Tesco Financial Reporting and Analysis, 2015/2016

Financial reporting and analysis, 2015/2016

Complete suggested solution

Case 1: Deferred revenues

1. Tesco is offering its customers the possibilities to accumulate points after each purchase and later benefit from discounts available to owners of clubcards. Because Tesco has the obligation to provide such benefits to clubcard owners, it has to defer the recognition of a portion of its current revenues (i.e., deferred revenues). The deferral of revenues would be based on assumptions, including the likelihood of redeeming such awards (redemption rate).
2. Specific accounts to be analyzed: the (total card) deferred revenues to the income from unredeemed cards, the historical activity of cards, the percentage of recognized income on unredeemed cards to total revenues, and the marginal impact of revenues on unredeemed card on net income.

Case 2: Barclays; working backwards from data on marketable securities transaction.

1. $23,000 = $18,000 proceeds + $4,000 realized loss +  $1,000 loss previously recognized because they are trading securities.
2. $22,000 = $18,000 proceeds + $4,000 realized loss which is selling price less acquisition cost because they are securities available for sale.
3. If debt securities were classified as held to maturity, Barclays would move to historical (acquisition) cost, thus not recognition any further market deterioration in the value of this investment on its financial statements.

Case 3: Dealco Corporation; working backwards from consolidated income statements.)  (Amounts in Millions)

1. $56/$140 = 40%.
2. [.40 X (1 – .25) X $140] = $42.
3. [1 – ($42/$280)] = 1 – .15 = 85%.
4. 1. Consolidated financial statements do not reveal restrictions on use of cash for individual companies. Nor do they reveal intercompany cash flows or restrictions placed on those flows. 2. Companies in poor financial condition sometimes combine with financially strong companies, thus obscuring analysis. 3. Extent of intercompany transactions is unknown unless the procedures underlying the consolidation process are reported. 4. Accounting for the consolidation of finance and insurance subsidiaries can pose several problems for analysis. Aggregation of dissimilar subsidiaries can distort ratios and other relations.

Case 4:  Income taxes

1. Apple has effective rates in the range of 24.2% (2011) and 26.2% (2013). The difference between statutory tax rates and effective tax rates is largely explained by permanently reinvested foreign earnings, which generate a permanent book-tax difference. Additionally research and development credits and tax deductions related to domestic production activities, which have been introduced to provide tax stimulus for such types of investment activities, contribute to the difference between statutory and effective tax rates. Higher effective tax rates in 2013 as compared to 2011 can be largely explained by the lower levels of foreign earnings or reinvestment rates in foreign subsidiaries. More specifically, federal and state expected taxes in 2011 were 12,525 (11,973+552), permanently reinvested earnings were approx. 31% of expected taxes (3,898/12,525); in 2013, permanently reinvested earnings were approx. 26% of expected taxes (4,612/(17,554+508)).
2. Valuation allowances on deferred tax assets are zero in both years. Apple’s management considers that all deferred tax assets will be realized in the future.  Financial analysts may evaluate how likely is that such tax benefits will be realized by examining the composition of deferred tax assets, their expiration date if any, the historical trend in profitability, projected tax payments, and past valuation allowances.
3. Benefits: lower future tax payments, perhaps lower cost of equity and borrowing costs, the ability to transfer tax savings to customers in the form of more competitive prices; Costs: higher costs to structure the tax inversion deal, perhaps higher agency costs (i.e., investors’ uncertainty how tax savings will be used or invested may lead to higher costs of financing), higher political scrutiny and perhaps tax audit costs.

Case 4: Pension accounting

1. GM has a funding deficit of 10,901 (U.S. plans) and 13,228 (non-U.S. plans) in 2014 and 7,314 (U.S. plans) and 12,542 (non-US plans) in 2013. The firm decreased the discount rate it uses to compute the pension obligation and health care obligation from 4.46% (4.10%) in 2013 to 3.73% (3.14%) in 2014. The decreased discount rate increases the obligations and results in an actuarial loss.
2. The firm contributes sufficient cash each year to fund other benefits and there is no excess contributions to invest in assets. As we can see, the “other benefits” obligations are 5,289 (1,336) in 2004; this amount is equivalent to “other benefits” assets. Pay-as-you-go system.
3. Actual return on plan assets was 7,346 (U.S. plan) and 3,179 (non-U.S. plan) in 2014. The expected return was 3,914 (U.S. plan) and 873 (non-U.S. plan). The expectations were lower than the actual performance in 2014. In contrast, expected returns were higher than actual returns for U.S. plans in 2013 (3,562 and 2,107, respectively).
4. The discount rate of U.S. benefit plans differs from the discount rate of non-US benefit plans due to the fact that a different selection of AA-rated corporate-bond yields were used to calculate the pension obligations (US bonds vs non-US bonds).