Interpreting Company Accounts: Window Dressing and Depreciation - Activity

This Activity looks at these two aspects of interpreting company accounts. They can be closely related to each other in that depreciation can be interpreted in diferent ways and as such this can affect the way the accounts can be presented.

Window Dressing

The first example looks at the retail supermarket chain, Sainsbury's. Sainsbury's was, for many years, the leading supermarket retailer in the UK. However, during the 1990s, competition increased and Sainsbury's found itself being increasingly caught up and then taken over by its rivals. Now, Sainsbury's stands behind Tesco and Asda Wal-Mart in terms of market share. Tesco's profits announcement for the year up to April 2004 recorded profits of £1.6 billion. Sainsbury's full year profits stood at £675 million (for the year to 31st March 2004).

The business has faced many challenges and a succession of chief executive officers (CEOs) to try and sort out the problems facing the business. At this stage, the most recent CEO, Justin King, needs the support of investors and the City to be able to develop and implement the plans he has to get the company back on track.

This support is essential; if the City feels that he is not making a positive difference to the business, then its share value will fall, the business will be worth less and it will find it harder to raise the capital it needs for future development plans. In addition, a lower share price might make it susceptible to possible takeover. Justin King and his board know how difficult the job is that they face in turning the business round. They will be keen, therefore, to stress the positives that are happening in the business to demonstrate that whilst things may be difficult, they are starting to go in the right direction. The question is, how effective are these new strategies?

Task 1

1. Use the company's Interim results for 28 weeks ended 9 October 2004 [PDF, 103 KB] to look at the summary of Sainsbury's interim financial figures. (http://www.j-sainsbury.co.uk/files/results/interims04/interims04.pdf)
2. Now look at the following news Web sites that reported on Sainsbury's performance:
   • Sainsbury's makes first ever loss - BBC report (http://news.bbc.co.uk/1/hi/business/4018407.stm)
   • Sainsbury's falls into the red - report from the London Evening Standard (http://www.thisislondon.co.uk/news/articles/14759753?source=Evening%20Standard)
   • Sainsbury's reports first ever loss - report from the Guardian (http://www.guardian.co.uk/business/story/0,,1353164,00.html)
   (N.B. You do not have to look at all of these but you should ensure you view at least two of them)
3. With reference to the interim results, to what extent would you argue that Sainsbury's has window dressed its interim figures?

Depreciation

One easy example to use when looking at depreciation is that of sports stars, especially footballers. A player is part of a club's assets; they have to be valued, therefore, but how do you value them and what is the value based on? More difficult still is a consideration of how to reflect the changing values of the player in the clubs accounts - how to depreciate that value.

Let's take the example of Newcastle United Football Club.

In January 2003, Newcastle United bought defender Jonathan Woodgate from Leeds United for a fee of £9 million.

Woodgate experienced a number of injuries during his time at Newcastle. He played in only 37 of 128 possible games before being transferred to Real Madrid in the summer of 2004 for £13.8 million. Woodgate only played 9 times for Real as a result of further injuries. At the start of the 2006 /07 season, Real loaned Woodgate out to a Premiership club. Newcastle were said to have the first option on any return made by Woodgate to the Premier league but in the event he joined local rivals Middlesbrough.

Alan Shearer is one of Newcastle's most exalted players.

A native of the area, he had played for other clubs before returning to Newcastle in 1996 for a then record £15 million. His career record is impressive; in 692 games he has scored 365 goals; for Newcastle he has scored 192 times in 363 games (Source: nufc.com). Shearer retired from football at the end of the 2005-06 season.

Title: Alan Shearer of Newcastle. Copyright: Getty Images, available from Education Image Gallery.

Task 2

Look at the information about Woodgate and Shearer above.

1. How would a straight line and declining balance method of depreciating the value of a player like Alan Shearer affect the club's accounts?
2. Was the sale of Jonathan Woodgate good business for Newcastle United?
3. How might Jonathan Woodgate and Alan Shearer's value to the club have changed during their respective time at Newcastle and why?
4. Now Alan Shearer has retired, how do you think that this affects the club's valuation of its assets?
5. What other information would you need to make a more accurate assessment of the issues above?

Extension Work

Biz/ed's Worksheet on Depreciation may help to further your understanding of the subject.