Financial reporting-an international approach

Prepared
By
Sheik Munaem Ahmed
ID: 307141
Prepared
For
Feroz Kassam Kanji
Total words:4350

19-05-2014

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One of the large fashion retailers is Next Plc.with wide range of customer appeal in the UK
and abroad, currently Nexts online shopping facility is available to around 50 countries of
the world including the USA. From 1986 Next Plc has been always increasing its market
share by using diverse business strategies such as diversifying its products in the competitive
market and making a gross profit of about 1125.8 million in the fiscal year 2012/2013 with
revenue in excess of 3562.8 million that makes it one of the leading retailers in UK.
Currently they have more than 700 stores around the world while employing over 30000
people Nextplc.co.uk, (2014).
Question no 1
According to the IASB conceptual framework (2010) the general purpose and the objective
of financial reporting is to present financial information regarding the reporting entity that is
helpful to lenders, creditors, existing and potential investors to make decision about selling or
holding equity, buying, or debt instruments and about granting capital to the entity Mehta,
Alkafaji, Ghosh and Ankarath, (2013).
This information is very much important to the users because it allows the users to assess
how efficiently and effectively management has exonerated their responsibilities to use the
entity's active resources not only to assess an entity's scenario for future net cash inflows
(Iasplus.com, 2014).
The financial reports are prepared from the entitys perspective, instead of the entitys capital
providers. An entity attains its assets from capital providers in exchange for claims to its
liabilities and equity. Capital providers include Lenders, Equity investors, and other creditors.
Basic qualitative characteristics of financial reporting differentiate the useful financial
information from non useful or misleading information. A good report must have two
fundamental qualitative characteristics.According to IASB information is said tobe relevant if
it influences theeconomic decisions ofusers by helping them evaluate past,present or future
events.Next Plc showed their Discontinued and continued operation separately which is
relevant and user can understand it easily.
Enhancing qualitative characteristics are used to distinguish more-useful information from
less-useful information and to improve the decision usefulness of financial reporting
information that is relevant and faithfully represented Mehta, Alkafaji, Ghosh and Ankarath,
(2013).
Comparability of a report enables the users to recognize likeness and the distinction between
two sets of economic phenomena. Information will be more useful if it can be compared
similar information about the same entity for some other period and with similar information
about the other entities. Next Plc used straight line depreciation method. Therefore, this
report can be compared with different time frame of the company also with the other
company like Marks & Spencer that follow the same reporting procedure.
Quality information which is verifiable will provide confident to its users. The verifiability of
a report concentrates on whether the measurement or recognition method is correctly applied.
Verification could be done either indirectly or directly

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Reporting information should be available to decision makers on time so that it can influence
the decision process. Lack of timeliness may get a negative response from the decision
maker. According to FASB making availability of the reports on timely manner enhance the
faithful representation and relevance of the information. Next Plc always published their
report on time.
Different level of user of financial report will have different level of understanding. But it
does not means to bring simplicity on the report but it means that the report must be geared
to the abilities and knowledge of the users concerned, (Alexander, Britton and Jorissen,
2011).
When the information is characterized, presented and classified clearly and concisely, the
understandability will be enhanced. However, users of financial information are assumed to
have reasonable knowledge to be able to read the financial report and reviewing and
analyzing the information with reasonable diligence. For example, a Glossary part of the
Next Plc report helps the user to understand the report those who have not got professional
knowledge. Moreover, tables, charts and graph also help the reader to read the report quickly
with less time and less word that ultimately increased the understandability of the report.

