Discuss About The Factory Influencing Disclosure Transparency?
A business division performs in an effective manner when the management is able to have a strong hold on the matter related to accounting policies and the quality of disclosures. The preparation of the report is done keeping into consideration Woolworths Ltd, a pioneer in the retail operations and listed on the ASX. Moreover, the competitor that is considered in the question is Wesfarmers. In the report, the discussion is done ranging from the critical evaluation of the accounting policies together with identification of the key accounting policies and its flexibility. Further, the discussion stretches to the disclosure quality together with the highlight on red flags. The report then stretches to the main concept that is the conceptual framework.
In relation to Woolworths Ltd, its significant accounting estimates and policies are prevalent in the notes to financial statement section of its annual report. In relation to PPE, the same is depreciated over its relevant life after considering residual values. Further, all PPE items are recognized at cost minus accumulated depreciation and accumulated losses of impairment. Besides, assets are depreciated on a straight-line system over their estimated useful lives (Bushman & Piotroski, 2006). Moreover, such lives are reevaluated regularly. In relation to borrowings, the same are identified at fair values minus attributable expenses (Woolworths Limited, 2015). After this, these are described at amortized costs with differences betwixt redemption and cost value. Lastly, in relation to intangibles, the same are identified at cost (if procured separately), or at fair value (if procured as a business combination). The company has complied with the AASB 101 standards that not only is related with the judgments of accounting policy but also offers valuable information regarding the steps that can be taken during estimation uncertainties. Based on this standard, Woolworths discloses how it has ascertained the carrying values of every assets and liabilities. In addition, it has also described various significant accounting policies in its financial statements as a response to several uncertainties owing to the prevalence of foreign currencies (Woolworths Limited, 2015). Nevertheless, the company also provides necessary information relating to judgments about lease liabilities and assets in its notes to financial statements. The estimates of all such policies rely on past factors and other reasonable factors that form the basis of making proper judgments about carrying amounts of liabilities and assets that are not apparent from other segments. Besides, estimates that can result in a significant risk of material adjustment in the carrying values of such assets or liabilities are incorporated in other notes in the financial statements (Brigham & Daves, 2006). Flexibility in such policies and estimates can be observed because the Group clearly depicts how accounting policies are required to be applied in practice. Besides, each asset of the Group poses a specific reporting issue and necessitates organizations to make relevant choices about these must be accounted for (Everingham et. al, 2007). Nevertheless, the decision to account for such assets is guided by such accounting policies and estimates.
Its competitors like Wesfarmers Ltd. also utilize such accounting policies and estimates. For instance, in relation to PPE, both entities depreciate their assets based on a straight-line basis and their PPE are recorded at cost minus accumulated impairment losses and depreciation. Further, the intangibles of both entities are also initially recorded at cost. Nevertheless, in relation to estimates also, both entities follow the same strategy (Woolworths Limited, 2015). The policies and estimates are even though effective and revealing in nature, yet there are various potential gaps that can be witnessed. For example, the Group does not assume how to revalue the fair value of some tangible assets, in particular, situations (Deegan, 2005).
With due course of time, it has been witnessed that accounting has changed from being a non-political concern to a political subject. The prevalence of significant pressures plays a vital part here in influencing the accounting environment. Further, the figures depicted by the accountant also results in having a powerful influence on the financial aspects. Hence, accounting rules have a direct impact on human behavior as a whole. This is the reason why the message depicted by BHP Billiton focuses on the fact that it can easily destroy the anticipation of investors, thereby affecting many of them (Graham & Smart, 2012). Moreover, it is the major nature of interested parties to play a pivotal role in tracing the safety of the financial amount. Hence, overall, this process is regarded to be of political nature.
