Accounting is not just bean counting

A large (approximately 8 feet in height) example of fei (or Rai) stone in the Yapese village of Gachpar
This isn’t the kind of money you can bend down to pick up. Fei stones. Image © Wikipedia, CC BY-SA 3.0, Original file

This is a brief introduction to the nature of money and its relationship with accounting. It’s not comprehensive, but it’s a fun way to introduce accounting to a new audience: ice-breakers, introductory sessions, or school talks. It makes learners think more carefully about money and differently about accounting.

Accounting isn’t just about counting beans— it makes them too. It may be hard to believe, but real money is created with a nifty bit of double-entry bookkeeping. To understand how this works we need a close look at those beans—the money.

Banknotes and coins are money but physicality is not the defining feature of money. This is clear from the “invisible money” that we use every day hiding in our plastic cards, mobile phones and computers.

Invisible money is not a recent phenomenon. The history of civilisation is scattered with examples of economies flourishing without physical money. For example, the Pacific island of Yap, which was largely isolated from the rest of the world until the late nineteenth century, used giant immovable “fei” stones to support a credit economy. John Maynard Keynes described its ideas about currency as “more truly philosophical than those of any other country” [1].

It’s difficult to say how much invisible money exists, not just because it changes all the time, but definitions are hard to pin down—just ask an economist. Or an accountant. Or yourself. Would you include cryptocurrencies [2], long term deposits, short term government bonds? Whatever the definition, banknotes and coins are likely to make up less than 10% of the world’s money supply.

The defining feature of all invisible money is that it exists only as a balance—a record in an accounting system. Whether it’s on a screen or on paper is not what matters—money is, in essence, no more than a mark of a promise.

An example will make this clearer.

Yana wants to buy a car but doesn’t have enough cash. She thinks that a bank might have some, so she asks Big Bank for £1,000.
The bank agrees and Yana signs a loan agreement after which £1,000 magically appears in her current account. She now has £1,000 more cash, and an obligation of £1,000 to the bank. In her accounting records, assets and liabilities both increase by the same amount.

The bank’s accounting records are even more interesting, because this is where the magic happens—well, the conjuring trick— because the bank doesn’t go to its cash cupboard in order to stuff Yana’s pockets with money. It makes an accounting entry. And that’s it—the money appears from nowhere.

Here’s the loan to Yana from the bank’s point of view. Yana’s obligation—the loan—is recoverable by the bank, so it’s valuable. It’s an asset. Big Bank’s asset is Yana’s liability.

The increase of £1,000 in Yana’s current account is in liabilities—it’s the £1,000 that Big Bank has agreed to make available to Yana. Yana’s asset is Big Bank’s liability.

The bank has created cash (and the loan) using double-entry bookkeeping. It really is that simple: Yana owes us, so we owe Yana—boom!—£1,000 is now in the economy that wasn’t there before.

Don’t be fooled into thinking that anybody can do this [2]. It only works because we all believe that the balance on Yana’s current account is cash. Because we believe, Yana can easily transfer that balance to someone else, or go to an ATM to withdraw the balance as physical money.

Being able, at will, to convert invisible money into physical money maintains our belief in the magic, but this, to some extent, is also illusory. The banking system will collapse if everybody simultaneously goes to the banks to convert their current account balances into cash — there’s not enough physical cash in the world for that.

Governments understand that our trust in money and the banking system are important threads that hold the fabric of society together, which is why they do almost anything — as they did in 2007/08 — to keep the banking system functioning.


The Bank of England has published a series of articles and videos that deal with this topic in a broader context:

Notes and further reading

[1] I recommend Felix Martin’s Money: the unauthorised biography (Bodley Head, London 2013). In fact, Martin’s book is a wonderfully readable treatise on money as an accounting mechanism. 

[2] In the absence of an accounting standard for cryptocurrencies, the existing standards are applied. Cryptocurrencies fail the definiton of cash equivalents under IAS 7 Statement of Cash Flows. Neither are they financial instruments under IFRS 9 Financial Instruments. This leaves them, for the time being, under IAS 38 Intangible Assets. [For a more detailed explanation, see this ACCA Technical Article: Accounting for cryptocurrencies.

[3] Although lots of people did exactly this during the Irish banking crisis of 1970 when the banks closed and people were forced to exchange personal IOUs in the absence of the cash and bank clearing. Again, see Money: the unauthorised biography by Felix Martin for the full story.

[4] This isn’t any more real than a bank balance. In the UK, all banknotes issued by the Bank of England make this declaration “I promise to pay the bearer on demand the sum of £X”. This dates from a time when the person holding the note could exchange it for gold of the same value. Sadly, you can no longer do this. You can only exchange your banknote for other banknotes of the same face value. That is, you can swap one paper promise for another paper promise.

