International Financial Reporting Standards - Aldi, Tesco - Case Study Example

IFRS POLICIES By student’s name Course Code + Title Instructor Institution City, State Date Introduction IFRS is an acronym that stands for International Financial Reporting Standards. It is a set of standards of accounting that is slowly growing to encompass the whole world in the era of accounting supremacy by most firms in different economies. It seeks to analyze the public listed companies’ financial procedures and practices plus their statements. This paper will seek to analyze two firms from two different countries that either or not practice the IFRS policies. Most companies report their economic activity in the form of accounting standards. The Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) help the accountants, managers, information system designers, investors, and auditors in the processing, interpreting the economic state of the firm(Accountancy Age 2007). The current accounting standards are diluted by ambiguity. There are instances where different firms have been able to interpret available standards to fit within GAAP and at the same time deserve additional action by the Financial Accounting Standards Board (FASB). There is need for the use of accounting standards formalization like the use of pseudo code to address exactly the concerns. Feasibility then comes in as to what extent should the accounting standards be formalized. Some scholars support the decoupling of accounting standards setting from the setting of regulatory capital and reserves. Some on the other hand advocates for a government oversight organization to change the accounting standards in order to protect the stability of capital markets. The countries in question are the Australian country that adopts the policies of the IFRS and the Chinese economy that does not provide room for the application of the IFRS policies. China claims that these policies are meant to demean the developing economies financially and that they have in grounds to be practiced in their home country’s economy. Meanwhile the Australian economy boasts of development especially in the finance and banking sector where these policies are to be implemented accordingly. For purposes of this paper, I will discuss the firms in the grocery and the retailing sector and due to this I will handle Aldi chain of stores in Australia against the Tesco firm operating in the Chinese market(Accountancy Age 2006). Overview of the Firms Aldi Aldi is an international retailing grocery store that opened its first retailing store in the year 1913. This was after Albrecht decided to open the store in Germany to offer grocery services to the inhabitants of the city of Munchen. The store derives its name from the initial first letters of the founder’s name plus the first two letters of the term Discount. The most recent store was in Australia where the operations of the Company have grown to very unimaginable heights. The store is ranked 12th among the top 30 food retailers in the global arena. In the year 2000, Australia named it the top retailing Company. This case study aims at exploring the successes in the enterprise, its stores’ operations, corporate functions, international expansions and the distribution centers. Aldi is the Australian retailing Icon due to its very successful operational procedures in the country and in the world as a whole. It offers very low prices through a narrow or limited selection of goods within its market share. They manage this by buying in bulk and reduce their economies of scale. This is the Limited Assortment Concept. Aldi deals in about 700 to 1500 items as compared to its immediate competitor, Wal Mart that deals in 25,000 items. The stores give the focus onto the items under very frequent use and continue to spice up its selection with weekly special offers on items like DVD players and the house wares(Accountancy Age 2005). Tesco On the other hand, Tesco has over 492,000 employees, operating in it’s over 5,380 stores across the world. It has branches in over 14 countries across the globe. The firm came up in the mid 1920s. Jack Cohen is the founder of the company. He successfully released its first brand in the market in the year 1924. From that time, the company expanded to higher levels year after year. In the 1930s, Cohen opened headquarter in China increasing its customer coverage as well as rising the earnings. The organization earned a license as a private limited company in 1932. The company thrives through a strategy of buying the rival companies in the market. For instance, in 1950s, the company absorbed 70 Williams’ stores and 200 Harrow stores. The company realized high profit margins in the following years. The trend to absorb other companies and stores in the market continued when Tesco bought 97 Charles Philips stores in the 1960s. The expansion of the company saw its entering into the book of records as the largest store in the whole Europe. The company then progressed to open superstore and managed to benefit from perfect positioning of the products in the market when most customers preferred supermarkets to small shops. The company has since improved and expanded its business to opening a petrol station, internet-shopping services, offering car and house insurance, and mobile phone network. Financial Reporting and Regulatory Environments of the Firms Aldi In some cases, it offers 30% cheaper pricing than its immediate competitors do. This is because these stores operate in a very efficient manner. Efficiency refers to the link between outputs and inputs. Aldi thus, operates efficiently by reducing their costs in all sectors of the business. The main areas where Aldi reduces its costs of operation include aspects of saving time, effort, energy and space. This helps the