Furthermore, the setting of accounting standard can be regarded as a product that is incorporated into several actions that are of political background such as logic that is believed to be flawless in nature or findings of an empirical background. The reason behind such can be attributed to the fact that social decision is a major result of such standards. Moreover, such standards often exert pressures on restrictions and therefore, must be properly accepted the affected parties as a whole. Besides, such acceptance can be voluntary in nature because obtaining it can necessitate the emergence of various complexities that further requires marketing skills in the area of politics. The statutory regulation of disclosure can be explained as the major outcome of political pressure that prevails betwixt the standard setters and management as a whole. Moreover, a status quo is prevalent in every period that plays a key role in focusing on the standards that are historical in nature (Woolworths Limited, 2015). Further, it is the duty of such standard setters to frame new regulation proposals so that management can then decide whether to deny such proposal or accept the same, thereby assisting in strategic decision-making. However, during the prevalence of a huge denial, such proposal is failed to be taken into account. As a result, the standard setter fails to gain control or authority over the matter and a new statutory regulation is taken into account by the approval that is enhanced by the existence of such status quo (Hanlon, 2013). Therefore, on a whole, the main outcome that is obtained from the case of Woolworths is that political accountability does not often assist in the production of a standard-setter that can further assist in the enhancement of welfare regulations.
Nevertheless, when an organization opts for a specific disclosure, it highly affects many interested parties. This is the reason why accounting choices can assist in offering an enhanced exposure so that the stakeholders and other related parties can attain a better viewpoint of the organization (Woolworths Limited, 2015). Besides, appropriate policies can assist in better decision-making so that the parties are provided with what they actually deserve.
The treasury function of the Group is liable for managing the liquidity concerns and safeguarding from financial risks that are associated with the overall functioning of the Group. This is done through the implementation of continuous assessment and monitoring techniques. The financial risks of the Group consist of liquidity risk, market risk, and credit risk that influences the measurement of fair value concept. Furthermore, the Group complies with various policies that offer written principles on such risks including the utilization of derivative financial instruments for hedging (Hanlon et. al, 2014). Further, compliance with such policies is reported by the Treasury on a periodic basis to the Board of Directors and these are further assessed by the internal auditors of the company.
The company to manage the requirements of short, long, and medium-term liquidity has framed a framework for the management of liquidity risk. Further, the Group also maintains a liquidity reserve as undrawn bilateral standby facilities with unexpired durations of at least twelve months. Moreover, in order to decrease re-pricing and refinancing risks, the Group exerts few limitations upon the amounts that can terminate within such twelve-month duration (Woolworths Limited, 2015).
The affairs of the Group also make it vulnerable to various financial risks owing to variations in the rates of foreign currencies, interest rates, and price risk of equities. In relation to foreign currency risk, the Group has significant exposure from expected purchases from equipment and inventories, term borrowings of foreign currencies, etc (Harrison & Colle, 2010). Further, in order to hedge against such exposure, the Group enters into cross currency swap agreements and foreign exchange contracts. These contracts and agreements are entered into for addressing the foreign currency payments and other receipts up to 100% of generated exposure (Woolworths Limited, 2015). Besides, the Group depicts these as hedging risk of foreign currencies and hedges of cash flow.
This risk is the outcome of default on the part of counterparties in relation to the fulfillment of financial obligations. Besides, in association with the Group’s policy, only short-term excess funds can be invested with financial institutions that are ‘A’ rated or higher under Standard & Poor so that the risk of financial loss can be safeguarded. Further, every counterparty is offered a maximum exposure value on the basis of their credit rating so that credit risk concentration can be restricted. In addition, the exposure of such counterparties together with their credit ratings is regularly assessed and compared with the counterparty credit limits sanctioned by the Board (Woolworths Limited, 2015). Nevertheless, the Group to measure credit risk also uses the risk methodologies utilized by financial institutions. Besides, during the reporting period, no default of credit risk can be observed on the company’s financials.
