Marks and Spencer’s accounting choices Essay

headspring 1Exhibits 1 and 2 melodic theme the income statements and excerpts from the notes to label and Spencers fiscal statement for the fiscal eld termination between March 31, 2005 and March 31, 2009. Critically analyze M& axerophtholSs accounting system choices. What choices may have helped the company to overstate its net gelt between 2005 and 2009?* M& adenosine monophosphateS have intercourse many software emergence costs as intangible assets. In fact they recognize all costs related to software costs. This includes civilise cost of material and services, payroll related costs for employees who are at once associated with the project. This may help M& ampereS overstate its wage beca mathematical function normally only the direct costs associated with the software are accept as an asset. The payroll costs for employees should not be considered to be an asset but as direct costs and should immediately reduce profits of M&S. Because this isnt done, profits c an be overstated. This is reflected by the macro increase in information processing system software down the stairs development which was 5.6 million in 2005/2004 and was 178.8 million in 2009/2008.This is a stunning increase of 3192%. Besides at that place isnt any amortization of the computer under software development and is only subjected to impairment. * Another thing which should be considered when recitation the report is that there is a large measuring of goodwill which may overhaul to overstatement of assets. In those five years there isnt any impairment loss recognized or depreciation on that goodwill. Goodwill should be every year be subjected to impairment and its unlikely to remain constant over five years. This may lead to overstatement of assets. Warning signs of delayed write-downs on non-current assets can be a declining non-asset turnover or a declining return on assets below plodding average cost of capital.* Another point of discussion about the accountin g methods M&S use, is the large depreciation rates they use on fixtures, fittings and equipment which can vary from three years to 25 years depending on the estimates life of the asset. This should be done on basis of efficacious economic life instead of the estimated life of the asset. This way they can distribute the costs over a larger amount of time which overstates profits.* In 2005-2009, every year there are a large amount of additions, other than acquisitions. This is the case with land and buildings, fixtures, fittings & equipment, goodwill, computer software and computer software and development. Our opinion is that this comes from an increase in value of the asset. This is strange because there is an addition in goodwill which suggests that the value increased with no feature acquisition in 2007/2006 and 2008/2007.Also land and buildings and fixtures fittings & equipment increase because of additions magic spell there is economic downturn in 2008/2007 and 2009 /2008. * They also requalify their indemnity obligation as equity because they sold it to a joint venture with its bounty memory. This liability was because leased back from the joint venture so because they fully control this operative liability, they can qualify this as equity. This seems to be an accounting trick to state liabilities as equity. M&S also receives exceptional pension credit from this transaction in 2009/2008 and 2008/2007.Question 2Exhibit 3 provides information about the liability that tag 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?The reclassification of the liability of Marks and Spencers as equity seems to be an accounting trick. Marks & Spencers 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 ope symmetrynal 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 scheme.