Published Financial Statements of Sainsbury - Essay Example

Published Financial Statements of Sainsbury by Course: Tutor: University: Department: Date Introduction This paper seeks to present a detailed analysis covering presentation of non-current assets in financial statements of Sainsbury Plc. The first section is an overview of Sainsbury and the period this company presents its financial statements. This will be followed by an assessment covering on recognition, measurement, and disclosure of non-current assets in the company. The essay will then proceed to investigate whether information provided by published financial statements on non-current assets satisfy differentiated needs of users of such financial statement. To succeed in this analysis, it is imperative to note prescription provided by International Accounting Standards 2007 on presentation of financial statements. Briefly, the paper will investigate whether Sainsbury follows IAS 2007 guidelines to the later. Overview of Sainsbury Founded in 1869, the company has managed to develop more than 1000 stores. Sainsbury is sensitive to the needs of customers and places emphasis on nature of experience faced by customers during their shopping in the company. This aspect is reflected in both vision and goal of the company. According to Sainsbury (2012, p. 10), the company’s vision is “to be the most trusted retailer, where people love to work and shop”. This company has registered success in all areas of focus i.e. food, general merchandise and clothing, complementary channels and services, property and new business, simply because of the strong culture and values. Despite intense challenges faced by retailers in 2010/11, Sainsbury remained profitable with a 6.8% growth in sales. As a public company, J Sainsbury trades its shares on London Stock Exchange. The company’s financial year normally ends in March, a time span of 52 weeks. i. Recognition, measurement, and disclosure of non-current Assets Non-current assets include property, plant, and equipment in addition to goodwill and other intangible assets. Guidelines on recognition, measurement, and disclosure of non-current assets are contained in IAS 16. This act outlines how property, plant, and equipment are supposed to be treated such that users of this information are in a position to understand the value obtained from investing in property, plant, and equipment. The standard further enables users of financial report to deduce changes that have taken place in these assets and the subsequent financial implications. Some of the pertinent issues revolving around accounting treatment of property, plant, and equipment are variables such as deduction of carrying amounts, recognition, depreciation, and impairment of losses. Recognition IAS 16 provides that a Company must set its recognition threshold of property, plant, and equipment and disclose it in the notes section of the financial statement (IASB, 2007). The threshold should not be too high or low since it will temper with quality of the information. If there were changes in recognition threshold, it must be disclosed in the financial statements. Sainsbury has outlined clearly in notes to the financial statements recognition used by the company. Through various classifications of assets and valuation, it means that Sainsbury Plc has recognized non-current assets appropriately. Measurement IAS requires publicly traded companies to record non-current assets in historical or fair value system. Besides, assets that fall under the same class must be measured using the same measurement basis. In applying the historic cost approach when measuring assets, a person is required to record in historic cost all assets under a class apart from land, building, and other items of property, plant, and equipment that are anticipated to live longer (IASCF & IASB, 2007). The standard provides that fair value approach may not deviate from depreciated historic approach if non-current assets have short life. This forms the reason for the application of historic cost on classes of non-current assets with short useful lives. This is why infrastructure, land, building, heritage, and other long-lived assets were excluded in historical basis. IAS 16 goes ahead to stipulate that companies must record long lived non-current assets at fair values. Sainsbury has used the depreciated historic approach to measure land and buildings. The cost of Land and building in 2012 was £ 50m while accumulated depreciation and impairment was 24 (Sainsbury, 2012, p. 87). This is contrary to IAS 16 provision that long-lived assets including land and buildings must be measured using fair value approach unless their useful lives can be determined clearly. In the case of fixtures and equipments whose useful lives are known, cost less accumulated depreciation has been used as a measurement basis by Sainsbury i.e. cost of £15M and accumulated depreciation of £7M. This is in agreement with guidance provided by IAS 16. In the same line, Sainsbury measures goodwill using fair value, which is in agreement with IAS provision. IASCF & IASB (2007, p. 563) guidelines on measuring non-current assets held for sale clearly puts across that such assets are measured by examining the lower of carrying amount and fair value less costs incurred in executing the sale. This rule has been adhered to in Sainsbury given that assets held for sale in 2011 valued at £13 million have been stated in line with IAS i.e. at lower of the carrying amount and fair value and subtracting cost incurred in sale (Sainsbury, 2012, p. 91). The company did not have any asset held for sale in 2011. Under IAS 36, a trigger prompts a company to test for impairment of assets. For this purpose, each store in Sainsbury is classified as a cash-generating unit, which aids in examination of store performance against expectation. Disclosure In a bid to protect users of financial statements, IAS 16 guides that disclosure of plant property and equipment ought to be done in the notes on non-current assets (Abdul-Shukor et al, 2008). Disclosure information includes note on how assets are carried whether at cost or at fair values, approach used in valuing the assets and dates of that valuation, strategy used in managing estate, and means used in financing the asset acquisition i.e. through government grant, donation, or lottery (IASB, 2001). In the year of acquiring non-current asset, it is imperative to disclose any difference between fair value of asset and cash provided by the funder. Sainsbury has fulfilled the requirement to disclose non-current assets by indicating in the notes how assets are carried. Concisely, Sainsbury’s notes to financial statement illustrate that land and buildings have been stated at cost less accumulated depreciation and provision for impairment. Furthermore, fixtures and equipment are valued at cost less accumulate depreciation. All other non-current assets contained in Sainsbury financial statements have been disclosed appropriately in the financial statements. ii. Differing needs of users of