The accounting policies of Marks and Spencer Essay

The accounting policies of Marks and Spencer - Essay Example   The first part of the report analyses the development of two accounting policies regarding tangible fixed assets and intangible one. To make the analysis more critical, comparisons with the main competitors of Marks and Spencer are drawn illustrating the controversial development of the selected policies. The second part of the report deals with the analysis of transition from UK GAAP to IFRS with specific respect to the following issues: treatment for property, property leases, employee benefits, share-based payments, intangible assets, and financial instruments. During their lifetime companies acquire property, which should be treated as assets according to the accounting standards. Meanwhile most of the property types have a 'lifetime' span, a time period, called useful economic life, during which an asset is used. To reflect the useful economic life in financial statements, profit and loss account receives regular portion of the cost of an asset. This expense is known as depr eciation. In other words, depreciation represents the extent to which economic value of an asset has been consumed by the business. There are different accounting policies on depreciation, but the most commonly used two are straight line depreciation and reducing balance. The one that is used by Marks and Spencer is the straight line depreciation. "Depreciation is provided to write off the cost or valuation of tangible fixed assets, less residual value, by equal annual instalments" (Marks and Spencer, 2005a, p. 33). That means the company pays the cost of an asset minus its value after its useful economic life expires by equal portions annually. Thus, fixtures fittings and equipment as a type of property has useful economic life of 3-15 years in the accounting policy of Marks and Spencer - that means, during that time the company annually pays its cost less residual value divided into 3-15 equal portions. Another popular policy of depreciation is reducing balance. In this case the d epreciation in each year is calculated as the percentage of the un-depreciated value. For instance, if the purchase cost of an asset is 100 and the reducing balance rate is 20% then the first year depreciation is 100*0.2=20 and the second year depreciation is (100-20)*0.2=16. The reducing balance rule is used to reflect the fact that the value of some assets falls more rapidly in the first years of use than in the last ones. As can be seen in theory the reducing balance policy can go on forever, with annual portions reducing ad infinitum. Generally, after 95% of the initial cost has been depreciated all the rest is written off in the next portion. The difference of these two methods is as follows: while the straight line depreciation is the simplest of all methods, the reducing balance allows taking the advantage of larger tax deductions in early years.