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All public companies must prepare documents called financial statements. It is important for company operating in multiple countries to be able to establish financial statements that are understandable in all of the countries they operate in. Financial statement shows many different sections about the financial performance of a company and it is used for both internal and external purposes. For internal, management team or employee will use it for their own information or use it for the forecast planning so that they could set some target for the upcoming periods. External purposes would be mainly for users (bank, investor, public, government) who would like to invest into the company. Investors would always take a dig deep into the company's financial statement and analyze everything from the auditor's report in order to make their decision for this investment. Therefore, to be clearly inform to all international users and make the financial statements comparable to improve its own reliability, there is certain standards are to be follow and some general rule are being made by The International Accounting Standards Board (IASB) and the International Financial Reporting Standards (IFRS). Furthermore, managers could choose different accounting policies to use for avoiding any political costs and this will leads to an improvement to their operating performance bonus.
I have chosen Tesco as my company and I will be reviewing the accounting policies section of the financial statements and discuss the purpose of this section of the financial statements. This consolidated financial report has used Financial Reporting Standards (IFRS) and International Financial Reporting Interpretation Committee (IFRIC) to compose. Underneath this paragraph, I will be writing about the accounting policy and the information would be found from Tesco Annual report 2009 in "Notes to the Group Financial Statements" at pages 72-80.
The Group's financial statement includes Parent Company; all entities are managed by the Company and the Group interest in its share of joint ventures and associates. Joint venture is when the Groups hold an interest in a long term period and it is controlled by one or more ventures under a contractual agreement. The Group does not need to be recognise if its share of losses unless it has made any payment on behalf of the joint venture or associate. Any unrealized gains arising from transaction with joint ventures and associates are eliminated to the extent of the Group's interest in the entity.
IAS27: Consolidated financial statement
According to Tesco accounting policy notes, it has stated that IAS27 will be effective for annual periods beginning on 1st July 2009. Consolidated financial statement is the financial statement of a group which is presented as a single economic entity. This should be applied in the preparation and presentation for a group of entities under the control of a parent company. Also, it should show the extent to which the net assets of the group are attributable to a non-controlling interest. The advantages of using this IAS 27 standard is that it is easy for the user to decide the operating performance of the Group and manager could have spend lesser time on prepare the financial statement of the upcoming year. However, it is possible for some of the subsidiaries which operated badly and others operated well, this might leads to a good whole result at the end as it could cover the information about the future expansion of the company.
Tesco's assumption methods are correspond with the thought of IAS8, which deals with changes in accounting estimates and the correction of prior period errors. By having this standard, estimation will always be updated whenever the event occurs or the situation is changed. On the other hand, the changes got to be disclosed and explained in order to avoid managers making any creative figures in the statement.
Tesco's revenue consists of sales retailing and some financial services. It has excluded any relevant voucher (money-off coupons)/ offers (buy one get one free) and value-added tax. Revenue comes from sales and it has recognized when "significant risks and rewards of ownership have been delivered to the buyers". Financial services includes interest, fees and commission receivable in which the interest income rate is calculated by the most efficient methods and commission income are recognized when the service is provided.
Under the Accounting policy IAS 18, it stated that it should be measured "at the fair value of the consideration received or receivable". Tesco's revenue should also be considered only when the goods and any significant risks have been delivered. If this principle does not follow, manager could add on any unrecognizable sales to raise the revenue which would make the financial statement superior for the company. In the financial services, it could use interest rate method to adopt because initial instruments could possibly bring future cash flow and if it is not discounted which could leads the interest rate higher.
IAS 17 define lease as "an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time". It distinguishes between finance leases and operating leases and assigns a different accounting treatment for each different type of lease. A finance lease is when transfers virtually all the risks and rewards of ownership to the lessee. The purpose of this is to ignore any legal form of the arrangement but concentrates on the extent to which the risk and rewards that are normally associated with ownership either the lessor or the lessee.
According to Tesco financial statement IAS 17 Leases, it has an impact of annual uplifts in rent and rent-free periods. It decide the minimum fair value and present value of lease payment is taken into account and this amount is charged to the Group Income Statement in respect of operating lease costs and incentives are expected to raise significantly as the Group expands its International business. Tesco has accounted as receivable for the amount of net investment in the leases and that amount are held by the group which are viewed as financial charges and some assets are owned by the company at their fair value. IAS 17 'Leases' requires the total cost of a lease to be recognized on a straight-line basis over the term of the lease, irrespective of the actual timing of the cost. Due to the impact of this, Tesco in 2008/9 was an adverse charge of 27million pounds to the Group Income Statement after subtracting the impact of the straight-line treatment recognized as rental income within share of joint ventures and associates.
IAS29: Financial Instrument: Recognition and Measurement
IAS 32: Financial Instruments: Presentation
A financial instrument is a contract which gives rise to a financial asset for one entity and a financial liability for another. Financial instruments are dealt with in international standards IAS 32 and IAS 39.
