Contemporary Issues In Accounting: Standard And Government Rules

Making sense of company executives’ compensation and employee benefits through the lens of cultural effects. How the conceptual framework revision to include Prudence is likely to address the disparity in Corporate Reporting.

 

In modern times, the structure of company’s annual report has changed very significantly. The accounting standards and government rules nowadays requires more information in the annual reports apart from the financial statements. The accounting standard boards now give more emphasis on the interests of stakeholders, as they are the real users of the annual reports. Hence, along with the financial reports, the companies have to provide various other financial and non-financial information in the annual reports, so that the stakeholders can get related information as much as possible. The companies also have to explain the various accounting methods and standards, which they have followed for maintaining the accounts throughout the year and preparing the financial statements accordingly.

Wesfarmers Limited is an Australian company, which operates in the food and staples retailing sector of Australia and New Zealand. Apart from its primary retail activities, it has investments in chemical, fertilizer, coal mining and safety products. It is having its headquarter in Perth and listed in Australian Stock Exchange since 1984 (Asx.com.au, 2011). As per the records, Wesfarmers Ltd. is the largest company in the Australian retail food sector by revenue on 2015. It is also the largest employer in Australian with having near about 205,000 staffs (Wesfarmers.com.au, 2016).

Woolworths Limited is one of the largest enlisted companies in the Australian retail industry (Asx.com.au, 2011). The company is based at New South Wales and operates throughout Australia and New Zealand. Recently it has expanded its operations in India. Apart from supermarkets, the company is also involved in liquor retailing, hotels & pubs and discount department stores. It is the second-largest retail company in Australia, after Wesfarmers Ltd., in terms of revenue. The company is ranked first as takeaway liquor retailer in Australia (Woolworthslimited.com.au, 2016).

In this report, both the companies’ reports are analyzed critically to exhibit how the companies have complied with the accounting standards in preparation of annual reports and incorporated various accounting concepts in the financial statements. The report also describes how annual reports produce data related to the compensation and benefits of the employees, who are one of the stakeholders of the companies and explains the effect of culture on the items.

Both, Wesfarmers and Woolworths, have segregated the structure into three parts. Out of the total compensation paid to executives, Wesfarmers has provided 42% as fixed remunerations in cash, 25% as short-time incentives and 33% as long-term incentives (Wesfarmers.com.au, 2016). Woolworths has paid the executives 40% as fixed cash remuneration, 30% as short –time incentives and 30% as long-term incentive awards (Woolworthslimited.com.au, 2015). It indicates that both the companies have followed almost same structure for paying off their executives.

Both the companies use to pay their executives in the same manner. The companies paid their executives party in cash and partly in terms of shares. The companies have also made employer’s contribution in the superannuation fund as part of the long-term benefits, provided to the employees. The employees are also provided with non-monetary benefits and long service leaves.

As per the director’s report of Wesfarmers, the company paid 60% of the annual short-time incentives in cash and the balance in mandatory deferred shares. Woolworths has also followed almost same structure regarding the payment for short-time incentives.

It should be noted that most of executives belongs to the high-class Australian society. They maintain a healthy and financially lavish life-style. However, they are also very concern about the future income also. Therefore, the companies have divided the payment structure in such a manner that it should include both higher cash payments and long-term benefits to secure the future of the executives.

The payment structure is analyzed through the lens of cultural effects below:-

As discussed above, the executives belong to the high-class society and maintain financially strong livelihood. The companies also want that their high-level executives should follow a high-class lifestyle.   Therefore, the companies paid higher cash payments to the executives so that they can afford the costly lifestyle and move into the high-class societies (Stone 2013).

It has been observed that the Australians are very much performance oriented and likes to be appreciated for their performances. Therefore, the companies have included incentive schemes in the remuneration structures. It helps the organization not only to motivate the executives for better performances, but also develops a healthy competition amongst the executives, which can result in higher volume of outputs (Jerome 2013).

As most of the civilized countries, Australians are also futuristic in nature. They always prefer such alternatives, which can be useful both in the present and in future. Therefore, as most of large companies around the world, the Australian companies, like Wesfarmers and Woolworths also include long-term benefits, such as superannuation funds, in its salary structures. As the long-term benefits provide secure future in terms of financially, the employees can work freely in the present, without worrying about the unseen future.

As discussed above, Australians are always very much keen to be appreciated for their performances. Therefore, when the companies provide shares to the executives as a part of salary or incentives and consider them as the one of the owners of the company, they feel very proud and motivated. It also creates an attachment between the company and the executives (Fischer et al. 2013).