firm to run its business around the general principles of lean thinking. Aldi operates on a no nonsense system of approach to its running of the business. As compared to other retailers in the industry who offer their customers elaborate displays, promotions and additional services, Aldi operates on its core value that is to ‘provide value and quality to our customers by being fair and efficient in all we do’.All activities of Aldi are towards giving their customers the value for their money. Aldi ploughs back the profits back into the business and thus used in meeting the business objectives for growth (Accountancy Age 2004). Efficiency cannot be in a short-term period, but has to be along term process attained through lean and feasible thinking. This helps the firm to meet its business objectives. This helps the fir in developing an ambitious investment program with new properties and suppliers. It also helps in the provision of benefits to the employees. They use the no frills policy or strategy to help them in cost saving program. They eliminate exclusively and virtually any extras. They have no check cashing, fancy displays, baggers or programs relayed to customers’ savings. The customers shop out of open displays and these displays are very easy to replenish and needs very limited labor (Alliance UniChem 2010). This is by the use of a system of cart rental. This system requires the customers to put a coin into their grocery cart. When the cart returns, then the customer gets back the coin. Since every customer must return the cart in order to get back their coin, it reduces the costs of labor, as there is no need to hire employees who retrieve the carts. They place their orders long in advance due to their large economies of scale. This brings in an enormous turnover rate. The entire store turns over its inventories in less than two weeks. This helps in maintaining very fresh products in its shelves (Cairns 2003). The stores receive daily shipments from much decentralized regional logistics. Since the centers are in constant contact with their vendors, it makes the firm to replenish its products in a very efficient manner. Aldi had been using the cross docking for over thirty years before Wal Mart began using the same service. It works very closely with its suppliers to help in the streamlining of the packaging process. Their savings from the efficient operating methods is then passed to the ultimate end user and thus the rock bottom prices to the customers. Tesco Tesco Company is believed to be among the best companies in the global arena especially in the financial sector. Tesco has achieved this mainly through its consistent source of funds and the liquidity ratio measurement method which it applies in the management of this wonderful enterprise.The historic development and achievement of Tesco Company clearly illustrates a successful firm. From the time of the company’s inception, it has continuously maintained commendable increment in profit and expansion. Despite the strong competition in the market, challenges in the economic field and inflation cases, the company has been able to survive. The financial assessment of the company reveals profound policies formulated and lay down with an aim of close monitoring and corrections of hiccups once realized. The proactive nature of management has enhanced low operational cost in managing risk (ASB 2009). The Lintner model of dividends suggests that in cases of smooth dividends, there must be another factor(s),which dilutes the fluctuations in the functioning profitability. In an illustration, dividend absorbs only a part of the income deviations; thus, the company has to establish ways of stabilizing the other part of fluctuations (EU 2002). Other theories that describe dividend policy include the dividend relevance theory and the dividend irrelevance theory. The relevance theory holds that there exists the best dividend policy that the company must implement to achieve the best value for the firm. The market price is to determine the value of the dividend. The dividend irrelevance theory illustrates that a company will pay only dividends from residual earnings. This implies after the crucial financial activities. Modigliani-Miller theory holds that the firm is the core determinant of dividend valueTherefore, more care and interest should be to the firm (Finn & Zoon 2004). The dividend irrelevant theory holds that dividend policy is irrelevant in cases where the firm is not facing taxes and bankruptcy cost. According to this theory, a company needs not to mind about the dividends since they influence insignificantly to the company capital structure. In respect to Tesco Company, the company values its dividends. The firmrenewed its dividend policyin 2012. The dividend policy, namely “increasing the firm’s dividend pay-outs broadly in relation with its income escalation rate” shows that Tesco’s dividends are considered relevant for prospect of the company. The company’s dividends have been on the rise showing proper management of the companies share market. Thus, the best theory that explains Tesco’s dividend policy is Bird-in-the-Hand Theory. The company is determined to repay the dividend in the line of the profit margins realized (Fuller 2005). Accounting Recognition, Measurement and Disclosure Practices Aldi Asset Management The standardization of the price means that the headquarters fix the price of products for all the international markets without taking into account the above named factors. The standardization of the price means that the headquarters fix the price of products for all the international markets without taking into account the above named factors. However, Aldi uses the adaptive strategy to maximize revenues because the economic situation sin different countries