The Accounting Practices in Marks and Spencer - Essay Example

? Financial Accounting Table of Contents_______________________________________________________Page Executive Summary…………………………………………………………………….2 2.1 Accrual Accounting……………………………………………………………………2 2.2 Going Concern…………………………………………………………………………3 3. Key Accounting Concepts and Conventions…………………………………………..4 4. Marks & Spencer’s treatment of PPE, Intangible assets and provisions……………5 5. Impact of Impairment on Marks & Spencer’s Finance Performance………………6 6. References………………………………………………………………………………..7 1. Executive Summary This report includes some of the basic principles and conventions that must be adhered to while preparing the financial statements. It includes analysis and evaluation of some of the accounting practices and conventions. This report also analyses and evaluates some of the accounting practices in Marks & Spencer Plc. 2.1 Accrual Accounting Accrual concept includes recognition of revenue when earned while expenses are only acknowledged when they are suffered or incurred. This accounting concept needs creation of an extra account that records the variance obtained from the difference between revenue and expenses recognized as well as reception or payments of cash. Accounts receivable is normally used in recording accrued incomes while deferred revenue account is used to record revenue not earned (Banerjee 2005, p. 4-5). On the other hand, accrued expense account is used in recording expenses before payment of cash while deferred expense account is used in recording expenses after paying cash. This type of accounting concept is very expensive and that it is possible for the account to owe taxes on their income even before the cash is received. In marks & Spencer income is recognized when the products are sent to the customers and important risks and title incentives are shifted to the client. The deferred tax is accounted for after calculating it based on anticipated way of realization. The company also has trade receivables account and trade payables (Banerjee 2005, p. 4-5). 2.2 Going Concern Going concern is regarded as one of the most important assumptions in accounting used in preparation of final accounts with an assumption that the business will continue to operate in the next foreseeable future. The company is expected to successfully settle their liabilities after realizing their assets. It is always upon the management of the company to check on the ability of the organization to continue doing business in the coming future. The accounts of Marks & Spencer are prepared in the basis of going concern and the directors are convinced that the company will be able to operate in the next future. The directors are very much concerned that there are no uncertainties that may interfere with the company’s operations in their future (Gibson 2012, p.11-12). The company managed to make a profit of $458 as at March 2013 and positive cash and cash equivalents. The company’s current assets also exceed the current liabilities thus showing an element of going concern. The company is also in a position of paying out her dividends and financing The company will not likely to fail in its operations in the near future considering her statement of financial position and the consolidated income statement (Marks & Spencer 2013, p. 1-3). There are a number of indications of a going concern business which are not reflected in the financial statement of Marks & Spencer. Some of the dangerous signs indicating challenges of going concern are poor liquidity positions, high financial risk and delay in payments as well as serious litigations affecting the company. Marks & Spencer do not also have any indication of defaulting by one of their chief customers that may eventually affect her operations (Gibson 2012, p.11-12). 3. Key Accounting Concepts and Conventions There are universal ways of presenting accounting information to the relevant parties. These conventions are very useful in doing away with inconsistency that may be experienced while recording accounting data. Relevance is one of the conventions that insist on disclosing only the information that is relevant as far as achievement of the business objective is concerned. Relevancy deals mostly with items whose nature and amount are significant in a way that they can influence the decision making process of the financial statement’s users. The convention may also be referred to as the materiality concept and is very important as it may greatly affect the accounting record and the nature of business (Weil, Schipper & Francis 2013, p. 24-25). This accounting concept is very vital as it is based on anticipation of loss but not profit. It provides that income must not be overstated while preparing the books of accounts although any loss anticipated must be accounted for. It is important to include some anticipated losses such as discount on debtors, depreciation and creation for doubtful debt. The other convention is full disclosure concept which posits that all important