Selection of Companies
The discourse of the study is aimed at providing an understanding of issues associated to recognition and measurement in financial accounting. The vivid investigation of various parameters of measuring financial accounting information is done on two publicly listed ASX companies namely Wesfarmers Ltd and Woolworth Ltd. The financial measurement has been considered by critically discussing the accounting standard literature on recognition and measurement requirements for leasing, provisions made for Income tax expense, benefits and obligations and intangible assets. The report will also review the recent financial statement of both companies to analyse and compare the disclosures made on leasing, provisions for Income tax expense, benefits and obligations and intangible assets with relevance to Australian accounting standards. The latter part of recognition and measurement in financial accounting will be provided with suggesting improvement measures for accounting standard and reporting’s practices followed by the firms based on the research literature.
Part 1 A
Australian accounting standard recognises lease as any contract whereby lessor conveys to the lessee the “right to use an asset” for a certain period of time in return for a single payment or series of payment. A finance lease is associated to substantial transferring of risk and reward related to the proprietorship of an asset. On the other hand, an operating lease can be transferred to another incidental ownership. A non-cancellable lease is any lease which can be cancelled with permission of lesser, presence of remote contingency or in case lessee agrees to enter into a new lease contract having equivalent asset with same lessor (Aasb.gov.au 2019). Presently, all Australian entities adhere to AASB 117 Leases which is issued by IASB.
The introduction of AASB 16 (effective from January 2019) relates to single lessee accounting model which requires the lessee for recognising liabilities and assets pertaining to all leases with a term period more than 12 months except fundamental asset is considered to be of low value. Additionally, a lessee is also required for recognising the right of use of asset with its obligations to make lease payments. The ASSB 16 standard also states that lessee measures the “right of use assets” comparably to other non-financial assets like PPE. As a result of this, lessee values the depreciation as per right of use asset and interest pertaining to lease liability. The measures recognising the “right of use asset” also classifies the lease liability as per principal portion and interest portion thereby presenting them into cash flows applied with “AASB 107 Statement of Cash Flows”. The measurement of lease for assets and liabilities are recognised as per present value basis. This is inclusive of non-cancellable payment of lease and payments made in optional period in case the lessee is convinced to exercise an option for extension of the lease (Aasb.gov.au 2019).
Areas of Investigation
AASB 16 standard is also relevant with disclosure requirement for lessees. The lessees will require to implement an appropriate judgement for deciding on the information to be disclosed in meeting the objective of providing main bases of financial statement to recognise the impact that the lease may have on monetary position, cash flow and financial performance of the lessee. In addition to this, AASB 16 substantially carries the lesser accounting necessities as per AASB 117 Leases (Aasb.gov.au 2019).
Part 1B
|
Category of Lease |
Wesfarmers Ltd |
Woolworth Limited |
|
Recognition criteria |
The operating lease commitments as that 30 June 2018 are in compliance to AASB 117. Wesfarmers have proposed to apply AASB 16 Leases (AASB 16) from 1 July 2019. In order to manage this transition, the group has introduced new system for ongoing compliance with the standard. It has further determined the appropriate discount rate for evaluating the present value of future lease on transition. Additionally, the judgements as per assessment of non-lease components are excluded from the right of use asset (Wesfarmers.com.au. 2019). |
Similarly, Woolworth Ltd is proposed to replace AASB 117 Leases with AASB 16. The current requirements of leases are based on categorisation of finance leases recognised as per concert later statement of financial position or operating leases. Following the lease recognition as per AASB 16, the group full be able to account for the operating leases as a result of “right of use asset and associated lease liability” considered as per consolidated statement of financial position (Woolworthsgroup.com.au. 2019). |
|
Finance lease |
There has been no disclosure made by the company pertaining to finance lease. |
The group has applied “AASB 2016-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107” for finance lease. |
|
Operating lease |
The company has declared operating lease commitments as an expense in the income statement on as “straight-line basis” for the lease term. On the other hand, the operating lease incentives are considered as liability over the lease term (Wesfarmers.com.au. 2019). |
Similarly, operating lease outgoings are recognised as per “straight-line basis” over the term of lease. Additionally, the fixed-rate interests to lease rental payments excluded against index-based rental increases are also recognised with same method (Woolworthsgroup.com.au. 2019). |
Part 1C
