Marks and Spencer Analysis - Coursework Example

?Marks & Spencer: Introduction Marks & Spencer came into existence on 28th September 1884 (Corporate, web). Aggregately, operating with more than 600UK stores, and serving more than 21 million customers each week, M&S has employed more than 75,000 people in more than 41 countries. Also, the sale of food accounts for 51% and 49% of remaining revenue comes from the sale of clothing and home products. Investment in subsidiary and associated companies are accounted for in the non-current assets portion of statement of financial position. In the consolidated statement of financial position of M&S, the company have many subsidiaries or associate companies. However, when the consolidated cash flows are analysed, they reflect ‘acquisition of subsidiaries’ amounting to 5.4 million pounds in 2010. Operating segments-IFRS 8 Marks & Spencer Group Plc adopted International Financial Reporting Standard (IFRS) 8- operating segments on 29 March 2009. This Standard requires the internal reporting should be used as a base to report the performance of operating segments of an entity. The Group has reshaped its operating segments as UK and International and their performance is reviewed by the executive directors. On the basis of review, the chief executives ascertain the amount of the further resources. The UK segment comprises of the UK franchise operations and UK retail business. The International segment operates in the Republic of Ireland, Asia and Europe, together with international franchise operations. In the year of 2009 and 2010, the Group made revenue of 8164.3 and 8567.9 billion pounds from UK operations respectively, and from the International segment, the Group posted 897.8 and 968.7 billion pounds in the year 2009 and 2010 respectively. Analysis The Group has shown less attractive financial performance. The above financial information suggests that the company earns more than 90% its revenue from its UK segment and the remaining comes from the International segment. Aggregately, much of the financial performance can be evaluated from the UK segment. In comparing the UK segment revenue of 2009 and 2010, the aggregate addition is around 403.6 (8567.9-8164.3), which is 4.94%. Also, there are no attractive figures of 2010, highlighting a stable growth in UK clothing and footwear. In terms of volume market share, only 11.2% in 2010 and the same figure was displayed in the year 2009. Furthermore, in terms of value market share, the growth percentage of 2010 is 11.0% and 10.7% in the year 2009. Without any doubt, such growth figures do not satisfy the current shareholders, nor could they attract the potential shareholders. The unattractive figures are also reported in UK market share food, in 2010 M&S posted mere 3.8 % in comparison with 3.9% in the year 2009. Instead of showing growth, in the UK market share of food segment, M&S has decreased and market share is slightly down (Kantar world panel, web).This means in the year of 2010, the company has only shown such a minimum level of revenue growth. Additionally, from the International segment the aggregate growth 70.9(968.7-897.8), which is 7.89%. Even this growth rate is not as attractive as it should be. Goodwill-impairment The Group does not amortise goodwill. However, it ensures that each year goodwill is tested for the purpose of impairment with the recoverable amount. And the recoverable amount is calculated from value in use. The Group uses the discount rate, changes in income and costs and growth rates as the key assumptions for the value in use calculations. Additionally, the Group prepares forecasts of discounted cash flows. They are prepared with the use of previous financial performance and predications for future developments in market for a period of three years. Cash flow occurring beyond this time period; are assessed and extrapolated with the use of a growth rate of 2% on the assumption that it must not increase more than the long-term average growth rate for the Group’s retail businesses. However, the Group owns certain brands and they are subject to amortisation on a straight-line basis over a period of 15 years. Analysis and comments Some reasons may validate non-amortisation of goodwill by the Group. The goodwill is intangible non-current asset. Being intangible, it is not easy to calculate and amortise the goodwill. However, it can be evaluated and measured successfully by some businesses, especially those who operate in a particular industry or segment. As a result, the process of goodwill calculation and amortisation can easily be carried out in comparison with such companies which operate more than one industry. M&S has diverse investment and operate in multiple but varied industries-food, clothing and home products, not only in UK but globally as well. This adds complexity in measuring and evaluating the goodwill amortisation and measurement with a reliable estimates and figures. Financial instruments Financial instruments have become complex (IASB.org). The IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instrument: Recognition and Measurement has added to this complexity. Financial instruments are accounted for in the financial statements when an entity becomes a party to contractual provisions of the instrument. The examples are trade receivable, investments and other financial assets, bank borrowings, loan notes, trade receivables and equity instruments. Additionally, to manage the financial risks, the Group fundamentally uses interest rate swaps and forward foreign currency contracts. Basically, financial instruments are accounted for at the fair value on the trade date and at the balance sheet they are tested for its fair reflection at the balance sheet. And, the resultant loss or gain recognition method is based on whether the derivative is classified as a hedging instrument and the type of the transaction being hedged. Hedge accounting and conditions The Group uses hedge accounting subject to the following conditions. First, formal documentation and designation at inception of the hedging must be carried out along with details of risk management objective and strategy for undertaking the hedge. Second, it is expected that the hedge is to be highly effective in obtaining offsetting changes in cash flows or fair value relating to the hedged risk. Third, a highly probable forecast transaction must be there in order to satisfy the needs of cash flow hedge. Fourth, the effectiveness of the hedge must not immeasurable but effectively and reliably measurable. Fifth, the hedge is measured on the assumption of ongoing basis and expected to be highly effective throughout its tenure. These conditions are essential for cash flow hedges, fair value hedges and net investment hedges. Changes in the fair value of financial instruments must be appropriately reflected in the financial statements. Such financial instruments that are