Question:
Discuss About The Controlling And Monitoring Of Its Monetary?
The accounting department is a critical part of a business organization that is involved in controlling and monitoring of its monetary resources. The accounting professionals of a business entity need to prepare their financial statements as per the accounting policies and procedures developed by the IASB (International Accounting Standards Board). These financial accounting policies are major principles, rules and procedures that need to be followed by the management of a business entity for developing and presenting its financial statements. The adoption of the IASB developed accounting policies and procedures are essential for a business entity for meeting the different needs and demands of its various stakeholders. The accounting policies and procedures are developed on the basis of various accounting theories such as positive and normative accounting theories (Henderson et al., 2015). In this context, the present report aims to analyze and examine the importance of the accounting policies and procedures in a business entity through selecting an ASX listed firm, that is, Wesfarmers Ltd. The report evaluates the accounting policies used by a firm and analyze it with the accounting procedures used by its competitor. In addition to this, the report evaluates the quality of accounting policies of the firm by considering the impact of political pressures on standard-setting of accounting bodies.
Wesfarmers Limited is a recognized Australian company that along with its subsidiaries is involved in retailing of chemicals, fertilizers, coal mining, industrial and safety products. The Group composition consists of subsidiaries, joint ventures and associates. As per the annual report of the company, it has effectively adopted and complied with the accounting policies of AASB (Australian Accounting Standards) and the Corporations Act 2001. The Group has mentioned the basics accounting policies adopted for developing its consolidated financial statements as per the AASB standards. The Group has adopted the accounting policies such as principles of consolidation, recognition and measurement policies for fixed assets on cost basis, implementing accounting estimates and judgments as per the GAAP principles. The Group has also disclosed proper policies in relation to risk management programs for minimizing the occurrence of risk hazards. The Board has complied with all the necessary environmental policies and legislations through developing a risk management program that has maintained adequate provisions for meeting the associated costs due to violation of any Australian or international environmental regulations. The auditor’s report has also advocated that the Group has implemented a code of professional conduct that guides its overall business process and procedures. The Group has also provided all the relevant information in relation to its future compliance with new accounting standards such as IFRS 15 and AASB 15 (Wesfarmers: Annual Report, 2016).
The accounting policies provide a framework to a business entity for developing its financial accounts such a deprecation, goodwill recognition, inventory valuation and consolidation of financial accounts (Sheridan, 2016). However, the business entities possess the authority to select the accounting methods that proves beneficial for improving their profitability and growth. However, the business entities need to conform to the Generally Accepted Accounting Principles (GAAP) and IFRS while the adoption of specific accounting policies during financial reporting. The Wesfarmers Ltd has implemented some flexibility in selection of its accounting framework policies for maintaining its accounts such as deprecation, inventory, goodwill and assets. The management of the Group has exercised some discretion in selection of the accounting policies for valuing its assets, liabilities, leases and goodwill as per the fair value accounting model. However, the board has adopted strict policies and procedure for monitoring and controlling the managers operations so that they don’t take undue advantage of their freedom. The management of the group through has the authority to select the accounting policies as per the nature of business operations but the board ensures that the policies adopted are in compliance with the AASB standards and Corporations Act (Wesfarmers: Annual Report, 2016).
The major competitors of Wesfarmers Limited is Woolworths, Billabong, Coles can be regarded to be a major rivals of the Group. The Group is recognized a global leader in retail industry of Australia with its main competitor of Woolworths Limited. The Woolworths Limited is also a retail giant in Australia with its main operations in supermarket, liquor retailing, hotels and pubs and discount department stores. The analysis of the annual report of both Wesfarmers and Woolworths reveals that they have adopted and implemented accounting policies and estimates in accordance with the AASB standards. However, there exist some significant differences between the accounting policies and estimated of Woolworths and Wesfarmers as evident from their notes to the financial statements section. The net carrying value of assets and liabilities are valued at their fair value and incorporates the use of hedge accounting for hedging the risks (Wesfarmers: Annual Report, 2016).
On the contrary, Woolworths does not implement the use of hedge accounting for recognizing any gain or loss in the consolidated financial statements. Also, the structure of income statements prepared for both the groups has major differences. The income statement of Wesfarmers have clearly defined the main elements such as income, expense and profit while in case of Woolworths the structure of the statement is not very clear. The Wesfarmers have recorded expenditure in their income statement on the basis of employee benefits and considering the depreciation and amortization. On the other hand, Woolworths have recorded expenses on the basis of administration expenses and not considered the depreciation and amortization. However, both the firms have adopted the changed accounting policies and estimates but the policies implemented are as per the AASB standards and thus are agreeable and acceptable (Hussey and Ong, 2017).
