Majestic chief blames accounting for £4.4m loss

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John Stokdyk
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AccountingWEB.co.uk
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The new chief executive of Majestic Wine this week blamed accounting principles and the Accounting Standards Board for turning a £100,000 half-year operating profit into a £4.4m loss.

Reactions in the City were generally sympathetic, citing the “hangover” from last year’s poor results and reporting the claims of new chief executive Rowan Gormley that the company had reached the tipping point and was heading in the right direction.

Gormley was brought in to replace former Majestic chief executive Steve Lewis last year and the company bought his business Naked Wines at the same time. Write downs of £4.5m mainly relating to that acquisition were the main reason for the reported loss.

Dominic O’Connell, business presenter on Radio 4’s Today programme, goaded Gormley into a critique of accounting standards on Thursday morning [1hr 20mins into the broadcast] by suggesting that Gormley himself was “partly responsible for this write-down”.

“The difference between the trading profit and the write-down of the acquisition is an accounting matter, it’s not a cash matter. The number we focus on is trading profit,” the Majestic chief executive argued.

According to Gormley all of Majestic’s key performance indicators are heading in the right direction. If that growth is sustainable and the fixed costs remain steady, that sales growth will translate into profit over time, he argued.

“You should speak to the Accounting Standards Board about the policy on write-downs of acqusitions. You are required by the accounting board to amortise the cost of the goodwill in acquisitions over a period of years. This is not a reflection the company’s performance has been poor. This is not a write off of goodwill. This is simply an amortisation of goodwill which you are required to do.”

AccountingWEB’s financial reporting expert Steve Collings commented: “I’m not sure Gormley fully understands the difference between amortisation of goodwill and the writing down of an acquisition.

“The group has prepared its interim financial statements under IFRS, which prohibits goodwill from being amortised and instead requires entities reporting under IFRS to test goodwill annually for impairment.”

Under this regime if the carrying amount of the goodwill in the accounts is higher than the recoverable amount, goodwill is impaired and must be written down. So the charge in respect of goodwill would represent the declining value of the acquisition(s) rather than amortisation, which is not the same as impairment, he expained.

“Had the company prepared its accounts under, say, FRS 102 then it would be required to amortise its goodwill over its useful economic life; this is where FRS 102 differs from IFRS,” Collings said.

From a technical perspective, he added, the value of the acquisitions were clearly declining, which is represented by the £4.5m write-down to the recoverable amount. 

“Blaming the International Accounting Standards Board and accounting standards is not a feasible argument because what would be the alternative?” he said.

“Ignoring the fact that acquisitions are declining in value and reporting a disproportionately higher value of assets? The group has exercised prudence and recognised its acquisitions are not performing as well as expected and hence the profit and loss has taken the hit, which is what the accounting standards would require.”

“IFRS principles work in the same way as other GAAPs in that you cannot carry assets in the balance sheet at any more than their recoverable amount; to do so would render the accounts misleading. Where assets are stated in excess of recoverable amount, then they must be written down by way of an impairment loss.”

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By KWest
19th Nov 2016 17:14

The biggest worry must be that a 10.6% increase in sales has been accompanied by a £4.4 million loss.

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21st Nov 2016 06:06

Gormley is merely following the agreed principles of the International Institute of Chief Execs:

1. Blame your predecessor.
2. Blame a convenient scapegoat you can sack.
3. Blame the messenger.
4. Any old smoke and mirrors will do.

These have been the key building blocks of many a successful career.

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to mr. mischief
23rd Nov 2016 10:17

Exactly! Would he say his £200k Aston Martin is still worth £200k after 5 years, with some bumps and scuffs and 80k miles on the clock?
Same idea expressed for laymen. Is the asset you own, really worth what you say it is/what it was when you bought it?

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to Andreas.MacFarlane
23rd Nov 2016 10:30

Andreas.MacFarlane wrote:

Exactly! Would he say his £200k Aston Martin is still worth £200k after 5 years, with some bumps and scuffs and 80k miles on the clock?
Same idea expressed for laymen. Is the asset you own, really worth what you say it is/what it was when you bought it?

Did you even read the article? It is saying that this is precisely not what has happened here, though it is the excuse used by Gormley thus demonstrating his failure to understand the underlying accounting principles at work.

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to Duggimon
23rd Nov 2016 10:39

But then, his beloved Aston may well "be worth" several million. Worth being a somewhat subjective concept, made concrete by a market.

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21st Nov 2016 09:14

spot on Mr Mischief...it is unfortunate but has taken me most of my career to realise that the easiest way to progress up the chain is to take all of the credit and none of the responsibility. Something most of the high flying execs have in abundance.

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23rd Nov 2016 10:22

It is an interesting, and perhaps somewhat provocative idea that anyone might "understand" accounting standards. Valuing goodwill has long been a challenging conundrum, which the somewhat trite conclusion to this piece rather glosses over.

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23rd Nov 2016 10:25

why is there any goodwill if Majestic bought a "PUP?" Mr Gormley is ok though when concentrating just on the trading profit. But is there a conflict of interest re his Naked Wines?

So,straightforward, is it not?!

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23rd Nov 2016 11:02

Oh here we go, A loss loss has been reported and guess what its all due to .........Accounting rules, nothing to do with him or his business, if he is right he could contact RBS, Lloyds, Barclays.......

And we have all heard the following before, its normally the first nail in the coffin. Its like a struggling football team picking up a point at home.

Reactions in the City were generally sympathetic, citing the “hangover” from last year’s poor results and reporting the claims of new chief executive Rowan Gormley that the company had reached the tipping point and was heading in the right direction.

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23rd Nov 2016 11:45

"IFRS principles work in the same way as other GAAPs in that you cannot carry assets in the balance sheet at any more than their recoverable amount"

That perfectly sums up the problem of goodwill. There's no objective way to value it without putting it on the market. At least with an Aston Martin you can get a quote from buyanycar dot com

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23rd Nov 2016 11:56

Serves both Majestic and Naked Wines right for not stocking kosher wines.

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By swatt66
23rd Nov 2016 12:16

He was talking about acquired goodwill, not fixed assets. FRS102 states:
“If an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall not exceed five years.”

The amortization period can still be 20 years, but it is hard to prove your case if the company is making losses.

Under IAS38 the annual impairment test seems less empirical than FRS102.

FRS102 can help in keeping arguments between auditors and management short and sweet.

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23rd Nov 2016 12:58

What if they did amortise the good will and not impair it because the FD didnt realise there was a difference and the auditors didnt spot it or didnt realise....

Is that worse?

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24th Nov 2016 16:13

Most of this is good technical stuff but it miss the real point - apart from a small mention by tiswas12.
Majestic brought Gormley in and at the same time bought his company Naked Wines for £4.5m more that it was worth. So someone has been stuffed.
Maybe Gormley stuffed Majestic...and they still employ/ed him????
Or maybe this is a device to replace income tax and NIC on £4.5m with CGT at 10% after entrepreneurs relief and it is HMRC (and us) who has been stuffed.
But no doubt the supporting paperwork is impeccable.

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