New to teaching accounting?

This course is for you if you’re new to teaching accounting in higher education, or are perhaps considering a career move to accounting education.

It’s designed to provide friendly support and to help you take the next steps in building your career, improve your teaching and engaege your students. The course is packed with advice, tips, tricks, and resources from a experienced academics and practitioners.
Toby York and Paul Jennings discuss the Accounting Cafe course New To Teaching Accounting

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More tips on teaching measurement

Image by Mahesh Patel from Pixabay 

Accounting students are understandably keen to put numbers next to everything. But often our students don’t understand why and how numbers are attached to words in financial statements.  IFRS uses the term ‘measurement’ (rather than ‘valuation’) to describe the process of quantifying resources and obligations. Measurement allows us to describe resources and obligations in monetary terms. It allows us to keep count of how well we are performing, to facilitate the understanding of the relative values of different resources, and to make comparisons between different businesses.

So I encourage students to understand that measurement is just one step, but an important one, in the process of deciding how to report events and transactions in the financial statements.

In a previous post I shared some examples that I use in class to illustrate measurement decisions for assets.  Here I will suggest examples that can be used to teach measurement of liabilities.  

Performance obligations

A typical business, Big Operations plc, will have some performance obligations — promises that the company has made to customers to deliver goods or services. And these will be measured at the value of those goods or services, using the transaction price to determine the value.

Discussing performance obligations like this also nicely illustrates income which is explored in more detail in this post. As Big Operations plc delivers the goods or services to its customers (i.e., fulfils its obligations) so it reduces its outstanding liability. And a reduction in liabilities is shown as income, in this case sales revenue. 

In the language of the Conceptual Framework, income is recognised as the liability reduces. (In fact performance obligations like this are sometimes labelled ‘deferred revenue’ in the statement of financial position because they will result in revenue in a future accounting period.) 

Financial obligations

Big Operations plc also has some financial obligations. A few years ago it issued some bonds as a way of raising finance. Since then the world has changed: the economic situation has deteriorated and the business suffered a significant fall in sales volumes.

Lending money to Big Operations plc is much more risky now than it was a few years ago  and so the market value of Big Operations plc’s bonds has fallen. While this makes it more expensive for the company to borrow more money it does mean that it could redeem those existing bonds at a lower amount (bond holders see them as less attractive so they will be relatively happier to offload them and get the cash). In other words the value of the company’s liabilities has fallen.  

We may feel a bit unsure about recording income arising from a worsening of our credit rating…but this is consistent with faithful representation. There will be other things happening as well of course but this particular effect of this particular change is inescapable.

Big Operations plc can now redeem those bonds at lower cost and in fact the shareholders will benefit if it does so. The liabilities of the business can be extinguished more cheaply than before and so in relative terms this has made the shareholders better off. Of course we will only measure our liabilities at fair value if that reflects the way in which that liability will be settled.

Income that arises from a remeasurement of liabilities does not feel like the same kind of profit made from buying and selling goods and services. And so IFRS requires that that this particular type of income is included in other comprehensive income rather than profit or loss. But this is a question of presentation, rather than measurement. 

When teaching measurement,  I emphasise to students that measurement is different from valuation — only assets are valuable (because they are resources that we will use) but anything can be measured [1]. And in fact, anything that we want to appear on the face of the balance sheet must be measured. That is why measurement is so important — it is the logical result of recognising assets or liabilities and a pre-requisite to presenting them in the financial statements. 

[1] For a longer justification of this rather sweeping statement I recommend Douglas W. Hubbard’s excellent book ‘How to Measure Anything’ available here:

From unrequited love to sleeping with the enemy

This Accounting Cafe online seminar on 25 March 2022 explored the future relationship between universities and the professional accounting bodies.

Our guests argued that to protect the future of accounting education a new social partnership is necessary between universities and the professional accounting bodies.

A significant problem is the current accreditation system which constrains accounting academics, risks academic freedoms and suppresses innovations in teaching, learning and assessment.

They claimed that university programmes dominated by professional development learning outcomes deprive students from obtaining essential critical skills better suited to employment opportunities and their future careers.

Their conclusion is that academia and the professional accounting bodies cannot survive without each other, but both must be willing to answer difficult questions and accept constructive criticism.

Their paper, From unrequited love to sleeping with the enemy: COVID-19 and the future relationship between UK universities and professional accounting bodies was published in the Accounting Research Journal in October 2021.

This was interesting session with wide-ranging views from academics, professional accounting bodies and students.