The pervasive use of AASB 16 Leases will be able to significantly impact on operating leases for retail manufacturing sector such as Wesfarmers Ltd and Woolworth Limited. In order to implement the changes, it is suggested for the entities to understand the new requirements which are to be followed in balance sheet, cash flow statement and income statement. It is suggested for the forms to consider implications of these changes on gearing and loan covenants. It is also important for the firms to identify the changes in key ratios and communicate the same to the stakeholders (Joubert, Garvie and Parle 2017). It is important for the entities to calculate the ongoing reporting requirements for existing data and system based on the new standard. Despite of AASB 16 considering recognition for individual lease, the accounting standard should also provide the provision of applying the standard to portfolio of leases which are reasonably considered to bring an effect on the financial statement. Moreover, the accounting model for lessee unless under AASB 16 is asymmetrical as it is not able to provide a clear distinction of finance lease/operating lease. This particular aspect needs to be improved by the accounting standard. Furthermore, the changes introduced in the new standard are not significant as per lease modification and sub leases which needs certain expansion for better accountability (Deloitte 2019).
Part 2A
As stated by Australian accounting standard entities tend to frequently incur liabilities on purchase, development maintenance or expend resources pertaining to intangibles such as design, licenses, intellectual property, market knowledge, scientific knowledge, technical knowledge and trademarks. This also includes publishing titles and name of the brands. Therefore, the definition encompassing intangible asset can be recognised as computer software’s, motion picture films, mortgage servicing rights, franchises, fishing licenses, customer lists, marketing rights and market share. At present, the Australian entities need to abide “Accounting Standard AASB 138” for recognising intangible assets. The standard is applicable for not only the intangible assets which are under the scope of another standard but also the financial assets which are defined as in AASB 132. The measurement and recognition of such an asset can be evaluated with AASB 6. The standard for the states that amortisation is a systematic process for allocation of the appreciable amount for the intangible asset over its useful life. Therefore, such intangible assets may be measured by the entities as a consequence of previous events and having upcoming economic benefits as expected with the flow of entity. ASA for that identifies the carrying amount as any amount for which an asset is recognised in the financial statement after deduction of aqua little amortisation and impairment losses. The intangible assets are also needed to be separable from transferred, licensed and related contracts which are recognised as the entity intends to do so. The recognition of various types of contractual and legal rights are also seen to be transferable from entity or other obligations and rights. Furthermore, in case intangible asset is the result of business combination the applicable procedure is stated under AASB 3. On the other hand, in case intangible is a result of goodwill generated then it is classified as recognition of an expense based on recognition criteria stated under paragraphs 18–67.
Part 2B
|
Category of discussion for intangible assets |
Wesfarmers Ltd |
Woolworth Limited |
|
Recognition and measurement |
Wesfarmers recognises the intangible assets as those assets which are acquired separately and measured as per initial recognition cost. The cost associated to the intangible asset in a business combination is measured at fair value on the date of acquisition. Based on the initial recognition, the intangible assets are carried at cost thereby subtracting impairment losses and amortisation (Bond, Govendir and Wells 2016). |
The recognition criteria of intangible assets for the company is measured at cost less accumulated amortisation and impairment losses. In case, intangible asset is a result of business combination the cost is represented at fair value from the date of acquisition (Su and Wells 2018). |
|
Amortisation process |
The intangible assets which have a finite life are seen to be amortised on a straight-line basis over the useful life and considered for impairment whenever there is a requirement for the same. The company reviews the amortisation period at the end of each financial year. Furthermore, such as sets with indefinite lives are also tested for impairment cost less accumulated impairment losses (Russell 2017). |
The amortisation process followed for intangible assets are considered with cost less accumulated amortisation and impairment losses. In case that assets are acquired during the course of business combination, cost represents fair value from the date of acquisition. Moreover, the amortisation process is followed in a similar fashion of straight-line basis for the estimated useful lives. The estimated useful life is taken into assessment during each financial year. The general procedure for the mining useful life of the assets for the brand names, liquor and gaming licenses are considered with indefinite useful life, Victorian gaming entitlements and customer relationships with indefinite and finite up to 20 years (Su and Wells 2018) |
Part 2C
Lease Recognition and Measurement
IAS 38 have identified that expenditure on intangibles ought to be recognised as expenses as and when they are incurred. The board has further noted that promotional activities and advertising are related to enhance customer relationship or brand identity. However, internally created brands are customer relationships are not recognised as a part of IA. However, these activities contribute to economic benefits and should be regarded as intangible assets.
