The Facts
Corporations undertake various types of strategies ways and means in order to enhance their profitability (Gore, 2007). While retailer’s aim to compete in a varied type of ways and means to offer their customers high profits on various goods and merchandised, suppliers to these retailers are often made to suffer. Wesfarmers, Target is a retail store that sells various products and goods and high rates of discounts, but in order to compete in the market and become more profitable, the Company ended up increasing their profitability in an unethical manner. The Company made use of supplier discounts for hiding the loss they would actually make while in case of lowered sales levels (Barth, 2008). They promised suppliers of higher sales levels and higher inflow of goods in the next seasons and by contravenes by accounting standards and principles they had overcome the fallacy in their books of profitability. The scope of this report identifies and aims to cover the accounting regulations that were mishandled during the period and with analyzing the key personnel involved during the same. The report further establishes the key accounting standards and regulations that were not adhered to for establishing of international standards in books of accounts (www.ft.com, Wesfarmers Target using supplier discounts, Retrieved on 12th May 2017).
Key Persons Involved: While aim of retailers remains to enhance business profitability, making such an initiative in an unethical manner often hampers long term business. Wesfarmers Target discount store sells various types of retail products similar to other retail stores of the Company (www.smh.com.au, Retrieved on 12th May2017). Some journals and media accused Wesfarmers being involved with Target in selling of such products at a discounted rate. However, some key managers and top leaders were involved in the case that made use of supplier discounts to depict profitability in their books of accounts. Senior executives, accounting heads all resigned post unfolding of the event by Wesfarmers.
Happening: Wesfarmers’ all retail companies need to abide by certain accounting principles and norms. Top level accounting and other senior executives of Target fiddled with supplier rebates to depict profits in the books of accounts (www.dailymail.co.uk, Retrieved on 12th May 2017). While the Company had to follow IASB Accounting framework of Conceptual Accounting and standards such were not followed. Upon diagnosis it was revealed that 10 members of the senior team from Target had inflated retailer’s earning to about 40%. The profitability was AUD21 million in December half of which originated from promising of suppliers that they will be given higher prices in the next June from which they will be able to make their remaining profits. The suppliers were long term suppliers of the Company, hence they agreed to such terms and conditions, but they were actually duped of their costs by paying them at a marginal rate compared to their desired levels of sales made (Deegan, 2012).
Accounting Principles, Standards And Concepts
Action Taken: While retailers profits mostly arise from sells made to customers due to purchase of various goods and merchandise. Such was not the case this time as Target team members made use of several supplier discounts to set off profits in their books of accounts. Wesfarmers was not aware of the incidence and acted immediately once the facts was revealed by senior members and authority (Ball, 2006). They made best efforts to diagnose the challenges faced and to overcome any sort of challenges that the Company might face sue to the incidence in the future. Prior to submitting or reviewing of books of accounts such facts and figures remained unknown to Wesfarmers. Upon diagnosis Wesfarmers immediately ordered a crackdown of the systems of compliance for understanding finances for the Company. Crack down on financial compliance was made by Wesfarmers on all its retail companies such that any sort of discrepancies can be figured by them. Once crack-down was established it was found that Target staff was directly involved in the financial discrepancies hence the senior members resigned immediately. The resignation of senior members and authorities involved in misusing of Target supplier discounts revealed a great fallacy that had entered and was facing the system (Ryan, 2007). Executives who were involved in the case did not receive any sort of payout as a way and means to depict the problems they made the system enter into.
Standards Applicable: International as well as national companies operating in Australia needs to abide by the IASB conceptual framework. The IASB framework provides objectives and concepts that guide formation of financial reporting (Lennard, 2007). While Wesfarmer diagnosed that errors and undue profitability has been shown in books of accounts at Target, they sent all retailers financial accounting books for compliance. Ernst and Young made several compliance checks to understand the relevant areas where the Company’s accounting personnel’s failed to abide by such norms. IASB has set standards that are on consistent concepts for developing accounting policies and treatment of transactions. The Standards follows choice for selecting accounting policy and interpreting their results subsequently. Thus, primary objective of such Standards is to improve overall financial reporting for making them clearer with updated concepts (Whittington, 2008). The Conceptual framework for accounting follows normative theory as it is prescriptive in nature hence helps avoids flaws and challenges pertinent to accounting.
