Essay: Analysis Of Equity And Debt Position Of 4 ASX-listed Public Limited Companies.

Select 4 public limited companies listed on the Australian Securities Exchange (ASX) that are in the same industry. Go to the website of your selected companies. Then go to the Investor Relations section of the website. This section may be called, “Investors”, “Shareholder Information” or similar name.

In this section, go to your firms’ annual reports and save to your computer your firms’ latest annual reports consecutively for last four years. Do not use your firms’ interim financial statements or their concise financial ements. Please read the financial statements (balance sheet, income statement, statement of changes in owner’s equity, cash flow statement) very carefully. Also please read the relevant footnotes of your firms’ financial statements carefully and include information from these footnotes in your answer.

You need to do the following tasks:
(iii) From your firms’ financial statements, list each item of equity and write your understanding of each item. Discuss any changes in each item of equity for your firms over the past four years articulating the reasons for the change.
(iv) Provide a comparative analysis of the debt and equity position of the four firms that you have selected. 

Corporate regulation and management

The primary objective is to provide a base for the analysis of the implications of in the financial reporting for the organizations. With the help of the regulators the profession of accountancy is powerful in the achievement a major rise in the comparability of financial statements.

It provides a usual boundary for what is to be accounted for in the financial reports, along with the rules about how transactions and items must be accounted for. Moreover the discussion deals with the adaptation of IFRS in the AASB framework (Acharya and Ryan 2016). The participation of Australian accounting standard board in the setting process of global accounting standard     outlines the power and function of the contribution and working to the worldwide process standard setting.

The Corporate regulation and management

The importance for the regulation in the financial reporting is vital for the organizations since there are various vital user of financial reporting that includes equity investors, employee, analyst adviser, public the government and stakeholders. The various stakeholders however, required to able to understand and interpret the monetary information in a organized process for make the needed monetary decisions. In case the various accounting users made the financial reports, it shall be made in varied ways that would comply with their suitable requirements.

In the case, the varied groups will understand the various financial reports their own ways thus may create a global differences in the practice of accounting (Capkun, Collins and Jeanjean 2016). The Accounting practices differ from country to country as well as their frame work of regulation. Therefore in order to maintain a balance between the various accounting frameworks the regulations are important. This also sets a boundary for the users of accounting so that there is a systematic interpretation of the financial data. The requirements disclosure resolves some of the issues that are associated with of information between the user groups of accounting.

It also enables the user to compare the inducements level with the received by the other users (Leuz, and Wysocki 2016). The regulations therefore, addresses the  various issues  of financial information by requiring the setting a boundary for the of certain key items of interest to the user groups. With the help of the regulators the profession of accountancy is more powerful in achieving a major increase in the financial statements comparability (Hoskin, Fizzell, and Cherry 2014). It provides a general framework for what is to be accounted for in the financial reports, along with the rules about how items and transactions should be accounted for (Christensen, Lee, Walker and Zeng 2015).

The regulations may include the mandates like the conventions like the materiality, the revenue recognition and objectivity. There exist various objectives and criteria that are helpful at the time of choosing the method of accounting. The choice of accounting method must always be reliable, relevant, understandable and comparable to all involved parties for the same to be favorable to the accounting users.

Accounting regulations may however, may limit the extent to which the accountants are able to prepare the financial statements to meet the needs of different user groups (Coleman, Cotei and Farhatn 2016). However, this may discourage the accountants from experimenting new techniques of accounting transaction recordings. There is no assurance that the standard procedure will provide the required information by the different groups of financial reports. Yet, there is the need for the reports to be regulated as it would be comparable and it can save money and time while adjusting them into a general arrangement.

Accounting standard setting of AASB and IFRS

Accounting standard setting of AASB and IFRS

Every major country has their own accounting standards, however to bring standardization and comparability, efforts has been made by organizations like IFRS to bring in the accountability with the Australian accounting standard board (AASB).  The participation of Australian accounting standard board in the setting process of global accounting standard     outlines the power and function of the contribution and working to the worldwide process standard setting. The international financial reporting that has been adopted by Australia is similar to the council for strategic direction of financial reporting (Jin, Shan and Taylor 2015).  

Therefore, the operational process of AASB incorporates the work program and IASB and IFRS. However, there is difference in involvement degree which may be substantive or non non substantive. The operational process of Global public segment standard of accounting board is strictly supervised by the AASB.

