Current Liabilities of Wesfarmers
1. The current liabilities are the short term debts or obligations which are required to be paid within a period of one year. They are reported in the company’s balance sheet on the liabilities side (Kieso, Weygandt and Warfield, 2010).The current liabilities of Wesfarmers have reduced over the period. In year 2016, total current liabilities were $10,424 million and in 2017, they were reported at $10,417 million. There has been a reduction of $7 million in the total current liabilities of Wesfarmers. Under classification “Current Liabilities”, items like creditors, Interest-bearing loans and borrowings, Income tax, Provisions, Derivatives and others are recorded (Wesfarmers.com.au. 2017).
2. The most common liabilities of a company generally have largest balances. Covering high portion of total liabilities make them major for the company, as they are required to be paid off quickly. Considering the annual reports of 2017 of Wesfarmers, the major liabilities of the company were its trade payables classified in the section “current liabilities”. Among all the items, accounts payable is the major liability as it carries largest balances. Similarly, under section “Non-current liabilities”, Interest bearing debt also known as long term obligations are consider to be the major liability for the company as it has the highest balance. These are two liabilities which Wesfarmers is required to pay off as soon as possible (Wesfarmers.com.au. 2017).
3. Referring to the Note 9 of Notes to Financial Statements, items included under the heading ‘Provisions’ in the ‘Current Liabilities’ are:
- Employee benefits: It include long service leave entitlements, annual leave and incentives.
- Wages and Salaries: they include amounts which are to be paid within a year of the recording date and are recognized in provisions with regard to the service rendered by employees (Wesfarmers.com.au. 2017).
- Annual and Long service leave: these leaves are measured as the future expected payments for the employee services. (Wesfarmers.com.au. 2017).
- Lease Provision: it covers the lease arrangement for enabling the lease expenditure to be recognized on straight-line basis.
- Off-market contracts: Wesfarmers also make provisions for the contracts, the terms of which can be affected by the changes in market condition as compare to the market condition prevails at the date of acquisition.
- Self-insured risks: provision is made on the worker’s compensation and general liability claims recorded and the estimation of claims that are incurred but not recorded.
- Mining and plant rehabilitation: provisions related to remediation are calculated on assuming current technologies.
- Restructuring and make good: For restructuring, provision is made in the situation where activities like implementation of comprehensive plan, negotiations with the employees is done and employee cost is recognized.
According to IAS 37, provision means an uncertain liability. A company is required to recognize a provision if,
- Present obligation arises due to past events.
- Probable payment and
- A dependable estimate of amount is needed to be done (Epstein and Jermakowicz, 2010).
Wesfarmers purely comply with the definition of provisions given under IAS 37. Provisions made for employee benefit include the estimation of the future expected payments to me made for the employees’ services. Wages and salaries which are to be paid within 12 months are the present obligations arise due to the services rendered in the past. Provision for the same has been made by the company. Remaining other provisions also satisfy the definition of provisions under IAS 37.
The liabilities for employee benefits have been decreased over the year from $1,154 million in 2016 to $1,150 million. They have reduced by an amount of $4 million (Wesfarmers.com.au. 2017).
4. Interest bearing loans and borrowings are known as the financial obligations of a company carried over more than one year. These are those debts which require the payment of interest over the predetermined period (Needles, Powers and Crosson, 2013).
Major Liabilities of Wesfarmers
The financial report of Wesfarmers says that, loans and borrowings are recognized at fair value initially and then they are measured at amortised cost, using effective interest method. No cash has been raised from the interest bearing loans, instead they are been paid off during the year. In year 2016, the total interest bearing borrowings were reported at $7,303 million and in 2017, they were at $5,413 million. This implies that within the year, company has set off its long term liability by an amount of $1,890 million. This also resulted in the decrease of interest expense over the year (Wesfarmers.com.au. 2017).
5. Secured liabilities are the debts of the company which are secured by an underlying asset or collateral in order to reduce the risk associated with borrowings. Non- current liabilities mainly include long term debt or interest bearing loans and borrowings. The loan taken by keeping an asset as a collateral security towards it is described as a secured non-current liability (Friedberg, 2015). However, the annual report of Wesfarmers does not showcase any non-current debts which are secured. Wesfarmers’ non-current liabilities mainly include its interest-bearing loans and borrowings. The note number 14 of notes to financial statements shows the details of interest-bearing loans and borrowings which includes unsecured current and non-current loans. It does not provide any information regarding secured non-current liabilities.
6. Provisions included under the heading ‘Non-current Liabilities’ are basically the provision made for those liabilities which are likely to arise in future. The amount is set apart for those liabilities or expenditures in terms of provisions or reserves, which a company may require to pay in future if they occur. Non-current liabilities include non current provisions for employee benefits, provisions for taxation and dividend which are to be paid in near future (Bhattacharyya, 2012). In note 9 of annual report of Wesfarmers, all the information related to the provisions made by the company is given. It includes current and non-current provisions or reserves for certain items such as employee benefits, self-insured risk, lease provision and many others.
1. The Australian Accounting Standards Board formulates an Accounting Standard AASB 112 for the treatment of Income taxes. All the companies operating in Australia are required to comply with this standard while reporting about their taxes. The purpose of this standard is to provide an accounting treatment for income tax to make sure that the companies report to the tax consequences in the same way it accounts other items. The tax expense should be included in company’s profit and losses and should be shown in the income statement of the entity. The standard also includes the recognition of deferred tax assets and liabilities (Henderson, et. al. 2015).
