Student number: 17048533
Module name: Accounting for Managers
Module number: UMAD5S-15-3
Word count: 3,271
Task 1:
The International Accounting Standards (IASB) is an autonomous organisation based in
the United Kingdom which has set up standard accounting rules that are to be followed
by all financial institutes in UK and other parts of the world (Ball, 2012). The International
Financial Reporting Standards (IFRS) was developed by IASB so that all organisations
report their financial statements using the same set of standard rules to maintain
uniformity, assuring that organisations are not involved in any fraudulent manipulation,
making it easier to compare and contrast their statements with its past performance as
well as its industry competitors (Paanenan and Parmar, 2008). The IFRS is crucial for
shareholders and financial analysts to identify opportunities and risks on investing in any
business, and also to improve capital allocation. The IFRS covers a wide range of
financial issues that may arise in any organisation like revenue recognition, employee
benefits, leases, forex and more (Accounting Tools, 2018).
The IFRS states that it is a must for all companies to prepare an annual report wherein
they include the management commentary, which is a descriptive account of financial
and non-financial information as expressed by the board of directors and auditors of the
company, which gives an insight on what steps can be further taken in order to improve
the performance of the firm.
Directors’ report:
The directors’ report contains a summary of the financial state of the company, addresses
their future plans and how they plan on overcoming any possible risks for the future. The
directors have the fiduciary responsibility and must abide by the duty of care by directors,
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which requires the directors to make decisions in good faith and best interest of the
organisation and the shareholders (DeMott, 1992). In the annual report of Sainsbury’s, it
has been mentioned that the directors are liable to prepare the report in agreement with
applicable law and that they are required to give a true and fair view of the state of affairs
of the company so that the shareholders are provided with adequate information (S, 90).
By providing a fair representation of the company’s performance, the directors will be
helping the shareholders make decisions that are best of them, as required by the duty
of the directors.
Chairman Martin Scicluna discusses on how they plan on delivering their strategy, make
better sales, retain their customers and attract new audience and grow value for their
shareholders. Scicluna states that the company has been performing well over the years
and states the enthusiasm and commitment from all employees have contributed in the
success of Sainsbury’s and would work collectively to improve the company’s balance
sheet while reducing net debt (S, 3). Focusing on their existing strategy of improving their
standards, services and availability of products, Sainsbury’s has plans to invest in over
800 stores in the proceeding years.
In addition, Mike Coupe, the CEO of Sainsbury’s has stated that the company was
successful in increasing their underlying profits before tax to £635m and decreasing their
net debt by £222m from last year, hence indicating a greater performance and sales. This
led to the company increasing the full-year dividend it gives out to the shareholders to 11
pence which was greater by 7.8% as compared to last years. Here, we can see that the
directors are following their duty of care by acting on the shareholder’s interests. He also
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emphasises on investing more on technology and their in-store shopping app,
SmartShop, as £4.7b of their revenue was generated through it (S, 5).
While all these facts and figures show that Sainsbury’s had an impressive year, the board
is well aware of the future opportunities they must seize immediately in order to maintain
their position. One of their major strategies is to differentiate themselves in food and
grocery segments by adding more quality, value and service (S, 11-12). Another major
strategy is to expand their merchandising department by integrating more diverse
products (S, 13). Their third priority is to improve financial access to their customers in
Sainsbury’s Bank and Argos Financial Services (S, 14). Another priority of Sainsbury’s is
to invest in SmartShop, making shopping easier for customers and business more
efficient for the company (S, 15). Lastly, they also have emphasised on strengthening
their balance sheet by increasing the wealth of the company and reducing debt (S, 17).
Although Sainsbury’s experienced profitability, the board has posed concerns over certain
risks they could face, one of them being intense competition in the market. With new
supermarkets and retailers coming up with new products every so often, it has become
quite a challenging task for any business to sustain in the market in the long run. The
board is aware about the emergence of competitors and how the customers tend to shift
from one brand to another quickly. They have been taking measures to mitigate the risk
of being lost among new competitors and losing their customers, and have been
constantly updating themselves with new, better and in-demand products (S, 32).
