Nov 10, 2019
Modern accounting plays fast and loose with limited liability
Because Thomas Cook forked out for MyTravel in its own stock, it can write off most of that loss not against its retained profits but a curious accounting artefact: the so-called "Merger reserve". Despite the thumping losses, they mean that Thomas Cook's distributable reserves in the parent company balance sheet do not drop from their 2010 level of £199m. In fact, they more than double to £447m. This gives the impression that the company's solvency - and ability to pay a dividend - has actually improved. Of course, concerns about parent company balance sheet dependability go much wider than Thomas Cook. The UK accounting watchdog, the Financial Reporting Council, recently expressed concern at the tendency of listed companies to place values on subsidiaries that far exceed their total stock market capitalisation, and whether this meant they could be overstating their distributable reserves. It is precisely to stop this abuse of limited liability that audit was made compulsory in the first place - in the 1900 Companies Act.
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