Provisions under Current Liabilities of Wesfarmers
Woolworth is an Australian company and the income statement shows a deduction of income tax expense worth amount $650.4 million in year 2017 and was $486.4in 2016 (Woolworthsgroup.com.au, 2017). The income tax shown comprises of two elements. Current tax is the income tax which is to be paid on the income earned to taxation authorities, using the tax rates. Deferred tax is calculated at the rates which are expected to be applied at time of realisation of an asset or settling of a liability.
However, in case of a partnership firm, AASB 112 is not applicable as the partnership does not pay the tax on profits earned. The tax is been paid by the partners when each of them prepare their income tax return and report their share of partnership income in it. The partners are required to pay tax on their share of profits at individual tax rate (Business.gov.au, 2017). The partnership firm has its own Tax File Number (TFN) and if want can apply for Australian Business Number (ABN). As it does not pay income tax, the firm has to lodge a partnership tax return which reports all the incomes and deductions made and also show the distribution of net profit and loss between the partners (ATO 2018).
2. Retained earnings are basically the amount of profits reinvested in the business by the company. The earnings demonstrate what company did with its profits. The reinvestment done is either in form of asset purchase or liability reduction. These are company’s profit used for the purpose of paying dividend to its shareholders (Wahlen, Jones and Pagach, 2012).As per the Woolworth’s financial report of 2017, changes in equity statement shows that the net profit earned by the company after deducting tax is $1535.7 million. This profit or amount of retained earnings is used to pay the dividends and other liabilities of the company. The dividends paid in 2017 were amounted to $859.6 million and other liabilities were worth $5.6 million. Along with this, an amount of $2.2 million is received by the company as dividend on Treasury shares. The balance of retained earnings recorded at the 30th June 2017 was $3797.2 million including the opening balance also. This is how the total profit is appropriated in the annual report of Woolworth (Woolworthsgroup.com.au, 2017).
Talking about a partnership firm, according to the Australian Partnership Act, the profits and losses are equally bear by the partners of the firm, irrespective of their share of capital in the business (Latimer, 2011). In general terms, a partnership firm prepares accounts like Profit and Loss Appropriation account, partners’ capital account. The firm determines the profit before deducting the partner’s salaries and the appropriation account shows how the profit earned is spent by the business. Salary paid to the partners, their interest on capital, partners’ commission all are paid out of the profits earned by the firm. These items are shown in the P&L appropriation account.
Interest Bearing Loans and Borrowings
The owners of a corporation or company receive their share of profits directly proportional to the number of shares owned by them. However, in case of partnership firm, the proportion of capital invested is not the basis for distributing the profits among partners. Generally it is distributed equally among the partners.
3. Issued share capital means the amount of shares, a company offers to the investors for the purpose of sale. The number of issued shares is usually equal to the amount of subscribed share capital. It basically consists of the shares which are been sold to the shareholders or investors against cash or some other consideration. Companies show the issued capital in their balance sheet under the head ‘Equities and Liabilities’ along with the number of shares issued and the price per share (Ferran and Ho, 2014). Woolworth’s balance sheet reports an increase in the issued share of the company of 1,294,416,480 fully paid ordinary shares in year 2017 than that of in 2016.
The treatment for raising a capital in the business is different in a typical partnership firm. The capital is generally brought by the partners in the business and if the firm requires additional capital, it can raise it from bringing the additional partners in the business who can act as an investor or a active partner. Another method to raise funds is to take a loan from bank or additional capital invested by the existing partners. The partners have the right to earn interest on their capital and can withdraw it from the business as and when required. Unlike corporations, partnership firms do not issue shares for the purpose of sale to raise funds.
4. According to the Australian Accounting Standard Board, a standard 107 is made for cash flow statements. It states that companies should prepare CFSs and should also mention the manner in which it is prepared. It says that the statement has to prepare in a proper format with the classification of the cash flows as operating, investing and financing activities (Mills and Woodford, 2015).As Woolworth is an Australia based company, so its complies with the standard and prepares a cash flow statement periodically which is included in its annual financial statements.
However, the standards only apply to the corporations and companies, so partnership firms in Australia are not required to prepare cash flow statements and include them in its final accounts. The financial statements of a partnership firm include P&L account, P$L appropriation account, Partner’s capital and current account and lastly a balance sheet which shows the financial position of the entity.
References
Ato.gov.au. 2018. Partnership. [online] Available at: https://www.ato.gov.au/Business/Starting-your-own-business/Before-you-get-started/Choosing-your-business-structure/Partnership/ [Accessed 28 Jan. 2018].
Bhattacharyya, A.K., 2012. Financial accounting for business managers. PHI Learning Pvt. Ltd.
Business.gov.au. (2017). Partnership. [online] Available at: https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure/business-structures-and-types/partnership [Accessed 28 Jan. 2018].
Epstein, B.J. and Jermakowicz, E.K., 2010. WILEY Interpretation and Application of International Financial Reporting Standards 2010. John Wiley & Sons.
Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.
Friedberg, B. ed., 2015. Personal Finance: An Encyclopedia of Modern Money Management: An Encyclopedia of Modern Money Management. ABC-CLIO.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2010. Intermediate accounting: IFRS edition (Vol. 2). John Wiley & Sons.
Latimer, P., 2011. Australian Business Law 2012. CCH Australia Limited.
Mills, A. and Woodford, W., 2015. Company Accounting. Pearson Higher Education AU.
Needles, B.E., Powers, M. and Crosson, S.V., 2013. Financial and managerial accounting. Cengage Learning.
Wahlen, J., Jones, J. and Pagach, D., 2012. Intermediate accounting: Reporting and analysis. Nelson Education.
Wesfarmers.com.au. 2017. 2017 Annual Report. [online] Available at: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0 [Accessed 28 Jan. 2018].
Woolworthsgroup.com.au. 2017. Annual Report 2017. [online] Available at: https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf [Accessed 28 Jan. 2018].
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