On January 26, 2017 the Financial Reporting Council’s (FRC’s) Financial Reporting Lab published a case study report on WM Morrisons supermarket PLC (Morrisons). The report focuses on two areas of disclosure of Morrisons’ supplier arrangements: commercial income and relationships with suppliers.
Disclosures: Commercial income
Reporting by a company to investors is often a fine balancing act between providing too much information and not enough detail. This is especially the case in areas where there is limited guidance, regulation, and practice.
In 2015 Morrisons found itself managing this balance when responding to increased investor interest in the nature and impact of commercial income (a type of payment between suppliers and retailers), following recognition issues identified at Tesco plc.
In its 2014/15 annual report Morrisons adopted a level of disclosure of commercial income which was more comprehensive than others in the sector.
Through its disclosure, Morrisons sought to:
- Improve understanding of the context of commercial income by providing the background to and describing the nature of commercial income; and providing details of the impact on profit, debtors, and creditors.
- Generate a level of comfort over commercial income by describing the controls and processes in place around commercial income, concentrating on the recording, accrual, and collectability; and describing the work of the Audit Committee, focusing on what they did in gaining comfort over commercial income.
In 2015/16 the focus of value to investors of the Morrisons disclosures changed, with the initial concern of investors having been satisfied the importance of trend and industry comparative information came to the fore. The disclosures provide additional insight into the Morrisons business, and over time add to investors’ understanding of margins and how the company works with suppliers.
A model for reporting of emergent issues
Investors consider that the approach that Morrisons adopted could be a useful model for others when reporting on an emerging industry issue. Disclosures which are made on an emergent or one-off issue can often be seen as adding clutter to the accounts once their initial purpose has passed. Companies which seek to produce clear and concise accounts consider on a regular basis whether the information they are producing continues to meet an investor or regulatory need.
Disclosures: Relationships with suppliers
Information on commercial income provides some insight into how a retailer works with suppliers. This feeds into the broader desire from investors to understand the quality of supplier relationships and their place in a food retailer’s wider business model. Investors recognise that the multi-faceted nature of relationships can be difficult to report in the confines of the annual report. However, by drawing out the differential aspects of its relationship with the supply base, Morrisons’ business model disclosure helps investors understand the importance of these relationships to the company.
This report forms part of the FRC’s Clear and Concise reporting initiative that promotes transparent and accessible reporting.
(Financial Reporting Lab, Lab case study report: WM Morrison Supermarkets PLC – Supplier relationships and emergent issues reporting, 26.01.17)