Section 1: Identify Key Accounting Policies
This report has been prepared for providing an insight into the importance of adopting appropriate accounting policies and choices for quality financial reporting. The business corporations need to develop and provide high-quality financial reports for securing the investors trust and confidence. The accounting standard-setting bodies of various countries have provided the accounting policies and procedures that need to be implemented by the businesses for developing the financial reports (Marley and Pedersen, 2015). In this context, the accounting quality of an ASX listed firm is analyzed and evaluated in the present report through examining its financial reports. The company selected for the purpose is Wesfarmers Ltd. The accounting policies of the company are compared with its one of its major competitor firm, that is, Woolworths Ltd. This is done to analyze the accounting norms established by the company for competing with the industry peers. The flexibility adopted by the company in the accounting framework for achieving its set targets and objectives is also analyzed in the report. The potential areas of concern that requires extensive disclosure in the financial reports is also discussed in the report. Thus, the accounting quality of Wesfarmers is evaluated in detail in the report through in-depth analysis of its accounting policies and strategies.
The Woolworths is recognized a supermarket giant of Australia and effectively complies with all the accounting policies and procedures established by the Australia accounting standards board. The financial reports are developed as per the Corporations Act 2001 and AASB standards. The Group has also stated the development of its financial report as per the International Financial Reporting Standards. The historical accounting method is adopted by the company for valuing its assets and liabilities. However, the company has valued its financial derivatives and other investment assets at fair value. The company has applied the principle of consolidation for developing its integrated financial reports that presents the financial information of all its subsidiaries in a single economic entity. The financial figures relating to the assets and liabilities of its overseas subsidiaries are converted into Australian dollars through the application of exchange rate existing on the date of measurement. The financial figures are presented in Australian dollars as per the Companies Act rounded to nearest million dollars (Wesfarmers: Annual Report, 2016).
The recognition and measurement of other financial figures relating to inventory, revenue, financial cots, dividend, leases, income tax are carried out as per the significant accounting policies advocated by AASB. The company have also discloses the auditor’s report of the company that states its effective compliance with the standard accounting policies. The effectiveness and performance of the independence of auditors is also reviewed annually by the audit and risk committee. The company have also developed and maintained a risk management framework for identifying, monitoring and controlling the risks involved in business operations. The risk committee is responsible for developing the code of conduct that provides standard guidelines to all its employees for conducting the operational process in order to minimize the business risk. Therefore, it can be said that Wesfarmers have implemented all the required accounting standards and policies that helps in providing all the necessary information to the stakeholders (Wesfarmers: Annual Report, 2015).
Section 2: Assess Accounting Flexibility
The business entities are required to prepare the financial reports as per the standard accounting procedures and policies. However, there is some discretion provided to the managers in adopting the change in standard accounting policies for achieving the corporate goals and objectives. In this regard, the positive theory of accounting states that manager adopts the accounting method that helps in achieving the best financial outcomes for an entity (Wolk, Dodd and Rozycki, 2012). Thus, management of a business entity makes some judgments and estimates in the accounting policies for recognition and measurement of its financial instruments. The Wesfarmers have also adopted some accounting judgments and estimates at the time of its financial reporting. The carrying value of assets and liabilities are determined on the basis of estimating the future situations. This accounting estimate involves causing material risk in the value of assets and liabilities in the future accounting period (Wesfarmers: Annual Report, 2016).
The company also incorporates the use of accounting judgments and estimates while determining the recoverable amount of cash generating units during identifying the impairment of intangible assets and goodwill. The selling amount of inventory in the current reporting period is also estimated on the basis their present sales value by deducting the cost of selling. The accounting judgments are also made for identifying the useful lives of fixed assets of the company by the management such as property, plant and equipment. Therefore, it can be said that the management of Wesfarmers have adopted significant flexibility in its accounting framework for achieving its corporate objectives. However, the Board of directors has ensured that discretion power given to the management does not distort the financial performance of the company in any way (Wesfarmers: Annual Report, 2016).
The accounting strategy is the financial action plan developed by a company in achieving its pre-determined goals and objectives. The accounting strategy of Wesfarmers can be evaluated on the basis of accounting policies adopted for competing with rival companies, developing incentive plan for managers and the rationale for incorporating the change in the accounting procedures. The major competing firm of Wesfarmers is Woolworths that is also recognized to be a major retail company in the Australian supermarket. There exist significant differences between the accounting policies of both the companies as analyzed from their annual reports (Kenny, 2009). For example, Wesfarmers incorporate the use of hedge accounting policies to offset the risks that arises at the time of estimating the carrying value of assets and liabilities for the next reporting period. On the other hand, Woolworths does not apply hedge accounting for managing the risk arising from the foreign exchange exposure in the future value of assets and liabilities. Also, the Wesfarmers have maintained an appropriate mix of equity and debt structure as compared to Woolworths that have a higher proportion of debt in its capital structure. In addition to this, the comparison of the consolidated financial statements of both the companies reflect that Wesfarmers financial reports clearly represents the major financial elements such as revenue, expenses and others as compared to Woolworths (Wesfarmers: Annual Report, 2016). Thus, it can be said that both the companies have adopted AASB standards and policies for financial reporting but Wesfarmers but adopted better accounting policies and procedures as compared to Woolworths (Woolworths: Annual Report, 2016). The increase in net profitability of the company over consecutive years is due to the adoption of quality accounting practices as per the nature of its business operations (Kenny, 2009).
