J Sainsbury plc Reports: 2003-2006
A Brief Backgrounder
J. Sainsbury plc owns Sainsbury's Supermarkets (hereafter Sainsbury's), the U.K.'s third largest retailer after Tesco and Asda. For many years since it opened for business in 1869, Sainsbury's was the country's biggest supermarket, the undisputed market leader. A series of mis-steps allowed competitor Tesco to catch up in 1995. In 2003, Asda passed Sainsbury's, relegating the latter to third position where it stays. Sainsbury's is now playing catch up, regaining market share one percentage point at a time. A publicly listed corporation since 1973, the company is on the renewal trail as it attempts to regain its leading position in the industry. Using a combination of common management tools in a wide range of areas, from stocking its shelves full with items customers want to buy to executing on a complete revamp of its information technology and supply chain management systems, a new senior management team is revitalising the whole organisation from top to bottom. This brief history helps us analyse the period 2003 to 2006, during which Sainsbury's hit the dust with their first-ever revenues slump in history (in the year ended March 2005) and then as nimbly picked itself up and began staging a comeback. We can learn how they are doing by studying the company's annual reports which are the "official" snapshots of the whole corporation each year. Just like any other company at the mercy of its stakeholders (Freeman, 1984), Sainsbury's is expected to behave to satisfy everyone. First Question
Identify significant areas of the accounts for 2006 where judgment has been used in determining the appropriate accounting policy for the company (for example depreciation of fixed assets). Critically discuss how such judgments have materially affected the accounts in terms of valuation and profitability. There are several portions in Sainsbury's 2006 report indicating where judgment has been used to determine the appropriate accounting policies. Note 2 on Accounting Policies (Sainsbury's, 2006a, p. 56-59) is the second longest portion of the report's general section of Notes to the Financial Statements (p. 51-101), next to Note 42 which is on the financial reporting transition to IFRS (p. 91-98). From the long list of accounting policies, we note the following that in our opinion materially affected the accounts in terms of valuation and profitability:
The 2006 reports are the Group's and Company's first financial statements prepared under IFRS and therefore, IFRS 1 First-time Adoption of International Financial Reporting Standards' was applied. The last statements under UK Generally Accepted Accounting Principles ("UK GAAP") were for the 52 weeks to 26 March 2005. An explanation of the transition to IFRS is provided in Note 42. A comparison of the GAAP-based 2005 and IFRS-based 2005 reports showed that whilst non-current assets declined by almost £3 billion, total equity declined by only £33 million thanks to adjustments in net current liabilities of over £2.9 billion. This shows how numbers can surprisingly appear and vanish like magic.
Early adoption of the standard Amendment to IAS 19 Employee Benefits' is effective for annual periods beginning 1 January 2006, i.e. beginning 26 March 2006. However, Sainsbury's elected to early adopt this amendment and has applied the requirements of the amendment to the financial statements for the 52 weeks to 25 March 2006. This led to gross actuarial gains of £128 million (Note 42, p. 95), cutting the pension deficit from £672 million to only £375 million due to a deferred income tax asset. This allowed Sainsbury's to conveniently finance the pension fund and contribute towards improving employee motivation.
The treatment of Subsidiaries and Goodwill allowed Sainsbury's to manufacture current year profits growth from its sale of Shaw's in 2004 by recycling £123 million of the goodwill write down from...
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