Breakdown of the CDS Financial Statements Part I

[Trebor Warcliffe]

After reading Gwyneth Llewelyn's and Cindy Ecksol's postings in the "Profit and Loss Statement of Al Andalus" thread I decided to attempt to clarify for my fellow citizens what they are looking at when they are reviewing the financial statements provided by the Treasurer. It is 4am EST and I've only gotten to the fixed assets section of the financial statements. I've decided to post what I have done so far and hope that all concerned will benefit from my hard work. While previewing this posting I noticed my columns I made in Word haven't converted in here. I can post my original document in google sharing if needed.

I am going to try to add some clarity to the finances of the CDS based on the monthly financial reports that the treasurer posts for all to see. Everything that I am clarifying in this posting is only based on these reports as I do not have access to any other information.

I’ll start with the June 2010 balance statement. The revalue rate on this statement is 270.0000000 which means that 1US$ is equal to 270L$. For current assets the report is showing 2 separate accounts. The first account is for Linden Dollars and the second account is for US Dollars. All figures presented are done in Linden Dollars. So the Linden Dollar account has L$ 3,082,457 which converts to US$ 11,416.51. The US Dollar account contains L$24,149 which converts to US$ 89.44. As you can see on the balance sheet the total current assets, or in other words the total cash available to the CDS is L$ 3,106,606 which converts to US$ 11,505.95.

In real life your fixed assets are the assets in a business that are not readily convertible over to cash. These assets would be your building, your equipment, your fixtures, etc. So the first line of our fixed assets is for the buildings. I’m assuming this means all the publicly owned buildings of all 11 SIMS. I don’t know for sure but I’m assuming this figure came from either the purchase of buildings or the payment to workers who built the buildings along with the cost of materials. The amount of L$ 90,535 converts to US$ 335.31. So if I understand this correctly it took a total of $335.31 for all public buildings on all 11 SIMS to exist. The problem with this assumption is that Fixed Asset – Building has been the same amount L$ 90,535 since February of 2009. What this leads me to believe is that when the CDS merged with the AA the value of the Fixed Asset – Building of the 6 AA SIMS wasn’t added to the CDS balance sheet. It is my guess that this oversight is most likely the possibility the AA SIMS owners didn’t keep track of this like the CDS SIMS did. Citizens who ask what AA has brought to the table in regards to the merger should be aware of this even though the actual value isn’t reflected in the balance sheet.

The next line in our fixed assets is for software. This asset has been a fixed figure since the first financial statement provided on the treasurer’s page, L$55,000. One inconsistency I did notice is that the amount has not changed on the balance sheet as the revalue rate has. In August of 08 the revalue rate was 277.0000000 which converts L$55,000 to US$ 198.56. On the June 2010 financial statement the conversion would be US$ 203.70. I know this may only be a technical issue but for those who want everything accountable down to the penny this could be an issue. For the treasurer the easiest way to fix this is to make a formula that attaches the revalue rate cell to each of the other cells. When you change the revalue rate at the top of the page the adjustments will be made automatically in your columns.
The next four entries in the fixed asset area involve land. The first line is land purchased from 3rd party and the second line is land purchased from Lindens. The first thing I’d like to point out is the June 2009 financial statement. This is when the Homestead Region – Monastery was purchased. The purchase price was L$ 100,875 or US$ 375.00. This purchase is reflected in the fixed asset Land Purchased from Lindens that reflects the increase of land assets from L$ 983,195 or US$ 3,655.00 in the month of May to L$ 1,084,070 or US$ 4,030.00.

Now I bring your attention to the July 2009 financial statement. This is the first financial statement that reflects the merger between the CDS SIMS and the AA SIMS. This reflection is noted in the revenue section of the financial statement that shows the Land Tier Revenues AA of L$ 2,282. Now what you don’t see, which I feel is very important, is an increase in Fixed Asset – Land Purchased from Lindens. If you want to get technical you could make it a new entry Fixed Asset – Land Acquired from Merger with AA. I’m assuming, based on my research that the AA SIMS were purchased at the Non-Profit pricing levels through Linden Labs. The following reflects what should be added to the fixed assets of the CDS financial statements.