Presentation: Umair Riaz, Mo Al Mahameed and Lara Gee

Seminar hosted by:

  • Dr Muhammad Al Mahameed, Assistant Professor in Managerial Economics and Management Accounting at Copenhagen Business School Muhammad and Visiting Assistant Professor at College of Business Administration at the University of Sharjah, having previously been a lecturer in Accounting, Sustainability and Entrepreneurship in the Department of Accounting at Aston University. Before that he worked in investment banking, auditing and accounting firms in the UK and Syria. Muhammad is currently leading the ‘RWAD’ project, which is primarily designed to supply the disadvantaged Entrepreneurs with financial and analytical skills.
  • Lara Gee, Associate Dean Post Graduate Studies for the College of Business and Social Sciences at Aston University, Birmingham. Lara has worked in professional training and higher education for the past 15 years and specialises in taxation, audit and accounting. Previously she has worked in audit for PwC and The Audit Commission.
  • Dr Umair Riaz, Lecturer in Accounting at Aston University.


Paper: From unrequited love to sleeping with the enemy:
COVID-19 and the future relationship between UK universities and professional accounting bodies

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Image by Inactive_account_ID_249 from Pixabay 

Accounting students are understandably keen to put numbers next to everything. But often our students don’t understand why and how numbers are attached to words in financial statements.  IFRS uses the term ‘measurement’ (rather than ‘valuation’) to describe the process of quantifying resources and obligations.

Measurement allows us to describe resources and obligations in monetary terms. It allows us to keep count of how well we are performing, to facilitate the understanding of the relative values of different resources, and to make comparisons between different businesses.

So I encourage students to understand that measurement is just one step, but an important one, in the process of deciding how to report events and transactions in the financial statements.

To put his into context, we deal first with recognition — whether there should there be an asset or liability in our accounts. See posts like this one about the elements of financial statements. Then, if the answer to that question is yes, we deal with measurement — how to quantify that asset or liability. 

Here are some examples that I use in class to illustrate measurement decisions for assets. In a later post I’ll add some examples of how I teach measurement of liabilities. 

Measurement basis

As part of the measurement process, we need to decide what basis we will use to measure our assets and liabilities — for example historical cost, market value, or a value derived from a model. The basis of measurement that we use for our assets should reflect the way in which we expect to obtain economic benefits from those assets and the basis of measurements that we use for our liabilities should reflect the way in which we expect to settle those liabilities.

Cost — vans and bonds

When my friend Mavis bought a van to deliver goods to her customers she knew that she would use up the benefits of the van over time. She estimates that it will last for five years, so after one year roughly one fifth of its benefits will have been consumed, and four fifths will be still available. So it would not make sense to include the van in the financial statements at its original cost because some of that resource has been used up. 

Our financial statements are a record of past transactions. But the information about those transactions should be relevant; it should be up-to-date so that it helps users of financial statements in their decision-making. Although we might look back to the original transaction and consider the cost of the asset at the point in time where we purchased it, we might sometimes update or modify that amount before including it in today’s financial statements. 

However, it would be no more relevant to measure the van at its current market value. On the day that Mavis purchased the van, she turned the key in the ignition and instantly reduced its market value. But that didn’t worry her because she was never planning to sell or rent out the van any time soon.  (She’s Mavis not Avis.) [1]  

We can apply the same logic to the government bonds which Mavis bought last week with the money that she had left over after buying the van. Although it would be easy to find today’s market price of the bonds that information would be irrelevant because Mavis intends not to sell those bonds but to keep hold of them until they mature, collecting the annual interest and the final repayment. (That is why IFRS effectively requires an accounting policy choice between measuring financial assets like this at either fair value or amortised cost.) [2]

Market value — buildings and shares 

Sometimes information about the market value of an asset might be more relevant than information about its cost. For example the Sankaset Hotel Corporation generates economic benefit from its hotels by renting out rooms to guests. The amount it can charge reflects the location of the hotel, how upmarket the surrounding area is, how well the local economy is doing and so on.  

And sometimes market value is the only relevant information, for example in the case of shares that we might purchase for trading hoping to make a profit when we sell those shares. Sometimes I test students by asking them if an investment in ordinary shares could be measured at amortised cost…[3]

And so to profit…

Once we have accepted that the market value of an asset is relevant information we need to remove any residual discomfort we might feel about recognising these changes as income in our financial statements. Remember income is defined in the Conceptual Framework as improvements in financial position i.e., increases in assets or decreases in liabilities.

If our assets have increased in value then our financial position has improved. That is income. We haven’t sold those assets, we haven’t converted them into cash, but we don’t need to do so to understand that they are more valuable to us. 

