Tesco-style accounting risks well known - UK
Fin24 - Sep 25th 2014, 09:04
London - Tesco's disclosure of huge accounting mistakes over contracts with its suppliers has shocked industry analysts and executives, but not because they did not realise the potential for disaster.
On the contrary, they assumed that everyone in retailing was fully aware of the risks involved in accounting for rebates paid by suppliers to Britain's biggest supermarket groups, thanks to auditors' warnings.
Tesco's revelation on Monday that it had overstated its profit forecast for the first half of the year by £250m came as a nasty surprise and wiped £2bn off its stock market value.
Auditors routinely list risks that companies may face and this year they have raised the supplier rebates - which have become a major part of the grocery business - in a number of firms' accounts following a change in disclosure rules.
The auditors for all three of Britain's biggest publicly quoted retailers - Tesco, Sainsbury’s, and Morrisons - told investors in their most recent annual reports that their businesses faced material risks regarding the reporting of the supplier rebates. Those at the smaller online retailer Ocado did likewise.
These cash payment or discount deals take many different forms, but suppliers typically offer them to the retailers in return for additional efforts to promote their products.
Accountants said that such disclosures by auditors reflected more the growing importance of the supplier rebates than worries that companies did not know how to account for them.
"The rules are pretty well established," said a senior auditor at one big accounting firm.
Companies can even buy software packages to help to track, analyse, and account for such payments.
Nevertheless, deciding how the rebates should be treated in accounts requires companies to exercise discretion and therein lies the risk of the kind of trouble that has hit Tesco.
Companies do not publish how much they receive in payments from suppliers. Nevertheless, France's Carrefour, which vies with Tesco as the world's second largest supermarket group by revenue, said at the end of last year that it had over €1bn in outstanding receivables from suppliers in relation to rebates and other commercial incentives.
One industry executive said that rebate programmes typically lasted less than six months so the actual payments - known as supplier or commercial income - for a group of Carrefour or Tesco's size could run to billions of pounds.
This may explain the size of write-down at Tesco.
The company blamed "accelerated recognition of commercial income and delayed accrual of costs" within its UK food business for the overstatement of its expected half-year profit.
Some analysts said the mistake could reflect grey areas that sometimes exist when accounting for complex agreements, but others were sceptical that such a big downgrade could have resulted from a mere interpretational misunderstanding.From Fin24.com
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