Discuss about the case study Billabong International for Australian Accounting Standards.
It is essential for the companies to prepare financial statements as it provides information related to financial information to its stakeholders such as investors, creditors, suppliers, customers, employees, shareholders and government. Companies need to follow some accounting standards so that investors can easily make comparison between the competitors in order to make decisions related to making investments in the company. There are different standards used by the companies in different countries such as US GAAP, AASB, IFRS and UK GAAP. These accounting standards provides information related to the treatments of different items in the financial statements in order to provide clear information related to financial aspects of the company to its stakeholders so that they can make effective decisions (Camfferman and Zeff, 2015). For the analysis of the effectiveness of meeting the obligations of general purpose financial reporting in preparing financial statements, Billabong International is selected. Billabong International uses or adheres with the AASB and IFRS.
Billabong International was established in the year 1973 in Australia by Gordon Merchant and Rena. It is engaged in the marketing, retailing and wholesaling of clothes, wetsuits eyewear and other accessories. In addition to this, it offers different products under different brands such as Palmers, Von Zipper, RVCA, Billabong, Xcel and Tigerlily brands (Billabong International, 2016). Along with this, it is publically listed on Australian Securities Exchange with approximately 5000 employees worldwide. It has also obtained license to distribute its products in more than 100 countries with approximately 10000 retail outlets. Besides this, there is a generation of majority of its profits from different countries like New Zealand, Brazil, North America, Australia and South Africa. It belongs to consumer goods sector and operates in Textile – Apparel Clothing (Yahoo Finance, 2016).
Billabong complies with the standards of Australian Accounting Standards Board (AASB) and International Financial Reporting Standards (IFRS) for the creation of different financial statements such as balance sheet, income statement and cash flow statement. The company complies with the AASB 118 for the recognition of the revenue from the consignment inventory. The company has applied AASB 118 for the purpose of recognising the revenue generated from selling of goods, dividends and royalties. Along with this, it is determined by the use of fair value concept applied to consideration received. It also do not recognise those transactions in which goods are exchanged with goods and services of similar nature for the generation of revenue. In addition to this, the revenue which is recognised from the sale of goods has to be met with some criteria such as measurable revenue, the ownership of significant risks and rewards must be transferred to buyer, flow of economic benefit to the entity and non transfer of control over goods and the costs incurred related to the transaction is to be readily measured (Complied AASB Standard, 2010).
The AASB 118 is similar to IAS 18 which outlines the requirements related to accounting for recognition of revenue. It recognises the revenue generated from interests, royalties, dividends, sale of goods and services. The measurement is done by the use of fair value of the consideration received and is operative after January 1995. This standard is also aligned with the AASB 118 as the company has to fulfil certain criteria in order to recognise the revenue from the sale of goods such as transfer of rewards and risks associated with ownership to the buyer, does not have continuous involvement of seller over the goods sold, easily measurable costs and benefits in terms of economy associated with the process. In context to this, revenue from sale of consignment inventory is recorded as per the AASB 118 due to the transfer of substantial risks and rewards to the end customer by the group (Chand and Patel, 2011).
AASB 137 is applied to provisions, contingent liabilities and contingent assets which entails that provisions must be differ from other liabilities like accruals due to the fact that there is a presence of uncertainty about the amount of future expenditure and timing. Besides this, recognition of the provision is done on the basis of occurrence of the obligation from the past event, easy measurement of the amount of obligation and requirement of outflow of resources to settle the obligation. In context to this,the company has recognised financial guarantee contracts are evaluated at higher value than its fair value due to the reason that it is considered as financial liability as per the AASB 137. The fair value of the liability is calculated subtraction in the payments made under debt instrument i.e. contractual payments and without guarantee payments and finding the present value of the difference in their net cash flows (Parker, 2013).
AASB 136 is used for the treatment of impairment of assets associated with cash generating units (Nobes, 2014). In relation to this, Billabong International allocates goodwill to the cash generating unit for the purpose of impairment tests. The company has tested all the cash generating units for impairment in accordance with AASB 136. There is a decline in the sales and profitability for different regions and brands due to which the impairment charges for the cash generating units are calculated. The impairment charge for goodwill and brands for the year 2014 is $24858000 and $4040000 respectively (Billabong, 2016).
In addition to this, as per AASB 136, it is requisite that the value in use and fair value less costs of disposal should be lower than the recoverable amount of cash generating units. The company has used value in use approach is used for the determination of the recoverable amount of cash generating units. Along with this, there is also amendments have been made in the this accounting standard by AASB in the year 2014 and the company has early adopted it as it affects the results of the financial statements of the company in a significant manner (Dagwell, Wines and Lambert, 2011).