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Question Number 2
The chief investment officer at Royal London Asset Management,Robert Talbut, has
criticized the short of information in annual reports that has effected from short of simplicity
in the region of which set of users annual reports are intended at.
Long-term capital providers are the primary users of accounts and that need accounts that
serve them, Talbut also mention that trying toserve everybody has ledto obfuscation and
lackof information and insight (Accountancyage.com, 2014).
According to Talbut, accounts had become too focused on compliance as the front ends of
accounts were viewed as "marketing documents". He added we need to make surethe backend actually represent a practical portrait of what is going on in the company".
For example, the majority individual retail investors wouldnot read all theaccounts but they
want toknow about the companys weak management issues, going concern issues,poor
controls, profitability, or leading heads which generally bringdown businesses - Barings,
WorldCom,Enron, etc.
Introducing a new type of audit committee report will increase the quality of annual reports
as suggested by Talbut. Also in terms of accounting standard it is necessary to ensure
interested party can understand the idea of fair and true is an override for accounts and it
needs to be used". Talbut suggest the IASB to reintroduce the idea of prudence. Though, the
idea of prudence had dropped bythe IASB in 2010 fromits conceptual framework for the sake
of neutrality concept.
But Talbut criticised it and urged for its reinstatement. He said "I don't believe prudence can
be equated with neutrality" and "Prudent accounts are essential for the confidence of
investors."
IASB should pay attention to Robert Talbut's view that is mention above and had been made
from many quarters.
Ian Mackintosh advised to re-establish prudence as an elementary accounting concept in the
same Audit Quality Forum; he also mentions that it would beto surrender to commonsense
rather surrender the IASB's independence to the EU.
Some might arguethat it isclear from consultations presentlyunderway thatthe profession
doesnot understand what it meansto serve the publicinterest. When convergence ofUK GAAP
with IFRS began,there was said tobe "an expectation gap"on the part ofusers with no rightto
rely onthe financial statements.That expectation gap has been widened,not narrowed, by
recognising aplethora of user groups within theIASB's present framework document.
From the writers point of view, if IASB consider serving the public interest by identifying a
wide range of users necessary will be seriously mistaken. Therefore, IASB can adopt
accounting policies that aims to provide economic stability to fulfil its public interest
mandate. Moreover, profession have the duty at the micro level whereas, government has it at
the macro level.
However, published figure may get importance to other group of users but have nolegal rights
to rely onthem. If, there isany expectation gap onthe part of other users could beaddressed by
advising other users to seek independent advice or lowering those expectations.

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Prudence should therefore be restored as amatter of public interest.Next annual accounts
reports consist of 101 pages covering all the areas of financial transaction by complying the
rules and regulation of accounting standard and company policy to meet the demand of
financial statement users. So it could be safe to say that Nexts annual account has got the
right balance.

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Question Number 3
Financial statements are prepared to make understandable to the person who reads and who
have "a reasonable knowledge of business and economic activities and accounting and who
are willing to study the information diligently" Gibson,(2013). And their capability of
understanding and analyzing the financial statements will help them to be successful in the
business world.
Users of a financial statement could be internal or external. Potential and existing external
investors are most important users of a financial statement as they play a significant role in
financing the company for short term or longer term. Some of the potential existing external
investors users are the equity investor group, loan creditor group, supplier and trade creditor
group.
Equity investor group is formed of existing and potential shareholders. This group of users
look for combination of two things or for one thing: income, a money return by way of
capital gain or dividend, or by selling their share at a higher price than the purchased price
Alexander, Britton and Jorissen,(2011). Though these two are closely related but the only
difference is the time scale. Still the simple theory is made hugely difficult in practice by the
effects on share prices of other equity investors belief. They will need this information to
assess the company potential for success and profitability and based on this analysis they will
take the decision to invest or to sell their share.
The loan creditor group includes of short-term, medium and long- term lenders of money.
Importantly this group of users will look for the answer of when they will get their
investment back? Short term loan providers will calculate the amount of cash that the
business have currently or will have soon to take the investment decision Gibson,(2013).
They will also consider the net realizable value of all the assets. Similarly, supplier and trade
creditors group needs the same information like short-term loan creditors. However supplier
and trade creditors group will also require forming a longer-term notion of the business.
Moreover, supplier and trade creditors group wants to know the ability of the company to pay
its obligations when they become due. In terms of long term loan creditors they need to see
the longer- term view of the firm and its future cash position by analysing the financial
statement. Moreover, they need to analyze the strength and position of the business some way
into the future before to take any investment decision. So, if the company have got the ability
to pay its liability upon maturity will most likely influence the investor towards a positive
response.
To sum up, both existing and potential investors needs this information for estimating the
potential success and future profits of the firm. Hence, the financial statement of a firm will
be a good guide to estimate the future profit if and only the statement is presented fairly and
honestly by complying all the rules and regulation of IASBs .