effective and designated as hedges of future cash flows are accounted for in comprehensive income directly and the presence of ineffective portion in the financial instrument is immediately accounted for in the income statement. Additionally, fair value hedges are also accounted for. For example, for a hedge subject to exposure to changes in the fair value, the hedged item is accordingly adjusted for those changes which are associated with the risk being hedged with the related entry in profit or loss. And gains or losses appeared from the re-measurement of derivatives, are accounted in profit or loss. Additionally, any such changes in the fair value of financial instruments that are unable to qualify for hedge accounting, are accounted for in the income statement as they arise. Also, the Group discounts hedge accounting as soon as a hedging instrument matures or is sold off or, exercised or terminated. Furthermore, the Group has no policy to use derivatives to hedge income statement translation exposure. Comments The Group looks more investing in current financial assets than non-current financial assets. In the Group’s consolidated cash flow statement, the group has not made any investment in the non-current financial assets in 2010; in 2009, it has made 4.4million pounds. However, in the current financial assets, the Group has made 1.1 million pounds investments in the year of 2009; and in 2010, this investment area observes more investment reaching at the level of 118.3 million pounds. This highlights two points; the Group has prudent policy towards the non-current assets due to the negative role played by hedge funds and other derivatives in the recent global financial crisis in 2007. At the same time, the Group seems taking less risky financial asset investment in the year of 2010 by heavily investing in the short term current financial assets. Post-employment benefits The Group has installed comprehensive arrangements for its UK employees through the Marks & Spencer UK Pension Scheme (M&S, 2010). It is identified as a defined benefit section, under this arrangement, only those who were employed before the date of 1 April 2002, would be entitled for such scheme. However, new members of the Group will be compensated with a defined contribution section applicable from the date of 1 April 2003. The defined benefit section is based on a final salary basis and at the end of the year some 15, 000 active members, 56,000 deferred members and 47,000 pensioners come within this scheme. At the year end, the defined contribution section had 8,000 active and 1,000 deferred members. It has comprehensive scheme for pension and defined benefit obligation towards its retired employees. Such scheme is based on certain assumptions such as, the discount rate, inflation rate, salary growth, mortality and expected return on assets on scheme. The Group has adopted demographic assumptions on 31 March 2009. Among them, the most important one is the post-retirement mortality assumptions are carried out with the analysis of the trends of the pensioner mortality. Financial assumptions-UK Defined Benefit Pension Scheme An actuary carries out the actuarial valuation of the UK Defined Benefit Pension Scheme at 31 March 2009. And a deficit of 1.3 billion pounds appeared. The difference between the valuation and funding plan is predicated to be filled by the investment returns on the existing assets of the pension scheme. This valuation is carried out under the requirements of International Accounting Standard (IAS) 19- Retirement Benefits. Determination of expected rate of return on scheme assets The aggregate expected return on assets assumption is based on the weighted average of the expected average of the expected returns from each of the main asset classes. The expected return is based on an aggregation of historical performance analysis, the forward-looking views of financial markets and the opinions of the investment companies. Additionally, the Group also considers expected rate of return to be available for the purpose of re-investment. Conclusion-usefulness and quality of disclosure The framework for the preparation and presentation of financial statement, provided by International Accounting Standards Board (IASB), is to provide conceptual underpinnings for the IFRS (Corporate reporting, 2009). One of the fundamental objectives of the conceptual framework is to assist and provide a basis for the formulations of IFRS. For shareholders, such disclosure is evidence what the directors and other management staff are saying about the aggregate performance of a company. Additionally, the audited financial statements further validate the real and practical financial condition of the company. And, on the basis of published financial statements, the shareholders become able to make up their mind towards their investments in the company. if the company has shown a healthy financial position and performance in the previous year, and they believe that the depicted financial performance trend is heading toward more growth in earnings per share, they avoid disinvesting instead they prefer to add more investment so that they can earn more better and attractive returns from the financial health and performance of the company. The disinvestment decisions would be made by the shareholders if the company is not financially vibrant and healthy. As far as M&S is concerned, the company seems to be less financially attractive and stable. The revenue growth percentage and profit after tax are not as growing as they should be. For example, in the year of 2009, the Group posted profit for the year is 506.8million pounds and; in 2010, it is 523million pounds- total profit growth-16.2million pounds. In terms of percentage, it would be 3.19% (16.2/506.8million pounds). Additionally, the consolidated statement of financial position has almost the same trend. Such as, in 2009, the Group showed total assets 7,258.1million pounds; in 2010, it posted 7,153.2million pounds. The aggregate reduction in total assets is 104.9 (7258.1-7153.2). This hallmarks that the Group’s aggregate performance is less financially attractive. References 1. Corporate Reporting, 2009,’ Corporate reporting ACCA textbook,’ Berkshire; Kaplan. 2. Marks & Spencer, 2010, Annual financial reports, [Available at http://annualreport.marksandspencer.com/] [ Accessed on 23 April, 2011] 3. Marks and Spencer, corporate history, [Available http://corporate.marksandspencer.com/HTML/index.html ][ Accessed on 23 April, 2011] 4. International Accounting standards Board, 2006, ‘financial instruments,’[ available at http://www.iasb.org/nr/rdonlyres/1d416a93-df17-4f43-b49b-c687c658f5df/0/financialinstrumentslongtermobjectives.pdf] [Accessed on 23 April, 2011] 5. Analysis on annual financial reports, 2010. [Available at: http://annualreport.marksandspencer.com/overview/performance-against-strategy.aspx] [Accessed on 28 April, 2011]. Read More