Financial Accounting - The TESCO Case - IASB - Assessment Answer

January 08, 2017
Author : Ashley Simons

Solution Code: 1AFJC

Question:Financial Accounting

This assignment is related to ”Financial Accounting” and experts atMy Assignment Services AUsuccessfully delivered HD quality work within the given deadline.

Financial Accounting Assignment

Assignment Task

NURSING

NURSING

These assignments are solved by our professional Financial Accountingat My Assignment Services AU and the solution are high quality of work as well as 100% plagiarism free. The assignment solution was delivered within 2-3 Days.

Our Assignment Writing Experts are efficient to provide a fresh solution to this question. We are serving more than 10000+ Students in Australia, UK & US by helping them to score HD in their academics. Our Experts are well trained to follow all marking rubrics & referencing style.

Solution:

Introduction

The article deals with the latest developments on the famous TESCO fraud case that took place in 2014; wherein three former Tesco Plc. employees were charged with accounting frauds and various other allegations. It has been a serious case of accounting fraud which has raised concerns of accountants and auditors world-wide. The executives have now pleaded guilty in September 2016.

An attempt has been made to examine the tenability of their claims based on accounting principles and regulations like AASB, IFRS etc. An attempt has also been made in this report to analyse the various frauds that took place so as to examine the tenability of the latest development in this case. These findings are then linked to the accounting principles and theories pursued so far so as to gain a deeper theoretical understanding of the case and its implications. Finally, a conclusion on the best expected decision based on understanding follows at the end.(Today, 2016)

Discussion

The TESCO case – Examination of tenability of the claim of not guilty

The three employees mentioned in the article were charged with falsifying the accounting records deliberately and pestering the relevant users to place reliance on falsified income figures so as to give a false escalated idea of the income earned by the retailer. They were also held guilty of dishonesty, as they had failed to perform the fiduciary duty expected of them as per their roles. They were held guilty of abusing position and engaging in fraudulent practices between February and September 2014. Investigation for the case had been initiated by the U.K. Serious Fraud Office in 2014 when the retailer informed investors on Sept. 22, 2014 that it had reported overstated profits by 263 million pounds or $343 million, which had further spiralled to 326 million pounds.

Tesco had claimed that the overstated profits were a “timing issue” – which ought to have been booked in a future period as per accounting principles related to recognition of revenue and costs regarding deals with suppliers. However, it wrote off in its interim accounts for the succeeding period, the above mentioned profits pertaining to various previous years and these were majorly related to revenue recognition. The company also booked £382 m of impairment charges, £27 m for miss-selling of payment protection insurance and £41 m relating to payment of rates on cash machines, £63 m of stock write-downs, and £136 m of impairment charges on assets in the UK and Europe. By implication the company had not written off stock in the previous financial year. The treatment of impairment charges majorly related to the value of supermarkets were also oddly of a large amount implying that impairment was not booked properly in previous years.

Another implication of the scam is regarding the involvement of the auditors of the company in perpetrating the fraud. PwC, in its 2014 annual report for the company had declared that its commercial revenues were at “risk of manipulation”. Ideally, the report should have not been qualified but disclaimed, given the nature of the fraud which indicates a huge level of involvement of the auditors in the scam and hint of agreement between both the parties. Tesco claims contradict those of its suppliers who have not reported any manipulation so far. Some of these suppliers include famous companies like Coca Cola and Nestle.(Today, 2016)

Linking with theory to evaluate the strength of the claim

Falsification of records, dishonesty, breach of Fiduciary duty

As per AASB 101 and IFRS 1 on Presentation of Financial Statements; the financials of a company ought to fairly present and faithfully represent the effects of transactions and events as well as the recognition criteria for assets, liabilities, income and expenses set as per the framework so as to achieve fair representation. IFRS compliant statement need to mention the fact on the face of the statements as such. ("Australian Accounting Standards Board (AASB) - Home", 2016)

The financial accounts of Tesco were clearly in default of these regulations by not abiding to the fair presentation rule. Further, the company also seemed to have violated the provisions of AASB 108 and IAS 8 relating to Accounting Policies, Changes in Accounting Estimates and Errorsso as to result in a relevant and reliable reporting and additional disclosures were missing. The instances included incorrect revenue recognition and expense recognition and disclosures. By implication the company had not written off stock in the previous financial year and defaulted in the compliance with relevant accounting standard relating to inventory as well (AASB 102 and IAS 2). The treatment of impairment charges majorly related to the value of supermarkets were also oddly of a large amount implying that impairment was not booked properly.

The officers of the company including directors, auditors and other executives are held responsible for financial reporting and a directors’ declaration on their opinion on the company’s ability to pay its current debts which are due in less than 1 year and the compliance of the financial statements with the applicable accounting standards, such that a true and fair view of the financial position and performance is reflected is made a part of the annual report. To ensure high quality financial reporting so as to provide meaningful information to the users, the internal incentives ought to focus on financial reporting quality.("Directors and financial reporting | ASIC - Australian Securities and Investments Commission", 2016)

The violation of these rules and regulations clearly hint that the claim may not be accepted as falsification of records, dishonesty, breach of Fiduciary duty is opposed to these rules set up by AASB board as well as non-compliant with the Corporation Act in UK (TESCO country of residence) Australia and other countries.