Of course we may decide to report different types of income differently, to improve the information given to users, to allow them to distinguish, for example, between income from sales and income from revaluations (of land, shares etc.) but that is an issue of presentation, not measurement. 

[1] The only reason she is called Mavis is so that I can make that awful joke. Word play keeps me entertained and it also helps students remember what they hear.

[2] IFRS 9 para 4.1.2. But you knew that!

[3] The answer is no because ordinary shares do not have a maturity date so you cannot calculate an effective interest rate. So ordinary shares cannot be measured at amortised cost and have to be measured at fair value.  Easy if the company is listed but a lot of work if it isn’t. 

Innovations in accounting education

Accounting Cafe online seminar on 17 February 2022

This Accounting Cafe seminar was hosted by Susan Smith, an innovative and prize-winning accounting educator and Associate Dean at University of Sussex Business School.

Here are 50 minutes of ideas and practical suggestions to help you to deliver innovative accounting teaching, learning and assessment. This is followed by an informal discussion and experiences from other enthusiastic accounting educators from across the world.

02:51Policy and external influences
04:00Accounting curriculum tensions
12:45Homogenisation of the accounting curriculum?
13:29The purpose of innovation
14:41Active learning pedagogies
    — 16:16    — Team based learning
    — 20:53    — Problem based learning
        – 22:24        – Case method
        – 27:55        – Simulations
        – 29:41        – Simulations: gamification
        – 32:08         – Role play
    — 33:29    — Service learning
    — 44:39    — Summary
45:07Pedagogical lens
    — 45:18    — Phenomenon based learning
    — 46:11    — Storytelling
    — 47:52    — Cross cultural learning

Before introducing changes

Susan ackowledges that innovating can be overwhelming and is certainly effortful, so she advises not to innovate simply for the sake of change. Rather, set out clear reasons for innovating and determine what success looks.

Good reasons to innovate include embedding employability skills, or implementing measures to narrow awarding gaps across ethnicities and social inequalities, to increase student retention, to maintain learning outcomes and/or contribute to the university’s other strategic goals.

An additional complication might be that your modules qualify for professional accreditation and must therefore meet syllabus prescriptions to maximise available exemptions and, at the same time, you want your teaching to be distinctive.

Oh, and be sure to enhance student experience while you’re at it!

Active learning

Active learning provides great opportunities for academics to build expertise in specific teaching areas, but the overarching aim is to engage students productively, and research shows that this can benefit all students (Freeman et al, 2014).

Active learning can be interpretated in different ways and covers a broad range of pedagogies. This article provides a small sample of possibilities.

Team based learning

Students are put into small groups which remain in place for the entirety of the module. Before coming to class, each student undertakes individual preparation and completes an Individual Readiness Assurance Test (IRAT) consisting of short answer or multiple choice questions. They then review their answers to those questions in their groups during which they negotiate and submit agreed answers to the same questions: the Team Readiness Assurance Test (TRAT).

Answers provided in the IRAT and TRAT are reviewed by the teacher and class time is used to fill in knowledge gaps and using exercises to apply and extend learning.

Team based learning is widely used across different insitutions which has been shown to reduce awarding gaps and helps to promote collabortion and engagement. Effective implementation requires careful planning and consideration. It requires a lot of upfront work and to be effective must be implemented throughout the module. Research indicates that team based learning improves students’ academic performance, reduces some achievement gaps, and enriches the learning experience (Cagliesi & Ghanei, 2022).

More information: Team-Based Learning Collaborative (TBLC)

Problem based learning

Problem based learning is an umbrella term used to refer to case method, role play and simulations. It develops critical thinking, problem solving and communication skills. It also supports embedded employability skills.

The problem might be a current news stor or a teacher created problem. To be effective it must engage and motivate students to seek out a deeper understanding of concepts. The problem should require students to make reasoned decisions and to defend them and incorporate the content objectives in such a way as to connect it to previous knowledge.

1. Case method

Cases describe real-world scenarios often centred around a specific problem challenge or dilemma. The case method provides an opportunity for students to consider and apply concepts in a practical context. Faculty members with experience or connections with the profession or industry can write their own cases which may also be submitted for publication, for example, Issues in Accounting Education and Accounting Perspectives.

It may be more effective if embedded throughout the module but can also be adopted on an ad hoc basis.

Capstone assessments allow students to demonstrate attainment of learning outcomes over multiple modules (or even an entire year of study) in a single assessment. A case study can provide an excellent foundation for this type of assessment.

There is a lot of support for teachers looking to adopt the case method. The Case Centre provides resources, training and scholarships for new teachers to case teaching. Published cases also attract royalties.

