Woolworths Limited, a company having its head quarter in Australia and having its name in Top 100 ASX listed companies has been chosen for the analysis of PART A of the report. The company was incorporated in 1924 in Australia and extended its customers base in Australia and New Zealand. The company has been chosen because it operates in Retail sector and this sector impact huge no of stakeholders who are interested in information disclosed by the company in its annual report. The company has many business including super markets, liquor chains, dairy products etc. The annual report for the year ended 30th June, 2016 and 30th June, 2017 have been selected 13.
The annual report of the company has detailed as how far the company has complied with the conceptual framework of accounting and its principles and whether the company features of the financial reporting which enhance the value of the financial statements as been duly complied 8. The feature which in the presentation of the financial statements and the annual report has been detailed as under:
- The first feature that has been identified is the Relevance. The feature is very important from the eyes of the investors and the other users of the financial statements of the company1. The feature informs about the items stated in the financial statement as to how far the items as stated or the accounting policy as disclosed shall have the effect on the decision making power of the company. The major example as checked form the annual report of the company has been the closure of the business segment of the Home Improvement. The home improvement has been related to the providing of the home related services to the customers. It provides all the things at one place. In the beginning of the year of 201612it has been mentioned that the company will be exiting from the home improvement business and since then the step of the series has been followed.
1 A Beyer, ‘The financial reporting environment: Review of the recent literature’ (2012) 50(2) Journal of accounting and economics, 296-343.
8 R.G. Schroeder, Accounting: Theory and Analysi. ( John Wiley & Sons, 2011)
12 Woolworths Limited, Annual Report 2017 (25th May 2018) https://www.woolworths.com.au/
13 Woolworths Limited, Annual Report 2016 (25th May 2018) https://www.woolworths.com.au/
These events includes the clearance of the inventory, sale of hardware group and home timber business and the clearance from the amount which is required to be paid to the employees12. The separate cash flow statement and the statement of the profit and loss of home improvement has been disclosed and hence it can be said that the annual report is relevant to the users of the company’s financial statements.
- The second feature which has been found as present is the comparability. The feature of the comparability states that the company’s annual report consisting of the financial and other statements shall be prepared and disclosed in a way so as to enable the users of the results of the company including the stakeholders to compare the data of the company for one period with the data of the company for the other period2. The major example which is reflecting this feature is the inclusion of the 5 year results in the summarized manner and that too has been for the profit and loss and balance sheet including the statement showing the movement of the cash flows 12.
PRACTICES ON ENVIRONMENTAL REPORTING
In the current scenario, the environmental reporting and the corporate governance statements has been given due weight age due to the impact that the activities of the company will have on the environment. Following are the two disclosures that have been made in the annual report of the company which ensures that the company has been making the environment related disclosures:
- In the statutory report of the directors, it has been mentioned that the each and every activity of the operation of the company is controlled by the regulations imposed by the environment laws and the company is required to comply with the same and obtains the necessary approvals wherever required for instance trade licenses. For ensuring the disclosing practice the company has disclosed that as on the day of the reporting the company does not own any form of the liability7.
2 F.V Beest, ‘Quality of Financial Reporting: measuring qualitative characteristics’ (2015) 40(2) Journal of Accounting Review, 378-401.
7 A Lennard, ‘Stewardship and the objectives of financial statements: a comment on IASB's preliminary views on an improved conceptual framework for financial reporting: the objective of financial reporting and qualitative characteristics of decision-useful financial reporting information’ (2016) 4(1) Accounting in Europe, 51-66.
- The other instance has been obtained from the disclosure made in the corporate governance statement which says that the company on the regular basis makes the assessment of risk in terms of the environment and how far the activities of the effects the environment and the company in the starting of its report has mentioned the planet where the impact on the environment will be less and the healthy food will be made available for the clients.
SUFFICIENCY OF DISCLOSURES
With the view of the financial statements of the company and the whole annual report of the company, it is clear that the information provided by the company and necessary disclosures made therein is adequate in terms of the needs of the users and the stakeholders of the company. The above statement so made has been evidenced by the following disclosures:
- Approximately 35 million dollar of the impairment has been charged during the year for the segment of the company namely Big W and the reasons for the same has been mentioned along with the detail of the amount as to how the same has been arrived.