Executive at Targets were meant to follow and adhere to principles of IASB Conceptual Framework that provides for ways and means to treat retail profits. Higher accounting executives were meant to treat profits made from sell to customers as profits and not include the entire of supplier discounts with profit heads. Hence, while compilation of books of accounts such standards were not adhered to resulting in misleading information for profitability for the entire chain. Thus, such fallacy might lead to challenges for Wesfarmers when it will compile the entire books of accounts for the Company and will lead to stakeholder’s discrepancy while investing in retail chains (McGregor, 2007). Target needed to file books of accounts according to proper prescribed standards of normative accounting theory.
Industry expert comments
Industry expert comments: Industry experts commented on the books of accounts that Target had developed such misleading information willfully (www.afr.com, Retrieved on 12th May 2017). They were fully aware that they were treating supplier profits unduly that can lead to discrepancies in asset allocation for Target. Industry Expert further called the move to be stupid and irresponsible that can possibly lead to harsh consequences for the Company.
Consequences: Consequences for misappropriating books of accounts can be tremendous in nature. While books of accounts or financial reporting depicts the only information source for a particular company, mishandling of such information might lead to inappropriate asset allocation and impact the overall filling of parent company. Wesfarmers holds a high brand name and brand value in the market, hence inappropriate filling for the Company can lead to distortions in the brand name.
Financial (for the industry): The entire retail industry operational in Australian market abides by financial reporting by means of IASB Conceptual framework. They adhere to proper reporting standards and means that can help in attaining highest possible levels of governance for the Company. All industry leaders and prominent operators as Coles, Woolworths and so on abides by Standards provided by International Accounting Boards.
Conclusion
Analysis of pertinent facts and figures of financial reporting and non-adherence to standards reflects that Target had failed to achieve objectives set towards its financial reporting. The Company had to submit period performances to Wesfarmers along with external entity such that proper resource allocation could be made. As decisions made by companies regarding investments and other pertinent decision criteria solely depends on the financial statements, hence it is crucial that companies follow them. Further following of such decision criteria allows for development of corporate governance standards and norms of accounting.
Reference Lists
Ball, R. (2006). International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and business research, 36(sup1), 5-27.
Barth, M. E. (2008). Financial reporting transparency. . Journal of Accounting, Auditing & Finance, 173-190.
Deegan, C. (2012). Australian financial accounting. McGraw-Hill Education Australia.
Gore, R. &. (2007). Building the foundations of financial reporting: The conceptual framework. The CPA Journal, 30.
Lennard, A. (2007). Stewardship and the Objectives of Financial Statements: A Comment on IASB’s Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Re. Accounting in Europe, 51-66.
McGregor, W. &. (2007). IASB and FASB face challenges in pursuit of joint conceptual framework. Journal of International Financial Management & Accounting, 39-51.
Consequences
Ryan, C. G. (2007). Politics of financial reporting and the consequences for the public sector. Abacus, 474-487.
Whittington, G. (2008). Harmonisation or discord? The critical role of the IASB conceptual framework review. . Journal of Accounting and Public Policy, 495-502.
www.afr.com. (Retrieved on 12th May 2017). Wesfarmers Target using Supplier discounts. https://www.afr.com/brand/chanticleer/wesfarmers-investiges-how-target-used-suppliers-to-boost-profit-20160330-gnuale.
www.dailymail.co.uk. (Retrieved on 12th May 2017). Wesfarmers Target using supplier discounts Accounting Standards violation. https://www.dailymail.co.uk/news/article-3535097/Senior-Target-executives-fired-mind-blowingly-stupid-scheme-artificially-inflated-earnings-40-CENT.html.
www.ft.com. (Retrieved on 12th May 2017). Wesfarmers Target using supplier discounts. https://www.ft.com/content/ec879b16-ffc5-11e5-ac98-3c15a1aa2e62.
www.smh.com.au. (Retrieved on 12th May2017). Wesfarmers Target using supplier discounts. https://www.smh.com.au/business/retail/wesfarmers-auditors-assist-in-target-supplier-probe-20160331-gnv1ka.html.
