Financial Analysis: Harvey Norman Compared To Wesfarmers

Analysis of (GPFR) general purpose financial report

Harvey Norman is the big multi-national, Australian based retailer for furniture, computers, consumer electrical and communication products. Their operating structure is different from others with respect to the fact that each of the store department is operated by the separate management entity. Therefore, the superstores are the combination of three to four different management of business that are independently managed through contribution of revenue to the Harvey Norman Holdings Ltd. through the sales portion and lease payments. The stores of Harvey Norman are operated and owned by Sydney based and ASX Listed parent company Harvey Norman Holdings Limited. The main objective of the company is to get the recognition as the global leader in delivering the retail services in fast moving sector of consumer goods, generate sufficient returns for the stakeholders, creating the inspiring workplace and to be welcomed by the communities under which they operate their business (Harveynormanholdings.com.au 2016).

The company is the profit company that is limited by shares and incorporated as well as operated in Australia. The shares of the company are traded publicly under the Australian Securities Exchange (ASX) and trading under ASX with the code HVN. The financial statement of the company is the general purpose financial report and is prepared as per the requirements of the Corporation Act 2001, interpretation of the Australian Accounting Standards and the compliance of other law. The financial report of the company further omplied with the AAS (Australian Accounting Standard) as issued by the AASB and the IFRS (International Financial Reporting Board) as released by the IASB (International Accounting Standard Board). Further, the accounts are prepared based on the historical cost approach except for the land, buildings, investment properties, listed shares those are held for trading, investments those are available for sale and few derivative instruments which are measured at the fair value approach.

From the remuneration report of the company it is recognized the remuneration strategy of the company is formed to retain, motivate and attract the high performance from the individuals and to align the shareholder and executive’s interest.

The fixed remuneration includes the superannuation contributions, base salary and other benefits and is paid for providing the competitive fixed remuneration with regard to the market, experience and role. For payment of fixed remuneration, the performance of the individual as well as the performance of the entity is taken into consideration during the review of annual remuneration.

The STI is paid through cash as the performance cash incentive. STIs are paid to reward the executives for the contribution under the achievement of the company as a whole. Out of the total STI, 50% is subject to the financial condition which is 50% satisfied at the 14% RONA, 100% satisfied at the 15% RONA and further 50% is subject to the non-financial conditional performance. Finally, the LTI are paid for performance rights with regard to the right to acquire 1 ordinary share of the company at zero exercise prices. Further, the remuneration strategies are presented to the shareholders in the AGM for their approval.

Remuneration report and conceptual framework

The inventories of the company for June 2015 were $ 298,381,000 and increased to $ 315,746,000 in June 2016. Inventories of both the companies are valued on net realisable value or cost whichever is lower and are transacted at net of all the volume rebates, business and marketing development settlement discounts and contributions. Costs are measured at the weighted average approach and it involves the duty, freight, inward charges and acquisition cost. Net realisable value is forecasted selling prices under the ordinary course of business and from this the forecasted costs for making the sale is subtracted.  

Table 1: Inventories of Wesfarmers Limited and Harvey Norman

(Source: Created by Author)

Graph 1: Inventories of Wesfarmers Limited and Harvey Norman

(Source: Created by Author)

It is recognized that the inventories of Harvey Norman is significantly low as compared to that of Wesfarmers for both 2015 and 2016.

Table 2: Accounts receivable of Wesfarmers Limited and Harvey Norman

(Source: Created by Author)

Graph 2: Accounts receivable of Wesfarmers Limited and Harvey Norman

(Source: Created by Author)

It is recognized from the above figures that the accounts receivable of Harvey Norman is better as compared to that of Wesfarmers for both the years (Rankin et al. 2016). The companies shall increase the level of accounts receivable to meet its current obligation in better way.

 Table 3: Total liabilities of Wesfarmers Limited and Harvey Norman

(Source: Created by Author)

Graph 3: Total liabilities of Wesfarmers Limited and Harvey Norman

(Source: Created by Author)

It is recognized from the above figures that the total liabilities position of Harvey Norman is better as compared to that of Wesfarmers for both the years. The companies reduce the level of total liabilities to improve their liquidity position (Picker et al. 2016).

Table 4: Net income of Wesfarmers Limited and Harvey Norman

(Source: Created by Author)

Graph 4: Net income of Wesfarmers Limited and Harvey Norman

(Source: Created by Author)

It is recognized from the above figures that the net income position of Wesfarmers Limited is better as compared to that of Harvey Norman for both the years (Wesfarmers.com.au 2016). The companies shall try to increase its net income position through reducing the expenses.

