Critical Analysis Of Woolworths Limited's Compliance With The Conceptual Framework Requirements For Financial Reporting Essay.

Prepare a comprehensive report directed to an Australian ASX Top 100 listed corporation detailing a critical analysis of the effectiveness of the corporation to meet the obligations of the conceptual framework of accounting. Consideration of the Conceptual Framework Objective, Recognition Criteria, Fundamental and Enhancing Guidelines is essential.

Does my company meet the objectives of the conceptual framework with its reporting Have they satisfied the recognition criteria required to report Assets, Liabilities, Equity, Revenue and Expenses.

Objectives of Conceptual Framework

The conceptual framework related to financial reporting provides effective support to the organisations for developing financial statements. The necessary outlines, regulations and standards are provided to the business organisations in order to develop financial statements. Apart from this, other business issues involved with financial reporting could be solved, if the norms and regulations of conceptual framework have been applied. Therefore, it is evident that conceptual framework plays various roles in the financial aspects of the firms.

“International Accounting Standards Board (IASB)” started this concept in 1989. The current report aims to examine the adherence to recognition criteria, objectives and qualitative features of the framework on the part of the firms. For meeting the purpose of this report, Woolworths Limited has been considered. Woolworths Limited is a major Australian organisation and it has extensive retail interest across Australia and New Zealand. It is the second biggest organisation in terms of revenue and it is the biggest takeaway liquor retailer in the nation. However, it had incurred a loss of $1.235 billion in 2016; the largest in 20 years after it has been listed on ASX (Woolworthsgroup.com.au 2017). Hence, the report analyses the compliance of Qantas with the crucial conceptual framework needs for financial reporting.

It has been found out that the conceptual framework is an important element for the organisations in relation to financial reporting. The annual report of Woolworths Limited contains crucial information regarding the compliance with the various conceptual framework aspects. Based on the annual report of 2017, it could be observed that the organisation has followed the rules and standards of “Corporations Act 2001” and “Australian Accounting Standard Board (AASB)” for financial reporting. Besides, the organisation has developed its consolidated financial reports in a manner that comply with the regulations and norms of “International Financial Reporting Standards (IFRS)” and “International Accounting Standard Board (IASB)”. Thus, it could be cited that the organisation follows the issues inherent in the conceptual framework in IFRS for financial reporting. In this context, it could be identified that conceptual framework comprises of three objectives, which Woolworths is required to fulfil and the objectives are discussed as follows:

The first objective represents the duty of the business organisations in providing valuable and meaningful financial information to the stakeholders for assisting them in making suitable financial decisions (Barth 2015). In case of Woolworths Limited, the organisation presents its necessary financial information by disclosing it in its annual report timely. The information is spread mainly in the form of various financial statements constituting of balance sheet statement, income statement, cash flow statement and statement of changes in equity. Moreover, it attaches the notes in the annual report, which is the main source of financial information.

Recognition Criteria of Conceptual Framework

The second objective lays out that the financial information presented could be helpful to determine amount, timing and uncertainties pertaining to the organisational cash flows (Carey, Potter and Tanewski 2014). In this context, it could be pointed out that Woolworths Limited publishes its cash flow statement within time enabling the users in collecting the required inflows associated with the organisational cash flows. 

The third objective cites that it is necessary for the organisations in revealing needed information regarding their resources to support them in the financial decision-making process. In case of Woolworths Limited, it could be found that the organisation develops its statement of financial position complying with the AASB regulations, since it contains necessary information about economic resources. 

Based on the above evaluation, it could be inferred that Woolworths Limited has met the main objectives of conceptual framework.

As per the conceptual framework for financial reporting, it is the responsibility of the organisations to meet the recognition criteria associated with assets, liabilities, equity, revenue and expenses. There are three basic requirements, which are depicted as follows:

• Relevant information about the financial aspects of the firm
• Faithful depiction of the identified financial aspects
• Valuable information for the users related to such aspects (Cordery and Sinclair  2016)

The following discussion represents the method Woolworths Limited satisfies the recognition criteria associated with conceptual framework:

There are different asset categories for Woolworths Limited. In case of property, plant and equipment, it is measured at cost after subtraction of accumulated depreciation and accumulated impairment losses. The self-constructed assets take into account the material cost, direct labour and part of overhead. 

In case of intangible assets, goodwill is gauged at cost less any impairment loss. The other intangible assets are measured at cost less accumulated amortisation and impairment loss, of any.

Woolworths Limited contains various kinds of liabilities, as observed from the annual report. In case of deferred tax liabilities, the organisation follows the balance sheet method providing for temporary differences between the carrying amounts of liabilities for taxation and financial reporting purposes. 

