Understanding The Classification Of Expenses In Financial Statements For Aristocrat Leisure Limited

Introduction to AASB101 and the classification of expenses

Aristocrat Leisure Limited is one of the most renowned names in the gaming industry and a leading provider in the field of gaming solution. The company operates in over 90 countries and have over 240 jurisdictions in gaming.

The company reported its financial statements for the year ended September 2017 with a net comprehensive income of $478.2 million. The requirement of the company is to report the consolidated revenues across all jurisdictions, countries and segment and the income statements report exactly the same. The consolidated revenue of the company for 2017 was reported as $2,435.80 million. The income statements reports the expenses classified on the basis of functions as desired by the company. The extract of the Profit or Loss statement available on page 57 (Aristocratleisurelimited.gcs-web.com, 2019) of the annual report is reproduced as below for ready reference

Solution to Task 1: Part B

AASB101 which is the standard controlling the Presentation of Financial Statements states in the paragraph 99 states that all business organisation shall present and report all the general expense incurred by it way of detailed analysis. The expenses should be classified on the basis of nature of the expense and functionality of the expense and then reported in the profit or loss statement. This shall form part of the financial statements in the annual report of the company (AASB 2017). Thus, the company can classify expense either on the basis of nature or function of expense.

Paragraph 102: This particular paragraph of AASB101 specifically lists out how the use of classification based on nature of expense can be used by the organization. This method records all the expenses of the company classified on the basis of their nature and not on the basis of how they are allocated to various function on the organization. Examples will be reporting purchases, depreciation, general expenses, salaries etc.

(Basiccollegeaccounting.com, 2009)

Paragraph 103: This particular paragraph of AASB101 lists out how the use of classification based on nature of function can be used by the organization. This method advises the companies to classify expense which are part of cost of sales based on the function in which they are incurred. This provides better information but obviously proper allocation is a concern. Examples will be reporting as administrative expense, selling expense, cost of sales etc. (Legislation.gov.au, 2018)

Thus, we see that a company can use either nature or function to classify their costs and choosing the one requires judgement. The table below summarizes the advantages, disadvantages of using them.

	Advantages	Disadvantages
Classification – Nature	Simple and easy application as no allocation requirement, Cost heads helps in proper analysis for cost controlling, makes prediction of cash flow easy.	GP calculation difficult, detailed information on cost missing
Classification – Function	GP can be calculated easily, helps in controlling departmental costs, better and more relevant information provided	Allocation to functions require judgement and estimates which are difficult, unable to predict future cash flow with this,

Advantages and disadvantages of classifying expenses on the basis of nature or function

Further, classification as per nature relieves the company of providing additional information as disclosures as the entire costs is mentioned as is, whereas classification as per function requires additional information in form of disclosures stating specifically the depreciation, amortization and the costs of employee benefits.

Solution to Task 2:

A thorough review of the financial statements of the company and you will see that the company has made changes in the workings of the items reported in the financial statements.

We all know that companies use their judgement, make estimates, and apply accounting policies for valuing the items of financial statements. These judgements estimates and accounting policies are all disclosed to the stakeholders in the annual report. The company reported all these important information as notes to financial statements and grouped them on the basis of their nature.

Note 1: Business Performance 

This segment provided vital information on financials of the company including its segment information, dividends, taxes, EPS and revenues and expenses.

Note 2: Operating assets and liabilities

This specifically presented information related to the assets and liabilities presented on the balance sheet including inventories, trade receivable, assets, provisions, long-term asset and payables. This explained the use of judgement, estimates for provisions and recording of these assets or liabilities.

Note 3: Capital and financial structure

This provided further information on the use of capital within the firm, indicating the type of funds utilised including equity and borrowings, risk factored, financial ratios etc. for user to have complete and transparent information about the company.

Note 4: Group structure

Provided information on the subsidiaries and other entities which the company has controlling interest and/or have plans for acquisition or disposals.

Note 5: Employee benefits

This presented the remuneration details of the KMP and share based payments that have been allowed to the employees and management.

Note 6: Other disclosures

Other disclosures are all important disclosures that do not fall under any of the 5 group above. This includes contingencies, related parties transaction, events that occurred after balance sheet etc.

This as we see is logical grouping and sequencing for users to gather complete information about the company; all these are available under page 62 (Aristocratleisurelimited.gcs-web.com, 2019) of the annual report for the year 2017.

One of the most important factors in presentation of financial statements is the use of same accounting policies over years to ensure consistency and comparability. The group has aligned the accounting policies of the subsidiaries companies’ with the on-going policies of the company to ensure consistency while reporting.

Important notes and disclosures provided in the financial statements

Further, as per the best estimate of the management all the unrealizable gains from the subsidiaries where eliminated while consolidation to ensure that the books represent the true and fair view of the state of affairs of the company as far as possible.