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Question Number 4
It is very much important for an investor to know how much money a company is making
before taking the investment decision. But the public limited company provide several
earnings figure to its investors. So, the investor should look at companys earnings reports.
Where the investor will see three different measures of profits net income, basic EPS and
diluted EPS.
Net income isthe total profit after taxes thatthe company made the year.In terms of
shareholders point of view it is best to look at EPS of the company. According to Elliott and
Elliott, (2008) EPS is the part of the company profits to be paid to each outstanding share of
common stock. According to IAS 33 the main objectives of calculating the EPS is to provide
a platform for to improve performance comparisons between different reporting periods for
the same entity and different entities in the same reporting period. [IAS 33.1]
Generally, the basic per-shareis the net income dividedby the number of general shares
outstanding.It will represent the whole earnings attributableto every share that investor will
own to Elliott and Elliott, (2008). Although this figure stilldoesn't express the whole story to
the investor. As because the number ofshares outstanding might change notably if any ofthe
employees or investors of the company who have rightsto shares that don'tcurrently exist
exercise those rights.For instance, most companies issue preferred shares or debt that can be
transformed into normal stock under certain situation and top executives are regularly paidin
part with stock options.However,diluted earnings per share take all that into account.It
represents the situation by considering;if all the existing rightsto general shares were
exercised then wthat will be the total earnings attributable to every share.
For the period from 2012 to 2013 the basic EPS and diluted EPS of NEXT plc has increased
respectively 282p to 320.1p and 275.1p to 311.7p and thanks to their strategy of share buyback, increase in net profit after tax and the decrease of the total number of share in issue.
Even if the EPS ratio increased proportionally more thanthe dividends per share,the company
hasbeen wised notto level outthis two ratios.As a matter of fact,whereas the net profit after
tax didnot increase as muchas the dividend per share,we can even assume thatthe increase in
dividends pershare was too high

Therefore,that could be one ofthe reasons why the

confidence ofthe market in the Nextsshare remains proportionally thesame despite the

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increasingin earnings per share ratio.The market could have seenthat company tries toboost
its dividends pershare.

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Question Number 5
Property, plant and equipment (PP&E) is a term that can be found on the balance sheet of a
company annual report. PP&E is the long term or noncurrent asset section of the balance
sheet. Land, office equipment, buildings, vehicles, machinery, furniture and fixtures used in a
business are included in this classification. Moreover, accumulated depreciation for these
assets is also included in property, plant and equipment (except for land, which is not
depreciated).
Normally, the PP&E assets are recorded at their cost followed by a deduction for the
accumulated depreciation that applies to all of these assets (AccountingCoach.com, 2014).
IAS 16 states that company must have to show their PP&E on the statement of financial
position at its carrying values Iasplus.com,( 2014). Next has shown their balance of PP&E at
cost and depreciated it on straight line basis on the balance sheet. That gives a chance to
compare it with other companies within the same industry. They have provided sufficient
information about the property, plant and equipment. There is detailed information about the
types of assets such as their free hold assets, leased assets and plant and fittings. There is
proper adjustment in the workings about the addition and disposal of assets so that the user of
the financial statements can get a clear idea about the changes in the balance of property,
plant and equipment of the firm.

