Detailed Financial Analysis Case Study: TESCO PLC Performance

This case study provides a financial analysis of TESCO PLC, a major British multinational retailer. It begins by calculating and interpreting the gearing ratios for TESCO over three financial years (2016-2018), offering insights into the company's debt levels. The study then delves into the International Financial Reporting Standards (IFRS) used by TESCO, specifically focusing on IFRS 15 and its application to revenue recognition, highlighting the five-step model employed by the company. Finally, the case study examines major credit rating agencies, such as Moody's, S&P, and Fitch, and their functions in assessing TESCO's financial health, including a summary of the company's credit ratings from these agencies. The analysis includes the interpretation of the financial statements and ratios, and the study concludes with a summary of the key findings regarding TESCO's financial performance, emphasizing the importance of financial accounting principles and credit ratings in understanding the company's financial position.

Case Study on TESCO

Table of Contents
INTRODUCTION...........................................................................................................................1
SET 5...............................................................................................................................................1
Gearing ratios of TESCO.......................................................................................................1
SET 6...............................................................................................................................................2
International Financial Reporting Standards on revenue recognition used by TESCO.........2
SET 8...............................................................................................................................................3
Major credit rating agencies and the functions performed by these agencies........................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5
APPENDIX......................................................................................................................................6

INTRODUCTION
Financial accounting refers to a specialized branch of accounting which includes the
process of classifying, recording, analysing, summarising and reporting all the transactions
which are financial in nature. TESCO plc is a British multinational groceries and general
merchandise retail chain founded in 1919. The report will outline the calculations of the gearing
ratio of the TESCO PLC. Further it will discuss the International Financial Reporting Standards
(IFRS) used by the company on the revenue recognition. In the end it will highlight the major
corporate credit rating agencies and their functions.
SET 5
Gearing ratios of TESCO
Gearing ratios are a part of financial ratios. It measures the proportion of the company's
equity with that of the borrowed funds of the company (Dragun, 2007). This type of ratios
indicates the amount of the financial risk up to which the company is open and subjected. A high
gearing ratio represents a high amount of debt involvement in the capital structure.
The gearing ratio is calculated as
long term loans / long term loans + share capital + reserves* 100
The gearing ratio of the TESCO plc for last three financial years are calculated below-
Year Long term loans(a) Ordinary shares(b) Reserves (c)
2016 9777 12775 5000
2017 9946 10103 6540
2018 9188 13215 1500
Calculation of gearing ratio-
Year Long term loans(a) (a+b+c) a/ (a+b+c)*100
2016 9777 27552 35.49%
2017 9946 26589 59.76%
2018 9188 23903 38.43%
1

Interpretation
If the company has more than 50 % gearing ratio it means that the company is highly
geared. From the analysis of last three years financial statements it can be interpreted that
TESCO has average in two years i.e. 2016 and 2018 but is good in 2017.
SET 6
International Financial Reporting Standards on revenue recognition used by TESCO
The International Financial Reporting Standards (IFRS) are a set of some common rules
so that financial statements can be transparent, comparable and consistent. These accounting
standards are developed by an independent organisation called international Accounting
Standards Boards (IASB). IFRS specifies measures and criteria that how the company have to
maintain and record their accounts, defining types of the transactions and also other transactions
which have the financial impact on the business (Ashjaei and Nagaraja, 2018). The TESCO uses
IFRS 15 of the International Financial Reporting Standards (IFRS) which deals with the revenue
recognition. When TESCO was not using the standard at that time it suffered a severe financial
penalties and reputation damages. But after the use of the it was easy to realise the sales revenue
and is included in the income statement (John Stittle, 2017).
International Financial Reporting Standards (IFRS) 15
The IFRS 15 specifies and mentions that the company should recognise revenue sources as well
as it requires from the company that it provide the users with more informative and structured
financial statements. For this IFRS has proposed a five step model which all the companies have
to apply to all contracts with the customers.
The five step model used by TESCO is discussed below-
Step1 identify the contract with the customers: for a contract the company has to meet the
conditions laid down by the IFRS and if the conditions are not met then TESCO has to re assess
the contract from starting that where the contract has gone wrong.
Step2 identify performance obligation: since the starting of the contract TESCO should assess
and check the goods and services promised to the customers.
Step3 determine the transaction price: it is the amount which the TESCO expects to receive
from the customer in exchange of the goods.
2

