Marks and Spencer Case Essay

796 Words Feb 15th, 2015 4 Pages
Financial Statement Analysis
Assignment 4 “Mark and Spencer’s Accounting Choices ” 20 February 2015
Semester 2, Period 1
2014/2015
Samantha Jay (10962670), Tutorial Group 1
Michelle Liva ()10962581, Tutorial Group 2
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1. Exhibit 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 21, 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?

In the report, it states that Marks and Spencer was criticized for the company’s accounting for pension
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These issues result in the major increase of computer software under development in 2005/2004 of $5.6 million to 2009/2008 of $178.8 million. Also, none of these costs are being amortized. Last but not least, depreciation. Firstly a way in which M&S was overstating the assets can be seen among the Goodwill. From 2005/2004-2009/2008, there is no depreciation expense being recognized, nor an impairment expense. Another issue is the depreciation on the fixtures, fittings and equipment, which range from 3-25 years depending on the estimated life of the asset. This extended depreciation rate allows M&S to drag the depreciation costs over a large amount of time. Instead of depreciating on the useful economic life, they are depreciating on the estimated life of the asset which the results in an overstatement of profits. So in conclusion, the company has found several ways to overstate its net profits by falsely reporting its pension liabilities as equity, by capitalizing intangible assets and by its unusual depreciation methods.

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?

I think that the decision to reclassify its liabilities as equity is a red flag. In 2007/2006 they had a liability of 496.9 million with their partnership, Marks and Spencer UK Pension Scheme. M&S

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