More information: The Case Centre

The Case Centre: scholarships

Harvard Business Review (webinars)

The Case Journal

2. Simulations

Simulations allows students to practice decision-making in a ‘safe’ environment and requires them to focus on specific learning points.

There aren’t many simulations available for accounting and most of those are “off the shelf”, so may not be suitable. There is a cost consideration too.

A specific type of simulation is games based learning (or gamification):

  • Monopoly has been used to help students prepare for an accounting exam (Bergner & Brooks, 2017)
  • The Colour Accounting Learning System uses a board and activities as the basis for demonstrating accounting concepts
  • AccountinGame is a quiz like board game used in classes (Silva, 2021)
  • LegoSerious Play could be used to create an accounting simulation.

There are also various apps and online simulations.

More information: LegoSerious Play

Colour Accounting

Financial Education for Future Entrepreneurs (FEFE)

3. Role play

Role play is a valuable approach that is not much used. It requires students to take on a role and to consider a scenario or problem from that perspective and to communicate and interact with syudents in other roles.

This is better suited to smaller cohorts. A good illustrative example relates to audit education (Powell et al., 2020).

Service learning

Service learning is also referred to as real world, authentic or experiential learning. Students are given access to a real problem and can provide them with the opportunity to add value.

Finding and managing projects is time intensive and scaleability may be problematic.

Riipen is an international platform that connects companies and students.

More information: Riipen


Bergner, J. & Brooks, M. (2017), “The Efficacy of Using Monopoly to Improve Undergraduate Students’ Understanding of the Accounting Cycle”, Advances in Accounting Education: Teaching and Curriculum Innovations (Advances in Accounting Education, Vol. 20), Emerald Publishing Limited, Bingley, pp. 33-50.

Cagliesi, G. & Ghanei, M. (2022) Team-based learning in economics: Promoting group collaboration, diversity and inclusion, The Journal of Economic Education, 53:1, 11-30, DOI: 10.1080/00220485.2021.2004276. Accessed: 23 March 2022.

Duch, B. J., Groh, S. E, & Allen, D. E. (Eds.). (2001). The power of problem-based learning. Sterling, VA: Stylus

Freeman S, Eddy SL, McDonough M, Smith MK, Okoroafor N, Jordt H, Wenderoth MP. (2014) Active learning increases student performance in science, engineering, and mathematics, Proc Natl Acad Sci USA, DOI: 10.1073/pnas.1319030111. Accessed: 23 March 2022.

Powell, L., Lambert, D., McGuigan, N., Prasad, A., & Lin, J. (2020) Fostering creativity in audit through co-created role-play, Accounting Education, 29:6, 605-639, DOI: 10.1080/09639284.2020.1838929

Sangster, A., Stoner, G. & Flood, B. (2020) Insights into accounting education in a COVID-19 world, Accounting Education, 29:5, 431-562, DOI: 10.1080/09639284.2020.1808487

Silva, R., Rodrigues, R. & Leal, C. (2021) Games based learning in accounting education – which dimensions are the most relevant?, Accounting Education, 30:2, 159-187, DOI: 10.1080/09639284.2021.1891107

Suwardy, T., Pan, G. & Seow, P-S. (2013) Using Digital Storytelling to Engage Student Learning, Accounting Education, 22:2, 109-124, DOI: 10.1080/09639284.2012.748505

Taylor, M., Marrone, M., Tayar, M. & Mueller, B. (2018) Digital storytelling and visual metaphor in lectures: a study of student engagement, Accounting Education, 27:6, 552-569, DOI: 10.1080/09639284.2017.1361848

Wahid ElKelish, W. & Ahmed, R. (2021) Advancing accounting education using LEGO® Serious Play simulation technique, Accounting Education, DOI: 10.1080/09639284.2021.1905011.

Susan is Associate Dean at University of Sussex Business School, she holds a PhD in Accounting and is a Principal Fellow of Advance HE, and an elected member of the ICAEW.

In 2021 Susan won the Learning Together Award at the University Education Awards for her work with a staff-student partnership.


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Embedding a single company case in an IFRS course

Alice Shepherd is an Associate Professor of Accounting and Finance at Leeds University Business School, Senior Fellow of the Higher Education Academy, and an award winning teacher with specialised knowledge of online and distance learning.

Alice Shepherd talks to Accounting Cafe

Course context

The cohort is approximately 200 students and the module is delivered to second year (Level 5) undergraduate students over two semesters. It is compulsory for all BSc Accounting and Finance and BSc Banking and Finance students. Non-specialist students study a different module.

Embedded case study

A single company case study is embedded into the course, so that when a technical topic is covered (e.g. leases, provisions, group accounts) the students can see how it is recognised and disclosed in a real set of IFRS listed company financial statements.

