Morrison Supermarkets plc. is one of the biggest four supermarkets nutrient retail merchant in the United Kingdom. It became a populace limited company in 1967 and listed in the London Stock Exchange ( LSE ) . Morrison has presently over 500 shops across United Kingdom with an one-year gross over ?17bn overall ( About United states: Morrison, 2013 ) . The company net income was ?947m, with an addition of ?73m ( 8 % ) compared with ?874m last twelvemonth.
Morrison ‘s investings contain of investings in equity instruments. All equity instruments are held for long term investing and are measured at just value through other comprehensive income. Where the just value of the instruments can non be measured faithfully, the investing will be recognized at cost less accrued damage losingss in conformity with IFRS 26 ‘Financial instruments: acknowledgment and measuring ‘ . Any damage is recognized instantly in net income or loss. The investings in subordinate projects are stated at cost less proviso for damage. However, Table 1 is shown the subordinates of Morrison Supermarkets PLC.
Table 1: Chief subordinates
Subordinates of Wm Morrison Supermarkets PLC
Chief activity
Equity keeping
%
Farmers Boy Limited
Manufacturer and distributer of fresh nutrient merchandises
100
Neerock Limited
Fresh meat processor
100
Wm Morrison Produce Limited
Produce bagger
100
Safeway Limited
Keeping company
100
Optimization Developments Limited
Property development
100
Safeway Stores Limited
Grocery retail merchant
100
( Beginning: Morrison 2012 one-year study note 31 )
The Group presently owns 51 % of the portion capital of Farmers Boy ( Deeside ) Limited. However, due to the nature of options in topographic point to buy the staying 49 % portion capital in 2013, the subordinate has been treated as if it were already 100 % owned for accounting intents.
Regulatory Framework for fiscal coverage:
Morrison is required to show reasonably the Group ‘s fiscal place, fiscal public presentation and hard currency flows in conformity with:
International Financial Reporting Standards ( IFRS ) .
International Financial Reporting Interpretation Committee ( IFRIC ) .
The demands of the UK Disclosure and Transparency regulations of the Financial Services Authority in UK.
The Parent company ‘s fiscal statements have been prepared in conformity with United Kingdom Generally Accepted Accounting Practice ( United Kingdom Accounting Standards and applicable jurisprudence ) .
The fiscal statements have been prepared under the historical cost convention as modified by the recording of pension assets and liabilities and certain fiscal instruments. The most critical of judgements and estimations that can hold a important impact on the fiscal statements relate to:
The utile economic life of assets and ore militias.
Damage of assets.
Restoration, rehabilitation and environmental costs.
Retirement benefits.
2. Damage of Assetss
Under ( IAS 36 ) Damage of Assets requires to guarantee that company ‘s assets are non carried at more than their recoverable sum ( higher of just value less costs to sell and value in usage ) . However, with Goodwill and intangible assets an impairment trial is yearly required. If there is an initiation of an damage of an plus, company is require to carry on impairment trial, and the trial may be conducted for a ‘cash-generating unit ‘ where an plus does non bring forth hard currency influxs that are mostly independent of those from other assets.
Harmonizing to ( Deloitte, 2008 ) IFRS requires impairment proving at the “ cash-generating unit ” ( CGU ) degree, which is by and large similar to the U.S. GAAP “ plus group ” degree, but may ensue in a lower degree of proving.
However, IFRS differs from U.S. GAAP in the method and rating for ciphering damage, and allows for reversal of damage with the exclusion of Goodwill. Durable plus damage is a one-step attack under IFRS and is assessed on the footing of recoverable sum, which is calculated as the higher of just value less costs to sell or value in usage ( e.g. discounted hard currency flows ) . If damage is indicated, assets are written down to the higher recoverable sum.
Table 2: Comparison of Impairment Approaches
U.S. GAAP
U.S. GAAP
IFRS
Good will
Fixed Assetss
All Finite & A ; Indefinite-Lived Assets
Measure 1
Determine if impairment exists by comparing the entire transporting value of the coverage unit to its just value. If the transporting value exceeds the just value, travel to step 2.
Determine whether damage exists
by comparing the transporting value of the plus group to the undiscounted hard currency flows. If the transporting value exceeds the undiscounted hard currency flows, go to step 2.
Determine if impairment exists by
comparing the transporting value of the CGU or plus to its recoverable
sum every bit defined above. If the transporting value exceeds the recoverable sum, damage is recognized for the difference.
Measure 2
Calculate and delegate just value of all other assets and liabilities of describing unit, balance peers
implied Goodwill. Impairment charge
is measured as the difference between
the transporting value and implied just value of Goodwill.
