Discuss About The Strategy Adopted For Accounting Reproting?
Every company shall function in the proper manner. The overall working of the company depends upon each function that the company performs whether it is purchase, sales, production or marketing. These functions further depend upon the main function of the company which is finance function. It’s the function of the finance which controls the overall working and operations of the company. Many of the companies located across the globe have been collapsed only because of the irregular conduct and operation of the finance function. For the purpose of the investigation report, the company that has been selected is the Woolworths Limited. The annual report of the selected company has been analyzed for the two consecutive periods – two thousand and seventeen and two thousand and sixteen.
Under the first heading of the report, the key accounting policy adopted by the company has been identified in relation to estimates, critical factors, etc. Under the second heading, the probabilities of the distorted picture of the financial statements have been detailed with reference to the choices of the managers. Then the strategy of the management has been evaluated as to how the management of the company has allowed the managers to make choices as per their discretion. In the next heading, the quality of the disclosure of the financial information in the annual report has been discussed. Along with the above, in the next section, the flaws in accounting and financial reporting practices have been detailed and identified the areas which require the more information. In the last section of the main body of the report, the assessment has been made whether the company complies with the conceptual framework of accounting or not. The report has been started with first section and has been made available for the users with the concluding paragraph.
The company that has been selected for the purpose of the study and for the purpose of achieving the investigation is Woolworths Limited. The company has been incorporated in the year of nineteen hundred and twenty four and in the country of Australia. The company is the listed company in the Australian Stock exchange. In the beginning years, the company has been engaged in the business of selling daily necessary items to the nearby customers but has grown up significantly with the passing of the years and is now working as the big departmental store wherein any person can have the goods ranging from necessary items to the electronic goods and it has expanded its operations almost across the globe. The company has also entered the Indian market where the electronic goods are sold at the different centre namely – Croma. As the company is very old and has good reputation in the market since its inception, the company has been selected for the purpose of report (Company Official Website, 2017).
On twenty fifth of June, the company’s financial year has been closed and as per the financial statements of the company forming part of the annual report of the company following are the policies of accounting that has been adopted by the company:
In accordance with the notes to the financial statements bearing number one, the management of the company is responsible for making the appropriate assumptions, estimates and judgments. These three activities are conducted only when these affects the items which is required to be reported in the financial statements of the company. Usually the management applies the experience that the company has gained over the past years in respect to the making of the estimates and assumptions wherever required. The material items shown in the financial statements of the company have been mentioned with proper estimation of the figures and the related accounting policies like the impairment test and accounting for of the loss on impairment, amount of depreciation, etc. (Anastasia, 2015).
In the given case, accounting policy for accounting of the impairment loss has been mentioned. The accounting policy contains that the each of the asset of the company except goodwill shall be checked for the impairment at the end of the every annual year. The test majorly includes whether the carrying amount of the assets so mentioned in the balance sheet at the end of the year exceeds the recoverable amount of the asset. Recoverable amount is further calculated as the higher of net selling price and the value in use. In case the value of the carrying amount exceeds the recoverable amount then the difference will be treated as the impairment loss and shall be accounted for as the expense being charged to the statement of profit and loss account and on the other side deducted from the value of the assets shown in the balance sheet.
This accounting policy has given the reason for estimating the future cash inflows which will be generated from the each cash generating units as identified by the management of the company. This is the critical factor and it will help the users of the financial statements to verify the position of the assets of the company whether they are utilizing it in the better manner.
Like the aforesaid accounting policy, the company has mentioned other accounting policy too which will help the users to have the maximum information for making the proper analysis.
Flexibility means the level of the ease of doing or performing the work. The flexibility in accounting means the ease adopted by the accountants and the management of the company in performing the accounting functions. In case of each and every company there is some level of flexibility that is allowed to the managers of the company including the accountants to perform the functions at their own discretion and comfort (Weygandt, 2012).
