Implications to Stakeholders and Users

Shareholders, Investors and Security Analysts

            The inability to disclose the share of parent and minority interests with regards to company’s assets and profits minimize the purpose of FS to provide the risks associated with an investment.  Investors are not informed on what level or percentage of those resources that will be attributed to them and from where will be their intended returns come from.  Specific figures (e.g. attributable to…) are necessary because they inform investors on how to evaluate the firm; namely, on its core operations or its minority interest in some partnerships.  However, with the ambiguity and absence of such information, investors will be hesitant to invest because performance indicators such as revenues, current assets and tax relief may not be reliable as the company may derive profits and induce investments from the capital/ secondary markets (e.g. derivative market). 

            The lack of comparative features of historical data also posts threat of inaccurate accounting which can lead to investor distrust.  This is also true even if the companies use regulatory excuses/ exemptions.  They maybe legally-rated entities but for very inquisitive and experienced investors this only makes these firms more risky investment destinations.  It can also imply managerial hesitance to disclose significant information and with using exemptions are able to minimize their job positions.  Steward is in question and this makes the entity yielding high amount of risks in the market without the same trade-off to expected returns especially when these speculations are true (Thomas 2002). 

            Notes is useful for investors as it can stimulate investment curiosity further and necessitates readers to diligently find the explanations which can be helpful (readers will be inquisitive) or otherwise (readers will complain).  In effect, the investment portfolio of very shareholder of an entity is analyzed using complete information.  Thus, scenario planning and several implications of “what if” can be brought into decision-making criteria.  In addition, similarity of FS formats of firms within an industry can be an incentive for investors to easily compare financial performance and position in relative basis.  In effect, this makes the idea that inability to use revenues rather turnover (although in its simplest form of error) can imply inconsistency within industry standards.

Managers and Employees

            For internal users of FS, the position of the management to induce excessive managerial judgment in making estimates or informing users about prior errors can be utilized in assessing leadership rather managerial capabilities of top-level management (Hitt, Hoskisson & Ireland 2003 pp. 382-390).  Co-managers and rank-in-file employees would be informed if unethical practice abounds top management and if there is a need to secure employment to other companies of defer stock options due to manipulation.  Also, using regulatory exemption to implement restatements can connote that management could be benefiting from the IFRS adoption without employees receiving the same benefits.  In effect, decision for additional remuneration due to use of regulatory exemptions can be envisioned from FS.  

Lenders and Other Suppliers

            When FS are certified by managers, it is a probable stance to take a defensive manipulation in order to obtain positive connotation regarding stewardship.  Due to this, lending investigators that can provide substantial loan could develop suspicion especially when top managers certified an FS records.  Without a representative from Board of Directors, it would mean that major shareholders are not consented and governance mechanisms are not in place.  Further, using too much managerial judgment in furnishing in FS can also serve as a back clash for credit rating agencies to reduce rating position because of inability to use international standards.  However, with organized FS suggesting clearly the liquidity and long-term prospect of a company, lending investors and suppliers will not hesitate to provide capital.  Such is potential because the entity’s numerical presentation is clear, explicit and impressive.  In the contrary, when the format is unusual, this may connote departure to standards or inconvenience to lenders which can deepen their perceived risks.       

Customers

            Major developments of a company are relevant to customers to measure how the products of entities had improved or what are its prospects.  Since Tesco and Morrisons are within a demanding industry of food and consumable retailing, customers want to be assured to the presence of food safety indicators like advancement in technology from related investments.  In effect, disclosing information about a huge investment (e.g. Morrison’s integration with Safeway) makes customer more loyal to a firm because it indicates that the firm’s assets is substantial and implies superiority in products.  On the contrary, if a firm cannot divulge such information, although growth is happening, customers will not change their company preference.   

Government Regulatory Agencies

            Stringent approach to accounting policies and standards is a tool for the government to measure the legitimacy of an entity with regards to its relationship with the public and environment (Deegan & Rankin 1996 p. 60).  As observed, the FS part of annual reports of the companies does not show social responsibilities like litigation matters, financial obligation to destroyed fauna or genetically-mutated products.  Although both have separate social and environmental reports, this scenario only proved the inability of IFRS (especially pertaining to IAS 1, 8, 32 and 39) to reflect corporate responsibility measures in financial accounts.  Regulatory authorities have to rely on separate reports without the knowing how those social/ environmental disclosures affect the overall being of a firm.  

Conclusion

            This paper has examined the shift to IFRS of Tesco and Morrisons and the shift’s impact to performance/ position reporting with regards to FS users.  It is found that even though a firm diligently follows international standards it alone does not constitute compliance to the information needs of the users.  For example, Tesco’s use of policy exemptions in order to mitigate disclosure efforts has caused stagnation of free-flowing FS that defeat managerial stewardship of the company.  It is also observable that the primary intention of FS is for positive imaging with reservation for government authorities.  This made the companies inclined to follow the basic and obvious tenets of IFRS while undermining the less stringent provisions (e.g. use of managerial judgment).  

            Companies cannot survive without profits and investments.  As a result, it is bound to serve shareholders, security analysts and lenders initially before anything else.  Government authorities are the second priority of FS but they are easily bypassed whenever majority of the companies in a country points out the inconsistency of international standards in national settings/ conditions.  In effect, what ultimately succeeds is the need for the company to survive.  This is very fundamental in the business sector.  After the needs of shareholders/ lenders and regulatory requirements are achieved, disclosures for customers, internal users and others will be provided.  Lastly, it is to be noted that survival of a company lays its ability to offer any social/ environmental responsibilities.  In effect, priority of capital suppliers is of utmost concern in making FS rather than basing it on some regulatory frameworks.