AASB 133 is related to earnings per share and applies to listed reporting entities which voluntarily disclose earnings per share. It includes dilution, potential ordinary share, ordinary share, ant dilution and contingently issuable ordinary shares. Along with this, the calculation of diluted EPS is done by making adjustments in net profit and average number of outstanding shares for the purpose of gaining knowledge of the effects on preference shares, and other potential ordinary shares. In this standard weighted average number of shares is used for the calculation of basic EPS in the denominator of diluted EPS (Budding, Grossi and Tagesson, 2014).
The denominator of the diluted EPS is estimated by adding average number of shares that can be converted into ordinary shares. Along with this, there is an exclusion of diluted shares as it has a significant impact on the EPS either in positive or negative manner. It is also necessary for the companies to disclose the method and basis of denominator in basic and diluted EPS(Carlon, et al., 2012). Besides this, it is also requisite to provide information related to the instruments which can potentially dilute the basic EPS in future and are not included in its calculation as they are regarded as anti dilutive for present period. In the similar context, IAS 33 also relates to earning per share which entails that the basis for the calculation of the basic EPS is weighted average number of ordinary shares outstanding but the diluted EPS includes dilutive potential ordinary shares such as convertible instruments and options. This standard is applied after January 2005. This standard is applied to those entities whose securities are publically traded (Henderson, et al. 2015).
For the purpose of the calculation of denominator, there is a requirement of dividing the shares which has to be issued by the number of issued shares through adjustment. After the division, the result has to be multiplied by weighting factor. In relation to this, for the calculation of basic earnings per share the denominator would be weighted average number of shares and various adjustments have been made for the purpose of calculation of diluted earnings per share such as inclusion of performance shares and conditional rights and options in Billabong International. It adheres with the requirements of AASB133 for assessing the requirements of dilute EPS. This is because; it is based on the profit or loss from continuing operations attributable to ordinary shareholders. Along with this, in the year 2015, there is an occurrence of loss due to which there is no presence of dilutionary effect. Besides this, it is also applied to discontinued operations irrespective of the position related to profit or loss making (The Institute of Chartered Accountants in Australia, 2012).
Along with this, the Billabong International also adheres with the requirements of the AASB101 which relates to presentation of financial statements. As per this standard, the company needs to include IFRS, notes, materials, general purpose financial statements, owners, special purpose financial statements, total comprehensive income, profit or loss and other comprehensive income. The elements of financial statements that are required to prepare by the company include statement of comprehensive income for the period, statement of financial position at the end of the period, cash flow statement and statement for changes in equity. In addition to this, it also requires disclosure of accounting policies and other information (Chartered Accountants, 2016). It is also requisite that there should be a fair presentation of the cash flow, financial performance and financial position of the company in its financial statements (Bazley, Hancock and Robinson, 2014).
Billabong International adheres with all the requirements of the AASB 101 in the preparation of the financial statements and reporting of the financial information to its stakeholders. The company prepares interim financial report for half year in accordance with the AASB 134. AASB 134 is applied in case the company decides to prepare interim financial report. It includes the condensed statement of financial position, comprehensive income, changes in equity, condensed cash flow statement and selected explanatory notes (Australian Government, 2016). Besides this, it is also required to include the main headings with their subtotals in the interim report which are presented in the recent annual financial statements. Along with this, it is also requisite to include those notes which if omitted may mislead the users of the financial statements (Billabong, 2016). Besides this, AASB 134 is similar to IAS 34 which also entails guidelines related to preparation of interim financial report to the companies. It is applied when an entity wants to prepare interim financial report in order to provide financial information to its stakeholders in the mid of the year (Deloitte, 2016).
The interim financial report consists of less information in comparison to information presented in annual financial reports. This standard becomes operative in the year 1999. In addition to this, if the full set of financial statements is published in the interim financial report then it should comply with the IFRSs (Deloitte, 2016). Billabong International has considered and complied with all the above mentioned requirements of AASB 134 during preparation of its interim financial report.
In addition to this, there are certain accounting standards that are not mandatory for the company to implement for the reporting period 2015 and cannot be adopted early by the group. Amendments have been made in certain accounting standards by AASB which are as follows.
The AASB has made additions in AASB 9 which relates to financial instruments. The board has included the information regarding the measurement and classification of financial liabilities in terms of fair value which is not included in AASB 139 and distinguish it from the AASB 9. It has also included certain derivatives linked to unquoted equity instruments in AASB 9. There is also an inclusion of the requirement related to de-recognition of the financial liabilities and financial assets in AASB 9. The primary models that are used for the measurement of the financial assets in AASB 9 include pay back cost and fair value. The classification is done on the basis of business model and characteristics of cash flow of the financial asset of the company (AASB Standard, 2014). The company continues to apply the guidance related to hedge accounting provided in AASB 139 until the non application of the hedge accounting provisions in AASB 2013-9 (Billabong International Limited, 2014).
