Discuss about the Evaluation Accounting of Wesfarmers Ltd.
Australian Accounting Standard Board provides accounting standards including its interpretation. The same are to be applied by entities as required by Corporation Act2001. Present essay revolves around the accounting method adopted by Wesfarmers Ltd. and Woolworths relating to Investment in Associates and Joint Venture. The objective of the essay is to assess whether the method of accounting in books of account of specified companies is appropriate or not.
According to the Australian Conceptual framework of Accounting AASB 127 is to be applied while accounting for subsidiaries. According to these standard separate consolidated financial statements should be prepared for subsidiaries according to the AASB 128. According to this standard, “A subsidiary is an entity, including an unincorporated entity such as a partnership that is controlled by another entity known as the parent company”. Wesfarmers has significant influence in Target and the same is considered as subsidiary by the company. As per Significant influence is the authority to take part in the operating and financial policy resolutions of the Subsidiary. Significant influence of an investor in the investee is usually verified in one or other following ways: representation of governing body of the investee in the board of directors of investee for policy-making and participation in decisions making; and/ or exchange of managerial personnel and technology between both the companies.
Under this method, the investment in a subsidiary is recognized at cost in the beginning and the carrying amount of investment is changed after the date of acquisition to identify the investor’s contribution in the investee for the profit or loss. The share of the profit or loss of investor in the investee is reflected in the profit or loss account of the investor. The carrying amount of this investment is reduced by distributions received from an investee. In order to reflect the true position of investor’s proportionate interest in the investee, it is necessary to make adjustments in the carrying amount (Ye and Simunic, 2013).
AASB 112 specifies the provisions relation to Disclosures of Interest in other entities. The books of accounts of subsidiaries of Wesfarmers are prepared for the same period as of its parent company and by applying consistent accounting policies. The inter-company transactions and carried balances relating to intra-group transaction have been eliminated. The acquisition method has been adopted for accounting of subsidiaries. The asset and liabilities related to foreign subsidiaries are converted into average exchange rate of Australian dollar at the reporting date. The difference arising due to change in same has been transferred to separate component of equity. According to Van Mourik and Katsuo (2014), consolidated Financial Statements monetary assets and liabilities provided in foreign currency denomination should be converted into exchange rate available on balance sheet date and difference should be accounted in profit and loss account. The same has been followed by company however exchange difference relating to borrowings in foreign currency which acts as hedge against net investment in foreign currency are accounted in equity until the same is sold.
Deferred tax liabilities / asset account: AASB 112 (Income Taxes) deals with provision relating to DTA and DTL. The company has complied with the provision and accounted as follows: in case taxable temporary difference is available in subsidiaries, joint venture or associate than deferred tax asset are not accounted in case the no probability is available that profit will be available in foreseeable future for utilizing the temporary difference; the same concept is applied for deferred tax liabilities.
Foreign currency translation reserve: As per the views of Potter, Ravlic and Wright (2013), difference that occurs from conversion of financial statement of foreign subsidiaries is recorded in the account of foreign currency translation reserve
Tax: A tax consolidation group has been created by Wesfarmers, according to which the members of group (its subsidiaries) have entered into tax funding agreement according to which each member has to pay amount of tax to or from parent as per the notional current tax asset or current tax liability.
Goodwill: As per the analysis of Annual Report of Wesfarmers, a non cash impairment of $1266 was accounted in carrying value of Target and Goodwill relating to Target was impaired by $1208 million.
The profit after tax of Wesfarmers for the year 2016 has decreased to $2,353 million which is 3.6% less from the year 2015. After accounting the effect of the impairment and restructuring costs of Target retail business the net profit of the company was $407 million in contrast with $2,440 million in year, 2015. As a result of large amount of operating loss of $195 million in Target, the group’s business strategies have been revised and they have focused on maintain reduced inventory level and high quality in products and services.
As per Huffman (2014), these main issues of concern can be maintained by increasing the levels of direct sourcing, simplification of the operations, better merchandise appeals and planning systems. Application of these renewal strategies have although reduced the profitability of the company in the current year, but these are expected to deliver returns in the upcoming year. These renewal strategies have resulted in increased revenue of 0.5% which was $3.5 billion. On an average, due to high levels of stock clearance the business documented a loss of $50 million.