 The chart shown in the above diagram represents a simple view of the process of standard setting that highlights the operations of the AASB.  The AASB are given with the duty of identification of the various technical problems, oversights and premeditated directives.  
    The IFRS that is the international financial reporting standard that is the accounting standards that have been implemented and developed by International accounting standard board has fifteen member countries including IFRS (AASB 2014). The business is able to do a comparison of the financial statements by implementation of the specific reporting standard. In the present discussion.

it is not compulsory for the IASB member countries to adopt the reporting standard because the full acceptance of standard results in loosing of certain quality level of. For example, the full acceptance of IFRS would be rejected by United States because they might not contain market incentive for the preparation of the financial statements (Nobes 2014). Additionally, it is also be said that advantages would be empowered by the cost associated with the IFRS adoption.

Owner’s equity

 The owner's equity is one of the primary components of the balance sheet and accounting equation. It represents the investment in the business deducting the owner's draws or drawings from the operations adding with the net profit. It refers to the amount of assets minus the liabilities. As the amounts need to follow the  principle of cost the amount of equity does not show the current fair market value of the organization. It is viewed as a residual claim on the operational assets as the liabilities have a higher claim (De George, Li and Shivakumar 2016). The owner’s equity can also be viewed as a  business assets source. The chosen Australian companies whose financial report is to be analyzed are Woolworths, Wesfarmers, JB Hi-Fi and Met cash.

Analysis of items of equity of Woolworths:

            The amount of contributed equity stood at $ (million) 6055 in year 2018 compared to $ 5615, $ 5252 and 5064.9 in year 2017, 2016 and 2015 respectively. From the figures, it can be said that the value of equity has risen since year 2015. The reserves are recorded at $ 353, $ 357 in year 2018 and 2017 compared to $ 93.9 and 95.1 in year 2016 and 2015. It can be suggested that the reserves has increased (Johnston and Petacchi 2017). Furthermore, retained earnings are recorded at $ 4073, $ 3554, $ 3124.5 and $ 5831.0 in year 2018, 2017, 2016 and 2015 respectively.

Owner’s equity

Analysis of each items of equity of Met cash:

            For Met cash, the amount of contributed and other equity is recorded at $ 600 in year 2018 as against $ 1719.3, $ 1626, $ 2391.9 in year 2017, 2016 and 2015. As per the abnual report the amounts of value of equity decreased in year 2018. Analyzing the amounts of the retained earnings, it represents that value has increased to $ 780.6 in year 2018 as against accumulated loss of $ 87.7 in year 2017, $ 184.7 and $ 765.9 in year 2017, 2016 and 2015 respectively (Tschopp and Huefner 2015). Amount of reserves for year 2018 stood at $ 0.7 compared to $ 3.0 in year 2017 and $ 4.1 in year 2016 and 2015.

Analysis of items of equity of Wesfarmers:

            For year ending 2018 and 2017, issued capital is reported at $ 22277 million and $ 22268 million compared to $ 21937 and $ 21844 in year 2016 and 2015 respectively. There has been constant rise in value of issued capital. Value of retained earnings is recorded at $ 176 for year 2018 compared to $ 1509, $ 874 and $ 2742 for year 2017, 2016 and 2015 respectively (Mardini, Crawford and Power 2015). The retained earning has reduced initially and has risen and decline further in the present year. Reserves were at 344, 190, 166 and 226 for year 2018, 2017, 2016 and 2015. The reserves declined and then increased showing that the reserves account has increased due to rise in profits.

Analysis of each items of equity of JB Hi-Fi:

            The equity stood at $ 438.7 and $ 49.3 in year 2017 and 2016 in comparison to $ 565.21 in year 2015. It is showed according the annual report that there is a fall in value of the equity. Value of reserves is recorded at $ 33.2 and $ 27.1 in year 2017 and 2016 compared to $ 17.63 in year 2015 respectively indicating a consistent increase in value (Sutherland 2017). Now, looking at the figures of retained earnings, it can be seen that the amount is recorded at $ 381.6 and $ 328.3 in year 2017 and 2016 respectively compared to $ 269.3 in year 2015. The figure suggests that the value of retained earnings is rising.