This is particularly important as scaffolded preparation for students’ final year projects as many choose an applied financial analysis project.

Wm Morrison Supermarkets Ltd (Morrisons) is an appropriate choice for our students because:

  • It is local to Leeds and one that students know and are likely to be customers.
  • It’s a listed company so provides full annual report disclosures.
  • Its business model is relatively straightforward.
  • Its reporting year end is January, so the release of the most recent annual report coincides with my preparation for the module over the summer.
  • For several years before the pandemic, the finance team was kind enough at the end of the first semester to give a guest lecture and answer students’ questions.

One or two weeks before each seminar, a set of questions is released on the virtual learning environment which students are expected to answer in advance of the class. These require students to find and sometimes reflect on information provided in the annual report.

The first exercise is a “hide and seek” quiz with about 30 questions designed to help students become familiar with the report and the business as a whole.

Since I took over as module leader in 2019/20, the course initally moved to full online delivery which consisted of pre-recorded videos, quizzes and activities, and online live seminars fortnightly.

In 2021/22 we moved to hybrid delivery: pre-recorded videos, periodic live online lecture/clinic sessions, quizzes and activities, live fortnightly face to face seminars but with a partial online cohort taught in separate online seminars.

I have retained the case as an element tying the module material together and have continued to update the seminar questions to reflect the most recent annual report and current business news about the company. Our ratio analysis topic is also based on Morrisons’ financial statements.

I only teach some of the seminar classes. Others are taught by an experienced colleague. I created brief teaching notes indicating areas to explore within the class discussion on the Morrisons questions to provide students with a consistent approach.

Here are some of areas that are explored:


You will see from the consolidated income statement on p.86 of the annual report 2020/21 that the tax expense was £69m in 2021, after exceptional items. This was against profit before tax of £165m, giving an effective tax rate of (69/165) = 42% (the UK corporate income tax rate in that year was 19%). In the notes you will find a reconciliation to show the main reasons for this difference.

  • Of the £69m tax expense, how much was current tax and how much was deferred tax?
  • What are the main reasons for the difference between the corporation tax rate of 19% and the effective tax rate of 42%?  


Morrisons implemented IFRS 16 for the first time in their 2019/20 financial statements, so 2020/21 was the second implementation of the standard.  Have a look at the general information section on leases on p.92 of the annual report, note 6.1 on p.117, note 6.4 on p.119-120 and the financial statements and answer the following questions. 

  • What is Morrisons’ approach to deciding on the lease term that is appropriate to use?
  • Did Morrisons use the exemptions allowed under IFRS 16?
  • What was the cash outflow for leases in 2020/21?
  • Are the majority of Morrisons’ lease obligations short or long term?


Morrisons was particularly high profile in 2021/22 because of their activities during the pandemic, and subsequently as the subject of a private equity-backed takeover battle. This has led to class discussions about some highly commercial aspects such as why private equity firms are interested in buying the company, linking this to coverage in the Financial Times, exploring what differentiates it from other supermarket chains etc.

Of course, now that Morrisons has been taken over and is going private, I will no longer be able to use this company as the case study, but I will retain the idea for 2022/23 and choose a different company.


Within the constraints of professional accreditation requirements, there has been some assessment of the Morrisons content as part of a larger exam question. However, students are encouraged to use Morrisons examples throughout their narrative question answers.

Student feedback

The students do find these activities challenging — but they enjoy seeing what they can find out, and the activities allow the students to link financial accounting with their commercial awareness and get ‘under the bonnet’ of the business.

Student feedback has discussed how the application helps them to understand what financial accounting might be like in a workplace context.  


Working capital is widely misunderstood

Working capital is a widely used but often misunderstood term. To teach it well, the term needs careful scrutiny.

The problem starts, as it usually does, with language.

“Working” isn’t helpful—we don’t have non-working capital, but working capital suggests that it works and the rest of capital doesn’t.

“Capital” is ambiguous and slippery—if you hear someone say capital be sure to find out what they mean before making assumptions. ‘Capital expenditure’, ’share capital’, ‘return on capital’ and ‘working capital’ are common accounting terms but each has a different meaning. Not nuanced quibbles over interpretation, but big whacking differences.

Depending on context, capital variously refers to one part of equity, all of equity, all of equity and liabilities, just liabilities, just non-current liabilities, just financial liabilities, or some combination of those. Oh, and in one case it means the acquisition of non-current assets.

Ask a banker or an economist and a slew of additional possibilities will open up. And we haven’t even started on ‘natural’, ‘social’, ‘human’, ‘manufactured’, ‘intellectual’, or ‘emotional’ capitals.

