Question:
Discuss about the Analyses The Market Disclosure ASX Listed Company.
The business corporations around the world are emphasizing on developing high-quality financial reports as per the qualitative characteristics of conceptual accounting framework. The IASB (International Accounting Standards Board) has directed all the business corporations to develop their financial reports as per the qualitative characteristics prescribed in its conceptual framework for financial reporting. The report specifically addresses the deviations observed in meeting the objective of general purpose financial reporting by the company in relation to Property, Plant and Equipment (PPE). The company selected for the purpose is Wesfarmers Limited, a supermarket giant in Australia involved in variety of business operations including chemicals, fertilizers, industrial products, home improvement and many others. The report reviews the disclosures made by the company in relation to PPE and their alignment with the CF objective and qualitative characteristics based on board of director’s decision on the perspective of an accounting graduate.
The objective of general purpose financial reporting as advocated by the IASB is to provide useful financial information of a reporting entity to the end-users including potential investors, lenders and creditors. The disclosure of all the necessary financial information to the stakeholders of a business entity is essential for supporting their decision-making process through gaining a complete understanding of its financial resources. The decisions include buying or lending equity and debt instruments, providing or settling loans and similar investment decisions. As such, the IASB has developed conceptual accounting framework for financial reporting that has stated the qualitative characteristics that financial information of a reporting entity must possess in order to meet the needs of end-users. The fundamental qualitative characteristics are relevance, faithful presentation, understandability and comparability (Macve, 2015).
The relevance principle of CF states that financial information should be relevant enough to make a difference in the decisions of the end-users. Thus, as per this qualitative characteristic, the financial information disclosed must have both predictive and confirmatory value. The confirmatory value should provide feedback about its current and past performance while predictive value should be able to provide an analysis of its future performance. The faithful presentation of the financial reports states that financial information disclosures should be complete, neutral and error-free. Thus, it should provide an in-depth understanding of the phenomena involved through depicting all the necessary descriptions and explanations. On the other hand, the comparability qualitative characteristics requires that financial information provided to the end-users must provide an analysis of the increase or decrease in the current financial performance of an entity in comparison to the past performances. In addition to this, the understandability of financial information ensures that it is simple to be understood by the end-users within involving any complexity (Harvey, McLaney and Atrill, 2013).
The accounting standard of AASB 116 has provided the guidelines to all the ASX listed business entities to value the property, plant and equipment (PPE). The standards has prescribed to take into account the carrying amounts and the deprecation and impairment charges related to PPE at the time of their measurement during financial reporting. As per the standard, the carrying value of an asset is recognized after deducting all the accumulated deprecation and impairment losses. The useful life of an asset is the period over which an asset is expected to be available for future use by an entity. The recoverable amount of an asset is said to be higher of either fair value of an asset loss cost to sell or its value in use. The impairment loss can be recognized to be the amount by which its carrying value exceeds the recoverable amount. The annual report of Wesfarmers Limited has stated the effective compliance of the company with the AASB 116 in relation to identification and recognition of property, plant and equipment (Compiled AASB 116 Standards, 2017).
The carrying value of PPE is measured on the cost basis through deducting all the significant deprecation and impairment losses as per the AASB 116. The items of property, plant and equipment is put to sale or is disposed when it is regarded to bring no future economic benefits to the company. The significant gain or loss arising from its sale is reported in the income statement of the period when the corresponding items is derecognized. The company has also provided disclosure regarding the key estimates taken by the management in estimating the useful life, residual value and amortization methods for its items of PPE (2017 Annual Report: Wesfarmers, 2017). Thus, it can be said that Wesfarmers have effectively complied with AASB 116 standard during financial reporting if its items of property, plant and equipment that can be depicted as follows:
Source: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0
It can be said on the basis of analysis of PPE disclosure of Wesfarmers that it has effectively complied with all the AASB 116 standard requirements. However, the company has not satisfied the fundamental and enhancing qualitative characteristics of useful financial information. For example, the company has incorporated the use of historical cost basis for measuring the carrying value of its fixed assets of property, plant and equipment (2017 Annual Report: Wesfarmers, 2017). The use of historical cost basis indicates that the financial information provided by the company is not relevant. For example, the company has estimated the useful life of its buildings between 20-40 years and plant and equipment to be in 3-40 years. Thus, there is n change in the useful life of assets during measuring its value after 20 years. This indicates that the company financial information relating to property, plant and equipment is not error-free as the building purchased 20 years ago would have different material value in the current market. Thus, the financial information is not relevant as it has not taken into account the current value of property, plant and equipment through adjusting their useful life as per the current market conditions (Compiled AASB 116 Standards, 2017).