Role of Auditors

The auditor is expected to vouch for the truth and fairness of the financials and express a relevant and reliable opinion to enable the users to take informed decisions. AAS504 clearly expects the auditor to either express his opinion or disclaim his opinion clearly indicating his reasons in both instances. AASB 315 and 330 emphasizes on the understanding of the internal controls for the identification and assessment of material misstatements, materiality; quality of management reporting covering areas of current assets, Revenue and Accounts Receivable, Purchasing and Accounts payable, Payroll etc.among others.

The tenability of the claim based on this point also appears doubtful as there is clear diversion from the expectations in this case.("Australian Accounting Standards Board (AASB) - Home", 2016)

Recognition of Revenue and Expense

Since the fraud basically involves flaws in the Recognition of Revenue and Expense; it is also important to examine the accounting rules in this respect. AASB 118 and IAS 18 dealing with Recognition of revenue(Applicable for reporting periods before 1 January 2018) clearly define the criteria for recognizing revenue such that significant risks and rewards of ownership have been transferred and no effective control exists on the goods sold, such that the revenue can be reliably measured and the probability of the flow of economic benefits is certain and the costs too can be measured reliably.

SAC 4 dealing with the Definition and Recognition of the Elements of the Financial Statements provides that an expense ought to be recognized in the income statement of the reporting period, when the probability of loss of future economic benefits causing the assets to reduce or liabilities to increase is certain and the loss can be measured reliably. ("Australian Accounting Standards Board (AASB) - Home", 2016)

Impairment Charges

AASB 136 (IAS 36) dealing with impairment of assets provides for an annual assessment in this regard based on the decline in the market value of the asset and other external sources, physical damage, poor economic performance and other internal sources for goodwill and other intangible assets included. An impairment loss is to be recognized where the carrying amount exceeds the recoverable amount in the income steamed and adjustment of the depreciation and amortisation charge over the remaining useful life.("Australian Accounting Standards Board (AASB) - Home", 2016)

TESCO violators seems to have violated these provisions as well.

Conclusion

The tenability of their claims based on accounting principles and regulations like AASB, IFRS etc. is not very strong and has strong chances of being rejected. The three employees mentioned in the article were charged with falsifying the accounting records deliberately by entering and pestering the relevant users to place reliance on falsified income figures so as to give a false escalated idea of the income earned by the retailer. They were also held guilty of dishonesty, as they had failed to perform the fiduciary duty expected of them as per their roles. Violation of AASB 101(IAS 1), AASB 108 and IAS 8, AASB 118 and IAS 18, AASB 136 and IAS 36 and SAC 4 further strengthen the conclusion reached. Thus, based on Accounting theory, the claim for non-guilty may be difficult to substantiate unless the onus can be shifted to a third party who is the culprit behind the scam.

Question 2

a)Issues

The exposure draft for the new standard that was originally published on 19 May 2015for comments was basically meant to defer the effective date of applicability of IFRS 15Revenue from Contracts with Customers,by an year to 1 January2018.

The Standard originally issued was the joint effort of the FASB and IFRS,in May 2014, and was meant to be effective from 1 January 2017.

The issues in the new standard which led to the proposal for deferring the effective date of the standard is that the IASB plans to issue another Exposure Draft of required amendments to this Standard, to make it more conclusive about its requirements with examples and illustrations for implementation. These amendments would be done in consultation with joint Transition Resource Group (TRG) in conjunction with the FASB to support the implementation of the Standard.

b)Review of Comments

ACCA (Association of Chartered Certified Accountants)

ACCA does not support the deferral of the standard. ACCA argues that the deferral would impediment the adoption of the new proposed standard by preparers who are all set for the adoption as per the earlier proposed effective date. The comment letter also dissents the deferral on the ground that for any preparers who are not set for the adoption of the new standard, practical assistance could be provided for updating of their accounting system so as to be able to adopt the standard. It is also argued that the clarifying amendments and examples which are argued to be the reason for the deferral are not justified reasons for the deferral.

Exxon Mobil Company

As per the comment letter by the Exxon Mobil Company, the company does not support the deferral and further requests for the effective date to be postponed by two more years so as to facilitate proper implementation of the judgement based comprehensive standard. The company further claims to have been involved in the standard setting process and argues that they need time to initiate the setup of the standard as well as to analyse the effect of changes proposed by the new standard. This necessities analysis of a large number of contracts earning revenue for the company and the impact to the accounting and reporting systems of the Organization.

