Risk & Economy » Audit » Tesco accounting black hole could be even deeper than first feared

THE GAPING BLACK HOLE in Tesco’s accounts could be even worse than expected, analysts at US brokers JP Morgan believe.

The revelations will heap even more pressure on the troubled supermarket group which has been embroiled in a wave of financial woes this year, peaking in September when it was revealed that £250mln interim profit shortfall, rose to £268m.

According to The Telegraph, Jaime Vazquez, an analyst at JP Morgan, said: “We are unable to explain the full gap between the Companies House earnings before interest and tax and the reported UK trading profit of 2013/14.

“Regardless of what the exact UK profit was in 2013/14, it seems clear to us that Tesco’s results are being hit by the unwinding of supplier rebates as volumes fall, hence the need to reset the framework with suppliers.

“We remain cautious on Tesco and the rest of the UK sector. The sector needs to go through a period of adjustment following the profit and expansion excesses of the past decade. The pain will come in the form of a price reset – which neither Tesco nor Sainsbury’s have addressed yet – balance sheet recapitalisations and store closures, in our view.”

Some £319m is the discrepancy identified between the published figures and the accounts of Tesco’s subsidiaries.

“The difference of £319m in 2013/14 includes £145m of the profit overstatement announced by the company of which £70m related to 2013/14 and £75m related to prior years).

“However, this still leaves a gap of £174m, which compares with an average gap of £28m in the previous seven years.”

JP Morgan said the grocer intimated that that the disparity in the figures could be explained by the differing accounting treatments of the disparate elements.

The broker also looked at Tesco’s rising rental costs in the UK up around £100m in 12 months to almost £1bn last year.

It also noted that its non-property fixed assets life kept on being extended, creating knock-on impacts on profits through the depreciation charge.

Tesco is currently being probed by the Serious Fraud Office over the profit overstatement.

In August, it announced that its half-year dividend would be cut by 75% and full-year profits would be in the region of £2.4bn to £2.5bn, less than its previous estimate of £2.8bn, and already £500,000 down on last year’s £3.3bn reported profits.