In classes, my students are required to consider the origins of working capital and then I give them an alternative method of calculation.

Working capital originates from a calculation used by bankers to indicate how much of their long-term lending is being used to fund current assets.

Working capital refers to non-current obligations [1]

A functional explanation will make this clear but let’s first look at the traditional way of determining working capital—calculating net current assets.

Net current assets

Working capital rests on the notion that different sources of funding are allocated to specific types of assets in a specific order.

This is different to the principles that some creditors have security over assets; or that in a winding-up some creditors take precedence over others; and that all creditors take precedence over shareholders.

There is an implication that current liabilities are a source of funding for current assets. This is a dubious notion, which we’ll come back to, but for the moment let’s assume that to be the case.

In the figure below Pear Inc.’s current assets are greater than its current liabilities, so it has net current assets of $10 ($50 – $40).

Adapted from the Colour Accounting Learning System by Wealthvox.

This suggests that current liabilities are insufficient to fund the total value of current assets, so Pear Inc. requires additional funding—working capital—of $10. Self-evidently, this has to be non-current liabilities, equity or both, depending on the notional allocations of the remaining sources of funds.

A banking perspective

From a banker’s perspective, total long-term sources of funding are $330 (equity of $160 + non-current liabilities of $170). The banker determines that long-term funding is first allocated to non-current assets—$320 in this case. Long-term funding exceeds non-current assets by $10 ($330 – $320), and that excess is working capital, as it is funding net current assets.

I prefer this calculation as it suggests working capital is an obligation:

( Equity + Non-current liabilities )
– Non-current assets

In reality, however, sources of funds are not linked or allocated to uses of funds—there are assets and there are liabilities and equity. There is cash and there is a bank loan. There is inventory and there are accounts payable.

Assets and liabilities are classified between current and non-current (interestingly, defined differently for assets and liabilities), but classification does not create a link between types of assets and obligations.

Arguably, stewardship requires an eye to be kept on their respective amounts, but the balances sit there without belonging to each other.

The current ratio

The current ratio, because it is based on the same notional allocations of current assets and current liabilities, presents similar problems.

No ratio on its own can tell a story, but together with corroborating data and context, the current ratio may indicate an entity’s ability to meet its liabilities as they fall due, i.e, its liquidity (and ultimately, possibly its solvency too).

The reasoning is that if current assets exceed current liabilities, short-term creditors (suppliers, for example) are exposed to less risk.

Pear Inc. has a current ratio of 1.25 (Current assets $50 / Current liabilities $40).

Working capital requirements vary considerably by business type. If high levels of inventory are necessary, for example a whisky distiller, the working capital requirement will be greater than that of a business where inventory turns more quickly, such as a food retailer.

A current ratio of 2 or more may be a sign of rude health, or it could be that the company has built up inventory that can’t be sold and its current liabilities are falling due. Such a scenario could spell disaster for the creditors.

A companion ratio, the “quick ratio” or “acid test” excludes inventory from current assets in the calculation, but that’s not necessarily a safe bet either.

In September 2021, Nestle, the Swiss food giant, shows that it has current liabilities greater than its current assets—net current liabilities—giving a current ratio of 0.8 and a quick ratio of 0.5. Don’t rush to short the stock—nobody’s worrying about getting paid. Nestle has the operational strength and market power to muscle suppliers and other short term creditors into providing funding for its non-current assets. That’s what a current ratio of less than one means. Net current liabilities are available to fund non-current assets.

The current ratio is just one part of the story and not even tentative conclusions can be drawn without understanding the context and other available facts. There are multiple factors to consider (sector, growth, credibility, profitability) but none matters more than point of view.

  • An unsecured creditor, a supplier for example, will be reassured by a high ratio.
  • A bank, whose purpose is to earn money from lending will, up to a point, want to provide working capital. So, lenders benefit from higher current ratios.
  • Investors, however, know that there is a financial benefit to them if current liabilities are a cheaper source of funding than longer-term liabilities, so a current ratio of less than 1, up to a point, may be welcomed.

Despite what texts might say, there is no such things as an ideal current ratio. Whatever the current ratio is, it does not tell you if the business is a safe bet or about to go bust, or whether its managers are good stewards, reckless or overly cautious.


[1] This is something that the IFRS Foundation appears not to understand. In its Conceptual Framework (paragraph 70) it states:

“Some current liabilities, such as trade payables and some accruals for employee and other operating costs, are part of the working capital used in the entity’s normal operating cycle.” [My emphasis].

Phenomenon-based learning

Accounting Cafe online seminar on 19 November 2021

Liz Marsland, Queensland University of Technology (45 mins)

Liz Marsland is a trailblazer in phenomenon-based learning. She unpacks the methods, the challenges and the benefits to students and teachers in using this multi-disciplinary approach that has wide application across subject areas and throughout educational levels.