According to the IFRS lease is a contract in which the right to use a specified asset or assets
is conveyed, for a period of time, in exchange for consideration The exposure draft also
proposes guidance on distinguishing between a lease and a contract that represents a purchase
or sale and on distinguishing a lease from a service contract .
According to IAS 17 two types of lease are the finance and operating leases. Operating lease
is a lease other than financial lease. On the other hand lease that transfers substantially all the
risks and rewards incident to ownership of an asset to the lessees known as finance lease.
NEXT plc do have an amount of 1811.8m operating lease as an off balance finance but they
do not have a significant amount of finance lease in the statement of financial position.
However, operating lease engages the higher level of expenses reported and appears on the
company's income statement. Expenses, including the operating lease expense, reduce the
company's net income. Also company have no ability to sell or modify the asset without the
lessor's permission due to the lack of ownership. Another disadvantage of operating lease is
lack of continuity makes it difficult for the company to plan. On top of that, it is very easy to
change the finance lease to operating lease by accounting engineering to falsifying the
financial statement. Although , IASB and FASB are working together to introduce a common
standard for lease accounting.
Financial instrument
According to (Clendon, 2014) financial instrument is a contract that gives rise to a financial
asset of one entity and a financial liability or equity instrument of another entity. It is

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fundamentally important that the instrument are classified correctly either an equity
instrument or a financial liability otherwise it will directly impact on the calculation of
gearing ratio. Gearing ratio is very much important for the user of the financial statement to
assess the financial risk of the company.
Financial instrument can be categorized into cash instrument which is financial instrument
whose value is determine directly by the market and derivative instrument which derive its
value from the value and characteristics of one or more underlying entities such as an index,
asset, or interest rate. Next plc has followed derivative financial instrument to manage
interest rate and foreign exchange rate. If Changes in the foreign currency derivatives or
interest rate derivatives do not meet the criteria for hedge accounting in IAS 39 are
recognized in the income statement Nextplc.co.uk, (2014).

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Question number 6
Generally companies release three primary financial statements ona regular basis and,a cash
flow statement is one of them. Acash flow statement showswhere money is going out and
fromwhere the money is coming in. This statement can provide valuable information to a
potential investor however it has some drawbacks as well.
A statement of cashflow statement consists ofoperating activities,investing activities and
financial activities. Cash flow statement provide the detailed look at the changes in the
amount of cash that a company holds over time that helps to get the wide view of the success
of the company. Moreover cashflow statement also shows whether the company has enough
money to expand. But it will not look at assets holdings of the company. However it does not
consider about future growth of the company.
In Next Plc cash conversion period is 43 days which includes Next Plc converse their
working capital into cash within 45 days. On the other hand Next Plc is generating more cash
then operating profit in 2013 &2012 respectively 116% and 111%. As a result it is seen that
Next Plc is very efficient to convert profit into cash due to well experienced management.
The cash flow statement of Next shows an increase in the overall cash flow of the firm
amounting up to 82.1 million from the year 2012 to 2013. The changes in the cash flow of
the firm have been an aggregate result of the following reasons:
The increase in the net cash generation from the operating activities by 133.1 million
because of various reasons has been a key fact for the rise in the cash flow of the firm.
The reasons are the reduction in the depreciation and impairment of assets and loss on
disposal of assets, rise in the share option charge and less expenditure in inventory
and the ore favorable exchange movement.
The increase in investment of 15.5 million by Next is a result of the large fall in the
disposal of subsidiary from year 2012 to 2013. Though the investment in new plants
were lesser but the fall of proceed from the disposal was so high that it could not
bring a positive figure of the investment activities.
The increase spending of the firm in financing activities in 2013 by an amount of 45
million has been a result of the purchase of share and a larger dividend paid by Next.
In addition, the decrease in the profit from share disposals an interest receipts is liable
for the negative balance of the investment activities.
From the investors points of view cash flow statement is very much important as it shows
how much actual cash a company has generated. Many companies has shown profit on the
income statement but struggled later because of insufficient cash flows. So the potential
investor should look for the companys ability to generate cash before taking investment
decision.