Similarly, the annual report includes more such possible risks the company could face
and points on how the risk can be mitigated (S, 31-36).
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Directors’ Remuneration Report (DRR):
The DRR provides an insight on how the remuneration and salary schemes are
determined for the board. The remuneration for the board should be set as per the time,
commitment and responsibility the director has undertaken (Financial Reporting Centre,
13). The DRR includes the basic salary set for each director, performance related bonus
and share options, pension contributions and any other benefits or perks to be awarded
(Mnzava, 2012). The DRR is an important facet of the annual report as it offers an insight
into whether the directors are being paid fairly as per their time and commitment or not,
while following the vision and strategy of the company (Kaplan Financial Knowledge
Bank, 2012)
Dame Susan Rice, Chair of the Remuneration Committee has stated that they have
designed the remuneration schemes for their directors based on their responsibilities and
performance towards the company (S, 73), as required by the UK Corporate Governance
Code (code) 2018 provision 34 (Financial Reporting Centre, 13). Since the directors
performed their roles well which resulted in higher revenue generation, the committee
decided on providing benefits and incentives to the board and set an annual bonus of
around 56% to the directors for the year 2019. The committee also determined to grant a
maximum of 55% of deferred share award to the directors and rewarding with the
company’s long-term incentive plan, Future Builder Award, as part of remuneration
incentives (S, 71). The committee declared an increase in salary for three board directors
by 2%, of which all three of them are male (S, 71). Although the report clearly states that
they do not discriminate while setting remuneration based on gender and that in fact, in
2018 their gender pay gap reduced by 2.5% as compared to the previous years (S, 70),
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the salary of any female board of directors have not been mentioned, neither have been
rewarded with any raise for which no further explanation has been given.
Provision 32 of the code states that the remuneration committee should include at least
three independent non-executive directors (NED) (Financial Reporting Centre, 13), and
looking at the annual report of Sainsbury’s, there are exactly three NED who are members
of the committee (S, 45), proving that the company has thoroughly followed the provision
made in the code in terms of appointing the NED. Rice also states in her report that while
the company has complied with the governance code 2018, they do see certain areas
such as their approach to pension for new board members and their policies for postemployment shareholdings, in which they might have to further consider while abiding by
the code (S, 71).
Corporate Governance (CG):
The CG is an approach through which all organisations are directed and includes a
standard set of rules that these companies must adhere to (ICAEW, 2019). CG creates a
corporate culture that encourages transparency, accountability and disclosure and is
necessary for investors and shareholders to decide on whether they should invest in an
organisation or not.
As mentioned in the annual report of Sainsbury’s for the year 2019, the board of directors
comprises of 10 members out of which only three of them are women, and the operating
board with 10 members out of which there are only two female members (S, 44-47). With
less than half of the members being female, it seems that Sainsbury’s board of directors
is not as diverse in terms of gender which could be an area of concern, as the principle J
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of the code emphasises on promoting diversity through gender, sex and ethnicity in any
company (Financial Reporting Centre, 8). Provision 1 states the importance of carefully
identifying any possible threats or risks to the company and ways to mitigate them
(Financial Reporting Centre, 4), which has been effectively followed by Sainsbury’s as
their annual report contains a detailed reporting on all possible risks and actions taken or
can be taken by the company to reduce them (S, 31-36). Provision 3 also states that the
board should be in constant loop with their shareholders and conduct frequent meetings
(Financial Reporting Centre, 4). In the annual report, it has been mentioned that the board
organises regular meetings with shareholders and investors, communicate via
roadshows, ad-hoc meetings, conference attendances, AGM and site visits in their stores
(S, 56), further proving the directors have followed their duty of care.
Under provision 9, the code states that the chair and the CEO of the organisation must
have distinct roles carried out by different individuals (Financial Reporting Centre, 6),
which has been implemented by Sainsbury’s (S, 44). Provision 11 and 12 also claim that
at least 50% of the board appointed should be NED, except the chair and that one NED
should be appointed as the senior independent director of the firm (Financial Reporting
Centre, 7). The board consists of 10 members out of which six are NED and one of them,
Dame Susan Rice is appointed as the senior independent director (S, 44-45). The annual
report also clearly mentions the various roles and responsibilities of each of these board
members and how they can lead the company to greater success in the future (S, 50).