The prudence as well as the consistency under the conceptual framework are complied to identify the inconsistencies that may be found in the preparation and presentation of the financial statements of any organization. To be stated more concisely, the terms like prudence and conceptual framework assist to find out the inconsistencies or non-compliance in the presentation, true and fair approach and accountability of the financial statements (Kent and Zunker 2015). Normally, the organizations listed under the ASX used different strategies for preparing their annual statement to increase its simplicity, clarity and transparency and enable the users like shareholders, creditors, potential investors and other users to extract the information easily as per their requirement. On the other hand, non-compliance explains that  the organization while preparing their annual statement has not followed the conceptual framework of IFRS, IASB or AASB or did not followed the true and fair view approaches.

Inventory analysis

The financial statements of any organization are of biggest concern which is beyond of just the true and fair approach and the contemporary issues of Accountability. Reliability and prudence with regard to the financial statement accounting reporting has long record (Zhang and Andrew 2014). Various arguments are there with regard to the significant accounting standards, AASB and IFRS that must take into consideration the term prudence and shall state its importance under the conceptual framework. Including the carefulness while applying the judgements on the financial statements are required with regard to probability and uncertainty in the circumstances, for example, the liabilities and the expenses are not undervalued and the incomes and assets are not overvalued (Scott 2012.). Thus, the concept of prudence is the big concern for the presentation of financial statement as per the true and fair approach. Moreover, it offers wide initiative with regard to the operational as well as the financial position of the company that is to be taken into consideration.

The major advantage of prudence is the preparation of the financial statements on the basis of going concern. It assists the accountant to forecast the future problems that may take place in the business. Further, it assists the accountants to prepare the plan for the future and allow them time to solve the financial problems. The prudence also assists in influencing the financial statement to be useful for the investors (Schaltegger and Burritt 2013). On the other hand, the criticism that is received against the prudence is that it failed to take into account the fact that the economic value and book value of the asset are different. Further, the contracting demand for the accounting of prudence is received with regard to the problem that most of the part that is to be applied does not exist actually.

One of the major issues of the company is the revolt of the shareholder for more than $ 943 million for loans to the franchisees along with the proxy advisor that recommended the fund managers to vote against the reception of the financial accounts. The main issue regarding the matter was detail regarding the loan was not provided. The lack of transparency in the account was a serious issue. It was also found that during FY16 the franchisees retailer doubled the sales growth that was amounted to $ 5.33 billion with increase of 7.6% as compared to 3.7% increase for the previous year. Though the company was happy regarding this tremendous growth, as per ASIC the company is not transparent to their shareholders.

Conclusion

From above analysis it is found that both the companies are following the AASB framework and IFRS interpretation while preparing their financial statements. However, the inventories of Harvey Norman is significantly low as compared to that of Wesfarmers for both 2015 and 2016 and that the accounts receivable of Harvey Norman is better as compared to that of Wesfarmers for both the years. Further, the total liabilities position of Harvey Norman is better as compared to that of Wesfarmers for both the years and net income position of Wesfarmers Limited is better as compared to that of Harvey Norman for both the years.

As it is found from the financial report of the company that the inventories of the company are significantly low, the company shall accumulate some fund to purchase inventories. Increasing the inventories will assist them in enhancing the current assets, which in turn will enable the company to be in the better position to pay-off their obligations.  Further, as the remuneration of the executives are based on the performance, chances are there that the management may falsify their own performances as well as the company’s performance to receive more remuneration. Therefore, the company is recommended to find out any other suitable approach for paying the remuneration.

References

Harveynormanholdings.com.au. 2016. Reports. [online] Available at: https://www.wesfarmers.com.au/investor-centre/company-performance-news/reports [Accessed 16 Aug. 2017].

Kent, P. and Zunker, T., 2015. A stakeholder analysis of employee disclosures in annual reports. Accounting & Finance.

Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van der Tas, L., 2016. Applying international financial reporting standards. John Wiley & Sons.

Rankin, M., Stanton, P.A., McGowan, S.C., Ferlauto, K. and Tilling, M., 2012. Contemporary issues in accounting. John Wiley and Sons Australia, Limited.

Schaltegger, S. and Burritt, R., 2013. Contemporary environmental accounting: issues, concepts and practice. Greenleaf Publishing.

Scott, W.R., 2012. Financial accounting theory (Vol. 2, No. 1, p. 12). Upper Saddle River, NJ: Prentice hall.

Wesfarmers.com.au. 2016. Reports. [online] Available at: https://www.wesfarmers.com.au/investor-centre/company-performance-news/reports [Accessed 16 Aug. 2017].

Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order