After analyzing the annual report, it has been observed that profit has reduced to 3.6% in the year 2016 due to impairment of Target. Loss in profits results in reduced dividends to the shareholders of any company (Hoyle, Schaefer and Doupnik, 2015). The same has been observed in the Annual Report of Wesfarmers. The slowdown in condition of resource sector during the year 2016 significantly affected the performance of the company. The impairment of main resource sector- leads to decline in the underlying earnings significantly (Henderson, Herbohn and Howieson, 2015). The impairment of goodwill of Target in the Year 2016 was $677million. This is a major share of impairment out of the total impairment of $ 1266m. The EPS of the Company also observed a fall in the year 2016. The Earning per share in the year 2016 was 209.5 compared to 216.1 in 2015.
There was also a slight fall in return on Equity to 9.6 in 2016. The former was 9.8 in the previous year. During the period of 2016, noncash impairment of $1,266 million before tax, in the carrying value of Target was witnessed in the annual reports. $1,208 million of Target’s share was written-down against the goodwill arising from the acquisition of the Coles Group. Other areas which reflected the impact of Target investment have been represented in the table below-
|
Areas Of Impact |
2016 |
2015 |
|
Shareholders’ Equity |
$22,949 Million |
$24,781 Million |
|
Net Borrowings |
$7,103 Million |
$6,209 Million |
|
Net Cash Flows |
$3,365 Million |
$3,791 Million |
|
Capital Employed |
$27,663 Million |
$ 28, 772 Million |
|
Cash Capital Expenditure |
$129 Million |
$ 127 Million |
A downfall in all the major areas has been observed in the annual Reports of Wesfarmers, owing to the loss and impairment of retail Business- Target. Renewal of business strategies often lead to a rise in the cash capital expenditure (Crawford, Lont and Scott, 2014).
The company has announced that Masters will cease trading on or before 11 December 2016; the provision relating to discontinuing operation have been followed by the company relating to its transaction. The inventory relating to Masters have been recorded at net realizable value and property, plant and equipment of same has been classified as Asset held for sale. Such assets are sold below cost based on the recovery rates available in exit scenario (Birt and et.al. 2014). Provision of impairment of same has been provided. AASB 1042 deals with provisions and disclosure that are required to be compiled in case of discontinuing operations (Australian Accounting Standards Board. 2017).
The company has applied estimations in recognizing the value of impairment cost relating to discontinued operation. The same evolves high degree of significant risk relating to major adjustment in carried balance assets and liabilities in further periods.
The discontinued operations have contributed overall loss of 3273.3$ million to the company. The same has increased majorly in comparison to previous year. An increase in net loss attributable to shareholders has increased from $1.3million to $1873.1 million in current year. According to Bentley, Omer and Sharp (2013), increase in overall all loss affects the decision of investors and subsequently brand image of the company.
Conclusion
It can be concluded from above discussion that the companies have complied with applicable standards relating to Investment in subsidiaries and discontinued operation. The same depicts that presentation of financial statement of Wesfarmers and Woolworths is in accordance with AASB 101.
References
Bentley, K.A., Omer, T.C. and Sharp, N.Y. 2013. Business strategy, financial reporting irregularities, and audit effort. Contemporary Accounting Research. 30(2). Pp.780-817.
Birt, J. and et.al. 2014. Accounting: Business Reporting for Decision Making 5e.
Crawford, L., Lont, D. and Scott, T., 2014. The effect of more rules?based guidance on expense disclosure under International Financial Reporting Standards. Accounting & Finance. 54(4). Pp.1093-1124.
Henderson, S., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Hoyle, J.B., Schaefer, T. and Doupnik, T. 2015. Advanced accounting. McGraw Hill.
Huffman, A.A. 2014. Value relevant asset measurement and asset use: Evidence from international Accounting Standard. 41 (Doctoral dissertation, The University of Utah)
Potter, B., Ravlic, T. and Wright, S., 2013. Developing accounting regulations that reflect public viewpoints: The Australian solution to differential reporting. Australian Accounting Review. 23(1). Pp.18-28.
Van Mourik, C. and Katsuo, Y., 2014. The IASB and ASBJ conceptual frameworks: same objective, different financial performance concepts. Accounting Horizons. 29(1).Pp.199-216.
Ye, M. and Simunic, D.A. 2013. The economics of setting auditing standards. Contemporary Accounting Research. 30(3). Pp.1191-1215.
Australian Accounting Standards Board. 2017. [Online]. Available through <https://www.aasb.gov.au/>. [Accessed on 25th January 2017].
Annual Report of Wesfarmers. 2016. [PDF]. Available through <Annual-Report.Wesfarmerspdf> [Accessed on 25th January 2017].
Annual Report of Woolsworth. 2016. [PDF]. Available through <Annual-Report.Woolsworthpdf> [Accessed on 25th January 2017].
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