substantial and pertinent facts regarding financial statements must be entirely revealed. Accounting information must be thorough, logical and appropriate. Financial statement should include detailed presentation of accounting information such as investors, accounts receivables, accounts payables and shareholders (Needles, Powers & Crosson 2011, p. 185-190). Furthermore, there is objectivity concept that states accounting data ought to be measured and articulated by the principles that are globally suitable. Feasibility concept states that the period, labor and cost of investigating accounting data ought to be compared to the profit coming out of it. In addition, consistency convention is another form of accounting concept which implies that accounting standards should be applied while preparing financial statements yearly. This is very important when it comes to comparability of different accounting periods. Similar accounting processes and practices should always be applied constantly in every financial year to facilitate comparability process (Weil, Schipper & Francis 2013, p. 24-25). 4. Marks & Spencer’s treatment of PPE, Intangible assets and provisions Property, plant and equipment in Marks & Spencer’s costs are recorded at a cost excluding depreciation as well as exclusion of impairment in accordance with conservatism theory. This concept is very important since it avoids overstatement of profit and also recognizes anticipated loss as required. The company does not revalue her property while doing their accounts although assets available as a result of construction are recorded at cost minus impairment cost. Marks & Spencer has a policy of depreciating her noncurrent assets after subtracting residual values Marks & Spencer 2013, p. 2-6). The organization do not depreciate her freehold land but the freehold and leasehold buildings whose remaining lease term is more than 50 years are depreciated by taking residual value and dividing by anticipated economic life of the property (Greuning 2009, p. 92-100). However, the leasehold building with period below 50 years are normally depreciated as per the outstanding time of lease. Equipment, furniture and fitting with between 3 and 25 years. Marks & Spencer usually ensure that they review their policy of impairing property, plant and equipment if there are some instances that prove that the carrying amount cannot be recovered. This always prompts the management of the company comes up with an amount that ought to be recovered basing on conventions and estimations. The depreciation of the property, plant and equipment is normally done in this company in writing down the assets to the remaining value divided by the property plant and Equipment anticipated useful live (Oppermann 2008, p. 64-70). 5. Impact of Impairment on Marks & Spencer’s Finance Performance. In the previous year Marks & Spencer impaired the carrying amount of Marinopolous B.V goodwill and other stores in Greek whose branches make do not make profit to show the value that can be recovered and the net book value. Impairment has several impacts on the financial position of various businesses and therefore should be taken seriously. Any loss for an asset due to impairment should be charged on the asset in question and further disclose the notes of impairment to the financial statements stating the assets and reasons for the action (Robinson 2012, p. 512-516). Impairment loss and write offs of an asset is likely to reduce both the net income as well as the non-current asset’s value. The reduction of income statement through charging the impairment loss has an effect of reducing the shareholders’ equity and eventually lowering debt to equity as debt to asset goes high. It is also likely that Marks & Spencer’s expected net income may go high because the value of the asset must have been reduced through impairment loss. The total impairment for the year ended 31 March 2013 for the Marks & Spencer company was ?m 44.9 (marks & Spencer 2013, p. 17-19). This means that the income was reduced by ?m44.9 and the value of assets were also decreased by the same value. Eventually the effect of impairment would mean that income is not overstated but expenses are recognized as anticipated. References Banerjee, A 2005, Financial Accounting: A Mangerial Emphasis, [S.L.], Excel. Gibson, Charles H 2012, Financial Reporting and Analysis + Thomsonone Printed Access Card South-Western Pub. Greuning, V 2009, International Financial Reporting Standards: A Practical Guide, Washington (D.C.), World Bank. Marks & Spencer, 2013, Notes to the financial statements, retrieved 27 August 2013, . Needles, Powers, & Crosson, V 2011, Principles of Accounting, Mason, Ohio, Cengage Learning. Oppermann, B 2008, Accounting Standards in Brief, Lansdowne [South Africa], Juta. Robinson, R 2012, International financial statement analysis, Hoboken, N.J, John Wiley & Sons. Weil, L., Schipper, K., & Francis, J 2013, Financial accounting: an introduction to concepts, methods, and uses, Mason, Ohio, South-Western. Read More