Billabong International will apply this new standard in the annual reporting period 30th June 2018 (Billabong International Limited, 2014). Along with this, it is also expected that it does not have a significant impact on the financial statements. In addition to this, the AASB has also issued a new accounting standard AASB 15 which relates to revenue from contracts with customers and replaces the existing AASB 118 that covers contracts for goods and services. AASB 15 entails that the revenue will be recognised at the time when the control of goods and services transfers to customer and replaces the existing notion of risks and rewards. It will be implemented in the year 2018 (Billabong International Limited, 2014).
Conclusion
It can be concluded that Billabong International is selected for the analysis of the effectiveness of the company to meet the obligations of general purpose financial reporting. It has been established in the year 1973 and deals in marketing and distribution of clothing, and other accessories. It is listed on Australian Stock Exchange and complies prepare its financial statements and reports in accordance with the IFRS and AASB. The company has adhere with different standards such as AASB 101 which entails information related to the preparation and presentation of the financial statements. There is a requirement to include financial statements which comprises of statement of financial position, statement of changes in shareholder equity, statement of comprehensive income and cash flow statement. Along with this, there is also a requirement to include notes.
Besides this, the company also complies with AASB 134 which is associated with the preparation of interim report. The company decides to prepare interim report for half year and incorporates the requirements of the AASB 134. The company has included condensed form of different financial statements along with those explanatory notes which are crucial as their omission may mislead the users of the financial statements. Besides this, the company has also complied with the AASB 118, AASB 136, AASB 133 and AASB 137. In addition to this, the company is also planning to implement some of the accounting standards which are introduced by the AASB in the near future. Therefore, it can be summarised that the Billabong International has effectively met the obligations related to general purpose financial reporting.
References
AASB Standard. 2014. Financial Instruments. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB9_12-14.pdf [Accessed on: 10th August 2016].
Australian Government. 2016. Accounting Standards. [Online]. Available at: https://www.aasb.gov.au/Pronouncements/Current-standards.aspx [Accessed on: 10th August 2016].
Bazley, M., Hancock, P. and Robinson, P. 2014. Contemporary Accounting PDF. Cengage Learning Australia.
Billabong International Limited. 2014. Full Financial Report and Shareholder Review. [Online]. Available at: https://media.corporate-ir.net/media_files/IROL/15/154279/AGM/20141010%2020141016%20FINAL_BB_FULL_FINANCIAL_2013-14_email.pdf [Accessed on: 10th August 2016].
Billabong International. 2016. Corporate Overview. [Online]. Available at: https://www.billabongbiz.com/phoenix.zhtml?c=154279&p=irol-irhome [Accessed on: 10th August 2016].
Billabong. 2016. Reports. [Online]. Available at: https://www.billabongbiz.com/phoenix.zhtml?c=154279&p=irol-reportsannual [Accessed on: 10th August 2016].
Budding, T., Grossi, G. and Tagesson, T. 2014. Public Sector Accounting. Routledge.
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Carlon, S., et al. 2012. Accounting, Google eBook: Building Business Skills. John Wiley & Sons.
Chand, P. and Patel, C. 2011. Achieving Global Convergence of Financial Reporting Standards: Implications from the South Pacific Region. Emerald Group Publishing.
Chartered Accountants. 2016. Australian Reporting Essentials for June 2016. [Online]. Available at: https://www.charteredaccountants.com.au/Industry-Topics/Reporting/Australian-accounting-standards/Analysis-of-AASB-standards/AASB-134–Interim-financial-reporting?standard={1AB93B1E-64AA-4FA5-AAA1-DE0335B7BD93} [Accessed on: 10th August 2016].
Complied AASB Standard. 2010. Revenue. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB118_07-04_COMPoct10_01-11.pdf [Accessed on: 10th August 2016].
Dagwell, R., Wines, G. and Lambert, C. 2011. Corporate Accounting in Australia. Pearson Higher Education AU.
Deloitte. 2016. IAS34-Interim Financial Reporting. [Online]. Available at: https://www.iasplus.com/en-gb/standards/ias/ias34 [Accessed on: 10th August 2016].
Deloitte. 2016. International Financial Reporting Standards. [Online]. Available at: https://www.iasplus.com/en/standards/ifrs [Accessed on: 10th August 2016].
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