International Accounting Boards and Standards are established such that there is uniformity in the prescribed standards for reporting (Danjou, 2013). The newly formed and proposed International Accounting Standards has been open to public opinion and has faced tremendous criticism due to various procedures and standards prescribed in it. The scope of this repot discusses the relevant issues and contemporary challenges that are deemed to be met by the newly established standards. The dissenting points are discussed along with the importance of such proposals. While the newly released data and press coverage for IASB covered only leases and provided several guidelines for the Effect Analysis. But the newly set Standards failed to accommodate in major changes and processes into the already existing standards making it complicated for SME’s along with several other stakeholders. There was also criticism in regards to not adopting in views of European Union which adopts IASB fully (Carmona, 2010). Thus, the report discusses relevant concepts, proposal along with certain recommendations as well.
The newly established Standards for International Accounting is said to lack transparency, accountability as well as legitimacy. As the proposal is not democratically controlled by elected parliament or government hence it is debated at the full Parliament (Henry, 2011). Such debate has led to IASB’s governing body already considering recommendations for change. There are various deficiencies that stock-exchange listed companies are prescribed to use their accounts. The International Accounting Standards Committee Foundation means to address any deficiencies but there are various areas that can be addressed while incorporating IASB. Most proposals of the newly incorporated standards was made in the lease portions as its treatment was diagnosed to be impacting various books of accounts along with profitability for the same (Barker, 2015). The Effect Analysis was the major proposal and recommendations that was brought into the purview of the proposal for which companies had to incorporate in changes.
The International Accounting Standards Board (IASB) have made provisions to review the three old traditional old standards of leases and aimed to obtain relevant feedback in regards to the same. In 2016 IASB proposed IFRS 16 Leases for changing the treatment of leases fundamentally (Exchange, 2011). There are also standards prevailing to the separate Effects Analysis to understand cost and benefits for implementation (Peasnell, 2009). There are certain relevant new guidance’s that are provided and included in the new proposal as follows;
- The Board made fundamental changes to the treatment of leases by incorporating in significant changes in IFRS 16 for lessee accounting model. It aims to further bringing in leases as a measure for reporting increase in reported assets. It includes balance sheet accounting model which will be like current finance lease accounting.
- European Union being the largest body that has incorporated all ways, means and procedures for IFRS does not have adequate representation from these countries(Humphrey, 2014). As there are inadequate representations of all countries in the Board hence there is no pertinent representation. Inappropriate representation of various stakeholders at the Body makes it inevitable for the recommendations hard to follow. There is a front loaded pattern recognized for all leases expenses even in the present of higher interests, depreciations, annual rentals. Such would directly impact lowering of Earnings Per Share (EPS) along with having a positive effect on the Earnings Before Interests, Depreciation, Amortization and Taxes (EBITDA) for such companies.
- IASB changed the definition of lease in IFRS 16 by increasing focus on the party controlling the asset(Ellwood, 2016). This will lead to several evaluation and re-valuation of assets under new standards. Companies which will be able to meet such defining standards will be treated in balance sheet and other services will be treated outside the purview of balance sheet.
- There are relevant inputs and feedback in the books of accounts and standardization for the lessor as well(Quagli, 2012). The lessor practices remains constant with current practices that classifies leases as finances and operational leases. Further the classification of leases that have significant risks or rewards have been found to be incidental to ownership.
- IFRS 16 provides for sale as well as leaseback of transactions as redundant in of-balance sheet for seller-lessee. The lessee just needs to record transaction along with the governing principles of IFRS 16 that provides for Revenue from Contracts with Customers.
Financial (for the industry)
The new Standards post proposal and inclusion of criticism have suggested that it will incorporate certain effective changes in the same. The newly rolled Standard will come into effect from January 2019 till such time the Board will collect significant data pertaining to leases. As IFRS has changed the definition of leases in the newly incorporated guidelines, it will set off balance sheet tests for many. Moreover common transactions as purchase agreements or transport agreements can be affected from such Standards.