This shows that Sainsbury’s have abided by the code regarding division of
responsibilities.
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In the nomination committee report, Rice has mentioned the appointment of their new
chair followed with him being designated as Chairman Designate and NED in November
and working closely with the former chair (S, 58). The detailed process of appointing him
has also been mentioned as required in provision 23 (Financial Reporting Centre, 9),
where the board thoroughly followed the steps of identifying, interviewing, selecting,
considering and appointing Scicluna as the new chair. The new chair’s appointment was
aided by an independent executive with no relations to Sainsbury’s, as stated in provision
20 (Financial Reporting Centre, 8). Upon appointment of the new chair, he was given a
thorough induction to provide an insight into the company’s vision and values. The
induction process saw Scicluna understanding the strategy and structure of the company,
understanding the market, their customers and stakeholders, meeting the core team and
become an active member of their operations (S, 53).
The regulations regarding determining directors’ remuneration across the UK emphasises
on the importance of the shareholders unanimous agreement on the policies (Mercer,
2019). The Say on Pay Initiative states that the shareholders of any company have the
right to vote on the remuneration policies of the directors set out by the committee
(Larcker and Tayan, na). As mentioned in the remuneration letter, the policy was agreed
by 96% of the shareholders at the 2017 AGM (S, 70) which is quite a substantial number
of votes in favour of the policy. But in 2004, there was a case of Sainsbury’s not abiding
by the remuneration policies where the then chair, Sir Peter Davis was found to have
rewarded with an ‘over-generous remuneration’ for himself despite a reported 2.9%
downfall in its sales in May (Hellier, 2004). The remuneration committee’s decision to
reward Davis with a hefty bonus of 846,000 free shares was also criticised as Davis was
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not found to be contributing to the financial success of the company (Hann, 2004). With
an outcry from the shareholders and exercising their right to Say on Pay, they raised
questions regarding Davis’ poor performance and high rewards, resulting him in being
ousted. The shareholders had been revolting since 2003 when he was rewarded a £2.4m
bonus which showed signs of the company not abiding by the code (Reece, 2004).
Auditors report:
The shareholders appoint the auditors of the company to report whether the accounting
books are maintained as per the accounting standards or not, and provide any advice or
recommendations regarding the betterment of the firm. The auditors then prepare the
auditors’ report wherein they mention if the accounting principles have been followed, and
call attention to any possible risks and how they can be improved by the board (McLaney
and Atrill, 2018, p 178).
The audit committee report has mentioned a potential risk of cyber security and data
governance for which the committee set up frequent meetings with the IT security and
data managers to help assist in being secure against the threat (S, 60). In addition, the
impact of Brexit also poses as a potential risk for the business, for which the company
has set appropriate mitigations to reduce the affect (S, 60). The external auditor has
brought attention to the complex IT systems and lack of adequate IT general controls in
the company which could pose a threat to Sainsbury’s and suggests the company to have
better IT controls to safeguard their company (S, 93). The external auditor has also
mentioned about additional risks which neither the directors nor the committee has
addressed, including supplier arrangement risk and aspect of revenue recognition among
others (S, 92-93).
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As per the external auditors’ report, they have declared themselves to be independent of
the company and their subsidiaries (S, 91), hence following provision 26 of the code
(Financial Reporting Centre, 11). Provision 26 also demands for the process of
appointment of the external auditor (Financial Reporting Centre, 11), which has been
followed according to the recommendation of the audit committee and were appointed at
the 2015 AGM and since then has been the statutory auditor (S, 95). The company has
portrayed their financial statements in a fair and true manner, adhering to all rules set by
the accounting principles (S, 91). However, the length of tenure of the audit firm and the
date of the last tender conducted has not been mentioned, as required by Provision 26
(Financial Reporting Centre, 11).
