IFRS 3 and IAS 38 Standards: Charles Stanley Group, Marks and Spencer, TESCO and Dominos Pizza Inc - Coursework Example

?Introduction IFRS 3 IFRS 3 deals with reporting of an entity when it incorporates a business combination. A business combination is bringing together of several businesses under one reporting unit. Normally there is an acquirer which acquires various other acquirees. If acquirees are not formerly separate business entities then it is not considered a business combination. IFRS 3 (Revised) IFRS 3 (Business Combination) is considered effective for annual reports issued on or after 1 July 2009. This revised method is currently applicable to business combinations with some considerable changes. For instance, all payments made to acquire a business must be recorded at fair value at the date of acquisition. And the contingent payments need to be classified as ‘debt’ which is measured sequentially through the income statement. All costs pertaining to acquisitions are expensed. IAS 38 This standard prescribes accounting policies for treating intangible assets that are not supervised in particular by any other standard. A firm can only recognize an intangible asset if it meets some specific standard requirements. This standard also guides in measuring the amount at which to report the intangible asset and specific disclosure requirements related to that intangible asset. IAS 38 (amendments) IAS 38 (Intangible assets) amendments are a part of annual improvement process of IASB that were published in April 2009. This amendment provides guidance for measuring the fair value of any intangible that is acquired through a business combination. It allows making a single group of all relevant intangibles that have similar economic lives. Charles Stanley Group PLC Introduction Charles Stanley Group PLC, (along with their subsidiaries) is in the investment business. They are headquartered and operate in UK. Last year Matterley Asset Management (Fund Management Company) joined CSG. This company (CSG) is registered as a public company on London Stock Exchange. Accounting Policy Charles Stanley Group PLC follows International Financial Reporting Standards (IFRS). IFRS 3 (Business Combination) As of the year ended 31 March 2010, there was no acquisition but on 1 October 2008, CSG acquired Griffiths and Armor (Financial Services) Ltd. The purchase amount of about ? 3.0 million was taken care of with cash payables on date of completion which is ? 1.4 million. The outstanding balance was paid in two equal ? 8.0 million installments on 30 September 2009 and 30 September 2010. There were no material amendments made to the book value of Griffiths and Armor Ltd before acquiring them. After acquisition till 31 March 2009, losses were ? 41,000. If CSG had undergone this acquisition on 1 April 2008 instead of October 2008 financial stats would have been different. Total revenue would have been ? 102.9 million and profit would have been ? 7.0 million. Analysis The goodwill amount is approximately 4 times greater than the net asset value of the Griffin & Armor (Financial services) Ltd. This implies that the CSG is not relying on the company’s worth of the net assets but the projections regarding G&A’s business. The CSG has highly optimistic, as well as, aggressive is highly optimistic. Recommendation It would be better for the firm to rely on numerical data to make solid projections about its financials. If the goodwill is well justified (4 times the net asset value) then more explicit explanation of calculations could be useful. Charles Stanley Group PLC Charles Stanley Group PLC Business Combination 2010 (Charles Stanley Group PLC, Annual report 2010) Charles Stanley Group PLC Charles Stanley Group PLC Business Combination 2010 (Continued) (Charles Stanley Group PLC, Annual report 2010) Charles Stanley Group PLC IAS 38 (Intangibles) Charles Stanley Group has complied with all necessary IFRS requirements regarding the Business combinations. Even if the most recent acquisition was not in the current year but still the application of IAS 38 applied retroactively. None of the intangible assets (as shown in the figure below) is or has been pledged as collateral. Customer relationships (that amounts ? 10.0 million) have customer lists with carrying value of ? 6.7 million. This amount is amortized annually and has an estimated remaining useful life of 7 to 8 years. Analysis Company is explicitly following IAS 38 by representing Intangible assets under separate heads in terms of their life assumptions. But economic life of customer relationship can’t be exactly measured because it depends upon the level of investment services that will be provided to investors. Moreover the portfolio management services can be flexible enough to increase or decrease the economic life of customer relationship under the head, intangible asset. Recommendations Regarding the measurement of customer life, more reliable sources should be provided that would convince the auditors, analysts and investors alike so that this measurement should not solely rely on portfolio management estimations. Charles Stanley Group PLC Charles Stanley Group PLC Intangible Assets (2010) (Charles Stanley Group PLC, Annual report 2010) Marks and Spencer Introduction Marks & Spencer is rated among UK’s top retailers for clothing and home products. Accounting Policy Marks & Spencer follow International Financial Reporting Standards (IFRS). IFRS 3 (Business Combination) Marks and Spencer Reliance India Pvt Limited, which is a subsidiary of the Marks and Spencer Group completed 100% acquisition of Supreme Trade Links Private Limited on 31 march 2009. Before this date it was a franchise for Marks and Spencer. The acquisition has been completed with a cash consideration of ?6.1m. Analysis The annual report shows a Good will (total) of 8.2m and arising. The total cash consideration for this acquisition is of 7.0m so the amount paid on top of cash consideration is 1.2m. Although the company explicitly follows IFRS 3 (Business combinations) but its notes to financial statement reveal that their good will has arisen in acquisition for facilitating a rapid growth rate. This is a very subjective statement and on precisely this base they have not included it under intangible assets on the acquisition date. Recommendation As the good will cannot increase on its own so an acquired goodwill can only increase when there are additional acquisitions of businesses having a positive value for good will, it is highly recommended that they explicitly give a comparison for the lack of growth rate and operating