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On the subject of Tesco’s profits

Tesco said the shortfall in its profits is due to the “accelerated recognition of commercial income and delayed accrual of costs”. In other words, Tesco has been paying suppliers later and taking monies from them earlier than it should. The size of the black hole suggests this practice was widespread.

Err, no.

That’s not what has been happening at all. Rather, Tesco has been saying, in its accounts, that it is paying suppliers later than it does and booking income earlier than it actually arrives. That’s what the “recognition” and “accrual” parts there mean. This isn’t about (from the very limited evidence in front of me) the dates upon which the cash moves. It’s about the dates upon which Tesco says the cash moves.

16 thoughts on “On the subject of Tesco’s profits”

  1. Typical fucking boneheaded journalism. Even a first year accounting student could have told the Telegraph journo this is bollocks. Just one call to any accounting firm or to any of the institutes – hell, even to me – could have put them straight.

    Paying a supplier late or taking money from them earlier are both balance sheet transactions that have no profit impact whatsoever. It’ll be about recognising the costs associated with supplier incentives wrongly and about booking income from commercial arrangements early. Nothing to do with cash going to/from suppliers at all.

  2. Isn’t it more about the payment being for a promotion that is say six months long but with the cash coming in one block. Do you recognise the revenue when the cash comes (bad idea), or split it over the length of the service provider (prudent)?

  3. given that they are paying an expensive accounting firm to find out what happened then perhaps you might conclude they are not entirely sure themselves?

  4. Tim, aren’t you being a little pedantic?

    The exact nature of the problem remains unknown, however it seems very clear that Tesco have played around with timings in order to boost the profit figure in the short-term.

    It may even be worse than that; the additional profit may have been exaggerated, and will not show up in future months.

    In short, this could be, probably is, and extremely serious matter. The Telegraph’s attempt to render Tesco’s statement in English is really not the big issue.

  5. My take on it is roughly the same as Christie’s.

    I’ve come across it before in a large company. They negotiated a volume discount with the supplier, but the supplier (to speed up the cash flow) made them agree that the discount was treated like a cash discount (due when cash is paid) as opposed to trade discount (due when the invoice is raised).

    In the case I discovered, the client was applying the discount at the time of purchase, which was not in accordance with the contract.

    Of course, this only works once. If you did it year on year, the effect on profit would be restricted to the increase in purchases. But the first time you do it you get 13 months discounts in respect of 12 months purchases, which gets you out of a hole in a bad year.

    As I say, not really enough info, but to me, the only explanation that leaves the entire media not looking totally stupid.

  6. @AH

    They’re paying another accounting firm to give this impression. PwC warned the audit committee that this area was a bit dodgy, but the committee responded that there were sufficient controls in place that this would not be a problem in practice.

    This gives two different bits of Tesco each a different problem.

    Either the audit committee were misleading the auditors, or management deliberately subverted the controls, which is false accounting.

    Expect the trial in 2016…

  7. Are the accounts of plcs like Tesco based on invoice dates or cash movement dates? In my business its the date of the invoice that counts for tax purposes – my tax year end is 5th April, if I get invoiced on 31st March but don’t pay until 30th April, that invoice is still included in the costs of the earlier tax year, not the later one. And the same for money owed to me.

    So has Tesco been falsifying invoice dates? Adding a few days to a bill date to push it into the next accounting period, and taking a few days off from invoices issued to debtors?

  8. There seems to be as much indignation over false reporting by the media, as over false reporting by Tesco.

    From what we know so far, it would appear that:

    a) Tesco have booked revenue in an earlier period than the corresponding cost
    b) May have guestimated revenue based on exaggerated volumes

    We can certainly say, given the profit warning already issued, that the Telegraph journalist has done a better job than Tesco and PwC.

  9. It’s not even “about the dates upon which Tesco says the cash moves”; cash movement shouldn’t affect profit recognition under accruals accounting. It’s about the date when the underlying transaction happened.

  10. “There seems to be as much indignation over false reporting by the media, as over false reporting by Tesco.”

    OK then, Jack C. If not to report faithfully what’s going on in the world, what do you think newspapers are for?

  11. Well, Christie, I’m sort of disputing that the journalist was wrong anyway. Some terms may have been inaccurately used, but the report makes the situation pretty clear, wouldn’t you agree?

    So, there’s a pretty major story involving possible fraud, a huge retailer and a collapsing share price, and you want to hang the journo for his terminology?

  12. It’s phrases such as “accelerated recognition of commercial income” that should really be getting up our collective noses.

  13. Jack C – but what’s wrong with using the correct terminology? So long as it is explained – which is part of a good journalist’s job. Using incorrect terminology just because it’s “simpler” is at best obfuscating, usually misleading, and in cases like this is why subject matter experts start to abhor and distrust the press – if they’re consistently wrong in areas you actually know enough about to pick up on mistakes, how much faith can you put in the rest of their coverage?

  14. “So, there’s a pretty major story involving possible fraud, a huge retailer and a collapsing share price, and you want to hang the journo for his terminology?”

    Jack C

    You presume, incorrectly, that I have but a single noose.

  15. MyBurningEars,
    Trust me, I find the Telegraph a constant irritation for pretty much this reason, particularly in comparison the standards it used to set.

    However, this doesn’t seem much of an example. It may even be true anyway that “Tesco has been paying suppliers later and taking monies from them earlier than it should”. How they can do this is explained in the article.

    Besides which, Tim’s explanation of the situation is, I’m afraid, no better and may not even be as good.

  16. All

    I don’t know if Tim read, and objected to, the wording of the report for the same reason I did.. but my take is one of great annoyance because it reads as if it was Tesco’s legendarily ‘challenging’ supplier relationships that caused the problem… that they are nasty to suppliers (“paying too late” “taking too early”) and this made their accounts wrong.

    That is bollocks. You can treat your suppliers as badly as you like, or as well as you like, and still get your accounts wrong by screwing up (intentionally or otherwise) your spreadsheets.

    I’ve known companies who’ve had all sorts of fancy schemes and rebates and discounts and wotnots in place with customers and suppliers.. and the complexity thereof has led to accounting errors. Maybe that’s what’s happened here. But it’s the accountants that caused the error.. not the underlying arrangements. The wording in the Telegraph suggest the contrary.

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