Naughty boys over at Tesco, eh?

So there was a little bit more going on:

and its policy for accounting for depreciation. He said that Tesco’s accounts suggest the company has extended the implied life of its non-property assets, meaning it could eventually have to book impairment charges.

Mr Vazquez said Tesco’s latest accounts show an implied life of 14.6 years for its non-property fixed assets, up from 8.4 years in 2006/2007. He added: “This may be explained by the fact that the company is truly using its shelves, vehicles and fridges beyond their accounting lives or that the company is extending the assumed asset lives used in its depreciation calculation.”

Could be legit: might have bought better shelves. But looks dodgy at best.

Jaime Vazquez, analyst at JP Morgan, said: “We are unable to explain the full gap between the Companies House earnings before interest and tax and the reported UK trading profit of 2013/14. Regardless of what the exact UK profit was in 2013/14, it seems clear to us that Tesco’s results are being hit by the unwinding of supplier rebates as volumes fall, hence the need to reset the framework with suppliers.

There’s the rub. The original complaint was that they were booking revenues from promotions (ie, payments from suppliers for promotions) in earlier accounting periods than the promotions really ran. But if your volumes fall over time then this becomes an ever larger problem…….

10 thoughts on “Naughty boys over at Tesco, eh?”

  1. Being a total hack accountant, why would you need impairment if you’re depreciating assets slower than you originally were? And depreciation rates close to service life are going to give you a better picture – if you’re using lots of fully-depreciated assets you can get an overly optimistic impression. Which was probably the original idea, subsequently corrected.

    Impairment is from the voodoo end of the accounting spectrum, isn’t it? It’s a hypothetical depreciation of a hypothetical asset. I’m sure it’s of great value in cutting tax bills.

  2. If you’re depreciating assets too slowly, you’ll end up having to stick a big impairment in when it becomes clear they’re worth less than book value. Or when you scrap them you’ll have a big loss on disposal, which comes to the same thing.

  3. I’m not an accountant but I have received many a grilling from auditors to justify whatever life an asset has been allocated by finance, which is often based on nothing more than making the books look good.

    Its my experience that they take a very dim view of any shenanigans around the life of assets and get senior management to sign in blood and often make comments in the notes.

    That said these weren’t for very large multinationals, except in one case and we were just a small satellite company, so there wasn’t as much power in the company. For a good read on that subject the Economist Briefing in the current edition is well worth a read. They are rather scathing about auditor’s.

  4. @Pellinor,

    Tescos should surely be big enough and havebeengoinglongenough, and growingslowlyenough that their annual shift of cash to assets when buying shelves, vans and so on, is pretty even from year to year. I’d’ve thought that depreciation should, therefore, be pretty much equal to actual spending on replacement assets in any one year.

    I’d expect depreciation shenanigans to be useful to a smaller company needing to replace lots of assets one year, not so many the next. And still it’s only useful in terms of shifting results from some year to some other year. The impairment due to slow depreciation making things bad this year has made things look artificially good in previous years. The investors should be taking a sufficiently long-term view not to worry about that (but of course we know they are not), while those responsible for cashflow should be hopping mad at depreciation being applied either too fast or too slow.

  5. If Tesco lists in the US and was improperly pulling net income forward between quarters, then, at minimum, it’ll get hit with a class action even if there was no net distortion.

  6. Bit confused by all this (yeah, I know, doesn’t take much).

    Don’t analysts start with EBITDA (earnings before interest, tax, depreciation and amortisation) precisely because they want to eliminate any opportunity for companies to play silly buggers with estimated asset lives?

  7. Bloke in Germany said: “Tescos should surely be big enough and havebeengoinglongenough, and growingslowlyenough that their annual shift of cash to assets when buying shelves, vans and so on, is pretty even from year to year. ”

    Might getting into online retailing, and especially home delivery of groceries, have upset that long term pattern? It would eventually settle at a new level which could be what is happening now.

  8. It would be nothing new for Tesco to be in the accounting sin bin. They got their very own 3 pages in Terry Smith’s wonderful “Accounting for Growth” back in the 1990s, but to increase the average depreciable life of fixed assets by 6 years in no more than six years, presumably without a reported change in accounting policy, would be beyond Enron-esque if there was nothing else happening.

    However I suspect that the answer might be down to outsourcing with shorter life assets such as IT equipment and trucks being shifted to service providers (cloud somputing?), with the shelves and racks remaining in house and on the books.

  9. “Sorry love, no new bathroom shelves this year. They’ll upset the delicate balance between depreciation and impairment and Ritchie will be on us like a shot.”

  10. @ Christie Mairy
    “Don’t analysts start with EBITDA (earnings before interest, tax, depreciation and amortisation) precisely because they want to eliminate any opportunity for companies to play silly buggers with estimated asset lives?”
    No, investment bankers yack on about EBITDA because they want to use a more flattering number when floating (selling an IPO) in a heavily indebted company, or even a loss-makling one. Just one of the ways to fool us (another is a majority-shareholder-CEO paying himself peanuts as a salary but living off dividends while it is unquuoted and then writing himself a contract at a six-figure salary plus bonus just before floating).
    The trick on understating depreciation is that when an impairment is taken it is treated as “exceptional” and excluded from “adjusted profits” so the average investor doesn’t notice *even then* that profits are being overstateds.
    EBITDA was invented to compare companies in the same industry in different countries when some countries hasd weird rules on depreciation, but it is very deceptivev when you compare companies in different industries – a highly-geared plant hire company would look good at the EBIDA level the day its bank called in the receivers.

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