Introduction
Debenhams is one of the largest British department store chains, headquartered in London. It was founded in 1778 and had been operating in its modern form since 1905. The network has survived many cataclysmic crises, although the crisis of 2020 due to the COVID-19 pandemic turned out to be devastating. However, there is evidence that Debenhams took part in some fraudulent schemes and earnings management. The purpose of the work is to analyze information about income smoothing and to find out whether the company is a “going concern” based on the annual report and other data.
Discussion
Regarding the current topic, it would be appropriate to consider this issue in terms of some accounting-related theories. Thereby, according to the effective market hypothesis, all the data is reflected in stock prices (Kamaljeet, 2020). Accordingly, after analyzing the annual report, one may conclude that investors would not be able to return financial resources on any model with the normal return on the market (Kamaljeet, 2020). Moreover, due to an act from the Debenhams authorities, customers had to pay additional taxable payments for goods and services (Nellen et al. 2020). It was part of the income smoothing policy of Debenhams, which seems to contradict norms and regulations of interaction between customers and an institution. The reasons for such actions may be formulated by the desire to gain additional profit, however, using illegal procedures.
The next theory one should mention considering the current case is the debt covenant hypothesis. A debt covenant implies that a company, when borrowing from a bank, agrees to certain conditions of the bank, at which the interest rate may decrease (Sangster & Wood, 2018). These terms imply some rules and regulations regarding the actions that can be taken in the event of a breach of a debt condition. Moreover, the interest rate can be further reduced if the company agrees to a penalty in case of violations of these conditions. Such a violation of the covenant may be dramatically costly for an organization, as the company will have to pay a fine. Moreover, in case of a need for monetary resources, the authorities may try to quickly sell its shares below the market price, which is harmful to the company’s budget.
Besides, there is some other view on the debt covenant hypothesis, which implies a specific ratio. Thereby, the closer a firm is to breaching accounting-related debt covenants, the more likely managers will define accounting actions that shift reported earnings from future periods to current ones (Ghio & Verona, 2020). Besides, it was identified that firms which are close to default are more likely to artificially increase their income (Ghio & Verona, 2020). No evidence of such actions was found while analyzing the annual report of the Debenhams. However, as it was mentioned above the company’s management applied some procedures which are related to income smoothing.
Furthermore, after analyzing Debenhams Annual Report 2018, it was possible to find out some signs of income smoothing. According to the report, the tax received/paid indicator is 1,3 million as of 2018 (Debenhams, 2018). However, it was nearly 15 times higher in the previous year, in 2017 the indicator was 16,3 (Debenhams, 2018). Thereby, one may notice the great difference in the tax received or tax paid amount within the short period. It is formulated by the impossibility of large organizations having such a difference in income fraction since tax counting is constituted by the income of the company.
However, all these actions did not save the company from a power crisis, which was provoked by the COVID-19 pandemic in 2020. This question is worth analyzing in terms of whether the company is operating today. In November 2020, Debenhams announced that the chain was going to close, which would lead to the loss of 12,000 jobs and the closure of 124 stores (Bryson et al. 2021). The preventive measures that were taken due to the spread of the infection provoked problems with the company’s cash flows, and the organization stopped its activity.
There is also an alternative point of view about the closure of a chain of stores. Some reports indicate that the closure of Debenhams was the result of tight financial policies, and quarantine was only a trigger for this (Cooper & Szreter, 2021). Thus, the company had debts to investors, and at some point, it became impossible to develop and pay the necessary amounts simultaneously. Moreover, at the moment when the company needed financial support, it was not available. After that, some financial accounts of the chain were at the disposal of private investors. Together with the crisis, all this led to the impossibility of the further existence of the Debenhams.
In addition, to determine whether the company is a “going concern”, there is evidence that non-online branches are not working. It is reported that 90% of Debenhams stores are empty after they close (Guardian, 2022). However, as already indicated, the online branch is currently active, and people can purchase some goods. Besides, the country’s authorities are going to replace Debenhams shops which are not working with some objects like universities, libraries, and others. Moreover, according to the time-period theory, the business should report its activity for a certain period (Kamaljeet, 2020). Accordingly, there is no evidence of reporting for the present time, as the company runs only in the online department.
Conclusion
To conclude, Debenhams is one of the largest sales chains which has witnessed different cataclysms. It has been established that there are indications that management has taken actions aimed at income smoothing. These included the need for clients to pay additional funds implied in the deduction of taxes. In addition, Debenhams today does not have working shops, and the authorities are going to replace them with other infrastructure facilities. Finally, the COVID-19 pandemic, along with other issues, caused Debenhams to close.
References
Guardian. (2022). Almost 90% of Debenhams stores still lie empty a year after collapse.
Kamaljeet, S. (2020). (Ed.). Digital innovations for customer engagement, management, and organizational improvement. IGI Global.
Sangster, A., & Wood. F. (2018). Frank Wood’s business accounting. (14th ed.). Pearson.
Ghio, A., & Verona, R. (2020). The evolution of corporate disclosure: Insights on traditional and modern corporate communication. Springer Nature.
Nellen, F., Doesum, A., Cornielje, S., & Kesteren, H. (2020). Fundamentals of EU VAT Law. Kluwer Law International.
Bryson, J. R., Lauren, A., Aksel, E., & Louise, R. (2021). Living with pandemics: Places, people and policy. Edward Elgar Publishing.
Cooper, H., & Szreter, S. (2021). After the virus: Lessons from the past for a better future. Cambridge University Press.
Debenhams. (2018). Annual Report and Accounts.