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Commerce · III.07 · MMXXVI · daylight

La Bourse  /  Volume III  /  Nº III.07  /  Workbook — the student

WORKBOOK — THE STUDENT

Chapter III.07 · The Regenerative Balance Sheet

For the person studying this alone, or in a seminar, with no enterprise to restate. You are not too early. Accounting is a reading skill before it is a professional one, and the reading is what you are here to build.

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WHY THIS WORKBOOK IS DIFFERENT

The chapter was written for somebody holding a set of management accounts. You may be holding a library card. That turns out to be nearly as good, because the raw material of this subject is public: annual reports, filed accounts, international standards and statistical manuals are all free, complete and online, and most of them have never been read by the people who cite them.

So you will do exactly what the finance director does. You will do it on published documents instead of private ones, and by the end of a term you will have read primary texts that most practitioners have only met in summary. That is a real advantage and it lasts.

One rule throughout: when a summary and a standard disagree, open the standard. Nearly every confident wrong statement in this field is a summary of a summary.

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PART ONE — READ THE PRIMARY TEXTS

Weeks 1–4

Exercise 1.1 — The four documents (four sessions, two hours each)

Read these four, in this order, with a pen:

1. SEEA Ecosystem Accounting (2021) — the contents page and the first chapter. You are looking for one thing: which chapters were adopted as an international statistical standard and which as principles and recommendations. Write the answer down as seven and four, and write beside it what falls in each.
2. IAS 41 Agriculture — the whole standard. It is short. Find the words fair value less costs to sell and the sentence putting the change in profit or loss.
3. IFRS S1, the objective and scope only. Copy out the boundary sentence about cash flows, access to finance and cost of capital. That sentence explains almost every argument in this field.
4. The <IR> Framework (2021 revision) — the six capitals. Then look up who publishes it now.

Exercise 1.2 — The split, in your own words (30 minutes)

Write one paragraph, no more, answering: why did the statisticians make the physical accounts a standard and the money a recommendation? Do not look up an answer first. Then look one up, and write a second paragraph on what you missed.

Exercise 1.3 — The timeline (60 minutes)

Build a single-page timeline from 2010 to today. Mark: integrated reporting required of Johannesburg-listed companies (2010), SEEA Central Framework adopted (2012), the <IR> Framework (2013), the Bearer Plants amendment (2014), SEEA Ecosystem Accounting (2021), the Value Reporting Foundation (2021), its consolidation into the IFRS Foundation (2022), IFRS S1 and S2 (2023), the TNFD recommendations (2023), ESRS Set 1 (2023), and the Omnibus proposal and stop-the-clock directive (2025).

Then write one sentence under it about direction of travel. Keep the page. You will revise that sentence twice this term and the revisions are the education.

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PART TWO — THE ARITHMETIC, ON YOUR OWN HANDS

Weeks 5–8

Exercise 2.1 — Reproduce the restatement (three hours)

Take Marrowfield's opening figures from the chapter and rebuild the restatement in a spreadsheet, from the inputs, without copying the results.

  200 acres of wood            175 m3/ha    £34.00/m3   5% costs to sell
  320 head of cattle           £1,850/head              4% costs to sell
  plantation carried at        £180,000
  herd carried at              £420,000

You should land on £457,497 and £568,320, an uplift of £425,817, and deferred tax of £37,080 — which is 8.7 percent of the uplift, because the timber carries none.

If you do not land there, find the difference before reading on. An acre is 2.4710538 hectares and the wood is 80.94 hectares; most errors are there.

Exercise 2.2 — The swing (45 minutes)

Compute the two treatments of one year's growth on the wood: plus £21,681 under IAS 41 and minus £29,000 under the cost model, a swing of £50,681, or 15.4 percent of operating profit of £330,000.

Then answer in writing: which of the two numbers is a fact about the forest?

Exercise 2.3 — Break a covenant (60 minutes)

Hold the volumes constant — 971 cubic metres grown, 300 removed, 14,835 standing — and move the price to 75 percent of £34.00. Closing value falls from £479,178 to £359,384; minus £98,113 goes through profit or loss; operating profit becomes £334,887; interest cover on £142,000 of interest is 2.36 times against a 2.50 times covenant.

Write two sentences: one that is true about the forest, one that is true about the accounts. Notice they do not contradict each other.

Exercise 2.4 — The asymmetry (90 minutes)

Compute the deferred tax on the land: £8,640,000 of surplus, £2,160,000 of liability, £527,609 of present value at 5.80 percent over 25 years, an overstatement of £1,632,391 — 75.6 percent of the liability.

Then find IAS 12 paragraph 53 and read it. Write down what you think the drafters were protecting against. There is a real answer and it is a good one; the point of the exercise is that you can hold their reason and the £1,632,391 at the same time.

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PART THREE — THE STOCK YOU ACTUALLY HAVE

Weeks 9–12

You do not have a wood. You do have stocks with regeneration rates, and the method transfers exactly.

Exercise 3.1 — Route four of your own stocks (90 minutes)

Take four: your technical skill, your physical capacity, your close relationships, your financial reserve. Run each through the four questions.

Almost certainly only the reserve gets a money column, and that is the correct answer rather than a disappointing one.

Exercise 3.2 — Build one four-column account (one hour, then ten minutes a week for the rest of the term)

Pick the stock with the clearest unit. Hours of deliberate practice. Kilometres. Named people you spoke to properly. Then:

  opening  +  additions  -  reductions  ±  revaluation  =  closing

Count weekly. Freeze the definition in writing, with a date, before the first count, and do not change it for the rest of the term even when a better definition occurs to you — write the better one in the margin instead. A definition that moves cannot produce a trend, and a trend is the only thing this document is for.