In relation to accounting analysis, the first step is the recognition of significant accounting policies and estimates of the company so that the risks and other relevant factors that can grant success can be identified. The second step is the assessment of accounting flexibility wherein the accounting information present in the financials may not provide adequate insights into the affairs of a company if the accounting managers pursue a high degree of flexibility in the selection of such accounting estimates and policies (Meeks & Swann, 2009). This is because the accounting managers have the power or authority to implement the accounting methods like measurement, disclosure, and recognition in the financial statements, and owing to their choices in selecting such policies; they can reveal private information about the company or distort the accounting numbers for their own benefits. Incentives facing accounting managers are the most affected by such accounting distortion because they become obligated for influencing the company’s state of affairs or financials in such a way that can offer them high incentives (Knight, 2014). Hence, in relation to Woolworths, if the accounting managers adopt some discretion during the selection of accounting estimates and policies, they can easily manipulate the figures for their own benefits.
The report of Woolworths has been prepared in accordance with the Corporation Act 2001 and it needs to be noted that the organization follows the same procedure on a continuous basis. The Australian standards and interpretations that are used by the industry are followed by the organization. Moreover, the group complies with IFRS and other needs of the law indicating that the standards of the industry are followed.
The incentives of the managers have been determined as per the industry norms and in tune with the work that been undertaken by them. When the manager uses their discretion in the process of earnings then it can lead to differences and impact the financial report. However, such a situation is not observed in the case of Woolworths (Knight, 2014).
As per the annual report of Woolworths there is no deflection in the plans and policies and hence, the company follows the principles on a consistent basis. This process has helped the company in having a continuous performance and the level of disclosure is effective. This has helped the stakeholders in getting a better view of the business and has aided in the process of decision-making (Woolworths Limited, 2015).
As per the policies of Woolworths, it is noted that the policies comply with the regulations that are framed by the accounting bodies. Therefore, transactions even adhere to the accounting policies and there is no deflection in the policies that are followed. The annual report is prepared in accordance with the accounting standards (Merchant, 2012).
Woolworths believes in the ideology of provision of relevant and accurate information in its annual reports so that the stakeholders like investors, shareholders, and the common public as a whole can attain a clearer view of its financial status. However, in relation to adequacy of disclosure measures, it can be seen that the Group has detailed its annual reports and made properly compliant with the standards framed by the AASB (Australian Accounting Standards Board). In addition to this, the financial performance of the company together with its plans for future development has been properly disclosed so that users can make relevant decisions out of the same (Ibrahim et. al, 2013). For instance, the outcomes of the Home Improvement Business of the company that relates to its discontinued operations have been separately disclosed in the financial statements. Further, in order to present such business as a discontinued activity, the Group has restated the comparative financial details in its consolidated profit and loss statement and consolidated statement of other comprehensive gains (Woolworths Limited, 2015). Besides, all the deviations in relation to the disclosures of the Group are effectively described in the footnotes section in the financial statements so that the users can extract significant information from the same to make proper decisions in the future (Needles & Powers, 2013). Besides, in relation to the significant accounting policies of the company, various segmented disclosures have been incorporated in line with the reevaluation of the reportable segments of the company.
In relation to segment reporting, the company has recognized reportable segments based on internal reports on its business units that are periodically analyzed by the CEO to apportion resources to the segment and evaluate its performance (Jones, 2011). The performance of every segment of the company is measured on the basis of their respective earnings before interest and tax (Woolworths Limited, 2015). Nevertheless, the portion of segment disclosure has been clearly disclosed by the company so that the users of financial statements can easily know the plans set by the management for future development. In addition to this, the company in the financials also effectively depicts the footnotes that are associated with such segment disclosures so that the users can properly know all the operating segments of the company including other support functions and separately reportable segments (Noble & Parker, 2010).
On a whole, the previously mentioned analysis on disclosure clearly summarizes the fact that the company has not made ineffective attempts in disclosing material information to the users of financial statements. Moreover, the GAAP also clearly depicts the accurate measurement of the prime measures of the company’s success. This can be proved by the fact that the company has adopted AASB 2015-2 as a disclosure initiative and amendment to the previous accounting standard AASB 101. In relation to such adoption, Woolworths makes sure that they take proper steps in ascertaining proper disclosures during the preparation of its financial statements. Therefore, in relation to the assessment of disclosure, Woolworths addresses all the requirements, thereby fulfilling the adequacies needed for a better outcome.