For contingent liabilities, the main item is guarantee, which is developed in the normal business course set out in applications of development and sale of properties. The organisation has not made any provision for these contingent liabilities; however, it has made a provision of $593.9 million for self-insured risks.Woolworths Limited classifies ordinary shares in the form of equity. There is attribution of incremental costs to issued shares of the organisation. Such costs are deducted from the total equity of the organisation.In Woolworths Limited, revenue is realised when the considerable rewards and risks of ownership have been transferred at the time it is likely the revenue would be received and it could be measured reliably. The recognition of service revenue is made depending on the completion stage of the customer contract.

Qualitative Characteristics of Conceptual Framework

In case of Woolworths Limited, the expenditures are recognised based on certain categories. One of such expenses is commitment for expenditure, which include the payable firm contracts.Hence, it could be inferred that Woolworths Limited has met the recognition criteria related to conceptual framework for reporting assets, liabilities, equity, revenue and expenses.

The following discussion represent the degree of compliance with the major qualitative features of conceptual framework in relation to Woolworths Limited:

As pointed out by Birt, Muthusamy and Bir (2017), this feature states that the provided financial information is required to be relevant in order to assist in financial decision-making. The organisation adheres to the standards and regulations of AASB, IFRS and Corporations Act 2001. Along with this, it takes into account the current rates of tax and depreciation. This depicts the relevancy of the financial information of Woolworths Limited in its annual report.

According to this feature, it is necessary for the firms to represent their financial information depending on true and fair values (Luke 2016). According to the audit report of KPMG, Woolworths Limited has adhered to the required accounting standards signifying faithful representation of the financial information of the organisation.

This feature of conceptual framework depicts that the financial information of a firm is required to be appropriate for better understanding of the stakeholders in gaining an insight of the differences and similarities amongst the various financial statements (Newberry 2015). As per the annual report of Woolworths Limited, it could be observed that the organisation has depicted its financial statements as simple charts, tables and graphs. Hence, it would be easier for the investors and creditors to contrast the financial position of Woolworths Limited with other similar type of organisations operating in the Australian market.

This feature of the conceptual framework clearly depicts the ability of the users in verifying the financial position provided in the annual report of the organisation (Ryan et al. 2014). For fulfilling this specific characteristic, the airline has presented notes to all the estimates of accounting depicted in its annual report.

As per this characteristic of conceptual framework, a firm is required to publish its financial information within the stipulated time. Woolworths Limited publishes both interim and annual reports that denote its adherence to timeliness.

In compliance with this specific feature of conceptual framework, it is necessary for a company to depict financial information in a way that would help the users in better understanding of the same (Yong, Lim and Tan 2016). Woolworths Limited discloses its financial information in simple format to gain a better insight for the users.

Conclusion:

Based on the above discussion, it could be stated that Woolworths Limited adheres to the conceptual framework of AASB associated with financial reporting. Apart from this, the organisation has adopted all the necessary standards and regulations of IFRS, AASB, IASB and Corporations Act 2001 for developing the consolidated financial statements. It has been evident that the organisation has met the primary objectives of the conceptual framework and the regulations of AASB in association with assets, equity, liabilities, revenue and expenses. Finally, Woolworths Limited has met the qualitative features of the conceptual framework for enhancing the quality of financial reporting of the organisation.

References:

Barth, M.E., 2015. Financial accounting research, practice, and financial accountability. Abacus, 51(4), pp.499-510.

Birt, J.L., Muthusamy, K. and Bir, P., 2017. XBRL and the Qualitative Characteristics of Useful Financial Information. Accounting Research Journal, 30(1).

Carey, P., Potter, B. and Tanewski, G., 2014. Application of the reporting entity concept in Australia. Abacus, 50(4), pp.460-489.

Cordery, C.J. and Sinclair, R., 2016. Decision-Usefulness and Stewardship As Conceptual Framework Objectives: Continuing Challenges.

Luke, B., 2016. Measuring and Reporting on Social Performance: From Numbers and Narratives to a Useful Reporting Framework for Social Enterprises. Social and Environmental Accountability Journal, 36(2), pp.103-123.

Newberry, S., 2015. Public sector accounting: shifting concepts of accountability. Public Money & Management, 35(5), pp.371-376.

Ryan, C., Mack, J., Tooley, S. and Irvine, H., 2014. Do Not?For?Profits Need Their Own Conceptual Framework?. Financial Accountability & Management, 30(4), pp.383-402.

Woolworthsgroup.com.au. (2017). Annual Reports - Woolworths Group. [online] Available at: https://www.woolworthsgroup.com.au/page/investors/our-performance/reports/Reports/Annual_Reports [Accessed 14 Dec. 2017].

Yong, K.O., Lim, C.Y. and Tan, P., 2016. Theory and practice of the proposed conceptual framework: Evidence from the field. Advances in Accounting, 35, pp.62-74.