efficiency so that their reason for not including the increased good will in intangibles could be justified. Marks and Spencer Marks and Spencer, Business Combination 2010 (Marks and Spencer Annual Report 2010) Marks and Spencer IAS 38 Intangible Assets It is mentioned in the notes that Marks and Spencer prepares its cash flow forecast which is based on a financial model managed by its own personnel who consider a mere 3 year period for taking care of both past and future forecasts and contingencies. Analysis Analyzing the intangible assets and looking at rapid changes in the firm, a forecast model of only 3 years seems insufficient. An accumulated value of 452.8m including Goodwill (127.9), brands (50.7m), Software (154.2m), under development software (120.0m) indicates volatility which is quite hard to encircle in calculations when the time frame is only of three years. This assumption can directly affect the reporting of intangibles under IAS 38. A wider time frame will give broader definition to intangibles and give a more precise answer to which intangibles can be grouped under one heading. As a direct consequence of the company’s assumption based on three years is shown when an exchange difference of 0.4m for Goodwill for the year 2010 raises questions and bears a big question mark. Recommendation Relevant details about the good will (for the exchange difference of 0.4m) need to be explained. To comply with IAS 38 the company has accumulated all similar economic life intangibles but more detail on Good will would be really helpful to explain the changes from year 2009 to 2010. Marks and Spencer Marks and Spencer, Intangible Assets 2010 (Marks and Spencer Annual Report 2010) TESCO Introduction TESCO PLC is a public limited company located in United Kingdom under Companies Act 2006. It is a grocery and general merchandise retailer. Accounting Policy TESCO PLC follows International Financial Reporting Standards (IFRS). IFRS 3 (Business Combinations) Reading the reconciliation of trading profit to profit before tax statement tells that conferring to IFRS 3 for business combination is stated a loss of 127m for year 2010 against 32m for year 2009. This is the amortization charge that arose on the date of acquisition. As of Feb 2009 business acquisitions of 77m can be seen and the restatement of this amount along with other intangibles has been reduced to a mere 44m for year 2010. Analysis The above mentioned restatements occurred due to acquisition of Homever on 30 September 2008 and of Tesco Bank acquired on 19 December 2008. The net impacts on financial statements can be calculated to an increase of good will of about 14m and 35m for Homever and Tesco Bank respectively. Recommendation For complying with IFRS 3 reduction of 36m in retained earnings and when proper analysis of the segmental reporting is done it is revealed that an expense of only 25 million is reported. Against a reduction of retained earnings of 36m, an expense of only 25m is dubious. Detailed notes are needed to grasp the complete numerical picture. TESCO TESCO, Goodwill and Intangible Assets, 2010 (TESCO, Annual Report 2010) TESCO IAS 38 (Intangible Assets) As of February 2009, a restated amount of accumulated intangibles show ?4,076m. On the face or on the balance sheet the recoverable amounts for cash generating units can be seen but notes to financial statement reveal that these amounts are recorded at the higher of fair value or value in use. For the year 2010, recoverable amounts are based on value in use. Analysis Analyzing the financials tell us that carrying amount for Japan has been reduced to its recoverable amount through recognition of an impairment loss of 131m against good will. This amount has been amalgamated in the income statement as the cost of sales. Recommendation Even though the company is IFRS compliant but these minor adjustments like; when they incorporate the loss of 131m against the goodwill, it demands more explanation. We cannot be certain as to why this huge drop in the value of good will. On the other hand when we look at the projected long term growth rates of 1.1% for Japan, this begs for either deeper inside analysis or more details from the company. Domino’s Pizza Inc. Introduction Domino’s Pizza Inc. is a public limited company headquartered in United Kingdom. They deal in food items and are especially famous for their pizzas. And therefore enjoy high value of brand loyalty. Accounting Policy Domino’s Pizza Inc. follows International Financial Reporting Standards (IFRS). IFRS 3 (Business Combinations) Just like any other established leasing firm, dominos owns the leased equipment and also earns rental income for the left-over term for the lease. Dominos also enjoys tax benefits of about 29,240, 000 in total. Total costs of acquisition amounts to 14,213,000 whereas the acquisition cost of ?732,000 (with initial consideration of 26,000) represents the present value of expected cash consideration. Analysis The net cash paid for the whole acquisition is 509m as there was no cash acquisition either with the lease or through separate acquisition accounts. On the other hand a huge liability has been put on Dominos, amounting to 14,092,000 by deferring the acquisition consideration. Recommendation As there is no significant or usual acquisition involved here, more information is needed for the leased acquisition and the IFRS standards that apply on it depending whether it was an operating lease or a finance lease. Domino’s Pizza Inc. Domino’s Pizza Inc. Business Combination, 2010 (Domino’s Pizza Inc. Annual Report 2010) Domino’s Pizza Inc. IAS 38 (Intangibles) Intangibles of Dominos mainly consist of franchisee fees and software. The former refers to the cost relating to Master Franchise Agreement (MFA) with Domino’s Pizza Inc. These costs are written off gradually over the agreement time of franchise. At the moment (as of when the report was published) MFA has remaining life of 6 years. Analysis Looking at the notes to financial statement for intangible assets reveal that gradual depreciation of MFA has been reduced to 216 from 288 in 2009. Recommendation Although the firm seems IAS 38 (Intangibles) compliant but there is a condition for reporting all intangibles under one heading when these assets have similar economic lives. The only thing that is dubious is how come software and franchise agreement have similar economic lives? More info on software programme and its up-gradation (or obsolescence) is required. Domino’s Pizza Inc. Domino’s Pizza Inc. Intangible Assets 2010 (Domino’s Pizza Inc. Annual Report 2010) Read More