Generally Accepted Accounting Principles (GAAP) Are Crucial For Financial Reporting And Essay.

Financial Statements are the presentation of financial information on the overall performance of the organizations. It provides useful information to the users like investors, creditors, financial institutions and other stakeholders of the business entities. Therefore, it is essential to recognize the transactions with the compliance of reporting requirements as laid by the International Board of Accounting. International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) regulate recognition of accounting information and measurement of values. However, there are regulatory boards country wise that designs the conceptual framework to recognize the conceptual framework for the companies registered in the country as per the respective Corporations Act. Similarly, Australian Accounting Standards Board (AASB) regulates accounting records for the organizations registered in Australia and listed in Australian Stock Exchange.

The Australian Securities and Investments Commission (ASIC) is a regulator for organizations incorporated in Australia, which requires the companies to prepare and submit the audited annual reports at the end of the financial year. The financial reports should be comprised of reports on sustainability and corporate social responsibility, reports on corporate governance, Director’s report, Auditor’s report and financial statements. Additionally, companies listed on the Australian Securities Exchange are required to prepare and file regular and periodic disclosures.

The following report presents the comparability and compliance of conceptual framework and AASB standards on preparation and presentation of annual reports of the selected companies Wesfarmers and Woolworths.

Wesfarmers Limited is an Australian company listed on the Australian Securities Exchange dealing in chemicals, fertilizers and mining products. It is one of the largest companies in Australia by revenue of around $62.7 billion in the year 2015 (Wesfarmers.com.au 2016). On the other hand, Woolworths Limited is the second largest company in Australia with the approximate revenue $60.68 billion in the year 2015. It is a major Australian organization deals in retailing of various products having its stores in New Zealand and India apart from Australia (Woolworthslimited.com.au 2016).

In order to prepare and present the financial reports by the organizations it is essential to comply the requirements of AASB conceptual framework. It has been amended and revised in December 2013 for incorporation of chapter 1 and chapter 3 of the International Accounting Standards Board which states the conceptual framework for financial reporting. It states the requirements with respect to the areas with detailed information for measurement of values, financial performance that includes comprehensive income, disclosures, and presentation (Díaz et al. 2015).

The annual report of Wesfarmers for the year 2015 contains the required reports according to the conceptual framework and reporting standards of AASB on the performance of the company. The annual report consists of all the necessary information to present the performance of the company along with the comparative values of the previous accounting year 2014. The report also reflects the statement of five years financial history to assist the users for evaluation of company’s financial growth and sustainability (Wesfarmers.com.au 2016).

Similarly, the annual report of Woolworths for the financial year 2015 consists of the all the necessary requirements of conceptual framework and AASB standards. The financial report reflects the transparent and efficient performance of the company by stating the comparative values of the financial year 2014 and a summary statement of previous five accounting years (Woolworthslimited.com.au 2016).

Both the financial reports prepared and presented the essential features of accounting report with respect to going concern, accrual basis and materiality of accounting along with the following statements as per AAS and general purpose financial reporting.

• Board of Directors’ Report
• Report on Corporate Governance
• Report on Sustainability and Corporate Social Responsibility
• Report on Independent Auditor’s examination and opinion
• Financial statements that involves income statement, balance sheet, cash flow statement, necessary notes on accounts, segment reporting
• Statement of changes in equity
• Statement of five year financial records

According to the AASB 1034 on Financial Report presentation and Disclosures all the public listed companies are required to disclose the entity’s operations, economic dependency, executives’ details and dividends. Further, the annual report should also disclose the remuneration of executives having a salary of more than $100,000 in a financial year (Sonnemann et al. 2015).

Wesfarmers annual report on executive’s remuneration reflects that there was an increase in fixed remuneration during the year while the managing director’s reported remuneration in the year 2015 was $9.9 million which included the payment of performance shares as well as unvested rights.

