Mark's and Spencer Accounting Choices

Financial Statement Analysis

Assignment 4 (Mid Term)  “Marks and Spencer’s Accounting Choices.”        

24th February 2015
Semester 2, Period 1

2014/2015

Dawid Lukaszuk (10966161)
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      Question 1

Exhibits 1 and 2 report the income statements and excerpts from the notes to Marks and Spencer’s finan- cial statements for the fiscal years ending between March 31, 2005 and March 31, 2009. Critically ana- lyze M&S’s accounting choices. What choices may have helped the company to overstate its net profits between 2005 and 2009?  

Studying the report one can find a huge amount of goodwill, which leads to overstatement of assets. It is interesting that there is no impairment loss or depreciation on that goodwill in the tables within the years that was recognized.

Goodwill should not stay constant within 5 years, and should be subjected to impairment.

One of the red flags could be the declining return on assets below weighted average of capital.

As one can read on pages 176/177 Marks and Spencer recognizes software development costs as intangible assets, so that all software related costs are costs.

Capitalized software costs include external direct costs of material and services, payroll and payroll-related costs for employees who are directly associated with the project.

Such actions increase profits. In normal case only direct costs associated with the software are recognized as asset (IAS 38).

Profits are overstated, because payroll costs for employees are considered to be an asset and not as direct costs. In this case it should decrease M&S’s profits.

Examining the table on page 177, one can observe a great increase of expenditures on computer- related development from 5.6 million in 2004/2005 to 178.8 million in 2008/2009, which is more than 31 times as much within only a few years. There is no depreciation or amortization on software development, and it’s only related to impairment.