Questions for students 1. Exhibits 1 and 2 report the income statements and excerpts from the notes to Marks and Spencer’s financial statements 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? 2. Exhibit 3 provides information about the liability that Marks and Spencer reclassified as equity. Do you agree with the decision to reclassify? What will be the effect of this decision on future financial statements?
Case analysis Question 1 Exhibit 2 shows various note disclosures related to Marks and Spencer’s accounting choices for non-current assets, leases and pensions. Following is a discussion of some of the accounting methods that Marks and Spencer may or could have used to boost accounting performance during the past years. Depreciation of fixtures, fittings & equipment
Marks and Spencer’s depreciation policy for fixture, fittings & equipment is to depreciate the assets to their residual values over a period of 3 to 25 years. Although it may be difficult to evaluate whether the company’s useful life estimates are reasonable without more detailed information, the analyst can evaluate trends in depreciation expenses as a percentage of assets’ initial cost.
TABELA
It appears that Marks & Spencer gradually reduced its depreciation expense (as a percent of average cost) from close to 8 percent in 2006 to close to 7 percent in 2008. Had the company used its 2006/2005 depreciation rate in 2008/2007, its operating profit would have been £36.2 million ([7.97% - 7.08%] x 4063.3), or 3 percent (36.2/1211.3), lower. Marks & Spencer increased its depreciation rate back to 8 percent in 2009/2008. However, this was only after analyst Tony Shiret had pointed to the gradual decrease in its research