Essay: Analysis Of Financial Reporting Process Of Harvey Norman - A Case Study.

Students will be allocated an Australian listed company ( Harvey Norman) and required to download the company’s latest available full-year financial statements and complete an accounting analysis.
Accounting Analysis
Students are required to address the following issues.
1. Provide a brief summary of the company’s activities as outlined in the annual report and any other sources considered relevant (i.e. what does it do? Where does it operate?).
2. Identify the key accounting policies relevant to the company’s success or lack of it; (b) Identify the accounting standards and rules (AASBs) which apply in respect of these accounting policies.
3. Evaluate the flexibility management has in terms of choices within the key accounting policies. Flexibility relates to accounting policy choices and the use of any discretion, judgment and/or estimates required by the accounting standards.
4. Evaluate the accounting strategy employed by management in respect of each key accounting policy and suggest/identify possible incentives behind the choice of strategy. Remember, you shouldn’t spend too much time discussing business strategy unless it relates to the company’s accounting strategy. By accounting strategy, we mean the accounting policy choices, accounting estimates and accounting disclosure choices. Think about management’s incentives to distort the financial performance/position of the business.
5. Evaluate the quality of disclosures made in the accounts.
6. Identify potential questionable accounting numbers.
7. Attempt where possible to undo questionable numbers using disclosures in the annual report and information from the notes to the accounts.
8. Summarise any financial press discussion of the company’s recent performance and accounting numbers. State your opinion as to whether what the media is saying about the company is fair/true?
Bonus points are awarded for extremely innovative or original analysis of your company’s financial reporting.

Background of Harvey Norman

Financial Reporting is considered as a major aspect for the financial success of the business organizations. The process of financial reporting is considered as a formal record of the financial activities as well as financial position of the businesses (Nobes 2014). While preparing and presenting financial statements, the companies are needed to comply with all the required financial rules and regulations of the available accounting conceptual framework. It implies that the companies are needed to follow all the accounting policies for the development of effective accounting strategies to achieve the financial objectives (Beatty, Liao and Yu 2013). In the process of financial reporting, the annual report of the companies play a crucial part as the companies are required to provide all the financial information along with the adopted financial policies in them so that the investors can access them to gain understanding about the financial position of the companies (Bentley, Omer and Sharp 2013). The main aim of the report is to conduct an analysis and evaluation on the financial reporting process of one of the Australian companies; and Harvey Norman is taken into consideration for this report. Different parts of this report analyze different aspects of the financial reporting process of Harvey Norman.

Harvey Norman is a large Australia based multinational organization. The company was established in the year of 1982 and it is headquartered at Homebush West, New South Wales, Australia. Accordant to the latest annual report of Harvey Norman that is the 2017 Annual Report, the principal activities of the company can be seen in the areas of integrated retail, franchise, property and digital system. More specifically, the main activities of the company can be seen in the selling of different products like furniture, computers, bedding, communication and consumer electrical products (static1.squarespace.com 2018). Apart from this, the involvement of the company can also be seen in the fields of franchisor, investment in property, lease of different premises, media placement, provision of consumer finance and many others. The annual report of the company states that the main operating areas of the company are Australia, New Zealand, Malaysia, Singapore, Slovenia, Ireland, Northern Ireland and Croatia. It can be seen in the 2017 Annual Report of Harvey Norman that there has not been any significant changes in the states of affair of the consolidated entities of Harvey Norman during the year of 2017 as per the directors of the company (static1.squarespace.com 2018).   

According to the 2017 Annual Report, Harvey Norman has complied with the principles and guiding regulations of AASB 10 Consolidated Financial Statements for preparing and presenting their financial statements (static1.squarespace.com 2018).

Revenue and Expenses: It can be seen from the 2017 Annual Report of Harvey Norman that the company follows the principles of AASB 118 Revenues for the recognition of their business revenues. It needs to be mentioned that Harvey Norman recognizes their revenues as the income from day-to-day business operations. It can also be observed that the management of the company reviews all the determining factors for the determination of their revenues and expense. It needs to be mentioned that the company is going to adopt the standards of AASB 118 Revenues from Contracts with Customers for the recognition of their revenues from July 1, 2018 (aasb.gov.au 2018).

Financial Reporting Standards and Policies

Intangible Assets: For the recognition and the accounting policies of the intangible assets of the business, Harvey Norman follows the principles and standards of AASB 138 Intangible Assets as per AASB conceptual framework. Some of the important intangible assets of the business of Harvey Norman are computer software assets, capitalized development expenditures and licensed properties. The company recognizes their intangible assets of business in the cost value less accumulated amortization and accumulated impairment losses (aasb.gov.au 2018).   