In almost all the listed companies and other than listed companies, the main aim for adopting the flexibility in accounting depends on the remuneration strategies adopted by the company. The company generally has two forms of incentives under which the executive remuneration has been planned. These are based either on the short term or the long term. Generally in the short term incentives, the company details that in case the manager of the concerned executive will be able to generate the higher sales in the current year as compared to the previous year or will be able to bring business for the company then the variable component of the short term incentive will be higher. In such as situation, the managers and the executives normally enter into the transactions through which their sales will be increased and in turn their remuneration part will also get increased (Cooper, 2015). The aforesaid fact has been listed only because of the increase in the value of the sale figure by $2002 millions and that too with the fact that the company is having the greater loss on the foreign currency transactions and the huge loss from the other segment of BIG W and winding up of that segment in the current financial year only (Bryer, 2013).
As per the reading of the annual report of the company, it has been clearly disclosed that the relevant accounting concepts, policies and the procedures are being adopted by the company in very diligent manner and has duly complied with the full disclosure principles, the conceptual framework and majorly the accounting standards that are globally accepted except some of the standards which have no relevance as on date like International Financial Reporting Standards on Leases which will be effected from the first of January two thousand and nineteen. But apart from these disclosures the director’s remuneration report embedded in the annual report has given the flexibility to the executives to behave in the manner so as to increase the remuneration accordingly. It has been justified from the increase in sale which shows that the executives might have been engaged in the practices which are manipulating in nature. Second instance which has delivered that the executives of the company might have enjoyed the higher degree of the flexibility is that the estimation of the cash flows which will be for future years from the BIG W business and the cash flows so mentioned in the annual report are purely at the discretion of the management. Due to this estimation the huge amount of impairment loss has been charged to statement of profit and loss amounting to thirty five million dollars.
Therefore, it can be concluded that the managers and the executives carry the greater level of the flexibility in accounting and choosing the accounting concepts and estimates.
In continuation of the flexibility in the accounting that is carried by the managers and the executives of the company proactively, the accounting strategy that the company has adopted is in alignment with the flexibility enjoyed by the managers and the executives. It makes the managers and the executives of the company to enter into such practices which will result in the bad and distorted view of the state of affairs of the corporate and which in turn will affect the decision of the stakeholders of the company.
The accounting policies are the backbone of the accounting function and the application of the same has been very well explained by the two theories of accounting – Normative theory of accounting and the positive theory of accounting. These two theories helps in understanding as to why the particular concept or accounting policy has been applied and what are the effect that the accounting policy will create on the state of affairs and the performance of the company. The normative theory of accounting is defined as the way of recording the transactions in the books of accounts. In order to accomplish this, the conceptual framework of accounting has been developed which entails as to how the financial statements shall be represented. It carries three basic features:
Each of the features has its own relevance. The features states that the information stated in the financial statements shall be free from any type of error, shall be relevant for the users and shall apply the accounting policy on consistent basis.
On the other hand the positive accounting theory entails that the application of the accounting policy and the accounting treatment has been basically derived from the behavior of the personnel deployed at the accounting function.
In the given case, the company has earned the earnings before interest and tax for the year ending 30th of June 2017 and 2016 respectively. The change in their percentage in proportion to sales is 2.78% in 2016 and 4.12% in 2017. The major point in this context is that the sales have been increased only by the proportion of 3.50% approximately (Company Official Website, 2017). It means that the managers and executives might have engaged themselves in the wrong accounting and reporting practices (Kothari and Ball, 2014).
The major reason for the diversion in sales and earnings before interest and taxes according to the positive accounting theory is that the behavior of the managers and the executives are governed by the interest of the stakeholders involved. It is because the stakeholder requires the higher earnings per share and that will be arrived with the maximum figure of the earnings before interest and tax. The second reason is the stipulation made by the management of the companies to have the higher earnings before interest and tax in order to plan for obtaining loans from the financial institutions and the banks (Ingram, 2008).
The disclosure that the financial statements of the company have made seems adequate and appropriate to the nature and size of the business (Sinha, 2012).