Figure 1: Executive remuneration

(Source: Wesfarmers.com.au 2016)

Similarly, the financial report of Woolworths represented the statement on disclosure of executives’ remuneration. In the year 2015, the company’s payment to key managerial personnel as executive remuneration was around $3.8 million to $1.6 million. However, the presentation of executive remuneration report of Woolworths is complicated and unclear in context to the actual payment to the senior executives and key managerial persons (Woolworthslimited.com.au 2016).

Figure 2: Executive remuneration

(Source: Woolworthslimited.com.au 2016)

Further, the companies are required to prepare and present Directors’ Report highlighting the financial results, payment of dividends, information of the number of board meetings held, details of directors, related parties and other relevant disclosures (Shaban 2015).

The annual report of Wesfarmers reflected the amount of profits distributable to the members as $2,440 million in its directors’ report along with the disclosure of payments of dividend and capital management. The company also disclosed its principal activities, shareholdings of Directors and number of meetings of the Board during the year (Wesfarmers.com.au 2016).

Figure 3: Directors’ report

(Source: Wesfarmers.com.au 2016)

On the other hand, the directors’ report of Woolworths Limited presented the information of dividend payment, meetings of directors, details of executive, non-executive directors and company secretary. The company also presented the disclosure on directors’ interest in securities and performance rights as well as the considerable changes in its state of affairs. Moreover, the company has presented the highlights on performance results in a paragraph which is not reader friendly. Presentation of financial results in tabular form depicts clear and concise understanding for the users of annual report (Woolworthslimited.com.au 2016).

As per the requirements of AASB it is important for the companies to present a report on corporate governance to understand the transparency and accountability of the financial statements (Shapiro and Naughton 2015). Wesfarmers Limited presented its corporate governance report stating its commitment towards the shareholders’ expected returns and responsibilities for the best interests of the organization and members. The company disclosed its important areas undertaken by the Board in the year 2015 which included investment made during the year at an interest rate 13.7%. The report also disclosed the approval of distribution of capital management at $1.00 per ordinary securities with a return of $1,148 million to the shareholders (Wesfarmers.com.au 2016).

On the contrary, annual report of Woolworths Limited contains statement of shareholders’ information while the corporate governance report has been made available on the website. The statement of shareholder information provides details on number of equity shareholders, distribution of equity shares, names and shareholdings of twenty largest shareholders of the company and payment of dividend (Woolworthslimited.com.au 2016).

In addition to the financial performance, business organizations are required to focus on sustainability and responsibility towards environment and society. The reports on sustainability and CSR represent the organizations responsibility and performance for the safety and welfare of the environment, community and government. Therefore, the conceptual framework requires the organization to report on sustainability and CSR disclose the performance in transparent and efficient manner (Christensen et al. 2015).

The annual report of Wesfarmers Limited disclosed a report on Sustainability and CSR during the year 2015 stating the safety measures and development measures towards the society and environment. Since, the company deals in chemical and mining products it is essential to take safety measures against the pollution affects (Wesfarmers.com.au 2016). Besides, the financial report of Woolworth does not contain reports on Sustainability and Corporate Social Responsibility as per the requirement of conceptual framework and AASB standards (Woolworthslimited.com.au 2016).

According to Standard on Auditing (ASA) 700 on “Forming an Opinion and Reporting on a Financial Report”, auditor is required to form a judgment on the preparation and presentation of the financial reports of the organizations. The auditor provides opinion with respect to the materiality, transparence and true and fair view of the financial statements with the compliance of accounting principles and standards (De Simone 2016). However, the auditor is required to provide a reasonable assurance on the materiality of the accounting statements while providing the absolute assurance is the management’s responsibility. The conclusion and opinion in auditor’s report shall be presented as per the regulations of ASA 330 and ASA 450 to comment on the appropriate audit evidence, material misstatements and adequate disclosures (Li 2015).

The independent auditor’s report on the financial statements of Wesfarmers stated a clear opinion on true and fairness of the presentation of financial position of the company during the year 2015. According to the opinion of auditor the statement of accounts are free from material misstatements and have been prepared in compliance with principles and regulations of AASB and IFRS. Executive remuneration report also disclosed the transparent and true information in compliance with the section 300A of Corporations Act, 2001 (Wesfarmers.com.au 2016).

