DDL should state how it defines third party sales
PEEPING TOM
Kaieteur News
June 15, 2004
THIS article is about the exchange of letters in the press between Chartered Accountant, Mr. Christopher Ram and the Company Secretary of the Demerara Distillers Limited, Ms. R. Vansluytman.
I hope that the debate continues so as to awaken greater public interest in matters which for too long has been seen as reserved for those who have a direct interest in the accounts of public companies.
The exchanges were precipitated by Mr. Ram’s article in the Business Page, a weekly feature in the Stabroek News, dealing with DDL’s annual accounts for 2003. In that feature, Mr. Ram noted that the subsidiaries (of the group) accounted for 23.4% of the revenue and not 37.5% as stated by the Chairman.
In her reply to Mr. Christopher Ram, Ms. R. Vansluytman insisted that the subsidiaries of the DDL, grouping did in fact contribute 37.5% of revenue. She hinted that Mr. Ram in his calculations did not account for inter-company sales i.e. sales between members of the group.
As such she argued that in arriving at the turnover for the whole group, it is fallacious to simply add the turnover of all of the contributing subsidiaries plus the parent company.
Conceptually she is correct. When calculating turnover within a group, one has to make adjustments for inter-company sales.
Mr. Ram however, countered that Note 3 of the financial statement defines turnover as sales of goods and services to third parties. As such, he argued that there is no inter- company transaction to eliminate.
My understanding of a third party is a party other than the parent. But does the definition of third party as used by DDL include sister subsidiaries in the same group?
DDL has to explain how in its accounts it defines third party sales. Is it a case where the parent company is the first party, the respective subsidiary the second party and other entities, inclusive of other group subsidiaries, third parties?
This is an important conceptual issue and DDL needs to state how in its accounts it treats the sale of goods and services to other subsidiaries within the grouping.
There are many young students of the accounting profession out there and certainly as a responsible corporate giant, DDL may wish to provide some answers to this issue as to how its turnover is calculated. The views of other professionals in the accounting field will also be helpful.
The second issue referred to was capital expenditure for the period 2001 to 2003. The Company Secretary denied that capital expenditure was US$15M for this period. No one said it was. What Mr. Ram said in his review was that the Chairman had announced in 2000 a three-year expansion of US$15M.
DDL indicated that during that period some US$17M was invested. This disclosure therefore now requires Mr. Ram to indicate how it is he claimed that “expenditure on the Expansion Programme has exceeded budget by close to $US7M.”
There is an aspect here that requires qualification. A capital expansion program can be over budgeted for a number of reasons, which could include a subsequent modification of the programme. Simply saying that the expenditure on the expansion programme had exceeded budget by close to US$7M creates the impression that cost overruns was in that sum, rather than the expansion program costing US$7M more than was originally announced in 2000.
Since Vansluytman indicated that US$17M was invested, Ram asks, “Would Vansluytman now like to unsay what the Chairman said?” She does not need to. In 2000, the Chairman announced a three-year US$15M expansion. The fact that US$17 was spent as capital expenditure does not require unsaying anything. I built a dog pen the other day and before work began I announced to my family that it would cost $10,000. When it was completed it cost less. Does that mean I should unsay what I said?
We must also be careful when in accounting terminology we equate capital expansion with capital expenditure. Not all capital expenditure is for expansion purposes. The replacement of existing plant which does not add to capacity, but which merely replaces existing plant, would be accounted for as capital expenditure even though it is not expansion.
In his response to the DDL, Mr. Ram wrote that the most egregious and embarrassing errors is when Ms. Vansluytman stated in her letter, “The 2000 Annual Report did not state that the company owned trademarks in 40 countries.”
Ram went on to quote from the 2000 Annual Report, which stated: “DDL currently owns the trademark for El Dorado in over forty countries…”
The embarrassment I am afraid is not Ms Vansluytman’s. She is correct in her interpretation of the English language. There is, Mr. Ram, a difference between saying that the company owned trademarks in over forty countries and saying that the company owns the trademark for El Dorado in over forty countries.
Ms. Vansluytman is perfectly in order. She could not say that DDL owns trademarks in over forty countries because DDL does not. They own one trademark, El Dorado, in over forty countries. There is a difference and it is embarrassing when it is not recognised.
Everyone is entitled to his or her opinion about the performance of the DDL Group. I have mine and will not deny any person his or hers.
For me, DDL is one of if not the leading group of companies in Guyana and its profits are ample proof of this. Given that a large number of companies in Guyana have and are experiencing problems in Guyana, the continued profitability of the DDL Group like that of its other main competitor is good news.