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HA2032 Corporate And Taxation For Corporate Regulation

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Questions:

1.Do your own research and critically discuss whether the financial accounting and reportingshould be regulated or manager should be allowed to disclose financial accounting information voluntarily.

2. Do your own research and critically explain how the Australian Accounting Standards Board take part in the global accounting standard setting process (i.e. in setting IFRS). Why is the IFRS set by the International Accounting Standards Board (IASB) not compulsory for the member countries of IASB?

3. 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. 
 
4. Provide a comparative analysis of the debt and equity position of the four firms that you have selected.

 

Answer:

Introduction 

Organizaiton is accompanied with the complex set of activities in which various functions are performed. However, with the increasing complexity, managers and accountants needs to  disclose the proper details in its books of account as per the IFRS rules and regulations so that they could make the business more transparent to stakeholders.  In the starting two questions on the corporate regulations and accounting standards have been analyzed. After that four companies named, Woolworths, Wesfarmers, Treasury Wine Estates Ltd and The a2 Milk Co Ltd have been assessed to evaluate their capital structure and owner’s equity.

 

1. Corporate Regulation

With the increasing complexity, managers need to disclose the proper details in its books of account as per the IFRS rules and regulations to keep the business more transparent to stakeholders. The main reason of adopting the voluntary disclosure of the financial information of company will keep the business more transparent. It is analyzed that if company keeps its business more transparent then it will allow stakeholder to strengthen their investment decisions for the best investment decision. If managers keep the business reporting more transparent and follow volunteer reporting frameworks then it will result to more informed decisions for the shareholders. It is analyzed that shareholders are the key owners of the company who invest capital in the business functioning of Organizaiton (Brigham, Ehrhardt, Nason, & Gessaroli, 2016). If managers establish the harmonization in its domestic and international reporting frameworks then it will not only meet the current legal reporting obligation but also result to sharing the key information with the stakeholders. It is analyzed that when all the technical issued is identified than the mean work of IASB start to make research on all the issues. It is sometime impossible for board to make research on everything so they take help of AASB For the research Nonetheless, managers and directors are drivers of the company who takes imperative decisions in the best interest of the organization. They also have responsibility to share imperative information with the stakeholders so that these shareholders could evaluate where their money have been deployed in the business.  It is further analysed that IASB does not mandate application of the IFRS rules and regulation to be followed by the member countries. These countries are given option to either adopt the IFRS rules or follow their own financial reporting rules till the time they keep their business on international level. These IFRS rule and regulations have been issued for the international organizations so that they could establish harmonization in their reporting frameworks. Due to the complexity of the reporting frameworks, it might be hard for the layman to interpretation of the financial data.   It is analyzed that only a few entities in the respective countries members that exceed a given threshold are authorised to compulsorily follow the IFRS. Therefore, it is no compulsory obligation on the members’ countries to adopt these rules as it is their own choice to follow these rules and regulations. Nonetheless, once, these rules have been adopted by particular countries then all the companies of that country need to follow the adopted international financial reporting standards (Baños-Caballero,  García-Teruel, and Martínez-Solano, 2014 

 

2. Accounting Standard Setting

With the ramified economic changes, the setting and monitoring of accounting standards for Australia is done by Australian accounting standard board and apart from setting of standards for the Australia organization, the board work for the international accounting standard board. The international accounting standard board is giving two functions improving and approving he international financial reporting standard. It work as the oversee body for managing the work of international financial reporting standards (Baños-Caballero,  García-Teruel, and Martínez-Solano, 2014). Mangers need to follow the proper financial reporting standards which will help him to strengthen the reporting frameworks.

The IASB function is to find out all the technical issues that are link with the IFRSs ask for the joining and help from the different accounting standard bodies, one major of them being the Australian accounting standard board.  The AASB provides all the help to the IASB by identify technical issues. When all the technical issued is identified than the mean work of IASB start to make research on all the issues. It is sometime impossible for board to make research on everything so they take help of AASB For the research. The documents prepared include, exposure draft, invitation to the comment that are given by the board, draft interpretations, and discussion papers that are prepared after the research is been done (Brigham, Ehrhardt, Nason, & Gessaroli, 2016).

 For preparing all the documents by the board they need certain communication with the stakeholders. As board have to communicate on the research paper with the stakeholders so single method for communication is not adequate. To bring the better method of communication certain communication tools are formulated focus group, project advisory panels and interpretation advisory panels. The other organization in Australia also sends such document to the AASB. The IASB received all the documents, suggestion, and they format in the form of international standards after that the IFRS are issued by IASB with the help of AASB. This rotate continuously and the AASB help the IASB (Cassar, 2011).