- The company has discontinued the business of Home Improvement and has detailed all the steps that have been followed in its closure.
- Both of the above factors have also been incorporated in the independent auditor’s report of the company which will be helpful for the company as well as the readers 5.
The disclosure in which the company is lacking and is not found adequate is the disclosure of the amount of the future cash flows as the same has not been mentioned as to how the same has been arrived.
5 M. Gibbbins, ‘Evidence about auditor–client management negotiation concerning client’s financial reporting’ (2013) 39(3), Journal of Accounting Research, 535-563.
TWO RECOMMENDATION TO TOP MANAGEMENT
Although the financial report and its disclosures made has been found adequate but for the top management of the company following are the recommendations:
- First has been to make the correct estimate of the future cash flows with the proper basis.
- Second has been discloses the same in the correct manner in the financial statements so that the users and the stakeholders can have the better idea of the utilization of the assets of the company 3.
For the purpose of this head, there is no requirement for selection of the company and therefore, the answer to this part has been made on an independent basis. The part wise answer has been given below:
RATIONALE OF PREACQUISTION ENTRIES
The purpose which specifies the need of the pre acquisition entries to be made in the presentation of the financial statements in the consolidated nature has been listed below:
- This avoids the situation of having the assets so purchased to be counted for twice. It is in the sense that without the pre acquisition entries the company will book the purchases and then do the consolidation due to which the double effect will not be removed at the time of the consolidation.
- This avoids the situation of having the equity so calculated to be counted for twice.
- This provides the way for accounting the gain on bargain purchase in the books of accounts.
- This accounts for the assets and liabilities which have neither been measured nor been recognized by the entities separately. Hence it is recognized by the group through these entries
3 R.M. Bushman, ‘Financial reporting incentives for conservative accounting: The influence of legal and political institutions’ (2016) 42 (1) Journal of Accounting and Economics, 107-148.
CONDITIONS FOR CONSIDERATION OF DIVIDEND
The shares which are cum dividend shall be considered while preparing the pre acquisition entries. It is because the share price which is cum dividend provides the right to acquirer about the dividend which it will receive immediately on the purchase. The subsidiary in its books shows it as the dividend payable and acquirer shows it as dividend receivable and at the time of the consolidation the entry is nullified. Therefore, under this situation, the dividend is considered in the pre acquisition entries.
PRE ACQUISITION AND POST ACQUISITION DIVIDEND
An entity gains controls over another entity when it acquired all the assets and liabilities on one company by paying the purchase consideration as decided amount the parties to business combination agreement. And acquisition date the date or event when business combination process takes place which bifurcate the time period into two parts- Pre acquisition period and Post acquisition period. The dividend payable by the company from pre acquisition period profits are called Pre Acquisition dividend and dividend payable by company from profits earned after the acquisition date are called Post-Acquisition Profits. The two types of dividend are necessarily required to be bifurcated and shown different because of the difference in accounting treatment of Pre and Post acquisition dividend. The amount of investment which the acquirer gives is reduced by the amount of pre acquisition dividend whereas Post acquisition dividend is consider as income by the company which will shown in Statement of profit or loss 6.
IMPACT OF GOODWILL ON PRE ACQUISITION ENTRIES
Pre-acquisition entries are done at the acquisition date in the books of subsidiary, Goodwill is recorded because of below reasons:-
6 RW Holthausen, ‘Testing the relative power of accounting standards versus incentives and other institutional features to influence the outcome of financial reporting in an international setting’ (2013) 36(1), Journal of Accounting and Economics, 271-283.
- An unidentifiable asset has come when the fair value of all assets and liabilities are compared with the purchase price in business combination agreement. These unidentifiable assets which are over and above the fair value of all assets and liabilities are considered and recorded as Goodwill. It is calculated for whole group and will adjustment in pre acquisition entry to remove the effect of Business Combination Valuation Reserve which is considered as equity in pre acquisition entry 10.
