Introduction
The deepening of globalization process and increase of multinational corporations has led to some big changes in the financial reporting world. This has meant the spreading round the world not just of goods and services but also people, money, technologies and concepts. As the world becomes globalized, this causes a problem for foreign investors to review financials prepared under different standards can be a great challenge. Each country has their own requirements and accounting processes that they must follow. It is accepted that investors need to be able to compare like kind investments with reports prepared utilizing one single accounting system in order to make an informed decision.
This report it is examined and evaluated that TESCO Plc and use of the International Accounting Standards to company Financial Statements.
TESCO Plc
Tesco is one of the worlds' largest and UK's number 1 retailer. It has operations in 12 international markets. Employing over 440,000 people and serving millions of customer every week.
In 1919 Jack Cohen founded Tesco in the east end of London. In 1947 Tesco Stores Ltd. floats on the London Stock Exchange with the share price of 25p.
Tesco has 3,728 stores worldwide including 2,115 stores in the UK. It has contains 6 departments Tesco Direct, Groceries and Wine, Entertainment and Digital, Finance and Insurance, Phones and Broadband and online stores including www.tescodiets.com.
International Accounting Standards
The integration of the world's economy is occurring at a fast rate and the international market has helped the accounting profession to move closer to a global accounting system. Therefore cross boarder accountants and auditors are important factor in the competitive global world. In addition, the last five years have ushered in some big changes in the financial reporting world. Some of those changes, for example, the Sarbanes Oxley Act is a response to notorious financial scandals, which included Enron, WorldCom etc.
Generally, standards differ from country to country for many reasons, including different legal systems, level of inflation, culture, and political and economic ties. These differences can cause problems for multinational corporations. A company doing business in more than one country may find it difficult to comply with more than one set of accounting standards if there are important differences among the sets. These differences also cause problems for investors who must struggle to compare companies whose financial statements are prepared under different standards. It has been argued that different national accounting standards impair the ability of companies to raise capital in international markets. The need of cross boarder accountants come in to play here.
The emergence of multinational organisations, foreign aids, and their complicated foreign operations has led to the internationalization accountants and auditors. Christopher Nobes (2005) stated that, when multinational organisations prepare consolidated financial statements, auditors will need audits of those statements on the basis of the rules of the home country of the multinational organisations. The emergence of multinational corporations has also led to development in the roles of audit firms and has led to international mergers among firms. In addition According to the International Organisation of Securities Commissions, the commission is taking in removing barriers for international capital markets. In addition, it has close consultations with the International Federation of Accountants concerning one set of global auditing standards, to achieve uniform quality level of audit and to determine whether these global standards are suitable for use for cross border listing purposes
TESCO Plc and International Accounting Standards
IAS 39 Financial Instrument recognition and measurement
.The main objective of this standard is to provide basic principles for recognising and measuring financial assets, liabilities and some contracts to buy or sell non financial items and derivatives. These are contracts such as options, forwards, futures, and swaps. They are often entered into at no or very little cost and therefore prior to IAS 39 were not often recognized in financial statements. IAS 39 requires derivatives to be measured at fair value with changes in fair value recognized either in profit or loss or in reserves depending on whether the company uses hedging. Where the derivative is used to offset risk and certain hedging conditions are met, changes in fair value can be recognized separately in reserves. (G Holt, (2008). CPD Articles).
The need for a new standard on financial instruments was mainly due to the current wide range of alternative measurements which led to incomparability and a number of unrecognised financial assets and liabilities, particularly derivatives. Hedge accounting is considered as one of the most complex aspects of IAS 39. Further, hedging is an important tool in designing risk management strategies and has been one of the important topics in finance for the last decade.
Considering the Tesco plc, the company follows this standard in their foreign currency transactions and loan interest payment. It can be identified that cross currency swaps, forward foreign currency contracts and interest rate swaps in the Tesco plc 2010 financial statement
*The group uses derivative financial instruments to hedge its exposure to foreign exchange, interest rate and commodity risks arising from operating, financing and investing activities. The group does not hold or issue derivatives financial instrument for trading purposes, however, if derivatives do not qualify for hedge accounting they are accounted for as such.
*Derivative financial instrument are classified as fair value hedgers when they hedge the Group's exposure to change in the fair value of a recognized asset or liability. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the group income statement, together with any changes in the fair value of the hedged item that is attributable to the hedged risk.
