ACCOUNTING AND FINANCE

Accounting and Finance

Accounting and Finance

Part I

Introduction

The table 1 gives a synopsis of M&S balance sheet on 2nd April 2005. The total assets of the group were £4,285 m. These were financed by a combination of liabilities and shareholders funds, i.e., the money due to shareholders after paying off everyone else due.

Most of the assets, 87.8 percent are financed by liabilities with total liabilities standing at £3,763 m. Liability includes money owed to creditors of material and senior lenders. Current liabilities are acquired during the normal operation of the business and are balanced by current assets.

Table 2 shows the maturity profile of interest bearing debt instruments. 43 percent of debt is payable after 5 years and this gives financial stability to the company. M&S uses a variety of long, medium and short term debt instruments to finance its purchase of assets.

The company also diversifies the risk by using debt instruments denominated in various currencies. The company has swapped its floating interest bearing debts with fixed rate interest dents. This allows the company to budget interest costs and not to worry about the fluctuations in interest costs due to varying interest rates.

B) M&S could use floating interest bearing debts with collars. Collars are used to fix the lower and upper interest rates. This allows M&S to limit the maximum interest costs that it will have to pay even if interest rates go to any level. It also allows the company to enjoy lower interest costs if interest rates fall than at the time of entering in to a debt agreement. The downside of this type of instrument is that if interest rates fall even lower than the lower limit of the collar, the company will still have to pay interest costs at the lower collar rate.

C) Liquidity

Liquidity is M&S's ability to pay obligations. M&S uses a series of financial instruments with varying maturity to match the profile of asset being financed. Short term bank borrowings and commercial paper are used mainly for financing trade creditors. Medium term loans and securitization are used to finance fixed assets like stores. Then the group also has retained profits to meet shortfall in funding of assets. The above range of maturity in debt instruments offers flexibility to match the life of asset with the instrument used to finance it.

Foreign currency

M&S has foreign currency risk due to exports arising from UK to its international subsidiaries and imports to UK from its international suppliers. The sales realization from its exports takes time and M&S is exposed to movement in foreign currency in the meantime. Similarly if it is paying in fixed local currency for imports, the time between order placement and payment may result in different value of the order in UK Sterling.

M&S copes with foreign currency risk in exports by hedging 80 to 100 % of expected sales through forward currency contracts (Annual Report, 2005). Similarly non-UK Sterling denominated import contracts are hedged through forward currency contracts. Hedging on one hand limits its exposure to ...