financial statements When developing a financial statement, it is prudent to bear in mind the differentiated needs of various users. These users can be external or internal. Internal users for example, are people within the organization who need the financial statements in order to make decisions. Managers and shareholders are supposed to be provided with accurate and comprehensive information on non-current information in order to determine whether an item of plant, property, and machinery should be purchased. A decision to classify a non-current asset as for sale depends on accounting information in relation to the asset. This information is pertinent to shareholders who will understand cash flows from investing in Items of plant, property, and equipment for the purpose of resale. Sainsbury has indicated very clearly in the statement of cash flows that proceeds amounting to £314M were realised in 2012 following sale of property, plant, and equipment (Sainsbury, 2012, p. 71). The statement of cash flows further indicates that property, plant, and equipment valued at £1,227 million were purchased in 2012. This informs shareholders on cash outflows since they are the ones who finance the company. The same shareholders are always concerned of the firm’s ability to pay dividends, which is actually the cost of capital. Dividends per yield for 2012 and 2011 were constant at 5.2%, showing that the company has been stable in rewarding shareholders for the funds they have invested in Sainsbury (Sainsbury, 2012, p.112). If a company concentrates on purchasing non-current assets of that are often highly valued, shareholders may not earn their dividends since the supposed earnings are committed in fixed assets. This therefore contributes to the need to have adequate information on purchase and sale of assets. Other investors need information on non-current assets with a view of determining whether to buy, hold, or sell their shares. In order to determine if a company uses debt or equity to finance company’s assets, debt-equity ratio is applied. This is obtained by dividing total liabilities by the total assets (Scott, 2000). Total assets contain both non-current and current assets. A situation that gives a ratio of less than one implies that the assets are financed mainly by the use of equity. Conversely, a ratio that is greater than one means that the company finances the assets using the debt. Under this scenario, the company is said to be highly geared prompting creditors to demand their dues. Lenders are also concerned whether their loan will be paid back given that the company is highly geared. Furthermore, investors tend to shy away from highly geared company due to inability of the company to pay dividends. In the case of Sainsbury, total assets and total liabilities amount to £12,340M and £ 5,629M respectively. Debt equity ratio is therefore calculated as follows: It can be concluded that Sainsbury finances its assets, both current and non-current, through the equity and not debt since the ratio of 0.5438 is less than one. Apart from indicating that the company is not highly geared, it evaluates performance of management i.e. efficiency Sainsbury is very efficient in the use of company assets. Another important ratio is fixed asset turnover, which explains the productivity of property, plant, and equipment in earning revenue and turnover. If the turnover is high, it means that the company is efficient in utilizing fixed assets. Sainsbury’s fixed asset turnover is as follows: For 2012: For 2011: Although by a small margin, Sainsbury was more efficient in utilizing plant, property, and equipment in 2011 as compared to 2012. This is because fixed asset turnover is higher in 2011 compared with 2012. The other pertinent user of information on non-current assets is the customer. This individual is concerned with continuity of business into the near future. A business that has sold off its non-current assets may not continue into the future since the assets that are supposed to generate incomes have been sold. Sainsbury’s balance sheet indicates that the company has assets valued at £9,329 million as of 19 March 2012 (Sainsbury, 2012, p. 70). This informs customers that the company will exist to 2013 and should continue trusting the company to provide services. This situation applies to suppliers. Financial statement of Sainsbury outlines non-current assets such as fixtures and equipment in addition to how they have been measured. As an example, Sainsbury has provided for depreciation and impairment. The cost of Land and building in 2012 was £ 50M while accumulated depreciation and impairment was £24M. In the case of fixtures and equipments, cost of £15M and accumulated depreciation of £7M were taken into account. The sole objective of these processes is to give a true and fair view of the company so that users of financial statement can make informed decision. Conclusion This paper discussed Sainsbury in terms of presentation of non-current assets in financial statement in line with international accounting standards. IAS outlines how a publicly traded company like Sainsbury should present its financial statement. It emerged from the study of Sainsbury that recognition, measurement, and disclosure for most non-current assets follow guidelines provided by IAS. Fixtures and equipment were measured using cost less depreciation and impairment. However, the approach used by the company in measuring plant and building was cost less depreciation, which is against IAS 16 provision that assets whose lives cannot be determined with certainty to be measured using fair value system. The essay also discussed ability of information provided in financial statement on non-current assets satisfies various needs of users of financial statements. Balance sheet, income statement, cash flow statement, statement of change in equity and other financial statements are used in combination to provide sufficient information for decision making. Reference List Abdul-Shukor, Z, Muhd-Kamil, I, Jagjit, K, & Md-Nor, H 2008, ‘The Value Relevance of Intangibles Non-Current Assets in Different Economic Conditions’, International Review of Business Research Papers, vol. 4, no. , pp. 316-337. IASB 2001, Framework for the Preparation and Presentation of Financial Statements, viewed 21 November 2012, http://www.tim.ethz.ch/education/courses/courses_fs_2009/course_copfi_fs_200 9/IFRS_Framework.pdf. IASB 2007, International Accounting Standard 1: Presentation of Financial Statements, viewed 21 November 2012, http://dipifr.info/lib_files/standards/eng/eng_ifrs_010109/IAS01.pdf International Accounting Standards Committee Foundation and International Accounting Standards Board (eds) 2007, A Guide through International Financial Reporting Standards (IFRSs), Kluwer, London. Sainsbury 2012, J Sainsbury plc Annual Report and Financial Statements 2012, viewed 21 November 2012, http://www.j- sainsbury.co.uk/media/649393/j_sainsbury_ara_2012.pdf. Scott, W. R 2000, Financial accounting theory, 2nd edn, Prentice-Hall Canada Inc, Ontario. Read More