ESTATE TYPE PRICE L$ PRICE US$
Al-Garnata Full Region 189,000 700.00
Al-Andalus Almunecar Homestead 70,740 262.00
Al-Andalus Alhambra Full Region 189,000 700.00
Al-Andalus Generalife Full Region 189,000 700.00
Al-Andalus Albaycin Full Region 189,000 700.00
Al-Andalus Sacromonte Homestead 70,740 262.00

Total of 6 PREEXISTING SIMS 897,480 3,324.00

I am not even going to point out how much 6 empty SIMS would cost the original CDS purchased at the Private Region Pricing schedule. All right for those who don’t want to look it up themselves the total would cost L$ 1,282,500 or US$ 4,750.00

Here is what the Fixed Asset section of the June 2010 financial statement should look like, reflecting the changes above not taking into account the difference in the revalue rate for software and Land Purchased from 3rd Party.

Fixed Assets
Building L 90,535 US 335.31
Software L 55,000 US 203.70
Land Purchased from 3rd Party L 325,000 US 1,203.70
Land Purchased from Lindens L 1,088,100 US 4,030.00
Land Sold in L$ (L 2,520,338) (US 9,334.59)
Land Sold in US$ (L 281,602) (US 1,042.97)
Realized Gain on Land Sales L 1,388,840 US 5,143.85
Land Acquired from AA Merger L 897,480 US 3,324.00

Total Fixed Assets (adding Building, Software, Realized Gain on Land Sales, and Land Acquired from AA Merger)
L 2,431,855 US 9,006.87

[Sudane Erato]

Trebor,

Thanks very much for your close study of the financial reports... it's great to have someone really look at them closely and provide an outside interpretation. I'm not sure that most people will understand your explanations any better than mine, but far better to have multiple people commenting on them than just the one person who administers them!

I need to point out a difference in the way I have managed Fixed Assets, from the way you describe. Your description is indeed a very standard and appropriate system for the management of Fixed Assets in RL (although you do omit considerations of depreciation).

But when I first set up the books for the community back in 2005, I despaired of placing any underlying value on any fixed asset we have. other than an asset which was acquired by exchange of cash (another asset, of course). So instead of the approach you describe, I decided to show the fixed asset of each sim (for example) in this section of the Balance Sheet, AND THEN reduce that value as each parcel of the sim was sold to an individual. In effect, this transferred the value of the fixed asset from the community (un-revenue generating asset) to the citizen-owner (revenue-generating asset). The net effect was that as the parcels of each new sim were sold, the Fixed Asset value of that sim on the community's balance sheet lowered.

Eventually, as parcel sales continued, the Fixed Asset value of the sim on the community's books went to zero. However, land sales did not stop there, but continued as parcels were abandoned to the community. Abandonment involved no net cash transfer... we simply had an unvalued saleable asset. When it was sold, using the same bookkeeping transaction, the Fixed Asset value of the sim went negative on the books... which would not be appropriate. It is reasonable, from a very strict cash point of view, to express the Fixed Asset value of the land we have as zero, but not reasonable to express it as negative. Therefore, every negative-going land asset transaction is converted, each month, to Land Sale Revenue, an income item on the Income statement.

I hope this explains the very elementary cash-based approach I have taken with our financial statements. Fixed assets... of ALL sorts, not just land... show up on the Balance Sheet only as they represent a net outlay of cash. If the cash is recovered, the asset is reduced (in effect, being converted back to cash).

And this shows why the huge majority of the infrastructure, the value of the AA sims, the value of almost all the builds, etc.... does not appear here. No cash was expended in order to acquire them. Only those things... selected buildings, the tier collection software... for which actual L$s were spent appears on our list of fixed assets.

A further note concerning your comments about re-valuation. Other than some of the sims, all other fixed assets (the builds and the software) were acquired with L$s. Since the sims have been valued down to zero (for the reasons explained) there is no basis to revalue the other fixed assets when the currency rate changes. All reports are in L$s, which is the effective currency of our "realm". The impact of this has shown to be only that the value of tier paid to LL each month varies slightly with the exchange rate, rather than being fixed as it would be if everything was kept in UD$s.