Exercise 3.3 — The gross and the marginal (45 minutes)

Cost your account two ways. What did it cost in total? What did it cost that you were not already spending? If you were already tracking the hours for another reason, the marginal cost is close to zero — which is the same distinction that took the chapter's instrument from 0.81 times cover to 2.16 times.

Exercise 3.4 — The appreciative interview (45 minutes, with one other person)

Find somebody who manages a physical stock — a grower, a brewer, a forester, a librarian, a physiotherapist — and ask exactly this:

"What do you count, how did you learn to trust the count, and what happened the first year the number told you something you did not want to hear?"

Take notes on the counting, not the conclusion.

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THE TERM PROJECT

One published company, one restatement, twelve pages

Choose one listed company whose principal asset is alive: a forestry group, a dairy, a fishery, an orchard business, a vineyard. Get the filed annual report. Then build:

1. The routing sheet. Every material balance-sheet line through the four questions, with the £0 rows justified in one sentence each.
2. The four-column account for the largest living stock, in physical units, from the disclosures. Say plainly what you could not find.
3. The restatement, in three columns, as the chapter does it.
4. The two consequences. What would move in the tax note? What would move in the covenant disclosure, if there is one, and what would not?
5. The honest negative. What volatility would the company be admitting, and what is a reasonable estimate of the assurance cost? Price it.
6. What you could not verify. A named list. This section is marked as heavily as the rest and it is the section that makes the others trustworthy.

Twelve pages, and no figure appears that you cannot compute from a filed document. Where you estimate, say so in the same sentence.

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SELF-ASSESSMENT

Mark yourself honestly against the six.

One — the split. Can you say, without looking, which parts of SEEA Ecosystem Accounting are a standard and which are a recommendation, and why one enterprise should care?

Two — the routing. Given any balance-sheet line, can you place it in under a minute and defend the placement?

Three — the arithmetic. Can you get from 200 acres, 175 cubic metres per hectare and £34.00 to £457,497, and say what the 5 percent was for?

Four — the inversion. Can you explain, to somebody with no accounting, why the same growing forest moves the accounts £50,681 in opposite directions depending on convention?

Five — the negative. Can you state the cost of the restatement before you state its benefit — £39,660 a year, breakeven debt of £11,331,429 — and mean it?

Six — the boundary of your own knowledge. Can you name three things in this chapter you have not verified yourself, without being asked?

If you can do all six, you can read a set of accounts for a living system better than most people who are paid to, and you have done it out of documents that cost nothing. That is the whole point of starting here.

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PART FOUR — THE SEMINAR

One session, four roles, ninety minutes

This subject argues better than it lectures, and the argument has four genuine positions rather than two. Run it once with somebody else, out loud.

The roles.

The finance director wants the restatement, holds the £2,491,163 succession charge, and knows the accounts show book equity of £2,990,000. She is not making an environmental argument and should not be allowed to drift into one.

The auditor prices the exposure at £39,660 a year and is professionally right to. His strongest line is the 2.36 times cover in the price-shock case against a 2.50 times covenant, and his question is the fair one: what have you added to the accounts that can be moved by somebody else's index?

The lender tests net debt to EBITDA, which is 3.92 times before the restatement and 3.92 times after it. She is not hostile. She simply does not see the thing everyone else is excited about, and the seminar should discover why rather than be told.

The statistician holds the SEEA split — seven chapters of standard and four of recommendation — and keeps asking the one question that settles rows: is there an observable market for the asset in the state it is in?

The motion. This enterprise should adopt fair value for its living assets from the next accounting date.

The rule. Nobody may state a figure without saying where it came from and what it did not look at. That rule alone will change how the room argues, and it is the transferable part.

Afterwards, write half a page on which position changed most during the session. In practice it is usually the lender's, and usually because somebody finally read the definition of Consolidated EBITDA out loud.

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THE HABIT THIS TERM IS ACTUALLY FOR

Everything above is scaffolding for one habit, and the habit is small enough to describe in a sentence: when you meet a number, ask what it did not look at before you ask whether it is right.

The chapter models it everywhere and it is easy to miss because it never announces itself. The uplift of £425,817 is stated beside the deferred tax of £37,080 that reduces it. The 37.8 percent rise in operating profit is stated beside the covenant it does not move. The instrument's 2.16 times cover is stated beside the 0.81 times it scores on the other cost basis, and both are called honest. The chapter's own threshold — £11,331,429 of debt, below which the financing argument simply fails — is printed rather than buried, and printed in the movement that is meant to be persuading you.

That is the practice. A figure with its denominator attached is worth more than a better figure without one, because the first can be checked by a stranger and the second has to be believed.

Carry that out of this chapter even if you carry nothing else. You will meet this subject again — in a job, a grant application, a farm, a fund, an argument about a river — and the people who do well in those rooms are almost never the people with the most figures. They are the ones who can say, without being asked, what their number did not look at.

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WHAT TO READ NEXT

Chapter I.04 if you have not, for the reading this chapter builds on. Then IAS 16 and IAS 12 in full — they are shorter than their reputation. Then the Bearer Plants amendment of 2014 and its Basis for Conclusions, which is the most honest document in this entire field: a standard-setter explaining, in public, why it reversed itself. Read what they were worried about. Then decide whether you still agree with the chapter.

And when you have read all of that, go back to the chapter's Discovery movement and read it once more. On a second pass it stops being a survey of institutions and becomes something more useful: a map of which doors are already open. The standard adopted in 2021. The exemption that has stood for decades. The valuer already walking the ground. Almost nothing in this subject waits on a reform. Most of it waits on somebody arranging four documents that already exist onto a single page, and that is a thing a student can do as well as a finance director, on published accounts, for the cost of an afternoon.