Started to look at Tasty’s 2019 annual report for a write-up on my blog:
Given what has happened to the company during recent years and the pandemic, the following issue is perhaps not the greatest worry for shareholders right now. However the accounting small-print involved is worth highlighting.
The issue concerns the useful life of tangible assets. Companies can spread out the initial cost of a tangible asset over its useful life through an annual depreciation charge. Apply a useful life that is too long, however, and depreciation is then calculated too thinly every year and so reported earnings can be flattered.
Tasty is a restaurant chain and its major assets are fixtures, fittings, equipment etc inside the restaurants. Tasty reckons the useful life of such items is 10 years (i.e. equivalent to a 10% straight-line charge to a zero residual value):
For comparison, restaurant chain Fulham Shore has a mix of useful lives ranging from 3 to 10 years:
Restaurant Group has the same 3 to 10 year mix:
I have looked at Loungers, Revolution Bars and JD Wetherspoon, which are cafe/bar/pub chains and not pure restaurant groups, but their useful lives are 3-15 years, 5 years and 3-10 years respectively.
(The 15 years at Loungers relates to ‘artwork’, which seems ambitious as well).
Anyway, the upshot is Tasty – at least compared to a small sample of similar-ish operators – has a more optimistic view of the longevity of its restaurant fit-outs. So Tasty’s depreciation charge is likely to have been spread too thinly compared to policies adopted by similar-ish businesses.
Has this policy flattered Tasty’s past profits? Possibly.
Could the policy signal Tasty’s directors being a tad optimistic on other matters? Possibly.
Note that Tasty’s annual report also implies the useful life of its computers is 20 years, which seems ridiculous to me.
I wish I had studied this accounting policy a few years ago. I may have been a little more cynical about Tasty’s ambitions.