Mark and Spencer's Case

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Max van Egmond 10001618 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…show more content…
The reclassification of the liability of Marks and Spencer’s as equity seems to be an accounting trick. Marks & Spencer’s group had a liability of 496.9 million to M&S UK pension scheme. Because they did not want that the liability influenced their financial reports in 2007, they sold it to a joint venture of M&S group with M&S UK Pension scheme. The partnership then leased the properties of the partnership to the M&S plc. This reclassifies the liability because of the operational lease as equity while M&S group still has to pay the money to the pension scheme. When the pension fund has not got the money to pay their employees, the group still has to bring up the money. The effect of this decision on future financial statements is that a large amount of liabilities is classified as equity which distorts the equity/liability ratio and is not an actual reflection of the financial health of the organization. The future financial statements will give off a wrong impression of the liabilities owed to the pension
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