tend to raise the cost of doing business there. Thus, the price is set depending on the prevailing local conditions such as the exchange rate, inflation, regulation, and tariffs, which vary depending on the different laws. Aldi has used reference pricing, as people tend to compare the price of products to the price of commonly used commodities. Thus, if products are just around the reference item, it is more likely to sell. The other strategy applied is premium and psychological pricing where the price is set higher to portray the exclusiveness and superiority of products. The use of psychological pricing in setting the price to say $199 instead of $200 in 2012, the customers usually perceive that they bought the product at a lower price. This strategy is highly effective. Liabilities Measurement A company’s liability base consist of the precise combination of advertising, product promotions, direct marketing strategies, personal and corporate selling which the company employs to convincingly communicate buyer value and put up customer interactions. The promotion of the products may take the standardization approach or adaptive. The promotion of the products may take the standardization approach or adaptive. This means creating advertisements, which work in various countries and cultures, or designing different marketing tools for each country. Liabilities standardization procedures require using the same promotion around the globe in all the countries with no changes. This will minimize the cost of advertising, but designed to include the diverse international market differences. The factors that determine the best strategy include the local regulations, language, and the religion of the local residents, political affiliations, economic disparities, and the accessibility of the media used to the target audience. Translation of the advertisement into the local language depending on its flexibility or a new advert needed. The adapting promotion is relatively cost effective and entails only minor modifications because altering the promotion message is reasonably inexpensive strategy. Depreciation Policies The firm enjoys good provisions for the depreciation expenses due its ever changing demand for expansion to other parts of the Australian economy. In any company, the functioning and advancement depends on how efficient the firm manages its finances. The company is currently experiencing diverse development in trying to expand to other areas in the world. This has influenced the company’s business structure, organizational structure, company culture and significantly the financial status of the company. However, this has not stopped the company from maintaining the competitive nature. Successful management of the funds and the escalated profit margins are through sound financial management. The finance department in Aldi Company ensures that there is enough money for the expenses such as payment of debts, employees’ salaries and investment of cash for the continuity of the business advancement. The main source of funding at Aldi is the share capital. The growth in the financial status of the company evaluation is through studying the trend in earnings and the share price(Jopson2005). Tesco Asset Management In order for the business to continue thriving in the market, the following assets management recommendations may be crucial. The firm has to consider placing its products at an affordable price among the customers yet not losing its customers. This will ensure that the more customers will be able to purchase ample products rather than going for the optional cheaper products in the market. The company should consider developing strong risk assessment especially the liquidity-funding risk, credit risk, and interest rate risk. The company should also act swiftly in cases where there are financial losses. For instance, in 2012, the company recalled some of its products that were to incur loss. This is avoidablethrough detailed research of the market regarding the brands. The company domination in one region UK (75%) could be detrimental in cases of calamity. The company should diversify in other regions of the world in a great proportion. Credit risk is the risk associated with losses realized from default by financial associate groups. These groupsfall in the list of reliable credit counterparties. To avoid such risk in Tesco Company, the retails holdan update of credit rating for such counterparties. The retail branches use a framework policy to evaluate the possibility of lending money to the customer. This policy has well delineated limits and standards depending on the level of the customer’s lifecycle. The ability of the customer to repay the debt is before lending. The policy also has monitoring scheme that validates the affordability of the client to a loan, thus, avoiding bad debtors. Among the most used frameworks for the assessment of the credit process there are such as Fitch, Standard and Poor’s ratings (Meall 2003). Liabilities Measurement Tesco is faced with lots of issues concerning the liabilities measurement and management due to the large consumer based it is based on in one way or the other. Successful management of the funds and the escalated profit margins are through sound financial management. The finance department in Tesco Company ensures that there is enough money for the expenses such as payment of debts, employees’ salaries and investment of cash for the continuity of the business advancement. The main source of funding at Tesco is the share capital. The growth in the financial status of the company evaluation is through studying the trend in earnings and the share price. According to 2012 financial analysis, the customer loyalty was higher in Tesco Company than in that of its competitors. The customer loyalty scaled