Comparative analysis of debt and equity of the chosen companies:

The debt to equity ratio, evaluated by dividing the  total liabilities of company by its  equity of stockholders, is a debt ratio used to measure a financial leverage of the organization (Leuz and Wysocki 2016). The debt to equity ratio represents the amount how much debt a company is using to finance its assets relative to the value of equity of the shareholders. 

            The total amount of liabilities of Woolworths limited for year ending 2018 and 2017 is recorded at $ 12709 and $ 13167 compared to total value of equity that is recorded at $ 10849 and $ 9876. It is suggested by the figure that value of equity is less as against total amount of debt. The amount of total debt for Met Cash is recorded at $ 2330.4 and $ 2294.9 in year 2018 and 2017 compared to $ 2254.2 and $ 2313.3 in year 2016 and 2015 respectively. On other hand, the value of equity is recorded at $ 1388.6 and $ 1637.4 in year 2018 and 2017 compared to $ 1538.4 and $ 1275.2 in year 2016 and 2015 respectively (Perera and Chand 2015).

Comparative analysis of debt and equity position

In case of Wesfarmers limited, the total amount of liabilities is recorded at $ 14179 in year 2018 and 16174 in year 2017 respectively indicating that total amount owed by organization to other has reduced. Looking at the figures of equity, it can be seen that equity has reduced from $ 23941 in year 2017 to $ 22754 in year 2018 respectively (Kim, Shi and Zhou 2014). For the company of  JB Hi-Fi, the total liabilities amount or debt is recorded at $ 1598.9 and $ 587.6 in year 2017 and 2016 compared to 551.5 in year 2015 respectively. It can be observed from the figures that the total liabilities amount has increased in year 2017. Total amount of equity on other hand stood at $ 853.5 in year 2017 compared to $ 404.7 in year 2016 and $ 343.47 in year 2015 respectively).The amounts shows that total value of equity has risen in year 2017.

Conclusion

The primary purpose of the study is to understand the nature and purpose of the financial reporting of the Australian companies under the guidance of the AASB framework. The chosen Australian companies whose financial report is to be analyzed are Woolworths, Wesfarmers, JB Hi-Fi and Met cash. From the figures of all the four companies, it can be observed that JB Hi-Fi has less amount of total debt followed by Woolworths compared to Wesfarmers and Met Cash. For the figures of equities, it can be seen that the value of equity of Wesfarmers is more than all other firms.

References

AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.

Acharya, V.V. and Ryan, S.G., 2016. Banks’ financial reporting and financial system stability. Journal of Accounting Research, 54(2), pp.277-340.

Capkun, V., Collins, D. and Jeanjean, T., 2016. The effect of IAS/IFRS adoption on earnings management (smoothing): A closer look at competing explanations. Journal of Accounting and Public Policy, 35(4), pp.352-394.

Christensen, H.B., Lee, E., Walker, M. and Zeng, C., 2015. Incentives or standards: What determines accounting quality changes around IFRS adoption?. European Accounting Review, 24(1), pp.31-61.

Coleman, S., Cotei, C. and Farhat, J., 2016. The debt-equity financing decisions of US startup firms. Journal of Economics and Finance, 40(1), pp.105-126.

De George, E.T., Li, X. and Shivakumar, L., 2016. A review of the IFRS adoption literature. Review of Accounting Studies, 21(3), pp.898-1004.

Hoskin, R.E., Fizzell, M.R. and Cherry, D.C., 2014. Financial Accounting: a user perspective. Wiley Global Education.

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Johnston, R. and Petacchi, R., 2017. Regulatory oversight of financial reporting: Securities and Exchange Commission comment letters. Contemporary Accounting Research, 34(2), pp.1128-1155.

Kim, J.B., Shi, H. and Zhou, J., 2014. International Financial Reporting Standards, institutional infrastructures, and implied cost of equity capital around the world. Review of Quantitative Finance and Accounting, 42(3), pp.469-507.

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Mardini, G.H., Crawford, L. and Power, D.M., 2015. Perceptions of external auditors, preparers and users of financial statements about the adoption of IFRS 8: Evidence from Jordan. Journal of Applied Accounting Research, 16(1), pp.2-27.

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Tschopp, D. and Huefner, R.J., 2015. Comparing the Evolution of CSR Reporting to that of Financial Reporting. Journal of Business Ethics, 127(3), pp.565-577.