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Question Number 7
Profitability Ratiostells company's abilityto generate profitrelated to its expensesduring a
specificperiod. Most ratioswith higher valuecompared to previousyear or competitor
indicatesthat company hasgood performance Mard, (2002).
Calculations of gross profit margin of NEXT plc are as follows
Formula Gross profit
Revenue
2013
1116.7
3547.8
31.5%

2012

1045.3
3441.1
30.4%

Gross profitmargin MeasuresCompanys profitabilitycompared to itsturnover. This ratiomust

be more thanone torun a business. If ratiois less thanone business cannot surviveregardless of
size ofturnover of thebusiness. And thisratio also indicate howmuch profitablethe business is
Mard, (2002).
In the year 2013 Next Plc. there is a increased of 4% of gross profit, whichshows slight
improvement thanlast year, whereas,its competitor Marks&Spencer gross profitmargin is
greater than Next Plc. It showssimilar trend asNext Plc. MarkandSpencer are spendingonly
62% on itscost of salewhile NextPlc. has 70%. This resultillustrates that priceof raw
materialof Next Plc. is higherthan Mark&Spencer or thecompany is sellingits products
justonly 29% percent higherthan its cost.Next Plc. offersmany promotional offersfor its
costumersthan Mark & Spencer. For instance, itoffered half -price saleduring Christmas
period, Buyone-get one freeand other occasionaloffers, which cutcompanys gross
profitmargin.
ROCE:
Return on capitalemployed tells the percentageof profit beforeinterest and taxcompared to its
investedcapital including long-termdebt and shareholdersfund Mard, (2002).
Formula Profit before interest and tax
Total asset current liabilities
2013

2012

621.6+29.00
1893.6-816

60.4%

53.9%

570.3+28.9
1854.2-742.4

Next Plc. Has verysatisfactory ROCEpercentage compared toits competitor Mark&Spencer.

Next Plc.gained 12% growth thanlast year. This indicates Next Plc.has used itscapital to
maximize itsprofit. In brief, resultsfrom profitability ratiossuggest that, NextPlc.is more
profitablecompany despite Mark&Spencer have greaterrevenue. Mark&Spencer is
earninghigher gross profitmargin but it isspending more onits overhead costand interest
expenses,whereas NextPlc. has lowergross profit margin. Nonetheless,higher operating

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profitmargin as wellas net profit margin. It can bebecause of itspromotional offers. NextPlc.is
offering products inlower price andtaking benefits ofeconomies of scale.

Gearing ratio
This ratio determines the balance between long-term debt and shareholders equity.
Formula

Debt
Equity
2013

2012

792.00
285.6

277.3%

399.2%

889.1
222.7

In the abovetable, Next Plc. has 277.3% gearingratio, which is decreasedthan last year. But
stillgearing ratio is highthat shows thatNext Plc.is more riskierbusiness. Moreover NextPlc. is
highly gearedthan Mark & Spencer. Next Plc.should focus on growththrough buying.
Dividend coverratio:
Dividend Coverage Ratiostates the numberof times anorganization is capableof paying
dividends toshareholders from the profitsearned during an accountingperiod.
Formula

Profit for the year

Dividend paid
2013

2012

473.1
147.7

3.20 times

3.18 times

430
135.1

0ne times paid

Dividend Coverage Ratioindicates the capacity of anorganization to pay dividendsout of
profit attributableto the share holders Mard, (2002).A dividend cover of 3implies that
acompany has sufficient earningsto pay dividends amountingto 3times ofthe present dividend
payout during theperiod. Investors use dividend coverratio to gauge the levelof risk
associated withthe receipt ofdividends on their investment.A low dividend covermay suggest
investors thatthe company may notbe able to sustainthe current levelof dividends in case ofa
downward trend incompany's profitability in the future whichcould impact the valuation
ofshares.
Inventory turnover in days:

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Managing inventory isvery important in acompany that sellsproducts to makea profit.
Calculating inventory days isan indicator of howwell the business is doing interms of
inventory.It involves determining the costof goods sold and average inventoryin a given
period.In most cases,an inventory turnover ratiois calculated to measurethe performance
ofoverall inventory and to findout how the company ismeeting product demands Hussey and
Ong, (2005).
.