The analysis of accounting policies and estimates of Wesfarmers with that of industry peers such as Woolworths have indicated that there exists flexibility in the accounting framework of business corporations. The business corporations select the accounting methods as per their nature of operational activities as evident form the difference in accounting policies and estimates adopted by Woolworths and Wesfarmers. However, there is only minor difference between the accounting policies of Wesfarmers as compared to that of its peers such as Woolworths as analyzed from their financial reporting system. Both the Groups have adopted similar accounting methods in preparation of cash flow statement, statement of changes in equity and also adopt the use of fair value accounting model in developing their balance sheet and income statement. Thus, it can be said that Wesfarmers and its peer group select the accounting policies as per their business operations but follow the standard accounting norms directed by AASB. The change in the accounting policies in respect to that of industry norms is explained adequately in the annual report of the Group (Wesfarmers: Annual Report, 2016).
As analyzed from the financial report of Wesfarmers Limited, the change in the structure of the accounting transactions is as per the accounting objectives of the group. The Wesfarmers is placing emphasis on enhancing the cash flow by selling its assets while Woolworths is increase its cash flow by enhancing its asset base. Thus, Wesfarmers are incorporating the use of hedge accounting and fair value model for increasing the revenue by selling the asset base. The flexibility in the accounting framework is implemented by the managing directors of the Wesfarmers Limited for improving its profitability position. The Board has introduced short-term and long-term incentives plan for the management depending on the firm’s financial position. The incentives plan is developed to provide motivation to the management to implement the accounting policies that help in increasing the financial performance of the Group but by complying effectively with all the AASB accounting principles (Mirza and Ankarath, 2012). The Board ensures that flexibility in accounting choices provided to the managing directors is in accordance with the standard accounting rules for restricting the occurrence of any fraudulent activities (Wesfarmers: Annual Report, 2016).
The Wesfarmers Limited have strictly implemented and adopted the standard accounting policies and regulations for improving its quality of financial reporting. The Group have disclosed effectively the AASB standards implemented for valuing its financial instruments and also the future compliance with the new AASB standards. The notes to the financial statements section of the annual report have provided all the necessary information about the accounting policies and estimates used by the Group for developing its financial statement by explaining the significance of each. The notes to the financial statements section have sufficiently explained the financial performance of the firm and are in consistence with its current financial position. The accounting policies depicted in the notes and that adopted for preparing the financial statements are same without any differences. There is adequate disclosure in the notes section relating to board composition, remuneration policies, risk management policies and policies adopted for promoting the sustainable growth of the Group. Also, there is sufficient information relating to the key judgments and estimates used by the Group relating to recognition and measurement of income, inventories, PPE, goodwill and other accounting information (Wesfarmers: Annual Report, 2016).
The GAAP principles has assisted the Group in reflecting its key measures of success such as basis of consolidation, the accounting policy adopted for measuring the foreign currency transactions, goodwill, impairment and other funding activities. These all activities are carried out by the Group as per the AASB and IFRS standards advocated by the Generally Accepted Accounting Principles (Mirza and Ankarath, 2012). The notes to the financial statements section of the Group has also disclosed adequate information relating to the functions of its operating segments. The Group has organized and managed separately its operating segments as per the nature of products and services. Each segment if the Group represents a strategic business unit that is involved in providing different products and services as per the external marketplace. The financial performance of each of its operating segments is evaluated on the basis of operating profit or loss while interest income and expenditure is not allocated to each of its operating segments that is managed on group basis (Wesfarmers: Annual Report, 2016).
The annual reports of the Group over the last two years have indicated that it has strong financial position in the year 2015 and 2016. The financial reporting of the Group has been done as per the basis of historical cost except for some financial instruments that are measured at fair value. This change in the accounting policies of the Group has not been adequately explained by the Group in its financial reports. Thus, there is not appropriate explanation about the change in the accounting adopted by the Group in different set of circumstances. The Group has implemented different method of recording its accounting transactions related to its expenditure in the income statement without its adequate disclosure as compared to the industry norms. The expenses are classified on the basis of employee benefits, depreciation and amortization unlike the normal categorization of administration, operating and interest expenses on the income statement (Pietra, McLeay and Ronen, 2013). Thus, all these other expenses of the Group are not able to quantify as per the normal expenditures listed across the income statements and thus it is required to provide a proper explanation of such expenses in the notes to accounts section as evident from the screenshot:
It is also evident from the financial reports of the Group that it has maintained a huge inventory level and thus leading to decline in its liquidity position. The monetary fund’s of the Group has been tied up in the accounts receivable and thus resulting in increase in its accounts receivables as comparison to the sales. Also, the Group is increasing its cash flows by selling its assets that can result in enhancing the gap between net income and cash flows. This is due to increase in the cash flows of the Group resulting in accounting profit higher than the taxable income and thus creating a gap between net income and taxable income. However, the annual report of the Group does not indicate any presence of R& D partnerships for financing its operations but the group is utilizing the cash received from sale of its assets for carrying its business operations. The Group has also recorded a decrease in its operating cash flow of about 11% as compared to that in the year 2015. This can be regarded as a point of major concern for the Group as it needs to increase its investment in acquiring assets for maintaining its cash inflows. However, there is no evidence of fourth-quarter adjustments or related-party transactions in the annual report of the Group. There is also increase in the asset write-offs of the group in the financial year 2016 as compared to that of the financial year 2015 as depicted in the screenshot below:
The financial reports of Wesfarmers have been prepared by the management in strict compliance with the AASB and IFRS standards as directed by the accounting standard-setting bodies. The Australian Securities and Investment Commission (ASIC) have directed the corporations listed on ASX to carry out their operational activities as per the AASB accounting rules and conventions. The IFRS have been developed by the IASB (International Accounting Standards Bodies) for promoting harmonization between the financial reporting standards of corporations across the world (Wolk, Dodd and Rozycki, 2012). As such, the Wesfarmers is complying with both the accounting standards as indicated from its financial reports. The notes to the financial statements section of the group has effectively disclosed all the accounting policies adopted in preparation of its consolidated statements as per the mandates of AASB and IASB. The proper accounting disclosures have been mandated by the accounting standard-setting bodies for improving the transparency in business operations and protecting the interests of all its overall stakeholders. As such, business corporations listed on ASX in Australia are bound to follow the principle of conceptual accounting framework in development of their financial reports. The principles are relevance, reliability, comparability and completeness. These principles are required to be integrated in the financial reporting system of business entities for ensuring the development of quality financial reports that effectively meet the needs of all the end-users (Wesfarmers: Annual Report, 2016).
