What did Nick Leeson do to topple Barings?

Barings was a British bank, which collapsed following one of the most talked-about UK financial scandals of the 1990s.

Nick Leeson, a middle-manager with only two years trading experience, was put in charge of trading derivatives on Japan's Nikkei exchange. Not only was he put in charge of trading; he was also put in charge of accounting for his own transactions. This meant that he could hide his own bad deals with false accounting.

Derivatives are risky financial instruments which can make or lose large amounts of money in a short space of time. Trading derivatives can be similar to gambling. Leeson ran up losses, and then tried to make the losses good with bigger and bigger bets. Eventually he ran up losses of over a billion dollars, enough to cause the bank's collapse.

One of the lessons from the scandal was this: Don't give an inexperienced manager control over both doing deals, and reporting deals - especially if senior management doesn't understand what he's doing. The pressure to report good news may lead to too much risk, hidden problems, and eventual bankruptcy.

Obviously all the lessons were learned immediately around the world. Hence, Enron and Northern Rock never happened. Ahem.

What will the 2012 Olympics cost?

When London won the bid in 2005, the budget stood at £2.4bn. This had been the figure when ministers put together the bid in 2003.

In November 2006 the budget rose to £3.3bn. Culture Secretary Tessa Jowell cited a doubling in the price of steel, and a decision to add inflation to transport costs.

In March 2007, the budget rose to £9.4bn, now including: a £2.7bn contingency fund; £1.7bn for regeneration and infrastructure; £0.6bn for security outside the site; and tax of £0.8bn.

In April 2008, Jack Lemley, the former 2012 chief, said it had always been clear that he was working to a budget of over £12bn. He said that, due to problems with the land in Stratford, the final figure may well exceed £20bn. Several MPs noted that the £9.4bn bill announced in 2007 excluded £2bn for actually staging the games; £0.7bn to buy land; and £millions to cover wider transport links, and the cost of government staff working on the Olympics.

What happened to Northern Rock?

Northern Rock is a UK bank. In 2007 it ran into serious trouble. In 2008 it was nationalised.

The bank focused heavily on residential mortgages, funding them through short-term borrowing on the wholesale money markets.

In 2007, there was a crisis in confidence as lenders in the U.S. realised they had pushed too much money towards sub-prime (low quality) residential borrowers. The money supply from the money markets dried up.

With nowhere to go for replacement funds, Northern Rock asked the Bank of England for an emergency loan. When everyone heard the word 'emergency', depositors and lenders became very nervous and started to pull away from the bank. To calm things, the UK Government guaranteed all deposits.

In 2008, having made huge loans and guarantees on behalf of the taxpayer, the Government decided to put the bank into public ownership.

What's a credit crunch?

Many journalists are talking about a credit crunch, but what does it mean?

A credit crunch is an economic threat where borrowing money suddenly becomes much more difficult for everyone.

A credit crunch often happens after a period where borrowing money has been too easy. The 2008 credit crunch follows a period where banks have fallen over themselves to lend as much money as possible. Suddenly, when it becomes obvious that many borrowers have overextended themselves, everyone gets worried about how many loans will fail. So everyone stops offering new money for new loans.

The cycle is one in which binges (easy credit) are followed by purges (credit crunch).

What happened to Enron?

At The Finance Academy, we are often asked what the Enron collapse was all about.

A U.S. company, Enron began by owning gas pipeline and storage facilities. Following the deregulation of energy prices in the U.S., Enron changed its main focus to buying and selling energy contracts.

In order to make its results look better, Enron found ways to disguise debt. The accountants hid debt in other organisations, pretending that it did not belong to Enron.

During 2001, journalists, and even Enron's own senior staff, began to challenge Enron's accounting methods. In October 2001, the Securities and Exchange Commission (SEC) announced an investigation. In November 2001, Enron announced that it had substantial hidden debts.

When the market found out, the value of Enron's shares plummeted. This fall in the company's value triggered repayment clauses in agreements with investors. Faced with a sudden need for cash, and nowhere to get it, Enron filed for protection.

These are the bare bones of Enron's demise, but if you need further information, do get in touch.

Do brands go on the balance sheet?

We are often asked if a company can put a brand on its balance sheet.

Under IFRS (International Financial Reporting Standards), the position is as follows:

If a company purchases a brand as part of an acquisition, and the value of that brand is separately identifiable, then it should go onto the balance sheet.

If, however, the brand is not purchased, but internally generated, then it should not. One reason for this is that, if a company can put its own self-created brands onto the balance sheet, there is potential for overestimating these brands' value, thereby overstating assets on the balance sheet.

If the directors of a company think a purchased brand has a limited life, then they should reduce that brand value every year, so that the balance sheet value is zero when the brand's life has ended. If they think the brand's value will go on for ever, they can keep it at the same value every year. Whatever the case, the directors must regularly check the brand value; if it has fallen below the value published in the balance sheet, they must lower the balance sheet value.

IFRS (International Financial Reporting Standards) must be applied by listed European companies. In other cases, other rules can apply, and you are welcome to e-mail eddie@thefinanceacademy.com for further information.

What is 'viring' in a budgetary context?

Viring is using one budget to pay costs in another.

For example, a budget-holder may be allowed to use an underspend on advertising to cover an overspend on stationery.

An advantage of allowing viring between budgets is that budget-holders have more independence to make their own decisions, as long as they hit their overall target.

A disadvantage of allowing viring is that budget-holders, if able to set overspends against underspends, can fail to take overspends seriously enough.