- The goodwill so identified helped the company group to show and recognized the same in consolidated financial statements so it should be part of pre acquisition entries 11.
REASON FOR ADJUSTMENTS IN SUBSIDIARY ASSETS
As per AASB 3- Business Combination issued by Australian Accounting Standard Board, all identifiable liabilities and assets are valued at fair value as it will be considered as most significant method of valuation so that proper disclosures can be made to stakeholders 9. Whereas, standard has guided the company’s to allocate all the identifiable assets and liabilities on cost. But in consolidation process all the assets and liabilities are recorded at fair value except Goodwill. Goodwill is recorded at cost in consolidation process so that adjustment can be made in preparation of consolidated financial statements 4.
CONCLUSION AND RECOMMENDATION
The conceptual framework of accounting has laid down the features that every company is required to follow. In the first part of the report these features have been discussed as to how the same has been seen as present. For this the annual report of Woolworths Limited has been selected. It is worthy to conclude that the feature of the relevance and the comparability has been identified as present with the proper analysis and the recommendation has been given as to how
4 M Davis, ‘Consolidated financial statements’ (2012) 78 (2), The CPA journal, 26.
9 K Schipper., ‘Principles-based accounting standards’ (2013) 17(1) Accounting horizons, 61-72.
10 R Shalev., ‘The information content of business combination disclosure level’ (2011) 84 (1), The Accounting Review, 239-270.
11 H Shizhong, ‘An Analysis of Economic Consequences of Accounting for Business Combination’ (2014) 8 Accounting Research, 6
the management will improve the disclosures made in the financial reporting. The second part deals with the issues relating to the transactions which require pre acquisition and the post acquisition treatment of accounting and the same has concluded that the provisions of the accounting standard and the related policies shall be applied and implemented in the annual report of the company. Thus, in order to conclude who study, the report has been the exhaustive and details all the requirements which the company shall comply.
In this regard, it has been recommended for the management of the company to ensure the presence of the qualitative features of the financial reporting and to the person responsible for making the account entries to record each and every transaction with due care.
Beyer, A., ‘The financial reporting environment: Review of the recent literature’ (2012) 50(2) Journal of accounting and economics, 296-343.
Beest, F.V, ‘Quality of Financial Reporting: measuring qualitative characteristics’ (2015) 40(2) Journal of Accounting Review, 378-401.
Bushman, R.M., ‘Financial reporting incentives for conservative accounting: The influence of legal and political institutions’ (2016) 42 (1) Journal of Accounting and Economics, 107-148.
Davis, M., ‘Consolidated financial statements’ (2012) 78 (2), The CPA journal, 26.
Gibbins, M., ‘Evidence about auditor–client management negotiation concerning client’s financial reporting’ (2013) 39(3), Journal of Accounting Research, 535-563.
Holthausen, R.W., ‘Testing the relative power of accounting standards versus incentives and other institutional features to influence the outcome of financial reporting in an international setting’ (2013) 36(1), Journal of Accounting and Economics, 271-283.
Lennard, A., ‘Stewardship and the objectives of financial statements: a comment on IASB's preliminary views on an improved conceptual framework for financial reporting: the objective of financial reporting and qualitative characteristics of decision-useful financial reporting information’ (2016) 4(1) Accounting in Europe, 51-66.
Schroeder, R.G., Accounting: Theory and Analysi. ( John Wiley & Sons, 2011)
Schipper, K., ‘Principles-based accounting standards’ (2013) 17(1) Accounting horizons, 61-72.
Shalev, R., ‘The information content of business combination disclosure level’ (2011) 84 (1), The Accounting Review, 239-270.
Shizhong, H., ‘An Analysis of Economic Consequences of Accounting for Business Combination’ (2014) 8 Accounting Research, 6
Woolworths Limited, Annual Report 2017 (25th May 2018) https://www.woolworths.com.au/
Woolworths Limited, Annual Report 2016 (25th May 2018) https://www.woolworths.com.au/