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).

 Both companies did not write in the face of balance sheet the number of authorized shares and their par value which in turn located in their notes (pp. 84-85; pp. 52-55).  In this aspect, Morrison complied not only in presenting such information but also the company somehow disclosed information regarding the rights and restrictions from the turnover of shares as stated in IAS 1.  For example, “the Group has yet to fair valued grants of the options from the acquisition of Safeway (p. 54)” which means that Morrisons wanted to simplify the decision-making of investors by offering its own analysis.  In a negative note, Tesco has several motions for buyback programs and share option schemes (p. 84) that undermining IAS 1 can cause investor distrust of its consequences.   

            The initial concern of IAS 8, that is the disclosure of any significant changes in accounting policy, is fulfilled by the two companies (p. 46; p. 8).  Further, Morrisons used before-Safeway integration and after-Safeway integration entities which are compliance with IAS 1 concerning separation of accounts (IAS Plus 2006).  Due to this, Tesco erred in adopting single-entity presentation for a consolidated FS which is heavily guided by managerial judgment.  IAS 8 allows managerial judgment to be applied in determining appropriate and practical accounting policy (IAS Plus 2006).  But this should be adopted with accounting policies in mind.  In the case of Tesco, although there is IAS 1 that prohibits consolidation, it opted to use managerial judgment without policy priority and thus erred in this respect. 

            Since the firm adopted IFRS officially only recently, it is a must for retrospection as set forth in IAS 8 for the purpose of comparative figures across years (IAS Plus 2006).  Retrospection means applying IFRS provisions to the earliest and most practical year (IAS Plus 2006).  However, the same IFRS provisions made companies to deter some comparative merits in their reports like applying IAS 32 and 39 which allows one year exemption (in the case of Tesco) and discharge of retrospection of financial instruments (in the case of Morrisons).  In this regard, Morrisons reflect the most comparable historical amounts between the two since it had retrospect as far as year ended 2004 while Tesco only retrospect on year end 2005.      

            In disclosing changes in accounting estimates, Tesco’s overuse of managerial judgment in accordance in withdrawing the use of available regulatory provisions disrupted its level of compliance.  IAS 8 merely provides managerial judgment as last resource for entities and not to use as strategic tool to raise individual goals (IAS Plus 2006).  On the part of Morrisons, they also dragged into the error of Tesco as there are no citations relating to IFRS (pp. 46-52) or other pronouncement regarding the framework used in establishing estimates.  This undermined the earlier upper hand of Morrisons when in comes to comparative historic performance as the estimates that primarily affects almost all significant entries (e.g. revenues, taxation, financing costs) are frame using managerial judgments (pp. 35-37). 

            Further, prior period errors are presented implicitly without each firm citing that there existed inability to conform to IFRS provisions in the past although regulations are already existing (IAS Plus 2006).  These implicit errors are presented in their respective notes (pp. 91-95; pp. 63-65).  As observed, both firms concerns their restatements in the year-ended 2005 figures as well as accounts pertaining to profits and changes in equity.  Morrison’s earlier admonition that IFRS adoption is not greatly affected their FS and their performance is misleading because transition to IFRS from UK GAAP resulted to a reduction in the bottom-line profit by £100M (p. 63).  The error is not only made implicit but rather false.  On the part of Tesco, the IFRS shift showed minimal effect.  Perhaps, this position of Morrisons is the cause of the company deflecting most of provisional exemptions and requirements apart from Tesco as shown by comparative compliance with IFRS provision in the “reconciliation to equity” (pp. 92-95; pp. 64-65).     

            In disclosing changes in accounting estimates, Tesco’s overuse of managerial judgment in accordance in withdrawing the use of available regulatory provisions disrupted its level of compliance.  IAS 8 merely provides managerial judgment as last resource for entities and not to use as strategic tool to raise individual goals (IAS Plus 2006).  On the part of Morrisons, they also dragged into the error of Tesco as there are no citations relating to IFRS (pp. 46-52) or other pronouncement regarding the framework used in establishing estimates.  This undermined the earlier upper hand of Morrisons when in comes to comparative historic performance as the estimates that primarily affects almost all significant entries (e.g. revenues, taxation, financing costs) are frame using managerial judgments (pp. 35-37). 

            Further, prior period errors are presented implicitly without each firm citing that there existed inability to conform to IFRS provisions in the past although regulations are already existing (IAS Plus 2006).  These implicit errors are presented in their respective notes (pp. 91-95; pp. 63-65).  As observed, both firms concerns their restatements in the year-ended 2005 figures as well as accounts pertaining to profits and changes in equity.  Morrison’s earlier admonition that IFRS adoption is not greatly affected their FS and their performance is misleading because transition to IFRS from UK GAAP resulted to a reduction in the bottom-line profit by £100M (p. 63).  The error is not only made implicit but rather false.  On the part of Tesco, the IFRS shift showed minimal effect.  Perhaps, this position of Morrisons is the cause of the company deflecting most of provisional exemptions and requirements apart from Tesco as shown by comparative compliance with IFRS provision in the “reconciliation to equity” (pp. 92-95; pp. 64-65).