According to the continuous disclosure scheme, the company shall make the adequate disclosure and on the regular basis and in case any change occurs which will have the material effect then that shall be reported in quick manner.
On reading of the Independent Auditor’s report, it has been observed that the auditors has mentioned the key audit matters and has defined the audit procedures that the auditor has adopted to complete the audit in an efficient manner. The same has been done in accordance with the Auditing standard of Australia having number seven hundred and one.
Secondly the company has mentioned the critical accounting estimates under the respective heads. For instance, as per paragraph number 3.3 detailing the property plant and equipment, the annual report has detailed the procedure as to how the useful life of an asset has been estimated and how the carrying value of the assets has been calculated. Similarly as per paragraph number 3.5 detailing the impairment of non financial assets, the calculation of value in use as per the estimated future cash flows has been detailed (Company Official Website, 2017).
Thirdly, the disclosure regarding the segment of BIG W has been detailed with reference to the reasons for losses incurred and the future course of action that the company has adopted. The note has also been given that the sensitivity analysis has been conducted and decision has been made accordingly.
Fourthly, the company has made the disclosure relating to the segments and according to the accounting standard for segment reporting, five segments have been made available for reporting. These are Australian Food, New Zealand Food, Endeavour Drinks, BIG W and Hotels.
With this, the disclosure made in the annual report seems appropriate and adequate.
Following are the red flags as observed on deep analysis of the annual report:
The above information requires extensive verification.
The company has in total complied with the conceptual framework of accounting as three features of the same are present:
(Capital Markets Advisory Committee Meeting, 2013; International Accounting Standards Board, 2010)
Conclusion
The investigation report has been conducted of the annual report of the company – Woolworths Limited for the year ending 2017 and 2016. The analysis has been made of the accounting policies adopted for the assets and of the different accounting strategies adopted by the management of the company. The use of the positive accounting theory and the normative accounting theory has been detailed in understanding the manipulative practices adopted by the managers and the executives of the company. The quality of the financial statements has been detailed with reference to the accounting standards and the grey areas have been noticed. The overall report concludes that the strategy of the management shall abide to the provisions of the accounting standards and other laws universally applicable.
References
Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 22-09-2017
Bryer, R.A., 2013. Double-entry bookkeeping and the birth of capitalism: management for the commercial revolution in medieval northern Italy. Critical perspectives on Accounting, 4(2), pp.113-140.
Capital Markets Advisory Committee Meeting, (2013), “Conceptual Framework” available on https://www.ifrs.org/Meetings/MeetingDocs/Other%20Meeting/2013/March/AP%203%20conceptual%20framework.pdf accessed on 22-09-2017
Company Official Website, (2017), “Annual Reports” available at https://www.woolworthsgroup.com.au accessed on 22-09-2017.
Cooper S, (2015), “A Tale of Prudence”, available on https://www.ifrs.org/Investor-resources/Investor-perspectives-2/Documents/Prudence_Investor-Perspective_Conceptual-FW.PDF accessed on 22-09-2017.
Ingram, R.W., 2008. A note on teaching debits and credits in elementary accounting. Issues in Accounting Education, 13(2), p.411.
International Accounting Standards Board, (2010), “Conceptual Framework for Financial Reporting 2010” , pages 16-21
Kothari, S.P. and Ball, R., 2014. Financial statement analysis. Mcgrew-Hill Companies.
Phillips, F. and Heiser, L., 2011. A field experiment examining the effects of accounting equation emphasis and transaction scope on students learning to journalize. Issues in Accounting Education, 26(4), pp.681-699.
Sinha, G., 2012. Financial statement analysis. PHI Learning Pvt. Ltd..
Weygandt, J.J., , 2010. Accounting principles. Issues in Accounting Education, 25(1), pp.179-180.
Weiss D, (2014), “Faithful Representation” available on https://bschool.huji.ac.il/.upload/Seminars/Faithful%20Representation%20October%202014.pdf accessed on 22-09-2017
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
