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Marks and Spencer Case

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Financial Statement Analysis
Assignment 4 “Mark and Spencer’s Accounting Choices ” 20 February 2015
Semester 2, Period 1
Samantha Jay (10962670), Tutorial Group 1
Michelle Liva ()10962581, Tutorial Group 2
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 liabilities, intangible assets, and depreciation. In regards to pension liabilities, Marks and Spencer reports these liabilities as equity. In 2007, M&S sold and leased back 1.1 million of its property portfolio to a joint venture with its own pension fund. M&S has full control since it was leased back from the joint venture, therefore making it equity. The result of this was reducing M&S’s pension liability. Another issue is that Marks and Spencer Group treats the software costs as an intangible asset. These costs include external direct costs of material and services and the payroll/payroll related costs for employees. Typically, the capitalization of intangible assets, particularly software development outlays, is prohibited because the benefits with these outlays are uncertain. However, Marks and Spencer capitalizes and amortizes these software development costs. This can overstate the profits because theses costs are being recognized as assets on the balance sheet. Payroll and payroll related costs should not be capitalized, but recognized as an expense. The costs of material and services should only be...

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