The purpose of having IAS32 Financial Instruments Presentation is to establish principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. This standard adopts a matter over form approach and states that an equity instrument is the one which includes no contractual duty to deliver cash to another entity. The objective of IAS 39 Financial Instruments Recognition and Measurement is to recognition principles determine when a financial asset or liability should be shown in an entity's statement of financial position.
Trade receivable are recognized firstly of their fair value and any standard amortise cost is measured by an effective interest rate. Investment is also to be recognized at the fair value at the day they trade and all investment would be classified available for sale. Loans are calculated at their fair value after added their direct transaction cost and any impairment loan are renewed at each accounting date accordingly which are made accordingly to the environment and other risks. Finally the financial instrument is recognizing at their fair value which is determined of their market value. Furthermore, financial instruments held by the group are not used to trade, but it is for simply the products of trading such as any receivable. Situation is much simple to report as the group does not trade these instruments. Managers should only be considering the value of these instruments before their estimate fair value at the financial statement preparing period. Sometimes it is true for a manager to look over the accounting policy that might use these instruments to trade to make profit for the company in the future, but the probability is very low to judge whether manager will do so or have done so.
Under IAS 32 'Financial Instruments: Presentation', the net present value of the expected future payments are shown as a financial liability. At the end of period, the valuation of the liability is reassessed with any changes has recognized in the Group Income Statement within finance cost for the year. Under IAS 32 and IAS 39, the Group applies hedge accounting to its relationships when allowed under the rules of IAS 39. Sometimes the Group is unable to apply hedge accounting to the arrangements, but continues to enter into these arrangements as they provide reality or active management of the exchange rates and interest rates applicable to the Group. The Group believes these arrangements could remain effective and economically and commercially viable hedges despite the inability to apply hedge accounting.
In addition, at each period end, any gain or loss accruing on open contracts is recognised in the Group Income Statement for the period. This means that the Group Income Statement could charge highly volatile, whilst the resulting cash flows may not be as volatile.
IAS19: Employee Benefits
IAS19 Employee benefits are laid down accounting and expose the requirements in relation to all forms of benefits provided by employers to their employees. It is to prescribe the accounting and disclosure for employee benefits. This would underlying all of the detailed requirements of the Standard so that the cost of providing employee benefits should be recognized in these period in which the benefit is earned by the employee, rather than when it is paid or payable.
The reason behind of having IAS 19 is that it can provide different type of employment benefits to the employee. Short-term employee benefits are those falling due within 12 months of the end of period in which they are earned. They are recognized as an expense in that period. Expenses such as short-term holiday pay, profit-sharing payment or bonus payable within twelve months of the end of the period and some non-monetary benefits. In Post-employment benefits, it is mainly set out a retirement benefits which is consist largely pensions. A pension plan is dividing into defined contribution and benefit plans. In Tesco Company, bond yield rates vary over time which creates volatility in group income statement and balance sheet.
These effects would make the IAS 19 charge disproportionately higher and more volatile than the cash contributions. Similarly, within underlying profit we have included the 'normal' cash contributions for pensions but excluded the volatile element of IAS 19 to represent what the Group believes to be a fairer measure of the cost of providing post-employment benefits. Tesco PLC Pension Scheme as shown in the financial statement notes, it stated that at the date of the last actuarial valuation the actuarial deficit was 275million pounds. The market value of the schemes assets was 3,987million pounds and these assets represented 94% of the benefits that had accrued to members, after allowing for expected increases in earnings and pensions in payment.
IAS23: Borrowing Cost
IAS23 Borrowing Cost is to prescribe the accounting treatment of interest and other borrowing, especially for those which are incurred in connection with the acquisition of assets such as property, plant and equipment. All of the borrowing costs of Tesco Company are recognized as financial cost in the period in which they occur, and cost of financial liabilities is considered as cost of sales and calculated with effective interest rate method.
Tesco adopts one of the alternative choices given by IAS 23, as it is hard to determine the real use of qualifying assets or it might take a long period to decide this. Tesco has treats it in a real simple way by viewing them as financial cost. This way is simple to prepare, but on the other hand, it is hard for the expansion direction to access the use of qualifying assets.
IASB standard does not ensure that all accounting policies to be consistence although the standard is used to exclude any inconsistence of accounting policies are internally consistence. Many principles are hard to oblige in practice and sometimes it could provide some misleading opportunities for litigation. After mangers choose what kind of accounting policy to use, they got to show clear information in the financial statement so that the auditors or user has reasonable ground to believe and to make the financial statement looks the best of their interest. Besides in some cases, managers pursue the company interest and they may choose some accounting policies which would help them to have a good review on the accounting reports and a strong operating performance in the financial statements.