Formula

inventory
365
Cost of goods sold
2013

331.8
2437
50 times

365

371.9
2395.8

2012
365

57 times

Generally,the lower the ratio thebetter use of inventory.High numbers shows ahuge amount
of capital invested in inventory.NextPlc. is taking less time to sell its stock compare to last
year. It shows that Next Plc. has not over purchased or a sale has increased since thestock
was purchased.

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Question Number 8
A chairman statement is a letter from the board to shareholders reporting on the companys
situation normally comes with the annual report Lee,(2006). Chairman is most senior
executive person of the company conveyer of the stakeholder interest to the board. It is a
voluntary report and it should be presented at the beginning of the report.
According to the chairman of NEXT year 2013was another goodyear for them.Underlying
EPS grew by 16.6%to297.7p and they propose toincrease the full year dividend to105p.
Moreover, while UK economy was struggling to growth NEXT dividend and EPS have
grown by 15%. operating margins and group underlying profit before tax rose during the
year. In addition to cash flow was very strong at the same time and they returned 390m toits
shareholders through dividend andshare buybacks.And the last two years performance was
great as well where share price raised by over 100%.
The chairman also expect a challenging year ahead and planning to investing in improving
their products, Brand and returning cash to its shareholder through controlling cost. Next year
might be an economic down turn worldwide and he did not provide any specific plan for that.
He explained the current year performance and hoping to do the well in the coming year as
well, where hope is hope. Also he did not mention anything about environmental issue.
However, their past performance was very good and it might indicate that the management
are well experienced and probably the upcoming year will also be good year for them.
Next plc corporate responsibility (CR) is concentrating on key business-related
environmental, ethical and social impacts in a way that aims to convey value to its
stakeholders. The report shows that how the focus of their CR programme supports to
continue to grow their business by acting responsibly. CR is a strategy but not only an ethical
issue. They act fairly and responsibly across their whole business. They believe they are
making good progress by being a great employer, reducing our impact on the environment
and trading responsibly.
They are committed to working with their suppliers to help them understand and develop
their businesses to be compliant to their Code of Practice requirements. They do work
directly with their various suppliers and establishing long-term m relationships with them to
help them achieve the requirements of their Code.
With the issue of environmental challenges they reduce carbon emissions by 3%, improve the
efficiency of their vehicles, consumption of energy was reduced by 4% compared to last year;
and 30% reduction achieved to date against a target of 35% by 2015. Also fuel intensity was
reduced by 8% compared to last year.
They maintained their operational waste at 85% diverted from landfill. In regards to the
health and safety within the business an 11% reduction in all employee accidents in the retail
stores, 14% reduction in Distribution and 17% reduction in warehousing. However, they did
not show any concern about the people who are working with supplier. Most of the suppliers
of the NEXT plc products are India, China and Bangladesh. In most cases suppliers from

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Bangladesh does not provide safe working environment and better wages to its employees.
As for example, On 24 April 2013, Rana Plaza in Bangladesh had collapsed due to the poor
working environment that cause a total death of 1,129 people while Approximately 2,515
were injured. It is Next plc sole responsibility to look after these issues from the social
perspective.
Normally CR is good and improves corporate accountability to its stake holder says Mullerat
(2010). Although, some argues that there are no common bench mark to which performance
can be compared. There are problems with the verification and expectation of using this
report by a wide range of stakeholders is proving incorrect Lee,(2006). And lastly, most often
readership of this report is largely restricted to the socially responsible community Mullerat
(2010).

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