Section 3: Evaluate Accounting Strategy
The company has adopted a share-based incentive plan for its key management personnel in order to link their interests’ with the shareholder value. The managers are provided incentives on the basis of their performance through providing the shares of the company. The executive managers are entitled to receive restricted shares of the company for performance beyond the target. Also, the long-term incentive plan of the company comprises of providing 50% of the total shareholder return to the managers as incentives. Thus, the board of the company has adopted such incentive scheme for providing motivation to its KMP to improve their performances for achieving better incentives and thus resulting in maximizing shareholder value. The companies do not possess nay legislative requirements for adopting particular remuneration structure for its KMP. Thus, the remuneration and incentive structure of companies are different from each other due to the flexibility provided to the management in adopting such a structure that helps them to improvise the performance of its KMP. The Wesfarmers have adopted an incentive plan that drives its performance culture and links the executive rewards with the achievement of corporate objectives of developing large returns for shareholders. However, the flexibility provided to the management in selecting a compensation structure and incentive plan that does not provide them authority to manipulate the financial information for their personal gains (Wesfarmers: Annual Report, 2016). The incentive plan adopted by the company should not provide an unfair advantage to the managers of achieving personal gains at the expense of organizational performance (Sheridan, 2016).
The company has adopted significant change in the accounting policies through making accounting judgments and estimates. The judgments and estimates have impacted the materialistic information of the financial reports of the company through changing the financial facts and figures relating to income, tax expenses, inventories, fixed assets, goodwill, provisions, and impairment of non-financial assets, associates, joint ventures and contingencies. The accounting changes are made for achieving the desired objective and goals for improving the operational efficiency of the company (Wesfarmers: Annual Report, 2016). However, the company has disclosed all the relevant material changes in its financial reports as per the AASB standards to maintain transparency in its business operations (Albrecht, 2010).
It has been analyzed from the annual disclosure of the company that it has provided reliable, relevant, comparable and understandable financial information for meeting the needs and expectations of the stakeholders. The financial disclosure provided by the company seems to be adequate as its notes to the financial statements section has provided all the necessary information to the key accounting policies adopted in developing the financial statements. Although, it has been analyzed that the financial statements section does not include footnotes that helps in explaining the relevant standards applied in developing a specific financial report (Henderson et al., 2015). The company has not provided any foot notes in its consolidated financial statements and as such violates the understandable principle of conceptual accounting framework. The understandable principle states that business entities need to disclose the financial information in such a way so that it can be easily interpreted and understood by the end-users (Mintz, 2013). The foot note provided at the end of the financial statements helps the users to easily understand the method of preparation of a specific financial report (Wesfarmers: Annual Report, 2016). Therefore, the business entities should include foot notes section in the financial reports as per the understandable principle of conceptual accounting framework (Gray and Manson, 2007).
Section 4: Evaluate the Quality of Disclosure
The notes to financial statements section of the company have been prepared in accordance with the Generally Accepted Accounting Principles (GAAP). The GAAP principles are the common set of accounting principles and standards that all business entities should follow for developing their financial statements. The notes section of the company ha adopted the GAAP principle in explaining the specific accounting policies adopted for identifying and measuring its various financial elements during developing the general purpose financial statements (Bragg, 2010). The GAAP principles have helped in reflecting the accounting procedures adopted by the company in measuring its key element of success, that is, assets, liabilities, equity, tax, finance costs and others. The specific AASB standards that have been followed for identifying and measuring the value of different financial instruments are detailed properly in the notes to the financial statements section of the company. The notes section sufficiently explains and is consistent with the current performance of the company (Wesfarmers: Annual Report, 2016).
The company as per the AASB standards have also discloses the performance of all its operating segments in the notes section. The major operating segments of the company consist of retail, department stores, industries and other operating segments. The retail division of the company includes its business unit of Coles. Home improvement business and Officeworks. The department’s stores incorporate two sub-units, which are, Kmart, and Target. The industrials sub-units are resources, industrial and safety, chemicals, energy and fertilizers. In addition to this, it has also other operating segments such as investment, banking and forest products (Wesfarmers: Annual Report, 2016).