In addition to this, the company calculates deprecation value through the use of straight-line basis that is not effective method for measuring deprecation on some of the equipments of the company such as computers due to rapid development in technologies. Also, the method does not accurately reflect the difference in asset use from one period to another and it does not match the costs with revenues of different types of long-term assets. Thus, it can be said that the company does not comply with the understandability qualitative characteristics of useful financial information through implementing the use of straight-line deprecation method (2017 Annual Report: Wesfarmers, 2017). The end-users are not able to match the revenue with expenses of long-term assets of the company with the use of the depreciation method (Alexander, Britton and Jorissen, 2007).
The objective of general purpose financial reporting is to protect the interests of end-users through providing them materialistic financial information that can be used by them for making investment decisions. As analyzed form the annual report of Wesfarmers Limited, the company has valued the items of property, plant and equipment as per the AASB 116 standards. However, the company has not adequately met the relevancy and understandability qualitative characteristic of conceptual accounting framework. Therefore, the company has not appropriately aligned its PPE disclosures with the objective of general purpose financial reporting. This is because the company has not provided the relevant and understandable financial information relating to PPE to its end-users (2017 Annual Report: Wesfarmers, 2017). The company as such is recommended to incorporate the use of fair value accounting in recognizing the carrying value of its long-term assets. The AASB 13 standard has provided the guidelines to the business corporations regarding the use of fair value in measuring the value of its fixed asset such a property, plant and equipment. The use of fair value would help in identification of accurate value of recoverable amount, residual and useful life of assets based on current market conditions (AASB 13, 2015).
The company is recommended to adjust the useful life of assets relating to items of property, plant and equipment in order to record the realistic and reliable value of property, plant and equipment. This is required by the company to provide relevant and reliable information to the end-users about its items of PPE. In addition to this, the company is recommended to incorporate the use of reducing balance method for calculating deprecation. This method of deprecation is simple to be understood by the end-users as deprecation for every year is calculated on the opening balance of an asset in his method. Also, it easily matches the cost and revenues of the business and therefore simplifies for users to understand the financial statements developed by the company as per the understandability principle of conceptual accounting framework (Harvey, McLaney and Atrill, 2013).
Conclusion
It can be inferred from the overall discussion held in the report that business corporations should satisfy the qualitative characteristics of conceptual accounting framework for meeting the objective of general purpose financial reporting. The Wesfarmers though have effectively complied with all the necessary AASB standard in relation to property, plant and equipment need to incorporate some changes in its valuation techniques for meeting the objective of financial reporting.
References
2017 Annual Report: Wesfarmers. 2017. [Online]. Available at: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0 [Accessed on: 4 September 2017].
AASB 13. 2015. Fair Value Measurement. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf [Accessed on: 4 September 2017].
Alexander, D., Britton, A. and Jorissen, A. 2007. International Financial Reporting and Analysis. Cengage Learning EMEA.
Compiled AASB 116 Standards. 2017. [Online]. Available at: https://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf [Accessed on: 4 September 2017].
Harvey, D., McLaney, E. and Atrill, P. 2013. Accounting for Business. Routledge.
Macve, R. 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat? Routledge.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download