The proposed amendments for the accounting standard are suggested with proceeding with aggregate adjustment for carrying amounts which are reported as per previous accounting standards. The intangible should be restated during the process of business combination. The accounting standards need to ensure that the first-time adopter of such a standard shall be able to recognise any relevant changes associated with adjusting the retained earnings unless there is any change resulting from recognition of such assets which was previously subsumed within goodwill. The relevant standard can also proceed with estimating the recoverable amounts of cash generating units with indefinite useful lives. In such a case, the entities should be able to disclose each CGU pertaining to raise the “carrying amount of goodwill or intangible asset” with unspecified useful lives shall be allocated to that unit significant with the comparison of “total carrying amount of goodwill or intangible asset”. In addition to this, the expenditure on intangible asset should be recognised as any expense which should form an amount attributed as goodwill during the date of acquisition (Aasb.gov.au. 2019).
Part 3A
Australian accounting standard recognises income tax as any domestic and foreign taxes which are profitable to a business entity. It further identifies income tax expense as any amount pertaining to the expense recognised by business entity in an accounting period which is to be paid for government tax associated to taxable profit. Such expense also includes withholding taxes which are payable by any subsidiary, joint arrangement or associate with the reporting entity. Presently, the business entities need to comply “AASB 112 Income Taxes” under “section 334 of the Corporations Act 2001”. The main objective of this standard is seen with prescribing the accounting treatment pertaining to the income taxes. The principal issues for the income taxes include accounting for future and current consequences of settlement for carrying amount of assets and recognition of entity statement of financial position. It is further based on evaluating transaction and other events of current period which are recognised in the entity’s financial statements (Tran and Zhu 2017). AASB 112 requires the entity for accounting the tax consequences of transaction in a similar way through which it accounts for dealings and other events. Henceforth, transaction and other events documented with profit or loss and related tax effects are also recognised as per the standard. Some of the other feature of AASB 112 can be depicted with the acknowledgement of DTA and liabilities as a result of business combination which has an impact on goodwill arising from the business combination or amount of bargain purchase gain recognised (Aasb.gov.au. 2019).
Part 3B
|
Category of income tax expense |
Wesfarmers Ltd |
Woolworth Limited |
|
Recognition criteria |
As per the amendment AASB 2018-1, it can be seen that Wesfarmers Ltd clarifies the requirement for income tax expenses pertaining to dividend payments to be accounted in harmony with the nature of past profits through which dividends were derived. This is in direct conjunction with standards prescribed under “AASB 112 Income Taxes”. With reference to the effects of the standard which we are not material the disclosure of AASB 2016-1 amendment stated that AASB 112 was applied to elucidate the acknowledgement of DTA pertaining to unrealised losses on their instruments which were measured at FV. |
On the other hand, Woolworth Ltd recognises income tax based on deferred tax assets and deferred tax liabilities arising as a temporary difference pertaining to the members of that tax consolidated group from each subsidiary. |
|
Tax consolidation |
Based on the tax consolidation section, the members of the group have entered into an agreement for tax sharing for the purpose of allocating income tax expenses to the wholly-owned subsidiaries on a stand-alone basis. Furthermore, the tax sharing agreement also provides allocation of income tax expenses between the entities as per default tax payment obligations. Some of the main benefits of such a disclosure for the form can be identified with better understanding of the profit attributable to the members of the parent company. |
The tax consolidation procedure for Woolworth have stated that the income tax expense charged by the company to the subsidiaries during the period were identified at call into company accounts. As per the consolidated statement for changes in equity, the company has also declared profit after income tax expenses. |
Part 3C
Intangible Asset Recognition and Measurement
The major improvements which can be brought by the accounting standard of AASB 112 is suggested with clarifying that the organisations account for all the income tax consequences based on dividend payments as per it was recognised initially or with the events that generated distributable profits. Some of the other improvements of the suggested with providing clarification on interest held in a joint operation for obtaining control of the business. In addition to this, the major amendments should be able to provide an appropriate measurement for the income tax interest on qualifying asset as a part of general borrowing which is intended for selling (Aasb.gov.au 2019).
