Financial Year of Tesco - Term Paper Example

 Tesco is one the largest retailers in UK having turnover of more than 30 billion pounds. The company is following international accounting standards while formulating its financial statements and follow a very developed and adequate corporate governance code Table of Contents Introduction 2 The value of segmental information 3 Key Ratios of the group 4 Corporate Governance Issues 4 Introduction As a part of my assignment, I am choosing the Tesco as my subject company with annual financial year of 2005. Tesco is a UK based retail chain serving both foods based and non food based products to the customers across the UK and other parts of the world. Tesco has more than 250,000 employees with much focused customer strategy. The year under review for this assignment is 2005. During the year 2005, Tesco has been able to generate a revenue target of 37.070 Billion pounds.(www.tescocorporate.com). The reason that we have chosen such a high turnover company is the fact that because of its size and significance in the UK economy, we believe its accounting policies and practices will reflect it therefore we have chosen this. Adequacy of accounting Policies adapted Accounting standards require that they should be consistently applied and practiced. (Deliotte, 2008). Accounting Policies adapted by Tesco are according to the both international and national standards of accounting prevalent at the time. Tesco has prepared its accounting statements on Historical cost convention however there are some changes with respect to the Transitional disclosure requirements under FRS 17. Revenue recognitiation policy is as per the standards and whereas the stocks are valued at lowers of the cost or net realizable value. Fixed assets are recognized at the cost with depreciation being recorded at the straight line basis with clear segmentation of depreciation rates. Goodwill is amortized and capitalized according to the prevalent standards whereas fixed assets and goodwill are also under review for impairment under FRS 11. On the whole it can easily be assumed that the accounting policies adapted by the Tesco are adequate and according to the prevalent international accounting standards. The value of segmental information Segment reporting is one of the important accounting information for the investors especially within the context of international businesses. The increasing trends of businesses to have segments working all over the world and even within the country require that the information shall be contained in the financial statements according to the prevalent accounting standards. The value the segmental reporting carries to the shareholders is very important because it provide investors the necessary look into the performance of the various segments of the company. Since the company is a collection of various departments and segments and a synergic coherence of these segments creates success for the firm therefore the information regarding the segments is very critical to the overall value of the firm to the investors. Since, Tesco has the presence in Europe and Asia therefore segment reporting of these two allied geographical location is very important to the investors. Segment reporting and its quality also protect the investors and reduce the information symmetry between the directors and the shareholders of the firm. Good corporate governance engenders good financial reporting, which results in the production of efficient segmental reports. This in turn facilitates good governance. Quality segment reporting protects investors and inculcates confidence in the company's performance by overseeing and assessing management's stewardship. Segmental disclosures are regarded as one of the most useful revelations of financial reporting. Key Ratios of the group Total shareholder return has been increased by more than 100% and have successfully beaten the FTSE with Return on capital employed being reported at 11.5%. Dividend per share has been 7.56p whereas the diluted earnings per share have been reported at 17.50p. Company recorded an operating profit margin of 5.2% whereas net profit margin is 3.58%. Tesco has an interest coverage of 11.464 times which is one of its strongest indicators of liquidity and solvency. Tesco’s current ratio is 1.32 times whereas working capital is also healthy. Corporate Governance Issues The corporate governance report has broadly discussed various areas of importance. To start with the , Corporate governance report mentions the directors report on the corporate governance which give directors’ review of the present and future outlook of the Tesco as a whole group having such diverse presence in the world markets. Apart from that the most important issue which it discusses is that of the board composition and independence besides discussing the board processes which outline as to how the board at the Tesco work and how its members function in their collective as well as individual roles. The report further went on to discuss that the board has delegated its powers to the executive committee for determining and implementing strategic plan for managing the whole group. The corporate governance review also clearly mentions the board responsibilities and how the board behaves according to its independence. Apart from other committees, corporate governance review outlines various other committees including the audit committee and nominations committee. The audit committee’s primary responsibilities are to review the financial statements, to review the internal control systems including risk management, to review the internal audit program, to consider the appointment of the external auditors besides maintaining their own independence to review the committee’s effectiveness. It has also being reported that the audit committee’s terms of reference are reviewed every year and setting the frequency of meeting of the audit committee as in the year under review, the committee has met for the five times. On the whole corporate governance review outlines in clear and concise way all the relevant information required to better inform the investors about the affairs of the company. Significance of audit report to the investors Since the emergence of the modern corporate structure, it has become important that the shareholders and the investors must have adequate information about the affairs of the company so that they can make better and more informed decisions. Since the ownership and management of the company are two different realities and that the managers work as custodians of the shareholders therefore it is expected that the managers must provide true information about the affairs of the company to the shareholders and investors. Because of agency cost arising due to the conflict of interest between the shareholders and the managers, it has become more important and critical that the information provided by the managers through financial statements are correct and according to the laid down criterion. It is therefore has become important that an independent and third party entity must certify that all the financial matters being carried out in the company were for the purpose of the company and that all the funds have been utilized for the purpose of the company. It is in this perspective that the audit reports are of significant importance for the investors as they are being certified by professionals having better understanding of the rules and procedures to determine whether the state of the affairs presented in the financial statement are true or not. References Tesco. (2005). Annual Review and summary financial statements. Available: http://www.tescocorporate.com/annualreview05/u/u1.html. Last accessed 27 March 2008. Deliotte. (2008). IAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS. Available: http://www.iasplus.com/standard/ias08.htm. Last accessed 27 March 2008 Read More