Prudence concept is based on conservatism accounting principle. It suggests that the expenses or losses should be included as soon as it is generated, whereas, the incomes or profits should be recorded only when the items are realized or assured. The concept helps the accountants to reduce the uncertainty level and prepare annual reports with more accuracy. However, many scholars and accounting standard boards believe that prudence concept is too much conservative as it ignores the expected revenues for reporting (Mora and Walker 2015).

IASB is very keen to resolve the issues related to over or under stated annual reports and wishes to make the annual reporting structures more neutral and bias. Therefore, the IASB and AASB both have considered the importance of prudence and are trying to include it again in the conceptual framework. IASB has introduced an exposure draft on October,2015, where it has declared that prudence concept will be reintroduced with some changes and will be applicable for all the companies, who use to follow the IFRS standards (PwC, 2016). Many of the companies have already started to include the concept in the annual reports.

Wesfarmers Ltd. and Woolworths Ltd., both use to follow the Conceptual Framework of IASB and AASB standards in preparation of annual reports. Therefore, these two companies have also included the prudence concept in their latest annual report to comply with the requirements of conceptual framework and AASB requirements.

Woolworths Ltd. has clearly declared in its annual report that the annual report is complied with the requirements of Australian Accounting Standards and Interpretations and International Financial Reporting Standards (Appendices)

Wesfarmers Ltd. has also mentioned same type of statement in the “Notes to the Financial Statements” section of the annual report that it has prepared the report in accordance to the requirements of AASB and IFRSs, as issued by IASB (Appendices)

As mentioned above most of the accounting standard boards wish to provide such a framework for annual reporting, which can provide authenticate and accurate data to its users. The users or the stakeholders consider the annual report as the statement, which they can rely for decision-making processes. Different stakeholders have different perspectives. Investors and shareholders wish to get information about the profitability of the company and security of their investments. Government authorities, especially, tax department, consider it for ascertainment of taxes. Employees want to know the future prospective of the company, which can ensure their future income and growth.

Therefore, it is very necessary to prepare the annual reports authentically. Many companies use the loopholes and disadvantages of the contradiction between various accounting concepts to manipulate the information, provided in the annual report, in various ways, which are discussed below:

• Many companies use to increase their revenues and profits to increase its market value and attract more investors.
• By showing lesser amount of profit, the companies often evade huge taxation.
• Companies also use to reduce the profits so that they do not have to pay high incentives or make salary increments to the employees.

The overvaluation of funds can be considered as the most harmful financial manipulation. The companies often increase its revenues to create a better image in the market and generate more investments from the market in terms of equity financing. In the long-run, the shareholders do not able to get back return and have to sell the shares at huge loss. It has been observed that most of companies use to enhance the profit margin by including expected revenues, which are not yet assured or realized.

Hence, the accounting boards have decided to include the prudence concept, which will prevent the companies to include expected revenues or profit, until it is assured or realized. Moreover, by inclusion of prudence concept, the accounting boards can force the companies to record the expected expenses or losses, which they may ignore while preparing the annual report for increasing the profits (Strouhal et al. 2012).

On the basis of the exposure drafts and amendments made by IASB in the IFRSs and conceptual framework for inclusion of prudence concept, AASB has introduced a new principle under AASB 15: Revenue from Contracts with Customers. The new standard suggest that the revenue should be recognized in the financial statements, when that revenue is realized or assured to be realized as per the contract between the reporting entity and the customers. Thus, AASB prohibits the entities to report unsure revenues and helps the users to get accurate financial information from the annual reporting. It also demolishes the disparities amongst various contradictory revenue standards, which had been used by many companies for manipulating the financial statements (Gebhardt et al. 2014).

Wesfarmers Ltd. has mentioned in its current annual report this new standard, based on the prudence concept, will be effectively used by company from 1^st July, 2017. Currently, the company is observing the effects of the implementation of this standard.

Woolworth Ltd. has also stated about the new standard. However, as it has mentioned about the IFRS 15: Revenue from Contract with Customers, issued by IASB, which will be effective from 1^st January,2018. It has mentioned that the company will be adopt the standard from its effective dates, as IASB is still researching and discussing over the implementation process of the standard with various stakeholders.

As the AASB standards for annual reporting is based on the conceptual framework, issued by IASB, the Australian Accounting Board follows and adopts the amendments in the IFRSs and also incorporates the new standards of IASB immediately. Therefore, if any company follows any of the two reporting standards, it can fulfill the requirements of other standard automatically.

Wesfarmers Ltd. mainly follows IFRSs, issued by IASB and AASB standards, whereas, Woolworths Ltd. uses to fulfill the requirements of IFRSs and ASIC. Therefore, both the companies’ annual reports maintains same disclosure format for providing information. The differences between the two annual reports are mainly in its designing and table of contents.

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Mora, A. and Walker, M., 2015. The implications of research on accounting conservatism for accounting standard setting. Accounting and Business Research, 45(5), pp.620-650

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