*Derivative financial instrument are classified as cash flow hedges when they hedge the Group's exposure to variability in cash flows that are either attributable to a particular risk associated with a recognized asset or liability, or a highly probable forecasted transactions.
*Derivative financial instrument are classified as net investment hedges when they hedge the Group's net investment in an overseas operation. The effective element of any foreign exchange gain or loss from remeasuring the derivative instrument is recognized directly in equity.
IAS 22 Business Combinations
The objective of IAS 22 is to prescribe the accounting treatment for business combinations.ISA22 deals with the method of the accounting for business combination, initial measurement of the assets and liabilities acquired and the treatment of the goodwill. (Source - accaglobal.com, members' publications)
According to this standard, apply fair value to acquired company including cost of acquisition, recognized separately the assets and liabilities of the acquired company and requires substantial disclosers including changes to the carrying value of goodwill. Further, disclose information that financial statement allows users to understand the financial effects of business combinations such as cost of acquisitions, names and description of the business acquired etc.
*Under IFRS3 "Business Combination" , any adjustments to the provisional fair values allocated with in 12 months of an acquisition date are calculated as if the fair value at the at the acquisition date has been recognized from that date. As a result, goodwill relating to the following acquisition has been restated
1) Homever (acquired 30 September 2008) - the net impact of the restatement is an increase in goodwill of £14m, increase in trade and other receivables of 22m, increase in trade and other payables of £2m and increase in non-current provisions of £34m.
2)Tesco Bank (acquired 19 December 2008) - the net impact of the restatement is an increase in goodwill of £35m, increase in deferred tax assets of £28m, increase in non- current provisions of £99m and a decrease in retained earnings of £36m.
ISA18 Revenue
This standard will be applied in accounting for revenue arising such as the sales of goods, the rendering of services and the use by others of entity assets for interest, royalties and dividends. (Source - iasb.org)
In addition, this standard implies that the revenue shall be measured at the fair value of the consideration received or receivable. Fare value is the amount for which an asset could be exchanged, over liability settled, between knowledgeable willing parties in an arms length transaction
*Revenue consists of sales through retail outlets. Revenue is recorded net of returns, relevant voucher/offers and value added taxes, when the significant risks and rewards of ownership have been transferred to the buyer. Relevant voucher/offers include: money-off coupons, conditional spend vouchers and offers such as buy one get one free (BOGOF) and 3 for 2.
*Commissions income is recorded based on the terms of the contracts and is recognized when the service is provided.
*Revenue consists of interest, fees and commissions receivable. Interest income on financial assets that are classified as loans and receivables is determined using the effective interest rate method. This is the method of calculating the amortised cost of a financial asset or for a group of assets, and of allocating the interest income over the expected life of the asset.
Conclusion and critically evaluation of International Accounting Standards
Convergence of accounting standards with international approach will inevitably raise the question of rules versus principles. IASB standards are principles based, therefore the countries that have rules based standards are expected to experience considerable difficulty in harmonization of their standards with IFRS. In addition, accounting standards have been developed in different countries under different legal, economic, social, and cultural environments. For this reasons if convergence is to be achieved, it is necessary to arrive at an agreement as to the central objective of financial reporting. Further, unlike most Western traditions, fundamental business ethics flow from the practice of Islam, rather than from codes created and enforced by professional organisations. For example, they are prohibition on involvement with industries considered sinful such as gambling, alcohol, and pig products. In addition they are strict ban on riba, which is similar to interest. Islam's prohibition of interest has significant implications for the harmonization of accounting standards since interest calculations are an integral component of many Western standards.
Now it is realized that, barring very few, almost all countries of the world are interested to follow IAS as their accounting standards. USA is the only main country reluctant to adopt it. The question arises here is what will happen if super power of the world and a highly developed economy like USA does not adopt IAS. Further, US practices on accounting and financial reporting have been for many decades, and remain, the most influential in the world. In year 2001, the collapse of the US energy trading company Enron and the demise of its auditor, Andersen, have had repercussions in all major economies.
In addition, April, 2010, The International Accounting Standards Board, said it proposes to require that companies provide new information on certain financial instruments on both, an amortised cost and market to market, or fair value, basis. The proposal aims to improve the information investors get about bank balance sheets in the wake of the credit crisis. But the measure marks a widening of the gap between US and British accounting standards. Critics believe the G20 agreement to reach a global accounting standard by June 2011 will be more difficult to achieve as a result.