The newly incorporated proposal has several benefits that once incorporated could yield high levels of effectiveness. The newly incorporated Standards had helped overcome the 30 years old existing Standards that was no longer deemed to be fit for applicable in industries (Stevenson, 2007). The newly incorporated ways provided advanced ways and techniques for dealing with leases as well as treatment of the same. As leasing forms an integral source of financing for companies The prevailing IAS 17 makes it difficult for investors to pay off such liabilities and to ascertain the position of the industry, norms of transport which is especially important in airlines, transport and retail sectors. It has been estimated that stock exchange listed companies have USD 3.3 trillion as lease commitments of which 83% is not a part of their balance sheet. The treatment made investors arbitrarily distinguishing amongst companies and comparing the effect of leases on their balance sheet. Such obligations in IFRS 16 is said to resolve various challenges of financial reporting as it will be consulted through various rounds of public consultations along with Board levels deliberations. IASB has coordinated and worked with U.S financial Accounting Standard Boards for developing its new Standards (www.ft.com, IASB new Accounting Framework Criticism, Retrieved on 12th May 2017).
It has been estimated that new front loaded leases expenses with its varied presentation of cash flows along with expenses can impact ratios and non-GAAP covenants as well as measures. Prior to applying the newly incorporated Standards it becomes pertinent to understand the effect or impact that they might cause and then set expectations from them. There will be vast impact on a varied number of sectors from incorporation of the newly set principles. Greater the lease portfolio of a Company the more impacts it is expected to have on its metrics to financial reporting and ratios. The key changes will however help overcome challenges by increasing transparency and comparability. It has been deeply criticized that the new standards have overlooked the stakeholders interests pertaining to various matters and is also very complicated to be incorporated by the SMEs. The IFRS versions for medium sized as well as large sized organizations is extremely complicated making it difficult to incorporate. Thus, without expansion these companies will not be able to include the same and overcome challenges in regards to leases or impact their balance sheet.
Conclusion
Conclusion
From the analysis and review of latest incorporations and proposal made by IASB there were various relevant conventions. However, there were various criticisms pertaining to the same that highlighted major flaws that could be included and made better. Thus, the pertinent criticisms came from several countries, industries as well as administrative systems that incorporated the legislations and wants to adopt the same. IASB for greater applicability and transparency needs to assimilate the recommendations and overcome the limitation of its current prevailing Standards. Prior to incorporating in the Standards all pertinent views and recommendations or impacts on various industries needs to be calculated as well as ascertained such that transparency and compatibility can be increased. The IASB has made relevant recommendations and provided amendments for leases only whereas there remains various concerns that needs to be addressed in balance sheet items. Further it has been criticized that IASB does not have proper representations and recommendations from various stakeholders that incorporates countries which adopt such principles. Without their proper approval and abiding for proper contracts that impact them as well as their industries such new guidelines might fall short of its destined targets.
Reference Lists
Barker, R. (2015). Conservatism, prudence and the IASB’s conceptual framework. . Accounting and Business Research, 514-538.
Carmona, S. &. (2010). The IASB and FASB convergence process and the need for ‘concept-based’accounting teaching. Advances in Accounting, 1-5.
Danjou, P. (2013). An Update on International Financial Reporting Standards (IFRSs).
Ellwood, S. &. (2016). New development: The conceptual underpinnings of international public sector accounting. . Public Money & Management, 231-234.
Exchange, N. S. (2011). Regulatory Framework. . Retrieved August 1st.
Henry, E. &. (2011). Conceptual framework revisions: Say goodbye to “Reliability” and “Stewardship”. Journal of Corporate Accounting & Finance, 91-94.
Humphrey, C. O. (2014). The rise of integrated reporting: understanding attempts to institutionalize a new reporting framework. Centre for Social & Environmental Accounting Research (CSEAR), St Andrews.
Peasnell, K. D. (2009). Reflections on the Revision of the IASB Framework by EAA Academics. Abacus, 518-527.
Quagli, A. &. (2012). How is the IFRS for SME accepted in the European context? An analysis of the homogeneity among European countries, users and preparers in the European commission questionnaire. . Advances in accounting, 147-156.
Stevenson, K. M. (2007). The IASB: Some personal reflections. . Globalisation of accounting standards, hrsg. von Jayne M. Godfrey and Keryn Chalmers, Cheltenham (UK), Northampton (USA), 34-45.
www.europarl.europa.eu. (Retrieved on 12th May 2017). IASB new Accounting Framework Criticism. https://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+IM-PRESS+20080410BRI26349+ITEM-024-EN+DOC+XML+V0//EN&language=SK.
www.ft.com. (Retrieved on 12th May 2017). IASB new Accounting Framework Criticism. https://www.ft.com/content/7f171f00-b900-11e4-b8e6-00144feab7de.
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