

3. Total costs and total revenue are linear functions of output.

4. Profit is calculated on a variable costing basis.

5. Applies only in a short term outlook.

6. Costs can be accurately divided between fixed and variable aspects.

Current Affairs

Capital One’s $35 Billion takeover of Discover Financial : The Birth Of A US Credit Card Giant

Although this isn’t the most recent news, I got thinking of how a chartered accountant is relevant to the whole deal.

The Deal:

Capital One, an American based credit card company is acquiring Discover Financial, another American based financial services company with a major foothold in the credit card industry. The takeover comprises a massive $36 billion dollars and looks to create one of the largest credit card company’s not just in America but in the world.

How Accountants Are Involved

How do accountants, particularly chartered accountants, contribute significantly to this dynamic?

A prominent avenue for chartered accountants is within investment banking, particularly in mergers and acquisitions. Engaging in this field empowers accountants to facilitate the mergers and acquisitions of companies.

The competencies required in this domain closely align with those imparted through the SAICA chartered accounting syllabus. Notably, skills such as crafting discounted cash flows are indispensable in navigating the complexities of mergers and acquisitions. This role demands a high level of proficiency, offering a steep learning curve that equips individuals with substantial business acumen. Moreover, it pays SUPER well.

Recognizing the professional opportunities inherent in one's chosen degree and qualifications is crucial. Such awareness empowers individuals to set tangible objectives, providing meaningful motivation for academic endeavors.

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