Elizabeth Marsland, CPA SHEA from Queensland University of Technology is a renowned TEDx speaker on phenomenon-based learning. She is passionate about innovation in accounting education.

Liz’s presentation (PPTX)

Zoom recording (45 mins)

Jenni Rose, Alliance Manchester Business School (44 mins)

Jenni Rose shares her experiences of teaching accounting through the lens of climate change. She challenges students to think about how accounting should be changed for the future and how climate change accounting works with formative and summative assessment.

Jennifer Rose, FCA BFP PGCert SFHea CMBE, senior lecturer in accounting, is the 2020 recipient of Teacher of the Year in the University of Manchester Distinguished Achievement Awards.

Jenni’s presentation (PPTX)

Zoom recording (44 mins)


Recording (45 mins): Liz Marsland — Phenomenon-based learning

Recording (44 mins): Jenni Rose — Teaching accounting through the lens of climate change

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The nature of equity

Of the five financial statement elements, equity is the most mercurial. In part, because it’s a function of recognised assets less recognised liabilities, simply expressed in this form of the accounting equation.

Assets – Liabilities = Equity (net assets)

It’s this residual aspect of equity that makes balance sheets balance. They balance because equity is the balancing amount. As such, equity has no recognition criteria—the recognition criteria that are applied to assets and to liabilities determine the value of equity.

The derivation of equity, however, says nothing of its inherent nature. So, let’s start with a quick one liner:

Equity is not valuable. It is an obligation.

This is not how equity is defined in the conceptual frameworks of FASB and the IFRS. Their definitions, however, are problematic because they are not consistent with their definitions of assets and liabilities.

The definitions differ in some details but both FASB and the IFRS describe assets as the rights of the entity. Likewise, liabilities are defined as the obligations of the entity. The standing point is clear. These elements are defined as rights and obligations of the reporting entity.

When it comes to equity, however, the standing point moves. FASB defines equity as the residual interest of the owners in the net assets of the entity [1], while the IFRS defines equity as claims on the residual interest in the assets of the entity after deducting all its liabilities [2]. Equity is defined not from the point of view of the entity, but investors.

Being aware of this is important when teaching. Consistency of approach and careful use of language will help students to achieve a deeper understanding, faster.

Some of those with prior accounting knowledge come to class with a clear notion that equity is “the money invested by shareholders”. It isn’t—cash is the money invested by shareholders, and cash is an asset. This notion of equity collapses accounting duality in the same way that cash sales does, which we discussed in The nature of income.

So, what is equity?

Early on in our elementary accounting courses we show students this picture and ask them what My Supermarket Limited is worth.

Adapted from the Colour Accounting Learning System, ©Wealthvox [3] (Download as PowerPoint slide)

The answer, as always, depends on point of view. Some students suggest £50,000 because that’s the value of its assets, but the question is asking the worth of the entity, not the assets.

The most common answer is £20,000 because that’s the value of net assets and, of course, equity. This assumes, however, that the question is about the worth of the business from the shareholders’ point of view. Prompt students to consider the lender’s viewpoint and they’re more likely to suggest that the answer is £30,000, the recoverable amount of the loan.

The purest answer is that, from the entity’s point of view, it is worth nothing. The value of assets is always equivalent to the total of liability and equity claims. This, after all, is what the accounting equation tells us.

In the article on teaching liabilities, the point was made that my liability is your asset. If I have an obligation to you, then you have rights you can enforce against me. My promise to repay you the money that you lent me is mirrored by your right to collect that money from me.

Admittedly, shareholders do not have the same set of rights as lenders and creditors, but they do have identifiable claims. Quoting FASB again, “Owners invest in a business enterprise with the expectation of obtaining a return on their investment…” [4].

It is rational and consistent, therefore, to define equity as the entity’s obligation to meet those expectations. It’s all about point of view. The owner has rights and therefore the entity has an obligation to the owner.

Accounting regulators appear not to have noticed their inconsistency of approach and can become a little cranky if you point it out, but hold your ground—equity has different characteristics to liabilities, but, from the entity’s point of view, it’s an obligation and is not valuable.



1. FASB (1985) Statement of Financial Accounting Concepts No. 6, paragraphs 49 and 60

2. IFRS (2018) Conceptual Framework, paragraph 4.63

3. Wealthvox (2020) Colour Accounting Learning System

4. FASB (1985) Statement of Financial Accounting Concepts No. 6, paragraph 51


PowerPoint slide (180KB) of illustration above. Free to use in teaching.

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