Task 2:
The Cash Flow Statement (CFS) is one of the important financial statements that must
be included in the annual report of any company, which shows how much of cash and
other cash equivalents moved in and out of the business in a certain period. It measures
if a company is managing its cash efficiently to generate enough to fund its operating
expenses and clear out any liabilities. The CFS has three parts – operating activities,
investing activities and financing activities, all demonstrating how each transaction led to
cash inflow or outflow (McLaney and Atrill, 2018, p 206).
Operating activities:
The operating activities include any transactions occurred from daily business activities
(McLaney and Atrill, 2018, p 209). From the consolidated CFS of Sainsbury’s for 2019, it
can be witnessed that the net cash flows from operating activities has decreased by
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54.73% from £1,356m to £618m (S, 99). A major reason for this could be because of the
decline in operating profit from £409m in 2018 to £239m in 2019 (S, 99), which could be
due to increase in cost of sales and administration expenses, while other income
decreased as compared to the previous year, as seen in the consolidated Income
Statement (S, 96). The depreciation expense has occurred from assets like plants,
property and equipment (S, 118) and there was also an increase in cash outflows of
inventories as compared to last year, from £36m to £118m which could be due to the
costs from the number of inventories brought in, the cost to maintain them and the space
they take up in the warehouse. We can also see an increase in amortisation from £72m
to £143m, which could be due to acquisition of Nectar in early 2018 (S, 103), leading to
increase in goodwill of Sainsbury’s (S, 163).
An increase in cash outflow from amounts due from financial services customers and
other deposits can also be seen, from an outflow of £1,161m to £1,480m this year, which
denotes that the intercompany receivables have gone up. Although the amount of cash
outflow due to financial services customers and other deposits has reduced to £1,077m
from £1,602m, it is still a huge amount of intercompany payable. Despite other cash
inflows from the everyday activities of Sainsbury’s, the high amounts of cash outflow led
to a lower net cash from operating activities in 2019.
Investing activities:
Investing activities includes cash flows from procurement and disposal of non-current
assets and other investments not included in cash equivalents and are usually a negative
figure as it requires cash outflow while purchasing non-current assets for the company
(McLaney and Atrill, 2018, p 210). In the case for Sainsbury’s they have seen a cash
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outflow in both years of £470m in 2018 and £474m in 2019. There has been a decrease
in the amount of interest received in 2019, from £14m to just £4m, which could be the
reason behind Sainsbury’s not generating more cash inflows. The dividends and
distribution received has also decreased by 51.35% from the past year. While the cash
outflows have reduced in 2019, it seems that the cash inflows were also less as compared
to those from the past year, which resulted in a more cash outflow in 2019 for Sainsbury’s.
Financing activities:
Cash flows from financing activities of a company represents any amount of cash inflow
or outflow that occurs due to long term financing (McLaney and Atrill, 2018, p 210). It
includes cash movements from long term borrowing as well as shares. In case of
Sainsbury’s we can see the net cash outflow from financing activities in 2019 is £752m
which is 208.20% higher than last year’s cash outflow of £244m. A major reason of this
huge amount of cash outflow is due to the high amount of long-term loans they borrowed
of £950m, as seen on the balance sheet (S, 98), which they were due to repay August
2019 (S, 152). Further, more cash moved out of the company when they purchased
shares as they issued more shares as compared to last year (S, 127) to fund their ESOP
trust (S, 129). Moreover, with more ordinary shares issued, the company had to give out
more dividends per share to shareholders because of duty of care by directors, which
increased from 6.6 pence per share to 7.1 pence per share (S, 118), resulting in greater
cash outflow from dividends on ordinary shares.
Due to higher cash outflows, the net change in cash movements in 2019 was an outflow
of £608m, which shows that Sainsbury’s had more cash movements that went out of their
company due to activities mentioned above. But it is not necessary that a negative cash
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flow denotes bad performance, as it could be the company's decision to expand its
business through acquisition of Nectar and providing more dividends to shareholders to
keep them satisfied.
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