Mark and Spencer's Case
Max van Egmond 10001618
Leon Hogenbirk 10000761
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Marks and Spencer’s accounting choices
Question 1
Exhibits 1 and 2 report the income statements and excerpts from the notes to Marks and Spencer’s financial statement for the fiscal years ending between March 31, 2005 and March 31, 2009. Critically analyze M&S’s accounting choices. What choices may have helped the company to overstate its net profits between 2005 and 2009?
* M&S recognize many software development costs as intangible assets. In fact they recognize all costs related to software costs. This includes direct cost of material and services, payroll related costs for employees who are directly associated with the project. This may help M&S overstate its profits because normally only the direct costs associated with the software are recognized as an asset. The payroll costs for employees should not be considered to be an asset but as direct costs and should immediately reduce profits of M&S. Because this isn’t done, profits can be overstated. This is reflected by the large increase in computer software under development which was 5.6 million in 2005/2004 and was 178.8 million in 2009/2008. This is a stunning increase of 3192%. Besides there isn’t any amortization of the computer under software development and is only subjected to impairment. * Another thing which should be considered when reading the report is that there is a large amount of goodwill which may lead to overstatement of assets. In those five years there isn’t any impairment loss recognized or depreciation on that goodwill. Goodwill should be every year be subjected to impairment and it’s unlikely to remain constant over five years. This may lead to overstatement of assets. Warning signs of delayed write-downs on non-current assets can be a declining non-asset turnover or a declining return on assets below weighted average cost of capital. * Another
Leon Hogenbirk 10000761
-------------------------------------------------
Marks and Spencer’s accounting choices
Question 1
Exhibits 1 and 2 report the income statements and excerpts from the notes to Marks and Spencer’s financial statement for the fiscal years ending between March 31, 2005 and March 31, 2009. Critically analyze M&S’s accounting choices. What choices may have helped the company to overstate its net profits between 2005 and 2009?
* M&S recognize many software development costs as intangible assets. In fact they recognize all costs related to software costs. This includes direct cost of material and services, payroll related costs for employees who are directly associated with the project. This may help M&S overstate its profits because normally only the direct costs associated with the software are recognized as an asset. The payroll costs for employees should not be considered to be an asset but as direct costs and should immediately reduce profits of M&S. Because this isn’t done, profits can be overstated. This is reflected by the large increase in computer software under development which was 5.6 million in 2005/2004 and was 178.8 million in 2009/2008. This is a stunning increase of 3192%. Besides there isn’t any amortization of the computer under software development and is only subjected to impairment. * Another thing which should be considered when reading the report is that there is a large amount of goodwill which may lead to overstatement of assets. In those five years there isn’t any impairment loss recognized or depreciation on that goodwill. Goodwill should be every year be subjected to impairment and it’s unlikely to remain constant over five years. This may lead to overstatement of assets. Warning signs of delayed write-downs on non-current assets can be a declining non-asset turnover or a declining return on assets below weighted average cost of capital. * Another