Revsion in Estimates: The Company has recorded a significant change in their estimates regarding the vested rights of the management based on the non-market condition of besting. The same is adjusted with the original estimate and adjusted in the financials. This is reflected under page 63 (Aristocratleisurelimited.gcs-web.com, 2019) of the annual report which represents the “Share based segment” of the company.

Solution to Task 3: Part A

The company incurred a total of $631.70 million for Property, plant and equipment. This is recorded in page 75 (Aristocratleisurelimited.gcs-web.com, 2019) of the annual report. The costs add up for three major components with $554.4 million against Plant and Equipment, $57.1 million against leased improvements and $20.2 against land and buildings.

This has increased from $540.6 million in 2016 to $631.7 in 2017, thus registering an increase of approx. 17%

Solution to Task 3: Part B

The company expensed for a total depreciation of $111.60 million in the year 2017. This is recorded in page 65 (Aristocratleisurelimited.gcs-web.com, 2019) of the annual report. The costs add up for three major components with $101.4 million against Plant and Equipment, $5.3 million against leased improvements and $4.9 against land and buildings.

This has increased from $115.6 million in 2016 to $111.6 in 2017, thus registering an increase of approx. 4%

Solution to Task 3: Part C and D

The company applies straight line depreciation method for all its assets with land having no depreciation expense at all. The company in page 73 (Aristocratleisurelimited.gcs-web.com, 2019)  of the annual report lists out the useful life that has been considered for all its class of assets which is 25-30 years for buildings, 2-10 years for the leased improvements and 1-10 years for plant and equipment.

Sl No.	Assets	Useful Life In years	Depreciation Method
1	Buildings	25-30	Straight – Line
2	Leased Improvements	1-10	Straight – Line
3	Plant and Equipment	1-10	Straight – Line
4	Land	Indefinite	NA

Solution to Task 3: Part E

None of the operating assets or liabilities of the company went under revaluation for the year 2017 and thus the annual report shows no disclosures related to revaluation.

Solution to Task 3: Part F

Here, we will talk about impairment process for assets. Any asset whose value in books as per balance sheet exceeds the current market value is called as impaired assets (Kenton 2019). It is important for companies to assess the impairment of assets and record the same in the financial statements for users to have full disclosure (Guthrie and Pang, 2013). Every company at a consolidated level, assess the impairment of financial assets at the end of each closing period (AASB 2015). The company also records the carrying amount of investment after adjusting the impairment loss and the carrying amount generally is the maximum credit risk attached to the given asset as on the date of reporting (Deegan 2012).

The company carries out impairment process when an adverse event related to an asset happens or materializes post their recognition. This loss after the event materialisation will have an adverse effect on the future cash flows (for Aristocrat refer page 73 (Aristocratleisurelimited.gcs-web.com, 2019) of the annual report)

The company has no exposure for price risk against investment held till maturity. The company holds no assets which are impaired and thus no impairment has been done.

References

AASB 2015, AASB 136 Impairment of Assets, viewed Retrieved 5 Feb 2019 from

https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf

AASB 2017, AASB 101 Presentation of Financial Statements, Retrieved 5 Feb 2019 from https://www.aasb.gov.au/admin/file/content105/c9/AASB101_07-15.pdf

Aristocratleisurelimited.gcs-web.com. (2019) [online] Retrieved 5 Feb 2019 from

https://aristocratleisurelimited.gcs-web.com/static-files/8a63b725-9d18-403b-a6cb-ae3b6af43acc

Basiccollegeaccounting.com. (2009). Explain What Are The Two Types Of Presentation Of Expenses Format Recognized In The Income Statement In Accordance to FRS 101 Presentation of Financial Statements – College Accounting Coach | College Accounting Coach. [online] Retrieved 5 Feb 2019 from https://basiccollegeaccounting.com/2009/11/explain-what-are-the-two-types-of-presentation-of-expenses-format-recognized-in-the-income-statement-in-accordance-to-frs-101-presentation-of-financial-statements/

Deegan, C. (n.d.). Australian financial accounting Retrieved 5 Feb 2019

Guthrie, J. and Pang, T. (2013). Disclosure of Goodwill Impairment under AASB 136 from 2005-2010 (pp.216-231). Australian Accounting Review, 23(3), Retrieved 5 Feb 2019

Kenton, W. (2019). Impaired Asset. [online] Investopedia. Retrieved 5 Feb 2019 from

https://www.investopedia.com/terms/i/impairedasset.asp

Legislation.gov.au. (2018). AASB 101 – Presentation of Financial Statements – October 2006. [online] Retrieved 5 Feb 2019 from

https://www.legislation.gov.au/Details/F2009C00140