The company also argues that the industry to which it belongs to faces several challenges due to regulations and rules imposed by regulatory authorities and specifically mentions AICPA Oil gas as also supporting the deferral of the standard so as to buy time for the identification and implementation of the standard on the reporting requirements of these organizations. It could be possible that inconsistencies may arise in accounting and reporting due to the lack of clarifications and examples due to which the Board is seeking the deferral. Critical implementation decisions and finalization of implementation plans may be held back as the company has a huge volume of accounting revenue transactions which arguably justify it requiring more lead time to set up the systems adhering to the proposed changes. This could mean huge costs as well as risky systems prone to accounting manipulations. Therefore, the company supports the deferral

Group of 100 Australia

The Group of 100 (G100) being an organization comprising of CFO’s from Australia’s large business enterprises formed with an aim to advance Australia’s financial Competitiveness also supports the proposed deferral of the application date of IFRS 15 as it believes that the reasons for the delay justify the deferral as these are substantial to the effective implementation of the IFRS 15. If the standard is applied after addressing and resolving these issues, an orderly implementation of the new requirements would be possible which would further enhance the applicability of the standard. Another justification for the support argued by the group is that the effective date of the new leases standard and IFRS 15 should not happen in the same year so as to give some more time to the companies to facilitate fair and prudent implementation

Ernst and Young Consulting Services

The company also supports the deferral of IFRS 15 on the grounds that it would give the entities extra time for the implementation of the standard which would result in better facilitation of their accounting policies and better implementation of information technology systems and related internal controls. This would also compensate the delay in the publication of the final standard and ensure an orderly transition and more entities favouring the retrospective transition alternative. This would also help the board to justify its own reasons for the deferral. Since IFRS 15 deferral also aligns with the proposal by (FASB) on Revenue from Contracts with Customers (Topic 606) — Deferral of the Effective Date; it would be imperative to consider the impact on multi-nationals obliged to follow both IFRS and US GAAP which further justifies the deferral.

So, most arguably there is generally a consensus on a multitude of grounds in support of the proposed deferral on the basis of the consideration of the proposed comments by a company, a chartered accountant firm and a group of leading company CFO firm. The only dissenting view provided by the ACCA on the grounds of practical speedy implementation of the standard does not appear tenable compared to the arguments put forth by the other respondents. The comments by the ACCA are grounded in ensuring quick implementation and clearing out inconsistencies while the implementation continues. The stand totally ignores the practical difficulties associated with the implementation. However, viewed from the perspective of regulation, the dissenting view of the ACCA is not completely incorrect; given the fact that companies were given enough time for the applicability and quick implementation will ultimately ensure better reporting.

c) Analysis from the Public, Private and Capture theory perspective

The capture theory explains that regulatory agencies tend to get "captured" by the industries that they are set up to regulate. Since these industries are the ones who are most strongly impacted by the regulations, they try their best to affect those regulations. The regulators also tend to favour the industries due too political favouritism.

The public interest theory regulators enforce rules for public protection without giving in to any influence by industries while the private interest theory claims that regulations emerge from the self-interest actions of individuals or groups and may or may not promote public interest.

In view of the basic premises and assumptions of all the theories, the comments evaluated above tend to be more bent towards the capture theory as each of the supporting letters specifically try to justify their stand on the basis of impact on them ignoring the public interest in quick implementation of the standard. Only, the dissenting letter by ACCA enforces the public interest impact. (Morgan & Yeung, 2007). To be noted that most of the comments also tend to drift towards the private interest theories as well. Here, the regulators have the same motivations as the industry groups and tend to be motivated by self-interest. The incentive structure of the theory determines the behaviour. In the instance where all the impacted companies or groups would have dissented to the deferral, probably it would have been shelved as per the premises of the Capture theory to appeased all the involved parties.

The comments in effect reflect the stand of the industries as favoured by the FASB. The fact that the proposal for the deferral of the effective date is issued indicates that the deferral was being done to make the industries get more lead time to initiate the setup of the standard as well as the analyse the effect of changes proposed by the new standard on the reporting requirements of these organizations. If the standard is applied after addressing and resolving these issues, orderly implementation of the new requirements would be possible which would further enhance the applicability of the standard. Another justification for the support aliased by the group is that the effective date of the new leases standard and IFRS 15 should not happen in the same year so as to give some more time to the companies to facilitate fair and prudent implementation. Since IFRS 15 deferral also aligns with the proposal by (FASB) on Revenue from Contracts with Customers (Topic 606) — Deferral of the Effective Date; it would be impetrative to consider the impact on multi-nationals obliged to follow IFRS and US GAAP which further justifies the deferral.

So, most arguably there is generally a consensus on a multitude of grounds in support of the proposed deferral on the basis of the consideration of the proposed comments by a company, a chartered accountant firm, a group of leading company CFO firm. The stand of the regulatory authority then arguably tends to get captured by the industry interest and does not necessarily favour the public interest theory meant for public protection without giving in to any influence by industries or the private interest theory which explains that regulations emerge from the self-interest actions of individuals or groups and may or may not promote public interest.

Find Solution for Financial Accounting assignment by dropping us a mail at help@myassignmentservices.com.au along with the question’s URL. Get in Contact with our experts at My Assignment Services AU and get the solution as per your specification & University requirement.

RELATED SOLUTIONS

Order Now

Request Callback

Tap to ChatGet instant assignment help

Get 500 Words FREE