at 29.7 % for Tesco and 18.5% for the closest competitor (PwC 2005). Depreciation Policies The depreciation of the assets in the company takes different forms that pose a lot of risk to the firm. This form of risk arises in cases where liabilities and assets of an organization present different re-pricing dates. Tesco Company, especially the bank, counters this through minimizing the sensitivity of gross revenue to fluctuations in interest rates. The company uses Value at Risk to control interest risk, especially the short-term exposures. Success in the management of interest risk is due to the well-established policies in the company. The company operates under a policy of fixing interest rates minimum level of 40% of the realized and procrastinated debt interest expenditures. In 2010 financial year, the value of the debt at an established rate of interest was £6.2 billion. It was at 91% of the company’s total debt, leaving the other amount in floating rate form (PwC 2004). Barriers to Adoption of IFRS There are several factors or barriers that can hinder the smooth running of the IFRS procedure and process in one way or the other. A venture’s choice of the fund is through the availability and accessibility of sources of fund. The corporate lifecycle theory determines the level or the position that a company/organization holds. It will be very crucial in the selection of the fund to ensure that the organization’s future is secure. A stable company will mostly show cash rich report, but will be dealt with later on during the life cycle, when it reaches the aristocratic stage. This is actually the time when the company will reveal signs of aging. Organizations should avoid the reflection of aging since at this time the company may decline drastically (Reuters 2005). Modigliani and Miller theorem argues that an organizational value remains unaffected irrespective of the means of financing the company. However, the theory acknowledges that some factors must maintain. These factors include absence of taxes, bankruptcy costs, agency expenditures and asymmetric information, in addition to a state where, the company operates in an efficient market. This theory is also the capital irrelevance principle. The theorem has enhanced the use of advantage in the companies. Financial Statement Analysis is also referred to as the financial analysis. It is defined as the process of understanding the profitability and risk of a Company, business or project. Thus is attained through the analysis of report on the financial status of the company in question where in cases of this paper is the Aldi and Tesco Companies. These reports could be the annual or the quarterly reports especially in the case of the organizations. For cases of a country, it could possibly be the analysis of a period much longer like perhaps a decade or more. It consists of three major steps. These are the reformulation of the reported statements of finance, analysis and adjustments of measurement errors and finally the analysis if the financial ratios (Reuters 2006). Theoretical Benefits for both the Companies in Adopting IFRS Standards Financial Statement Reformulation The reformulation is done in respect to the income statement of the Company in question. Items are divided into either recurring or non recurring items. The recurring items are the normal items while the nonrecurring items are the special items. Therefore, earnings could be separated into core or transitory earnings. The notion brought about by this dealing is that the normal earnings are indeed more permanent as opposed to the transitory earnings and are thus much more relevant for prediction and the total valuation of the financial status of the company. The normal earnings are then regrouped into Net Operational Profits after Taxes (NOPAT) and Net Financial Costs (NFC). The balance sheet to the Company is then regrouped in an explemplary note into the Net Operating Assets (NOA) and Net Financial Debt and Equity (NFDA) (Smith 2005). Analysis and Adjustment of Measurement Errors This will question the eminence of the reported numbers in accounting books. These reporting could be bad or even noisy representations of the invested capital. The Return on Net Operating Assets (RNOA) with respect to NOA will be a very noisy measure to the profits underneath the Internal Rate of Return (IRR). R and D brings the expectations of such expenditures yielding future economic benefits which could mean that the R and D creates assets that could have been dealt with in the balance sheet. An adjustment method would involve the removal of the R and d expenditures from the statement of the income and place them directly into the balance sheet. This involves the annotation of the R and D capital promptly into the balance sheet. The reported numbers could as well be adjusted in cases where the analyst suspects mismanagement of earnings (Tricks 2005. 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ICAEW 2004; http://www.icaew.co.uk/viewer/index.cfm/AUB/TB2I_67022 ICAEW 2006; ‘Qualified audit reports and delayed financial statements seem inevitable in 2005 warns ICAEW’, 26 July 2004. Jopson, B. 2005; ‘IFRS changes securitization on continent’, Financial Times, February 22 2005 Meall, L2003.; ‘IFRS transition – Will your systems be ready?’, Accountancy, Oct 2003, Vol. 132. PwC 2005; ‘Ready or not: are you prepared for IFRS?’, January 2005 PwC 2004; ‘Ready for take-off?’, December 2004  Reuters 2005; ‘UK Royal & Sun says IFRS rules to reduce net assets’, 23 Feb 2005 Reuters 2006; ‘Tesco sees little impact from new accounting rule’, 25 Feb 2006. Smith, G 2005; Tesco plays down impact of new accounting rules, Financial Times, Feb 25 2005. Tricks, H.2005; ‘Impact on sectors shows plenty of differences’, Financial Times, Jan 04, 2005. Read More