Introduction

            Tesco and Morrisons adopted International Financial Reporting Standards (IFRS) and its policies set forth in International Accounting Standards (IAS) on their year-end 2006 financial performance for the first time (Tesco 2006 p. 46; Morrisons 2006 p. 8).  This is a very interesting development on the part of the two companies as they situate their respective FS side-by-side IAS.  Due to this, they can now be referred as few firms that make and issue fair presentation regarding their FS as set forth in IAS 1 (IAS Plus 2006).  This paper will examine this reporting shift on the matters of how much are their compliance and analyze how it affects that ability of each company’s FS as well as IAS provisions to provide useful financial information to a wide range of users and stakeholders which have business and other relations with each company. 

Importance of FS

            Financial statements (FS) provides an overview on how managerial decision-making drives an entity to attainment of each stakeholder’s goals.  With such information, stakeholders will be able to execute economic decisions in accordance to what FS indicate and its implications to stakeholder’s future relationship with the entity.  Aside from being a decision-making and managerial-monitoring tool, FS are also used to interpret contracts or agreements in which the performance or position of an entity is of utmost concern (WSU 2006).  Perhaps, a credit agency or a certain regulatory body closely examines the entity and appraise it based on an authentic FS.  As observed, the presence of FS implicates indefinite number of advantages not only for a firm but also for the whole business community and public at large.     

Level of Compliance between Tesco and Morrisons

            In terms of format, consolidated income statement of Tesco complies more diligently with IAS 1 (IAS Plus 2006) compared against Morrisons.  The latter states turnover instead of revenues, raw materials and consumables instead of cost of sales and did not classify the profit (loss) for the period according to equity holders of the parent and minority interests (p. 38).  In SORIE, Morrisons (p. 38) disclosed very little accounts while Tesco (p. 43) completed the requirements.  In addition, the former located profit for the year in the beginning of the SORIE.  This can be primarily the evidence that the former really did not have major concerns regarding IFRS shift (p. 8) but nonetheless affects how stakeholders view its FS.

           With regards to balance sheet, both companies have the same level of compliance with IAS 1.  The two companies exemplified compliance with its structure having split accounts (current/ non-current), presentation of liquidity (net current assets/ liabilities) and having a new account such as “assets/ liabilities held for sales” (IAS Plus 2006). However, the difference is in the signatories that certify the authenticity of their respective balance sheets.  In the required format (IAS Plus 2006), at least one Director of the company should have the signature reflected but Morrisons failed to comply with this as it only have as signatories its CEO and finance officer (p. 39).  In terms of cash flows, both companies complied diligently.  Back to income statement, it is noticeable that Tesco did not provide depreciation expense while Morrisons reflected this.  The former showed this on the “notes” but its use of functional-form should have at least minimum accounts relating to depreciation, amortization and staff costs on the face of income statement as stated in IAS 1 (IAS Plus 2006).   

The most noticeable of all in terms of format is that Morrisons situated accounting policies as a prelude to numerical figures of FS (pp. 35-37).  This includes the basis for collating, analyzing and computing FS accounts and other consolidated figures.  Although may find its merit as an good indicator that users can rely at the start of FS inspection, this format is not what is required by IAS 1 as well as IAS 39 (IAS Plus 2006).  Morrisons also presented their FS with figures showing the 2005 and 2006 financial results of the company accounting and not accounting for Safeway Integration which is said to be its biggest corporate move (pp. 1-2).  On the part of Tesco, despite its continued growth in the UK, did not present its FS this way rather in consolidation.

Especially the need to cross-reference them to appropriate accounts (IAS Plus 2006), notes are very useful in disclosing information that may not fit in the face of certain consolidated FS.  Both companies use notes all throughout their presentations.  There is also no account such as “extra ordinary items in the income statements” which is prohibited under IAS 1.  Morrisons did not follow the suggested format for notes that they should be non-fragmentized (IAS Plus 2006).  The revenue notes of Morrisons reflected the face amount of revenues in the income statement (p. 41) while Tesco reflected its result for the year (p. 53) with regards to its continuing operations.  This disclosure stance indicates how Tesco would hinder information pertaining to the attributes of its revenues without data regarding fuel, VAT and third party shares which is possessed by Morrisons.

Both companies provide comparative data for 2005 and 2006 performance including the time-frame in which they are accounted for (Tesco pp. 42-45; Morrisons pp. 38-40).  This is compliance regarding the reporting of any period changes in making FS (IAS Plus 2006).  In the contrary, Morrisons erred to apply IAS 32 and 39 to reflect changes in accounting policy with regards to equity holders and minority interest.  Since financial instruments are the tool of every competitive firm, it is hard to think that Morrisons do not have any.  In the part of Tesco (p. 100), its compliance to IAS 32 and 39 is tarnished of the absence of comparative figures as it is not required to first-time adopters (IAS Plus 2006).