The company consolidates its financial data of its holding and subsidiary companies and these are called GPFS. The company complies with various applicable laws and standards. The GPFs are prepared & presented in Australian Dollars and also are rounded up to nearest tenths of million dollars (unless specified otherwise) as per ASIC Class order 98/100. The GPFS are prepared using historical cost method except for financial assets & financial liabilities which are valued at fair values in compliance with accounting standards. The figures have been regrouped and reclassified wherever required. The GPFS include a Balance sheet, Profit & loss account, and cash flow. GPFS are prepared by the company in order to depict its correct profits from the total turnover achieved by the company during the year, so as to facilitate the users and stakeholders to assess the performance of the company during the year (Davies & Crawford, 2012).
The basis of preparation of consolidated financial statements/ General Purpose Financial Statements of the company are:
These are recognized at fair value initially up to 30 days from the date of the transaction. The trade receivables are impaired at the reporting date. Long-term receivables are discounted at a current interest rate to find out current cash flow (Woolsworth, 2016). Short term cash flows are not discounted.
Inventories are valued at lower of cost and net realizable value. Purchase cost includes acquisition costs plus all the charges related to the expenses of the purchase like freight and cartage and other directly attributable expenses. Inventories are impaired at the balance sheet date if the historical cost is not recoverable (Woolsworth, 2016). The above are consistent with the recommendations of Australian Accounting Standards Board.
The company should estimate the useful life of assets where the useful lives are changed, the written down value of the assets should also be changed in accordance with the revised useful life. In the case of freehold properties, the valuation should be done as per external market assessments and internal value in use (Woolsworth, 2016).
The company’s plant and machinery are recorded at historical cost less depreciation n and impairment loss. In the case of self-constructed assets, the cost of material, labor and overheads are accumulated (Meeks & Swann, 2009).
Depreciation can be calculated by mainly two methods – written down value method or straight line method. However, as per recommendations by AASB, written down value method or SLM can be used for depreciation purposes. In the case of sale of assets, profit or loss is shown in profit and loss account.
Lease Rentals are an expense to the company and are of two types. One is Finance Lease and other is an operating lease. Finance Lease is where the lease payments cover the entire useful life of the asset. All other leases are operating lease (Woolsworth, 2016).
The company has incurred operating lease expenses this year and increased from last year as shown below.
These assets like Goodwill are recorded in excess of the cost of acquisition over the fair value of assets acquired. Impairment losses are recorded at a later stage. Other Intangible assets are measured at cost of acquisition less depreciation or impairment losses. The intangible assets that have a defined life are amortized over their estimated useful lives using the straight-line basis method (Melville, 2013). Further, the reassessment of useful lives is done periodically so that the amortization does not get overstated.
The company has entered into guarantees which are contingent liabilities like workers compensations guarantees. The calculation of the percentage of payment of such guarantees may or may not be possible but these are part of financial statements (Woolsworth, 2016). The company has provided for contingent liabilities regarding workers compensation claims only in consolidated financial statements at the reporting date as shown below.
The taxation by the company has been shown as current tax and deferred tax in the Consolidated Financial Statements. Income tax is payable by the company to the Income tax authorities on the Income earned at the rates prevailing. The Company has made an agreement with its subsidiaries which sets out that subsidiary shall pay the company equal to the income tax liability assumed by the company. The company shall also pay its subsidiary the loss arising from the carry forward of losses (Woolsworth, 2016). Deferred Tax is also calculated using the difference between assets and liabilities carrying costs for temporary differences.
Prudence is a qualitative characteristic of a conceptual framework that necessitates the management to be prudent or cautious while implementing measures and strategies. Moreover, this compulsion assists in preventing income and assets to be overstated, and expenses and liabilities to be understated. It was recently revised by the IASB in the year 2015 because it permits the management in safeguarding biases and errors from their financials. Besides, other qualitative characteristics in the conceptual framework like materiality, relevance, etc, do not tamper in the presence of prudence (Needles & Powers, 2013).