The group has also adopted some flexibility in its accounting framework as per the nature of its business operations as discussed in the above sections of the report. These accounting choices have been made by the group for improving its financial conditions as per its operational activities. However, the Group has maintained its compliance with the standard accounting rules while implementing particular accounting choices and disclosures. The difference in the accounting choices of Wesfarmers and the business corporations in other parts of the world are due to the impact of political factors in the external marketplace (Kenny, 2009). The difference in the disclosure process of the corporations around the world is due to lack of development of a comprehensive conceptual theory of accounting that can result in harmonization of accounting standards. The accounting choices made by the business entities are significantly influenced by the economic conditions present in the external market place. The government institutions, professional associations, industry groups and also ASX influences the accounting choices and estimates made by the corporations operating in Australia. The Wesfarmers have adopted fair value rules and changed lease rules as per the economic conditions of the Australia. As such, the changed accounting rules can help the group to get a favorable treatment by the auditors and thus improve their financial performance (Knight, 2004).
The FASB and IASB have mandated the firms to adopt the accounting standards that help them to produce economic favorable results. However, the lack of harmonization of accounting policies is creating need for adopting different accounting choices by the firms across the world. Thus, it can be said that accounting rules adopted by a business entity can provide an undue advantage to one party as compared to the other due to the absence of a comprehensive conceptual theory of accounting (Albrecht, 2010). However, ASX have prioritized the need of investors over those of the companies and therefore it is required on the part of Australian companies to adopt the accounting standards that are in accordance with the conceptual accounting framework. This is essential to provide maximum value to the stakeholders including investors and creditors by providing them all the necessary and realistic financial information. As such, it can be stated that Wesfarmers have complied with all the principles of conceptual accounting framework by providing all the necessary financial information in its annul disclosures (Mirza and Ankarath, 2012).
Conclusion
It can be inferred from the overall discussion held in the report that Wesfarmers has implemented accounting and financial reporting strategies as per the international accounting standards and policies. The difference in the accounting policies and estimated used by the Group are due to the impact of political pressure present in the external marketplace where it operates.
References
Albrecht, D. 2010. Economic Consequences and the Political Nature of Accounting Standard Setting. [Online]. Available at: https://profalbrecht.wordpress.com/2010/01/06/economic-consequences-and-the-political-nature-of-accounting-standard-setting/ [Accessed on: 13 September, 2017].
Henderson, S. et al. 2015. Issues in Financial Accounting. Pearson Higher Education AU.
Hoffman, C.W. 2016. Revising the Conceptual Framework of the International Standards: IASB Proposals Met with Support and Skepticism. World Journal of Business and Management 2 (1), pp. 1-32.
Hussey, R. and Ong, A. 2017. Corporate Financial Reporting. Springer.
Kenny, G. 2009. Diversification Strategy: How to Grow a Business by Diversifying Successfully. Kogan Page Publishers.
Knight, J. 2004. Internationalization Remodeled: Definition, Approaches, and Rationales. Journal of Studies in International Education 8 (5), pp. 5-29.
Mirza, A. and Ankarath, N. 2012. Wiley International Trends in Financial Reporting under IFRS: Including Comparisons with US GAAP, China GAAP, and India Accounting Standards. John Wiley & Sons.
Pietra, R., McLeay, S and Ronen, J. 2013. Accounting and Regulation: New Insights on Governance, Markets and Institutions. Springer Science & Business Media.
Sheridan, T. 2016. Managerial Fraud: Executive Impression Management, Beyond Red Flags. Routledge.
Wesfarmers: Annual Report. 2015. [Online]. Available at: https://www.wesfarmers.com.au/docs/default-source/reports/2015-annual-report.pdf?sfvrsn=4 [Accessed on: 13 September, 2017].
Wesfarmers: Annual Report. 2016. [Online]. Available at: https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4 [Accessed on: 13 September, 2017].
Wolk, H., Dodd, J. and Rozycki. J. 2012. Accounting Theory: Conceptual Issues in a Political and Economic Environment. SAGE.
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