Lease: For the accounting treatments as well as recognition of the business leases, the management of Harvey Norman follows the principles of AASB 117 Leases. As a result of the adoption of this lease standard, the requirement for the management of the company is to distinguish all of their leases between operating leases and finance leases (aasb.gov.au 2018).  

It can be observed from the 2017 Annual Report of Harvey Norman that the company has adopted different strategies and the connection of these strategies can be seen with the accounting policies of the company. The main aim of the adoption of the accounting policies of Harvey Norman is the maximization of business as well as profitability (static1.squarespace.com 2018). Alignment of this policy can be seen with the strategy of the company to identify and develop unique Flagship stores or a Franchised Flasgship complex in each of the operational countries of the company. Major progress can be seen in this strategy for the financial year of 2017. Another major strategy of the company is the retail strategy in order to get steady as well as reliable income throughout the financial year. According to the 2017 Annual Report, the Flagship strategy of Harvey Norman leads to a 30.8% rise in the profit before tax of the company from $77.09 million to $100.68 million (static1.squarespace.com 2018).

In this context, it needs to be mentioned that the remuneration of the directors of Harvey Norman largely depends on the achievement of financial strategies of the company along with the incentives. The 2017 Annual Report of Harvey Norman states that the Short-Term Incentives (STI) and Long-Term Incentives (LTI) re largely dependent on the outcome of the financial performance of the company (static1.squarespace.com 2018). For example, the payment of the LTIs for the directors of Harvey Norman large depends on the achievement of the objectives that are utilization of the net assets of the company and the generation of wealth of the shareholders. On the other hand, he payment of the STIs of the directors depends on the achievement of desired profit level, Return on Investment and others (Bender 2013). This particular aspect provides the directors of Harvey Norman with the intention to distort the financial information of the company so that they can show higher amount of return on profit for gaining higher amount of incentives. However, it needs to be mentioned that there is not any instances of such distortion in the financial reporting of Harvey Norman (static1.squarespace.com 2018).

Disclosure of all the required financial information of the companies is considered as a major pillar for the financial reporting success of the organizations (Lawrence 2013). According to the 2017 Annual Report of Harvey Norman, the general purpose financial reports of the organizations have been prepared by complying with the requirements of Corporations Act 2001, Australian Accounting Standards and related pronouncements. It can also be seen from the 2017 Annual Report that the company has made compliance with the Australian Accounting Standard Board (AASB), International Financial Reporting Standards (IFRS) and International Accounting Standards Board (IASB) for the purpose of financial reporting.

Revenue and Expenses

Apart from this, as per analysis of the annual report of Harvey Norman, it can be seen that the company has released all the financial information for their investors and other users with the help of the required financial statements such as Statement of Financial Position, Income Statement, Statement of Comprehensive Income, Statement of Change in Equity and Statement of Cash Flows (Quayes and Hasan 2014). Investors and other users can gain underatsding about the financial position of the company from assessing these financial statements. Most importantly, the company provides all the information related to the change in the disclosure of the financial information in the annual reports so that the investors and users can know about this. Thus, based on the above discussion, the company has made all the required disclosures about the financial accounts of their business (static1.squarespace.com 2018).  

It needs to be mentioned that Harvey Norman has compiled with the guidelines of AASB 117 Leases for the purpose of lease accounting for the financial year of 2017. Under this lease standard, Harvey Norman is needed to classify their business leases wither financial lease or operating lease (Dakis 2016). Thus, the company is not needed to show the leases in the statement of financial position if they are classified as operating lease; and thus, they are needed to show in the profit or loss account as expenses in the profit or loss. However, it needs to be mentioned that there are some leases that re non-cancellable and for this reason, the companies are needed to consider them as liability and need to show them in the liability side of the statement of financial position (Wong and Joshi 2015). In the absence of disclosure in the statement of financial position, companies get the chance or scope to hide them from the balance sheet; and this process is highly illegal and manipulative.

It can be seen from the above table that Harvey Norman has lease payments worth $5,185,000 and $1,406,000 for the years 2017 and 2016 respectively; and they have shown this n the notes to the financial statements. These amounts can be considered as questionable as these amounts may include non-cancelled lease liabilities that the company should consider showing in the statement of financial position. There may be manipulative measures taken by the company to show them here so that they do not have to show them in the statement of financial position (Gomariz and Ballesta 2014).

It is possible to undo this whole aspect related to lease in the right manner. In order to do so, Harvey Norman is needed to adopt the new lease standards of AASB 16 Leases. As per this lease standard, there will not be any finance or operating lease as the companies will be liable for identifying the lease assets and liability; and they will have to report them in the statement of financial positing (Xu, Davidson and Cheong 2017). Thus, Harvey Norman will have to consider the identification of the lease liabilities out of the amounts of $5,185,000 and $1,406,000 for the years 2017 and 2016 respectively; and will have to report them in the statement of financial position. This is the way to undo the questionable lease amounts (Joubert, Garvie and Parle 2017).