An impairment charge is recognized by cut downing the transporting value of the plus group to its estimated carnival
value.
Not applicable.
( Beginning: Deloitte, 2008 IFRS ) .
However, the company divided into hard currency bring forthing units for the impairment trial of non-current assets. If there are indicants of possible damage so a trial is performed on the plus affected to measure its recoverable sum against transporting value. An impaired plus is written down to its recoverable sum which is the higher of value in usage or its just value less costs to sell. In measuring value in usage, the estimated hereafter hard currency flows are discounted to their present value utilizing a pre-tax price reduction rate that reflects current market appraisals of the clip value of money and the hazards specific to the plus ( Morrison 2012 one-year study ) .
If there is indicant of an addition in just value of an plus that had been antecedently impaired, so this is recognized by change by reversaling the damage, but merely to the extent that the recoverable sum does non transcend the transporting sum that would hold been determined if no impairment loss had been recognized for the plus. Impairment losingss antecedently recognized relating to Goodwill can non be reversed ( Morrison 2012 one-year study ) .
3. The damage of Goodwill
Harmonizing to ( IAS 36.96 ) Goodwill must be tested yearly for damage. Goodwill should be allocated to each of the acquirer ‘s cash-generating units, or groups of cash-generating units to prove for damage. If the recoverable sum of the unit exceeds the transporting sum of the unit, the unit and the good will allocated to that unit is non impaired. If the transporting sum of the unit exceeds the recoverable sum of the unit, the entity must acknowledge an impairment loss.
Table 3: Good will and intangible assets
Good will
?m
Trade names
?m
Software
development
costs ?m
Licenses
?m
Entire
?m
Current period
Cost
At 30 January 2011
7
–
173
20
200
Acquired in a concern combination
27
15
19
–
61
Additions
–
–
70
2
72
Interest capitalized
–
–
7
–
7
At 29 January 2012
34
15
269
22
340
Accumulated amortisation and damage
At 30 January 2011
–
–
9
4
13
Charge for the period
–
1
16
7
24
At 29 January 2012
–
1
25
11
37
Net book sum at 29 January 2012
34
14
244
11
303
( Beginning: Morrison 2012 one-year study note 10 )
Table 3: Amalgamate balance sheet 29 January 2012
Assetss
Non-current assets
2012
?m
2011
?m
Goodwill and intangible assets
303
184
The company does non impair Goodwill, therefore there was no consequence on fiscal statements. However, if the company has impaired the Goodwill the company will compose down Goodwill by describing an impairment disbursal. The sum of the disbursal straight reduces net income for the twelvemonth. The company has non tended to detain any historical damage loss and no impairment loss was identified in the current fiscal twelvemonth. However, any Goodwill originating on a concern combination is non amortized but is reviewed for damage on an one-year footing or more often if there are indexs that Goodwill may be impaired. Any damage is recognized instantly in net income or loss ( Morrison 2012 one-year study ) .
Table 4: Reappraisal and Benchmark ( Morrison, Sainsbury and Tesco are all nutrient retail merchant companies listed in LSE )
Morrison
Sainsbury
Tesco
Test indicant for damage at each balance sheet day of the month
i??
i??
i??
Intangible plus with an indefinite utile life is tested yearly
i??
i??
i??
Goodwill allocated to ( group of ) CGU expected to profit from the A & A ; M and represents the lowest
direction degree
i??
i??
i??
( Beginning: Morrison, Sainsbury and Tesco 2012 one-year study ) .
4. Fiscal Instruments
The fiscal instruments reported in Morrison are as follow:
Financial assets
Trade and other debitors
Trade and other debitors are ab initio recognized at just value. when there is an grounds that the Group will non be able to retrieve balances in full, the proviso is made and recognized in ‘Administrative disbursals ‘ in net income for the period.
Cash and hard currency equivalents
Cash and hard currency equivalents for hard currency flow intents are held at just value which equals the book value and includes hard currency in manus, hard currency at bank and bank overdrafts. In the balance sheet bank overdrafts that do non hold right of beginning are presented within current liabilities.
Cash held by the Group ‘s confined insurance company is non available for usage by the remainder of the Group as it is restricted for usage against the specific liability of the prisoner. As the financess are available on demand, they meet the definition of hard currency in IAS 7 ‘Cash flow statements ‘ .
