Helping people read Facebook’s accounts

Richard Murphy has complained that the Facebook UK accounts for 2015 are opaque and hard to understand (see his blog at http://www.taxresearch.org.uk/Blog/2016/10/09/facebook-uks-accounts-a-case-study-in-the-tax-data-we-dont-have-from-current-accounting-standards/).

I, on the other hand think that they are quite easy to understand, and have tried to explain this to him in comments on his blog.

Accounting is a complex area, so I’d be grateful for any comments from other people.

The discussion essentially concluded with Mr Murphy complaining that the accounts do not tell us anything about the deferred tax asset: what it is, why it is being recognised, whether there will be any future profits, where they will come from, and so on.

In particular, he challenged me to explain how we can possibly know from the accounts that the company is planning to make more sales in the UK, but not pay tax on them.

In answer I suggested (just before he closed the comments on his blog) that:

“We know they have more of their existing business because the accounts show the increase in the number of engineers.

“We know they have a new reseller business because it says so in the strategic report, on the very first page of the accounts (not counting the contents page).

“We know they expect to make a lot of pre-tax profit out of this, because they say so when they recognise the deferred tax asset.

“We know that they expect not to pay tax on that pre-tax profit, because they say they are expecting relief for the RSUs. That is, the accounting profit they expect to make in the future is sheltered from tax by the dirty great loss they have already disclosed in the accounts.

“And we know that this is a reasonable result, because although they are expecting to make a lot of money, we can see that they have already committed to giving it away to their employees via RSUs. As the value goes to the employees rather than the company, we would expect the employees to be the ones who are taxed on it.”

He maintains that the accounts tell us none of those things, and that I am making things up to fit a pet theory.

On re-reading the accounts, I find:

  • On the increase in number of engineers, the strategic report says “The company has experienced large growth, especially in the area of engineering”.  Note 6 shows that the engineering team has increased from 215 to 415, which seems to corroborate that.
  • On the new reseller business, the strategic report (again) says “From 1 April 2016, the company’s function expanded to include an advertising reseller business in respect of large UK customers.  The company is positioned to continue to expand in the future”.
  • On the expectation of profits, Note 15 says “The deferred tax asset has been recognised on the basis it is probable there will be sufficient future taxable profits against which the deductible temporary differences can be utilised”.
  • On the expected relief for the RSU deductions:  just before the above, Note 15 says “the deferred tax asset mainly relates to unvested employee RSUs”.  So Note 15 is very much saying that the company will get a tax deduction when the RSUs vest, and this will be used up against future profits.

Now to me, the above constitutes the accounts saying, in very clear language, exactly what I thought they said.

I don’t think I’m even extrapolating from numbers and drawing conclusions: the accounts (to me) seem to say things in plain English.

I’m worried I might have lost my sense of perspective.  Am I just too used to tax accounting?  Am I reading obscure jargon and thinking it’s common parlance?

When I read things like “expanded to include a new reseller business”, is it only my corporate tax training and experience that allows me to deduce that the company has expanded to include a new business?

Or are the accounts actually quite easy to read?