Elizabeth Bruce - Line Manager

To: Elizabeth Bruce - Line Manager

From: Charvin Ebanja - Accountant

Date: 7 November 2002

Subject: Introduction and discussion of Directors (Pentium plc) concerns about the use of published financial statements for evaluating the success of a company. You should discuss the purpose of financial statements for various stakeholders. You should also discuss the impact the different accounting policies have on the final published figures.

The company we have chosen to focus on is the Selfridges Group plc. In this report we will look at the published financial statements to analyse their financial performance and positioning. We will also focus on the objectives, limitations and users of financial statements. As well as the how the various accounting policies impact on these statements.

Before discussing directors concerns we must look at the objectives of the financial statements. The ASB states in their statement of principles, that the objective of financial statements

 To provide information about the reporting entity's financial performance and financial position that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions.

 It can usually be presumed that this objective can be met by focusing exclusively on the information needs of the defining class of user, investors.

 Investors need information about the reporting entity's financial position and performance that is useful to them in evaluating the entity's ability to generate cash ( including the timing and the certainty of its generation) and assessing the entity's financial adaptability

Financial information regarding the operations of and resources controlled by an entity will be of interest to a wide range of stakeholders (user groups). Although, various stakeholders will be able to obtain bespoke financial information to suit their particular requirements the vast majority will have to rely on the published financial statements. Although the various user groups will have different requirements it does not follow that financial statements are not designed to meet the specific needs of all interested parties.

The Statement of Principles identifies seven user groups. These being, investors, customers, employees, lenders and other creditors, suppliers, governments and their agencies and the public. Each of these user groups (stakeholders) and their particular needs will be considered in turn.

Investors as providers of capital, their principle interest is in assessing the risk inherent in, and return provided by their investment or potential investment. Also the organisations ability to generate cash and its financial adaptability.

Government and their agencies main interest lie in the entities allocation of resources, which constitutes looking at all the activities of the organisation. In order to do this they require information to assist them in regulating the activities and assessing the taxation. A lot of their information is acquired through special purpose financial reports as well as the published general-purpose financial statements.

Customers require the use of financial statements because they are interested in the companies continued survival. This is especially so if they rely on the company or have a long-standing relationship with the company.

Employees are users because they require information in order to assess the stability and profitability of the business. Attention is especially paid to any activity or change that will affect their sector of the business. They are also interested in assessing their employers' ability to provide remuneration, pensions and any other benefits.

Lenders and any other creditors are interested in information that helps them assess whether their debts will be paid in due time. They are also concerned with information that helps them to decide whether or what conditions to borrow to the organisation.

Suppliers and other creditors are concerned with the information that helps them to decide whether or not to sell to a company and whether they are likely to be paid on time.

The publics' interest in financial statement lies in the fact that, entities often provide employment, bring commerce, use local suppliers and generally make contributions to the area. The local area and general public often use financial information to assess developments and trends.

When assessing Selfridges financial performance and position we can see that there have been improvements to Selfridges turnover from Ј392.1 million last year to Ј402.2m this year respectively. While Net profit has fallen by Ј5.1m. Our analysis shows us that although turnover has increased there has been a loss in profitability this is notable due to increases in cost of sales and costs. Selfridges have attributed this increase in costs to the opening and operating of a new store. Liquidity has fallen but is not at a level that is cause for concern. Due to this fall in profitability and liquidity, the earnings per share has fallen from 20.5p to 18.2p.Gearing also slightly increased to 1.38% from 0.63% both of which are extremely low. Selfridges attribute the increase last year as being a transition year in which there was a lot of investment that is due to make returns in the following year.

The ACCA defines accounting policies as "the specific accounting bases judged by business enterprises to be the most appropriate to their circumstances and the adopted by them for the purpose of preparing their financial accounts." The effect that accounting policies have on the financial statements is apparent in three main areas, recognition, presentation and selecting measurement bases. In other words these policies determine how a transaction is recognised (as an expense, asset or liability) measured (the process of calculation) presented (which financial statement).

Accounting policies are not to be confused with estimation techniques. Accounting policies determine the basis of how an item will be measured, while estimation techniques will determine the amount within the policy's boundaries. For example a change in the method or rate of depreciation is a change in estimation technique not accounting policy.

Within the Selfridges financial statement the impact of accounting policies is prevalent throughout, I have looked at the relevant accounting policies.

The

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