Table 5: Fiscal assets [ IAS39.45 ]
2012
2011
Measurement base
Changes in just value
At just value through net income and lost:
Trade and other debitors
( 329 )
( 323 )
Fair value
I/S
Loans and receivables [ IAS39.46a ]
Cash and hard currency equivalents
241
228
Amortized cost
Bachelor of science
There are no fiscal instruments classified as “ Held to adulthood investings ” .
Fiscal liabilities
Trade and other creditors
Trade and other creditors are stated at just value.
Borrowings
loans and overdrafts ab initio are recorded at just value, after price reduction dealing costs. After initial acknowledgment, any difference between the initial carrying sum and the salvation value and is recognized in net income of the period on an effectual involvement rate footing.
Table 5: Fiscal Liabilities [ IAS39.47 ]
2012
2011
Measurement base
Changes in just value
At just value through net income and lost:
Trade and other creditors
–
–
Fair Value
I/S
Loans and receivables [ IAS39.46a ]
Borrowings
1,102
25
Amortized Cost
I/S
Derivative fiscal instruments and hedge accounting
Derivative fiscal instruments normally are remeasured at just value through loss or net income, except if the derived function is qualify for hedge accounting.
Cash flow hedges
Derivative fiscal instruments are categorized as hard currency flow hedges when the derivative fiscal instruments hedge the Group ‘s exposure to variableness in hard currency flows, that are either refer to a peculiar hazard associated with a recognized plus or liability.
The Group has cross-currency barters designated as hard currency flow hedges. These derivative fiscal instruments are used to cut down hazard from possible motions in foreign exchange rates inherent in the hard currency flows.
To diminish the hazard from possible motions in energy monetary values, the Group has energy monetary value contracts which are designated as hard currency flow hedges.
The Group uses frontward exchange contracts with fiscal establishments which are elected as hard currency flow hedges to diminish the hazard from possible motions in foreign exchange rates. The addition or loss on any uneffective portion of the hedge is instantly recognized the IS.
Fair value hedges
Derivative fiscal instruments are classified as just value hedges when they hedge the Group ‘s exposure to alterations in just value of a recognized plus or liability or an unrecognised house committedness. The fudging instrument is stated at just value and any alterations in just value are instantly recognized in other comprehensive income.
Hedge accounting is discontinued when the fudging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that clip, any cumulative addition or loss bing in equity at that clip remains in equity and is recognized when the prognosis dealing is finally recognized in the income statement. When a prognosis dealing is no longer expected to happen, the cumulative addition or loss reported in equity is instantly transferred to the income statement.
Table 6: Group ‘s derivative fiscal instruments
At 29 January 2012
& lt ; 1 twelvemonth ?m
1 – 5 old ages ?m
5 + old ages ?m
Cross-currency barters – hard currency flow hedges
Outflow
( 8 )
( 31 )
( 234 )
Inflow
7
28
230
Forward contracts – hard currency flow hedges
Outflow
( 67 )
–
–
Inflow
66
–
–
Energy monetary value contracts – hard currency flow hedges
Outflow
( 4 )
( 3 )
–
Inflow
2
–
–
The derivative includes: Cross-currency barters, Forward contracts and Energy monetary value contracts. Those are used to fudge hazard from foreign exchange, involvement rate and trade good monetary value. No derived functions are used for bad intents.
5. Financial hazard direction
The major types of hazard of Morrison are Foreign currency hazard, Liquidity hazard, Credit hazard and Other hazard. However, the aims, policies and procedures for pull offing these hazards are stated below:
Foreign currency hazard:
The bulk of this hazard in Group occurs when the company trade purchases in Sterling and overseas trade purchases made in currencies other than Sterling, chiefly being Euro and US Dollar. The Group ‘s aim is to cut down hazard to short term net incomes and losingss from exchange rate fluctuations. It is Group policy that any transactional currency exposures recognized to hold a material impact on short term net incomes and losingss will be hedged through the usage of derivative fiscal instruments. At the balance sheet day of the month, the Group had entered into frontward foreign exchange contracts to extenuate foreign currency exposure on up to 50 % ( 2011: 50 % ) of its forecasted purchases within the following six months.
Liquid hazard:
The Group policy is to keep a balance of support and a sufficient degree of undrawn committed adoption installations to run into any unexpected duties and chances. Short term hard currency balances and undrawn committed installations, enable the Group to pull off its liquidness hazard. At 29 January 2012, the Group had undrawn committed installations of ?725m.
Recognition hazard:
The Group recognition hazard arises from hard currency and hard currency equivalents, sedimentations with banking groups every bit good as recognition exposures from other beginnings of income such as supplier income and renters of investing belongingss.