The financial entities on the other hand, needs to equip themselves for the recognition of deferred tax assets for unrealised losses. In case, the debt instrument of the companies falling in its value without a corresponding tax deduction. However, the organisations should be aware that on the due date they will receive a full contractual amount and there will be no tax consequences applied for such a repayment. However, the business entities need to also question themselves whether the unrealised loss has triggered a temporary difference in order to recognise a deferred tax asset on it. In addition to this, the business entities need to decide between deductible temporary difference as per carrying amount of their set and tax base (Assets.kpmg 2019).
Conclusion
The report shows that recognition criteria for leasing can be seen with a similar approach followed by both Wesfarmers Ltd and Woolworth Limited. This is evident with operating lease commitments as being in compliance to AASB 117. In addition to this, both the companies have introduced new system for ongoing compliance with the standard which relates to leases as a result of right of use asset. The revealing is on intangible assets have shown Wesfarmers recognises the intangible assets as those assets which are acquired separately and measured as per initial recognition cost. On the other hand, the recognition criteria for Woolworth is based on “cost less accumulated amortisation and impairment losses”. In case, intangible asset is a result of business combination the cost is represented at fair value from the date of acquisition. The difference in amortisation process is evident with Wesfarmers Ltd following intangible assets which have a finite life are seen to be “amortised on a straight-line basis over the useful life” and considered for impairment whenever there is a requirement for the same. On the other hand, the amortisation process for Woolworth is followed for intangible assets are considered with cost less accumulated amortisation and impairment losses. Recognition criteria for income tax expense for Wesfarmers Ltd is clarified with the requirement for income tax expenses pertaining to dividend payments to be acknowledgement in accordance with the nature of past profits through which dividends were derived. On the other hand, Woolworth Ltd recognises income tax based on DTA and DTL arising as a temporary difference pertaining to the memberships of that tax consolidated group from individual subsidiary.
References
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Aasb.gov.au. 2019. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB117_08-15.pdf [Accessed 21 Jan. 2019].
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Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.
Deloitte 2019. [online] Available at: https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-aasb-16-guide-220916.pdf [Accessed 21 Jan. 2019].
Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. Journal of New Business Ideas & Trends, 15(2).
Russell, M., 2017. Management incentives to recognise intangible assets. Accounting & Finance, 57, pp.211-234.
Su, W.H. and Wells, P., 2018. Acquisition premiums and the recognition of identifiable intangible assets in business combinations pre and post IFRS adoption. Accounting Research Journal, (just-accepted), pp.00-00.
Su, W.H. and Wells, P., 2018. Acquisition premiums and the recognition of identifiable intangible assets in business combinations pre and post IFRS adoption. Accounting Research Journal, (just-accepted), pp.00-00.
Tran, A. and Zhu, Y.H., 2017. The impact of adopting IFRS on corporate ETR and book-tax income gap.
Wesfarmers.com.au. 2019. [online] Available at: https://www.wesfarmers.com.au/docs/default-source/reports/wes18-044-2018-annual-report.pdf?sfvrsn=4 [Accessed 21 Jan. 2019].
Woolworthsgroup.com.au. 2019. [online] Available at: https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf [Accessed 21 Jan. 2019].
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