I will make a personal note on this. This is the first time in my 35 years of doing bookkeeping for various organizations that I have had to deal with two currencies and a continuously floating exchange rate. It is VERY muddlesome! While it's possible that over time I may have made a few errors regarding relative values in one currency vs another, I make a VERY special point to tie out both the US$ account and the L$ account every month. The statement of the US$ account is included in each report. The statement of the L$ account is technically Rudeen Edo's lengthy transaction report, which I preserve but do not publish... but which is available for inspection should a finance committee ultimately get formed. Contrary to public understanding, bookkeeping is an inexact art, but the elements of exactness to it, such as the tie outs to the statements provided by LL, are critically maintained in order that people know their money is properly accounted for. This has been done.

I really welcome your involvement in this. Please don't hesitate to bring up further issues both here and in personal communication.

Sudane............................

[Trebor Warcliffe]

Sudane,

Thank you for your feedback it is greatly appreciated. I was thinking about the issue of land after I posted my analysis. Here's a suggestion that may give the financial statements a more accurate picture. The asset land is in reality two different types of assets. First is the land that is owned by the CDS that is used for public purposes. Second is land that is purchased or acquired that is available for sale. This land asset would be considered inventory. If you were to take this approach it actually wouldn't be to difficult to figure out how much land the CDS holds as a fixed asset. If you want I can even assist you with this. Here's what I need. For each SIM I need to know how many sqm of land is owned by the CDS. Then depending on the SIM we take the cost per sqm and multiply it by how many sqm's that SIM has. Here's an example:

Full Region Private Region Pricing costs L$270,000 for 65,536 sqm. That figures out to $L4.12 per sqm. So if the CDS owns 30,000 sqm of land in one of these SIMS the fixed asset of land would be $L123,596.

Now to address the second issue concerning Fixed Asset - Land. When you first set up the books in 2005 I'm assuming all fixed assets were acquired by cash and that is why you chose this approach which was appropriate at that time. As a result of the merger you've acquired more assets. You cannot not account for these assets just because we acquired them from an individual or group instead of an exchange of cash. In my analysis I used the replacement value approach and I used the conservative pricing for non-profits under the assumption that was the price they were purchased at. It would be no different if Linden Labs approached the CDS with a gift of 4 SIMS. Those 4 SIMS are an asset to the bottom line of the CDS financial statements and should be accounted for as such. I am sure that whoever turned over the assets of the AA to the CDS would consider that those assets have a value.

Concerning the revalue rate. You are correct and I have made a mistake. In reallife if I purchased a stripmall in 1950 for $100,000 and I still owned it today, it would still be valued on my books at $100,000 not taking into consideration depreciation of course. My point is just because $1.00 in 1950 is equal to $9.05 in today's dollars doesn't mean we change the asset from $100,000 to $905,302.90 in today's dollars.

[Jamie Palisades]

What a great contribution. Delighted to have you in the village, Trebor.
You are exactly right that the acquisition of the AA sims had asset value. The books for 2009 should reflect an asset addition, which represented a new resource that can be used to generate income (rent!) -- or wasted (left vacant).
They were a donation, so they should be booked like a donation, e.g., market value, not at zero.
Similarly, when the merger was dissolved in 2010, CDS takes a fixed asset loss in that same amount.
And, yes, whether they were making or losing money is a cash flow question (tier & expenses against rents) -- a good one, but one that appears elsewhere in the books.
Regards JP

[Rosie Gray]

Thanks very much for the explanation, Sudane and Trebor. Being a non-accountant type person who finds these topics a bit difficult to follow, this has helped me understand both the current status of the financial situation and the history behind it.

Cheers,
Rosie

[Guillaume Mistwalker]

I agree, thank you very much for that explanation!
Guill.

[Delia Lake]

This is very helpful. Thank you all for the hard work you put in to produce these analyses.