Step4 allocate the transaction price to performance obligation: when a contract has multiple
performance obligation then TESCO will have to allocate the transaction price to the
performance obligation in the contract.
Step5 recognise revenue: revenue is recognised when the goods or the service is passed on to
the customer and the transaction price is paid to TESCO.
The contract with the customers will be presented in the TESCO financial statement
either as a contract liability, a contract asset or a receivable depending on the relationship
between the TESCO performance and consumer payment.
SET 8
Major credit rating agencies and the functions performed by these agencies
The credit rating agencies are the organisations that evaluates the financial conditions of
the issuer and then assigns a rating which reflects the company's ability to pay back the debt
(White, 2018). The major credit rating agencies are Moody's investor service, S&P, Fitch, DBRS
etc. The major function performed by these agencies are as follows-
 These agencies gathers, analyses, interprets the complex information in simple and
understandable manner which helps consumer in analysing the company.
 These companies judge the utilisation of the capacity of the organisation whether the
company is optimally using the resources or not.
 These agencies also studies the availability of any precaution for the sudden unforeseen
contingency.
TESCO plc credit rating
Agency Short term rating Long term rating Outlook
Fitch F3 BBB- Stable
Moody's NP Ba1 Positive
S&P B BB+ Stable
TESCO plc finances its operations with a combination of the retained profits, medium and long
term capital, bank borrowings, etc. So this rating helps the consumer in analysing the status and
financial health of TESCO before investing in it or buying products from it. Good credit rating
3

ensures high credibility and trustworthiness among the consumers. Because rating from all the
top three agencies is good so the riskiness of the company is less for the creditors because the
company is able to pay to its creditor because the rating is good.
CONCLUSION
Financial accounting is the field of accounting which is concerned with the recording,
classifying, summarising, analysing and reporting of the financial transaction related to the
business working. By end of the report it summarised that what is gearing ratio and also
compared the past three years of ratio of TESCO. Further it acknowledged about the standard
used by TESCO on revenue recognition laid down by International Financial Reporting
Standards. At last it discussed about the credit rating agencies and their functioning.
4

REFERENCES
Books and journals
Ashjaei, N.P. and Nagaraja, N., 2018. Effect of IFRS Adoption on Income Smoothing in Indian
Companies. Asian Journal of Research in Banking and Finance. 8(4). pp.48-60.
Dragun, D., 2007. The financial implications of retail strategy. In Retail Strategy (pp. 153-186).
Routledge.
White, L.J., 2018. The Credit Rating Agencies and Their Role in the Financial System.
Online
John Stittle Revenue recognition 2017, [Online.] Available through:
<https://www.icsa.org.uk/knowledge/governance-and
compliance/indepth/technical/july-2017-accounting>
5

APPENDIX
Assets
2018
Cash & Short Term Investments 5.18B
Cash Only 4.61B
Short-Term Investments 574M
Total Accounts Receivable 6.13B
Accounts Receivables, Net 1.48B
Accounts Receivables, Gross 1.53B
Bad Debt/Doubtful Accounts (43M)
Other Receivables 4.65B
Inventories 2.26B
Finished Goods 2.26B
Work in Progress 4M
Raw Materials -
Progress Payments & Other -
Other Current Assets -
Miscellaneous Current Assets -
Total Current Assets 13.58B
2018
Net Property, Plant & Equipment 18.52B
Property, Plant & Equipment - Gross 34.36B
Buildings 23.39B
Land & Improvements -
Computer Software and Equipment -
Other Property, Plant & Equipment 10.85B
Accumulated Depreciation 15.84B
6

2018
Cash & Short Term Investments 5.18B
Total Investments and Advances 2.77B
Other Long-Term Investments 2.08B
Long-Term Note Receivable 7.07B
Intangible Assets 2.66B
Net Goodwill 1.8B
Net Other Intangibles 865M
Other Assets 149M
Tangible Other Assets 149M
Total Assets 44.86B
Liabilities & Shareholders' Equity
2018
ST Debt & Current Portion LT Debt 1.48B
Short Term Debt 357M
Current Portion of Long Term Debt 1.12B
Accounts Payable 9B
Income Tax Payable 335M
Other Current Liabilities 8.43B
Dividends Payable -
Accrued Payroll -
Miscellaneous Current Liabilities 8.43B
Total Current Liabilities 19.24B
Long-Term Debt 7.14B
Long-Term Debt excl. Capitalized Leases 7.03B
Non-Convertible Debt 7.03B
Convertible Debt -
7

2018
Capitalized Lease Obligations 110M
Provision for Risks & Charges 4B
Deferred Taxes (26M)
Deferred Taxes - Credit 91M
Deferred Taxes - Debit 117M
Other Liabilities 3.93B
Other Liabilities (exclude Deferred Income) 3.93B
Deferred Income -
Total Liabilities 34.4B
Non-Equity Reserves -
Preferred Stock (Carrying Value) -
Redeemable Preferred Stock -
Non-Redeemable Preferred Stock -
Common Equity (Total) 10.48B
Common Stock Par/Carry Value 410M
Retained Earnings 4.23B
ESOP Debt Guarantee -
Cumulative Translation Adjustment/Unrealized For. Exchange. Gain 655M
Unrealized Gain/Loss Marketable Securities -
Revaluation Reserves -
Treasury Stock (16M)
Total Shareholders' Equity 10.48B
Accumulated Minority Interest (22M)
Total Equity 10.46B
8