As companies can gain benefit from cheaper sources of finance, high share prices, and efficiently reported profitability, there is a risk that may overstate income and assets, and understate liabilities and expenses. Further, accounting plans and choice of estimates may also result in errors or biases in financial statements (Brigham & Daves, 2012). As a result, revision of prudence became vital irrespective of the fact that it created complications in 2010. Prudence is effective when judgment and estimate matters are required. It cannot only enhance other qualitative characteristics of the conceptual framework but also allow companies to be precautious in cases of uncertainties. It also helps in sorting out business expenses and future problems before recognizing instances of profit. Although all these complications have been addressed by prudence, it is incapable in recognizing unrealized gains and writing predictable losses (Merchant, 2012). This can misguide the creditors and stakeholders, thereby resulting in unwanted scenarios. Furthermore, overstatement of liabilities and expenses and understatement of income and assets can also be done by this concept, thereby creating another complication.
The conceptual framework was developed to enhance the setting of accounting standards, thereby making it easier for accountants to adhere to it. Furthermore, the concepts forming part of the conceptual framework can assist in offering efficiency and consistency to financial reporting. Moreover, the principles designed by the FASB can be applied to situations when significant accounting standards are not present.
However, there are various problems in the conceptual framework, like the accounting principles rely on monetary aspects and it may create issues for the users. In addition, the absence of an appropriate definition in the conceptual framework can allow net assets variations to be reported as a performance part of companies that actually does not depict business results in cash flows (Douma & Hein, 2013). Therefore, a powerful alignment between reporting and business model is needed to make the management being responsible for value creation. Besides, catering to remuneration and other issues can help in enhancing the efficacies of the conceptual framework. Furthermore, the present conceptual framework proposed by the FASB plays a vital role in providing efficacies to every user (Choi & Meek, 2011). Such proposed framework comprise of Revenue Recognition Project for addressing complications in learning procedures, Liability, and Equity Project for reconsidering their differences, and Fair Value Project for opting an advantageous measurement output (Lapsley, 2012). Nevertheless, accountants still adhere to the conceptual framework irrespective of its various complications, as it allows them to enhance comparability and consistency of financial reporting.
Conclusion
Woolworths Australia is a very vast company along with its subsidiaries, it has strong fundamentals which clearly shows after seeing their annual report. The company has invested a lot of time and efforts in setting up their goals and objectives. The employees are duly rewarded both by cash and its equivalents and also by ESOPs etc. The shareholders have also been benefited due to company’s growth. The auditors have duly set out the comparison and tried to bring out the variances in form of overstatement or understatement through their audit.
Reference
Brigham, E. & Daves, P 2012, Intermediate Financial Management , USA: Cengage
Bushman, R & Piotroski, R 2006, ‘Financial reporting incentives for conservative accounting: The influence of legal and political institutions’, Journal of Accounting and Economics, vol. 42, pp. 107-148.
Choi, R.D & Meek, G.K 2011, International accounting, Pearson .
Davies, T & Crawford, I 2012, Financial accounting, Harlow, England: Pearson.
Douma, S & Hein, S 2013, Economic Approaches to Organizations. London
Lapsley, I. 2012, Commentary: Financial Accountability & Management, Qualitative Research in Accounting & Management, vol. 9, no. 3, pp. 291-292.
Meeks, G & Swann, G.M.P 2009, ‘Accounting standards and the economics of standards, Accounting and Business Research’, International Accounting Policy Forum, vol. 39, no. 3, pp. 23-44
Melville, A 2013, International Financial Reporting – A Practical Guide, Pearson, Education Limited, UK
Merchant, K. A. 2012, ‘Making Management Accounting Research More Useful’, Pacific Accounting Review, vol. 24, no. 3, pp. 1-34.
Needles, B.E. & Powers, M 2013, Principles of Financial Accounting, Francisco: Mc Graw-Hill Brook co.
Woolsworth 2016, Woolsworth Annual report and accounts 2016, viewed 2 May 2017 https://www.woolworthsgroup.com.au/icms_docs/185865_annual-report-2016.pdf
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