[Trebor Warcliffe]

WOW!!! Thank you for all the positive feedback in regards to this posting. As a few of you know I've been dealing with some personal, how would I word it, trials and tribulations, since July 22. Due to this I haven't been able to spend much time at all in world or working on my accounting project for the CDS. Though I did manage to purchase a beautiful piece of real estate in Alpine Meadows that just happens to overlook my other beautiful piece of real estate in Colonia Nova. What can I say I know how to answer the door when opportunity knocks. I am happy to report that as of Monday 8/9/10 my RL world seems to be going back to a sense of normalcy and I should be able to get back on track with my SL/CDS world. My goal is to be able to present an updated accounting system to the treasurer and my fellow citizens by the time the August Financial Statements are due to be published. From the looks of it I will be consulting with Sudane and Jamie on any particulars that I have questions about and I welcome anyone else's input as well. Again, thank you for all the positive feedback and I look forward to continuing to be a positive contributor to this world we call the CDS.

Thank you,

Trebor

[Arria Perreault]

Trebor, every volunteer work is appreciated in CDS. There are a lot of things to do. If I understand your project present to updated accounting system, you work from your own, without any mandate from the RA or any other organization. Would it not be a good idea to integrate the Financial Commission of Tor which is doing a great job or the Financial Committee that we all would like to see created. This second committee's goal is to help the Treasurer.

I also appreciate a lot your list of owners in CDS. I have seen that you maintain it. I think you should be appointed to do this job.

[Trebor Warcliffe]

Arria, thank you for your complements. In regards to my CDS Owner/Citizen List that I maintain I would be more than happy to be appointed to the position, whatever that position may be. You had mentioned in a previous post that someone had a tool that would notify the user when an ownership change in world has occured. This would be of great assistance to me. Currently if a sale occurs privately between two members I am unaware of the change in ownership unless someone drops me an IM in world. I also feel that a link on the portal to the list would be a benefit to citizens and visitors alike. I know some citizens aren't to big on the portal but I personally found myself spending a lot of time exploring the CDS there in the beginning as well as in world.

You are correct, my project to update the accounting system to more accurately reflect the finances of the CDS is not mandated from the RA or any other organization. I've been attending school since January 08. December 09 I obtained my AA degree in Accounting and I've been continuing my education to earn my BA in Accounting. I've spoken in world with Tor quite a few times since I've become a citizen and I would enjoy working with him and everyone else on the Financial Commission. I will need to go through the forums and read the transcripts of the meetings to catch up. I will also find the forum posting that references the Financial Committee and volunteer for that one also.

Thank you,

Trebor

[Ranma Tardis]

Hate to rain on the parade but used sims are not worth $700. You can get a new sim from LL for $1000 with one months tier included making it $705. Unless you like the name and location of the sim it will cost you $200 to change both. Thus a used sim is worth $500 or even less. Desmond told me once never to pay more than $300 for a used sim. Thus the sims values need to be redone to reflect their true value.

[Trebor Warcliffe]

Ranma,

You're not raining on the parade, I appreciate input from all. In response to your statement you may be both correct and incorrect at the same time. Allow me to explain. Dictionary.reference.com has a few definitions for the term value. I feel numbers 2,3,and 5 are the most applicable for this situation.

2. monetary or material worth, as in commerce of trade: This piece of land has greatly increased in value.
3. the worth of something in terms of the amount of other things for which it can be exchanged or in terms of some medium of exchange.
5. estimated or assigned worth; valuation: a painting with a current value of $500,000.

The same web site has two definitions for the word asset.

1. A resource having economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.
2. A balance sheet item representing what a firm owns.

In accounting, in RL and in our CDS world, when the CDS purchases or acquires land it is purchasing or acquiring an asset. That asset is recorded on the financial statements for what the purchase price was regardless of the value. When Home Depot purchases a piece of land for $1,000,000 that has a market value of $1,250,000 it is reported on thier financial statements as an asset for $1,000,000. Ten years from now, whether that exact same piece of land has a market value of $2,000,000 or $500,000 it will still be on the books as an asset of $1,000,000.

Obviously if they sold the land for only $750,000 they would report a loss of $250,000. If they sold the land for $1,500,000 than a profit of $500,000 would be reported. The purchaser of that land would record the land on their financial statements for the price they purchased it for, again regradless of what the market value is at the time of purchase.

I'll give you one more example. In my earlier posting I broke down the cost of a Full Region Private Pricing Region SIM purchased from LL. 65,536 sqm, price L$270,000 breaks down to a cost of L$4.12 sqm. In Locus Amoenus right now the CDS government has up for sale 3 parcels, each 1024sqm for the price of L$14.8 sqm. That is the "value" the CDS government has put on these three pieces of land. If accountants used value instead of assets than based on this value the entire sim of LA would be worth L$969,932. This is why in accounting an asset is presented in the financial statements at the cost it was obtained by, regardless of the value.