Intangible Assets

In a recent press conference of Harvey Norman on May 27, 2017, the company has discussed about a large operating profit of the company’s Irish Stores after a huge accumulated loss of €120 million. As per the news, Harvey Norman Trading Ireland Ltd registered an operating profit of €203,799 after the 12 months to the end of June 2016. This profit was majorly boosted by a 13% increase in revenue from €158 million to €178 million. However, in the presence of an interest amount of €1.4 million, there was a pre-tax loss of €1.2 million. However, the profit after tax was a major relief for the management of the company (harveynormanholdings.com.au 2018).

Conclusion

From the above discussion, it can be observed that Harvey Norman is a major Australian company involves in different types of businesses like retail and others. The above discussion sheds light on the fact that the company has adhered to the standards and principles of AASB 10 Consolidated Financial Statements for the preparation of their general purpose financial reports. At the same time, compliance of the company can be seen with Corporations Act 2001, AASB, IFRS and IASB. The management of Harvey Norman has huge flexibility in making accounting judgments and estimates as they have stated in the financial statements that there may be difference in the financial reporting results with the judgments and assumptions. After that, it can be seen that the company has developed their business strategies with accordance to their adopted financial and accenting policies; and the STIs and LTIs of the directors largely depend on the financial performance of the company. Harvey Norman has disclosed all the required financial information by complying with the required standards. Due to the not adoption of AASB 16 Leases, there can be questions in the reported operating lease payments of the company.

References

Aasb.gov.au. (2018). [online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/SAC4_3-95.pdf [Accessed 17 Aug. 2018].

Beatty, A., Liao, S. and Yu, J.J., 2013. The spillover effect of fraudulent financial reporting on peer firms' investments. Journal of Accounting and Economics, 55(2-3), pp.183-205.

Bender, R., 2013. Corporate financial strategy. Routledge.

Bentley, K.A., Omer, T.C. and Sharp, N.Y., 2013. Business strategy, financial reporting irregularities, and audit effort. Contemporary Accounting Research, 30(2), pp.780-817.

Bisogno, M., Santis, S. and Tommasetti, A., 2015. Public-Sector consolidated financial statements: An analysis of the comment letters on IPSASB’s exposure draft no. 49. International Journal of Public Administration, 38(4), pp.311-324.

Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance Directions, 68(2), p.99.

Gomariz, M.F.C. and Ballesta, J.P.S., 2014. Financial reporting quality, debt maturity and investment efficiency. Journal of Banking & Finance, 40, pp.494-506.

Joubert, M., Garvie, L. and Parle, G., 2017. Implications of the New Accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. Journal of New Business Ideas & Trends, 15(2).

Kim, J.B. and Zhang, L., 2014. Financial reporting opacity and expected crash risk: Evidence from implied volatility smirks. Contemporary Accounting Research, 31(3), pp.851-875.  

Komninos, J. and Cameron, R.B., 2017. IMPACTS OF REVENUE RECOGNITION CHANGES IN THE CONSTRUCTION INDUSTRY.

Lawrence, A., 2013. Individual investors and financial disclosure. Journal of Accounting and Economics, 56(1), pp.130-147.

Nobes, C., 2014. International classification of financial reporting. Routledge.

Quayes, S. and Hasan, T., 2014. Financial disclosure and performance of microfinance institutions. Journal of Accounting & Organizational Change, 10(3), pp.314-337.

Static1.squarespace.com. (2018). 2017 Annual Report. [online] Available at: https://static1.squarespace.com/static/54803162e4b08e1b8a472201/t/59cded6780bd5e4dbeef7f83/1506667916831/2017-Annual-Report.pdf [Accessed 12 Aug. 2018].

Wheelhouse, G. and Wheelhouse, G. (2017). Harvey Norman Irish stores in profit . [online] Harvey Norman Holdings. Available at: https://www.harveynormanholdings.com.au/news/2017/5/27/harvey-norman-irish-stores-in-profit [Accessed 12 Aug. 2018].

Wong, K. and Joshi, M., 2015. The impact of lease capitalisation on financial statements and key ratios: Evidence from Australia. Australasian Accounting, Business and Finance Journal, 9(3), pp.27-44.

Xu, W., Davidson, R.A. and Cheong, C.S., 2017. Converting financial statements: operating to capitalised leases. Pacific Accounting Review, 29(1), pp.34-54.