The remuneration of the CEO of Woolsworth is reasonable as per the scenario of the market, however, the share of stock-based incentives ranks below average. This problem can be enhanced with the remuneration component (Heffernan, 2015).
The company also fails to portray the sensitivities of the carrying amounts of the inventories, and how to tackle such sensitivities as a whole. Therefore, apart from this, the accounting policies and estimates of the company are more or less consistent and appropriate. Moreover, if this red flag can be improved in the future, then the financial statements of the company would portray an enhanced true and fair view of its operations (Parrino et. al, 2012).
Further, it was alleged that Woolworth strived to reduce the profit that is executed by intake of around $60 million from payments (suppliers)
In relation to Woolworths Ltd, it can be observed from its financial statements that it has efficiently adhered to the requirements of conceptual framework by fulfilling all the necessary qualitative characteristics of the financial report in order to make sure that its reporting quality is enhanced altogether (Mark & Michael, 2016). For instance, it can be witnessed that in association with materiality aspects, the company has adhered to the ASX Corporate Governance Principles and Recommendations in their reporting framework for maximizing their quality of reporting and possessing an ability to mold the decision-making on the part of users as well. Besides, material information relating to various segments has also been provided that offer a valuable insight into its operations. Secondly, in relation to faithful representation, it can be seen that the directors of the company have disclosed through a separate section wherein they ensure that the information forming part of the report is true and fair to the best of knowledge (Mark & Michael, 2016). This requirement clearly portrays the fact that the management assures faithful representation in their financial reports. Moreover, to provide solidity to the fact, the company complies with section 295A of the Corporations Act 2001. Furthermore, the company has also complied with the relevance characteristic of corporate reporting in its framework. For example, it has offered relevant details regarding its termination of the Home Improvement venture that poses a threat of affecting its financials negatively (Woolworths Limited, 2015). However, despite this fact, the company has still provided information of the same. Further, in association with the aspects of reliability, Woolworths has provided significant information to the users to enable them in making proper decisions based on the same. The relevance qualitative characteristic of the conceptual framework assists an investor in making proper investment decisions as they entrust utmost faith upon the company’s affairs (Williams, 2012). For instance, it has offered significant information regarding their emissions of greenhouse gas emissions into the environment. However, the company has offered information wherein it has offered information regarding their increment in greenhouse emissions even though it can influence its financials negatively. This proves the fact that the company has not stepped back in complying with the reliability characteristics of the conceptual framework. Lastly, the concept of prudence (recent revision in the conceptual framework) can also be observed from the financial statements of Woolworths. For example, intangibles like goodwill are measured at excess of procurement expenses over the acquired amount of the company’s assets (Woolworths Limited, 2015). Besides, the impairment losses of all the company’s assets are measured and reevaluated periodically to make sure that the amount of amortization is not exaggerated. In addition, the presence of AASB 9 standard in the financial statements of the company plays a vital part in the provision of information for measuring the investments of the company in various equity instruments so that if there are any material changes, the same can be identified at the initial stages itself (Samaha & Dahaway, 2010). Therefore, the fulfillment or compliance with the prudence concept can also be seen in the financials of the company.
Conclusion
On a whole, after analyzing the previously mentioned information, it can be stated that the company has efficiently complied with the conceptual framework for financial reporting, and for such purpose, it has adhered to all the important qualitative characteristics for enhancing the quality of reporting. Therefore, Woolworths is clearly compliant with the conceptual framework requirements and hence, users are more likely to extract relevant information from its financials and make appropriate decisions thereafter. Overall, the entire report indicates that Woolworths has effectively followed the accounting standards and is strong in the process of compliance.
References
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