I hope I've been able to clarify this for you and anyone else who may see it that way also. Now what I find very interesting about your post is this. If what you say is true and we are able to purchase used sims for $300 to $500 than why would the CDS buy new SIMS from LL. Even with the cost of moving and renaming the SIM like you have pointed out the CDS would still be saving some money. I would encourage my CDS government officials to see what kind of deals we could obtain inworld to acquire more SIMS. I'm assuming there wouldn't be a difference between a new SIM and a used SIM in regards to terraforming and such? In closing Ramna if we did purchase a used SIM and the cost to purchase and relocate/rename the SIM was $500.00 or L$138,500 it would be reported on the financial statements as an asset for that exact amount.

Thank you,

Trebor

[Sudane Erato]

Trebor, the "book value" pricing of parcels in our sims, or I should say the "chart value", is based on the initial cost of the sim, including a month or two of tier for the period of time during which the sim was not fully resold. Please remember that the pricing is based only on the total area of *sellable* parcels on the sim, not on all 65536 square meters of the sim. In the case of Locus Amoenus (and of Alpine Meadow too), the sim is "double-primmed", meaning that each parcel holds twice the number of prims for its area that on a normal sim. So in this case, only half the square meters are available for sale... and indeed the amount is less than half because we need to allow prims for the public land as well. The sale price of the double-primmed parcels on LA and AM is reasonable from the point of view of book value.

You give a good explanation of the rationale behind the current system of asset accounting. The value of the sims are posted on the books for the amount that was paid for them. That amount is then lowered as portions of the sim are resold. If anyone in the community is of the opinion that re-possession of all those privately owned parcels (and subsequent sale of the sim to an outside party) is a valid and legal action, then perhaps a resale value should be retained on the books. (I hear screams of "eminent domain"). But I think that we are a bit more akin to a cooperative developer. The developer buys land for a cash value, and puts that value on her books. She then builds streets and houses, and slowly resells the land, lowering the asset value on her books each time she does so. Eventually, when all the parcels are sold, the developer has no land asset value remaining on her books, since that asset value has all been transferred to the individual landowners. This is the model we use now.

And I should note that one or two of our sims were in fact purchased on the used market, tho my old brain forgets which. I'm quite sure CN was one. It is true that at this time used sims are not worth much... this has not always been the case. The effective purchase price of a full sim from LL is 705... and in the past one could save a few hundred dollars at best. Also, in the past, buying a sim from a third party was often dicey... LL had no system to guarantee that the seller wouldn't simply walk off with your money (they do now). Also, and this is direct personal experience, when a sim is purchased, avatar "home settings" do not delete... there is no way to clear them. If there were a lot of people calling that sim "home", and particularly if the sim was sold under circumstances not favorable to them, one can discover that one has purchased not only a sim but also a large crowd of very disgruntled people.

Sudane.................................

[Soro Dagostino]

Opinions please? If one buys a "used" prim from an EO, do they get to be in privity with LL? Or are they always subject to the selling EO? The kind of sale that in RL is known as a "wrap." [Until the wrapped meat begins to stink and the EO fails to pay tier to LL . . . ].

I have had this situation described to me by several sim owners who found themselves sh** out of luck and the sim retaken by LL. Be careful what you wish for . . .

FWIW.

[Trebor Warcliffe]

UGGGGGGHHHHH!!!!! I just had three paragraphs written explaining everything and didn't save anything before I previewed the link. Ok real quick now because I have to get ready for work. Here is the link for the working papers of the accounting system I'm working on. The left sides are the simple presentation and the right side is a little more detailed. On the balance sheet I don't know if we really need the detailed breakdown of buildings and land improvements but I do want to keep the detail of Land. Remember Fixed Asset - Land will be seperated from Inventory - Land Available For Sale. I had a lot more written but like I mentioned I accidently deleted it and I'm pressed for time. As always input/suggestions are always welcome. Here is the link. https://spreadsheets.google.com/ccc?key ... l=en#gid=0