Similarly, the auditor’s report of Woolworths limited also declared a clear opinion on the preparation of financial statements during the year 2015. However, the report stated the opinion on overall performance of the organization and not segment wise. There is no definite comment on the company’s executive remuneration report and other significant reporting segments (Woolworthslimited.com.au 2016).

AASB 101 on “Presentation of Financial Statements” regulates the purpose and features of preparation and presentation of accounting statements by the organization. It requires the recognition of accounting information in compliance with IFRS and on accrual basis. The accounting records should be prepared free from all material misstatements along with the appropriate disclosure of all the transactions (Chauvey et al. 2015). The preparation and presentation of accounting statements is the responsibility of those charged with the governance of the organizations. Accountants, management, Board of Directors and audit committee members are responsible to recognize the financial information in accordance with relevant standards and principles (Preiato, Brown and Tarca 2015).

On observing the annual report of Wesfarmers Limited, it can be said the company had complied all the requirements of AASB and IFRS on presenting the financial statements. The company duly presented the income statement for the year 2015 and a report on comprehensive income along with notes on accounts. It stated the revenue income of $62,447 million during the year 2015 and that of $60,181 million in the year 2014. The company also stated the information on basic earnings per share for the ordinary shareholders at 216.1 cents while 215.7 cents as diluted earnings per share (Wesfarmers.com.au 2016).

Figure 4: Extract of income statement

(Source: Wesfarmers.com.au 2016)

Similarly, the company also presented the statement of financial position during the year 2015 along with the comparative figures of 2014 by disclosing all the assets, liabilities, minority interest incomes and shareholding fund with relevant notes on accounts. The financial reports also disclosed the cash flow statements to recognize the equivalent cash funds available with the necessary explanations (Wesfarmers.com.au 2016).

The annual report of Woolworths also presented the consolidated statement of income along with the comprehensive income statement that discloses the total revenue income $60,679 million during the year 2015 whereas $60,772 million during the year 2014. The company disclosed its financial profit as 2,137 million in 2015 and $2,458 million in 2014 along with the earnings per share 170.8 cents in 2015 and 196 cents in 2014 (Woolworthslimited.com.au 2016).   

Figure 5: Extract of financial statement

(Source: Woolworthslimited.com.au 2016)

The company complied the requirements of AASB and IFRS in preparing and presenting the balance sheet and statement of cash flow along with the supported notes on accounts. The statement of financial position of Woolworths Limited disclosed the assets owned by the company and liabilities owed with adequate explanations. In order to disclose the going concern and accrual basis of accounting the company presented the financial information as per the regulation of International Accounting Board (Woolworthslimited.com.au 2016).

As per the amendments in conceptual framework, chapter 1 states the objectives of general purpose financial reporting whereas the chapter 3 facilitates the qualitative characteristics of financial reporting. The annual report of Wesfarmers discloses all the requirements of AASB and IFRS with respect of relevant reports, values and disclosures. Whereas the annual report of Woolworths has limited disclosures on financial statements and other reports. The company did not present the governance report and a report on sustainability. Hence, the management of Woolworth should prepare and present the report on compliance of CSR and Corporate governance. Apart from that, the management of Woolworths should prepare the Directors’ Report stating the highlights of results of financial position in tabular form for better presentation and understanding.

The report highlighted the requirements of conceptual framework and reporting standards for the accountants and those charged with the governance for the preparation and presentation of financial statements. Moreover, the report presented the comparability in annual report of Wesfarmers and Woolworths in compliance with Generally Accepted Accounting principles. It has been noted that both the companies have represented the financial statements and relevant disclosures in accordance with the AASB and IFRS. However, the presentation of financial report of Woolworths requires improvement in better understanding whereas the financial report of Wesfarmers is prepared and presented to form better understand for use of stakeholders. It is important to recognize the financial information free from material misstatements and errors to present the annual report with transparency and accountability. Moreover, the management is responsible to prepare and present the accounting reports with materiality, true and fair view for the use of its stakeholders.

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