The Wesfarmers Limited through have provided sufficient disclosure of various elements of its financial reports in its annual disclosure but there are still some issues of concern identified that requires more disclosure. The company has made various accounting judgments and estimates in developing its financial reports that have impacted its materialistic information. As such, the company needs to provide more disclosure in relation to the need of implementing large number of assumptions in identifying and measuring its financial instruments value (Horngren et al., 2012). The accounting transactions carried out using the estimated values of financial instruments have largely impacted its financial profitability. Also, it has been analyzed from the income statement prepared by the company that there is large increase in its inventory value as compared to sales revenue. The large increase in inventory value of the company as compared to past years require more disclosure for providing a knowledge of the reasons for its increase and the measures taken by the company for improving its sales revenue and decreasing inventory in the coming years (Wesfarmers: Annual Report, 2016).
Section 5: Identify Potential Red Flags
The company is also adopting the use of associates and joint ventures for financing its operations. The investment of the company in associates and in the joint controlled assets is accounted through the use of equity method. The company should provide more information in relation to the use of such strategic partnerships for increasing its asset base. Also, the company is required to report the information in relation to the increasing gap between net income and taxable income (Wesfarmers: Annual Report, 2016). This is due to the presence of non-deductable tax items and other expenses as depicted from its statement of tax expense:
The investments section of the company also shows that it is receiving finance from ‘Proceeds from sale of controlled entities. This depicts that company is selling its asset base for increasing its cash-flow (Wesfarmers: Annual Report, 2016). This is the area of major concern for the company as it has large asset write-offs that can lead to decrease in its asset base in the future period of time (Mumba, 2013).
The IASB has recommended the business companies adopting the IFRS standards to comply with the conceptual accounting framework principles of relevance, reliability, comparability and understandability. The presence of all these qualitative characteristics in the financial reports is essential for developing high-quality financial statements. The qualitative characteristics are developed on the basis of normative theory of accounting. The normative theory of accounting states that the main role of accounting theory is to provide recommendations regarding the optimal accounting method to be adopted for developing financial reports. The normative theory has largely helped in developing a consistent accounting framework by identifying the qualitative characteristics that should be possessed by the financial information disclosed in the financial statements (Hoffman, 2016). The Wesfarmers limited have prepared its general purpose financial statements as per the standard accounting procedures and guidelines in order to effectively comply with the conceptual accounting framework principles (Wesfarmers: Annual Report, 2016).
The financial information possesses all the fundamental characteristics as prescribed by the normative theory of accounting for supporting the decision-making process of the end-users. The company operates on a global level and therefore has also settled in its financial reports its compliance with the IFRS standards. This is done mainly by the company to comply with conceptual accounting framework indifferent countries also effectively (Mirza, and Ankarath, 2012). There is large difference in the accounting policies and procedures of different accountant standard-setting bodies to meet the country-specific requirements. The company for meeting its corporate goals and objectives of diversification should meet the accounting polices of different countries accounting standard -setting board. The selection of particular accounting choice and disclosures as per the IFRS standards will help the company to meet its corporate goals of strengthening its competiveness in the global market Pietra, R., (McLeay and Ronen, 2013). The company as such is making some voluntary accounting disclosures as per the IFRS standards that are not required under the accounting conventions of AASB standards (Hussey and Ong, 2017). The reason for making particular accounting choices is to meet the political needs and requirements of various countries where is aiming to conduct its business activities. Therefore, it can be said that Wesfarmers is emphasizing on adopting a coherent and consistent set of accounting framework as per the normative theory of accounting that meets the expectations of its different stakeholders around the world (Bamberg and Spremann, 2012). This is required by the company to maintain transparency in its business operations throughout the world and therefore achieving reliability and trust in the eyes of its global stakeholders (Wesfarmers: Annual Report, 2016).
Section 6: Compliant with the Conceptual Framework
Conclusion
The analysis and examination of the financial report disclosure made by Wesfarmers Limited it can be said that the adoption of accounting policies and procedures as per the standard legislative requirement has helped it to achieve a global image in the supermarket. The company financial disclosure meets the qualitative characteristics of conceptual accounting framework and is in accordance with the end-users needs and requirements. There is sufficient disclosure about the relevant accounting policies and procedures adopted for identifying and measuring the various financial elements. The financial statements have been prepared as per the principle of consolidation as required by the Corporations Act and AASB standards for a company having various sub-divisional units on a global scale. There are various issues of concern present in the financial report that requires extensive disclosure on the part of management during developing its future financial reports. The company has adopted better accounting policies and choices as compared to its industry competitors contributing to its supermarket giant position in the retail market of Australia.
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