Other hazard:
Pricing hazard: The Group manages the hazards associated with the purchase of electricity, gas and Diesel consumed by its activities ( excepting fuel purchased for resale to clients ) by come ining into bank barter contracts to repair monetary values for expected ingestion.
Cash flow involvement rate hazard: The Group ‘s long term policy is to protect itself against inauspicious motions in involvement rates by keeping about 60 % of its amalgamate entire net debt in fixed rate adoptions. As at the balance sheet day of the month 70 % ( 2011: 55 % ) of the Group ‘s adoptions are at fixed rate, thereby well cut downing the Group ‘s exposure to adverse motions in involvement rates.
Harmonizing to Provision for damage of Financial Instruments, the company does non unwrap any other proviso in term of damage of Financial Instruments.
As we explained before the company usage hedge accounting and the tabular array below explain company ‘s hedge constabularies compared with the industry pattern.
Table 7: Company ‘s hedge constabularies compared with the industry pattern.
Policy
Morrison
Sainsbury
Cash Flow Hedge
Forward exchange contracts
Energy monetary value contracts
Currency barters
The alterations in just value of derived functions that are designated as effectual are recognized in equity until the weasel-worded minutess occur, at which clip the several additions or losingss are transferred to the income statement. The uneffective part is recognized in I/S ( Morrison 2012 one-year study note 10 ) .
Forward contracts
Commodity contracts Currency Swap
The effectual part of alterations in just value of derived functions are recognized in Equity, the addition or loss relating to uneffective part is recognized in I/S.
Fair Value Hedge
Cross-currency Barters
Changes in just value of derived functions instantly recognized in equity and alteration in just value of weasel-worded point is recorded in I/S.
Interest Rate Barters
Changes in just value of derived functions and alteration in just value of weasel-worded point is recorded in I/S.
The basic policies of these two companies are similar. However, they use different instruments in fudging. Fair value hedge are chiefly used to fudge the exposure from involvement hazard. Cash Flow hedge are chiefly used for goods monetary value fluctuation.
6. Retirement Benefit
Table 8: Post employment Policy
Histories
Treatment
Defined part strategy
is a pension strategy under which the Group pays fixed parts into a separate
entity.
Pension benefits under defined benefit
strategies
defined on retirement based on age at day of the month
of retirement, old ages of service and a expression utilizing either the employee ‘s compensation bundle or calling norm
revalued net incomes.
Pension strategy assets
held in separate legal guardian administered financess, are valued at market rates.
Pension strategy duties
measured on a discounted present value
footing utilizing premises
The operating and funding costs of the strategy
recognized individually in net income
for the period when they arise
Death-in-service costs
recognized on a consecutive line footing over their vesting period.
Actuarial additions and losingss
recognized instantly in other
comprehensive income.
( Morrison 2012 one-year study, Group accounting policies ) .
The major premises used in this rating to find the present value of the strategies ‘ defined benefit duty are shown below:
Fiscal
2012
2011
Rate of additions in wages
4.55 %
5.05 %
Rate of addition in pensions in payment and deferred pensions
2.50 % -3.30 %
3.30 % -3.80 %
Discount rate applied to intrigue liabilities
4.75 %
5.60 %
Inflation premise
3.30 %
3.80 %
Longevity
The mean life anticipation in old ages of a member who reaches normal retirement age of 65 and is presently aged 45 is as follows:
2012
2011
Male
24.4
24.2
Female
25.3
25.1
The mean life anticipation in old ages of a member retiring at the age of 65 at balance sheet day of the month is as follows:
2012
2011
Male
22.0
21.8
Female
23.0
22.8
Expected return on assets
The major premises used to find the expected future return on the strategies ‘ assets, were as follows:
2012
2011
Long term rate of return on:
Equities
5.90 %
7.45 %
Corporate bonds
4.75 %
5.60 %
Gilts
2.90 %
4.44 %
Property related financess
–
5.60 %
Cash
1.50 %
1.50 %
The company has no any off-balance sheet post-employment duties. The expected return on program assets is based on market outlook at the beginning of the period for returns over the full life of the benefit duty ( Morrison 2012 one-year study, note 20 ) .
The difference between forecasted benefit and existent benefit: “ If the fund set aside in the post-employment program are greater ( less ) than the program committednesss, the program is overfunded ( underfunded ) ” ( Palepu et al. , 2007 ) . Therefore, the economic duty of the company will non be reflected decently. If the prognosis for post-employment duty is excessively low to the existent, the house ‘s duties and related disbursals recognized in the Income Statement will be underestimated.