 All the changes that are brought by IASB in the IFRS are according to the observation in the different countries. All the IFRS are issued so that the harmony is maintain worldwide and there are no different standards that are followed by different countries. This will not only strengthen the reporting frameworks but also keep the financial information to easily understand for the investors.  

 The IASB do not force the countries to follow IFRS it is completely their choice to follow these rules and regulations. Only there are few countries are force to follow IFRS and the rest of the countries can follow it or else they can reject to follow them it is completely their choice (Cassar, 2011).  It is analyzed that each and every shareholder should be given proper accounting information and business details which could be used by them to make the effective investment decisions (Ehiedu, 2014).

 

3. Owners’ Equity

Owner’s equity of the all four listed companies working in the supermarket industry

 Particular

Woolworths

 

 

 

 

Wesfarmers

A2 Milk Company

Treasury Wine Estates Ltd

 

Share capital  Common Stock

11375

 22242

142

3235

 

Equity

144

133

12

(7)

Retained earning

9033

1509

291

256

Accumulated and other comprehensive income

-

57

111

8

 Total stockholders' equity

19826

23941

556

3492

Ordinary Share capital

It is the part of the capital which invested by the shareholders in company. It is accompanied with the outstanding equity share holding and other part of the equity share holders which have been invested by the shareholders. The ordinary share capital of all these four companies have increased drastically as they company raised capital from the investors by issue of shares (Treasury Wine Estates Ltd., 2018). After analysing the table given above, it is analyzed that The owner’s equity of Woolworths Company has been increased and recorded to AUD $ 22243 million which is 12% higher as compared to last four year data. In case of Wesfarmers, the owner’s equity has been recorded to AUD $ 4063million which is 13% higher since last three year data. The Treasury Wine Estates Ltd Plc has AUD $ 3235 million share holding and The A2 Milk Company has AUD $ 142 million share holding which is 7% higher as compared to last four year data (Grant, 2016).

Other Equity Instruments

It is the part of the equity investment by investors in the other equity instruments. It is analyzed that issued equity instrument is the part of the share warrants which is accompanied with the shares papers, notes and other documents which have been issued to investors for the particular consideration. All of these four companies do not carry any other equity instruments in its books of account (Treasury Wine Estates Ltd, 2018). 

Reserves

It is accompanied with the reserve and retained earning which reflects that company shows the accumulation of the profit of last years. After analysing the annual report of all these four companies, it is analyzed that all these companies do not have any reserve in their account (Miao, Teoh, and Zhu, (2016).

Retained profits

The retained profit is accumulation of the profit of last year. It is analyzed that the retained profit is kept in the business to strengthen the business outcomes and meeting the set targets in determined approach.  It is analyzed that Wesfarmers Company has kept AUD $ 9033 million as retained profit which is 14% higher since last four year.  In addition to this, Woolworths Company has also kept AUD $ 1509 which is 12% higher and reflects the positive indicator for future growth. In case of Treasury Wine Estates Ltd., it had AUD $ 256 million retained profit has been kept. The a2 Milk Co Ltd has increased its retained earnings to AUD $ 291 million (Wesfarmers plc, 2018).

Accumulated and other comprehensive income 

It is the income earned by company due to the other external factors such as hedge funding, changes in the foreign exchange reserve.  It is analyzed that Wesfarmers Company has kept AUD $ 57 million Accumulated and other comprehensive income which is 11% higher since last year (Bloomberg, 2017).  In addition to this, Woolworths Company has also kept zero Accumulated and other comprehensive income.  In case of Treasury Wine Estates Ltd, AUD $ 8 million Accumulated and other comprehensive income has been kept which is 2 % higher as compared to last four year data. The A2 Milk Company has also lower down its retained earnings to AUD $ 291 million which is 1.5% lower since last four year. The Accumulated and other comprehensive income have been kept highest (Weygandt, Kimmel, and Kieso, 2015). 

After analysing the equity capital and other reserve of all these companies, it is analyzed that the shareholders capital of Wesfarmers of company is the highest as compared to other three companies (Weygandt, Kimmel, and Kieso, 2015).

 

4. Comparative analysis of four companies (Woolworths, Treasury Wine Estates Ltd, Wesfarmers and A2 Milk)

The comparative analysis of capital structure of these four companies has been made so that we could analysis which company has higher financial leverage and cost of capital. It is analyzed that Woolworths has kept higher Accumulated and other comprehensive income as compared to others (Wong, Lo, and Firth, 2015). 

Capital structure of Wesfarmers

 

 

Fiscal year ends in June. AUD in millions except per share data.

2014

2016

2016-06

2017-06

Long-term debt

4215

4752

5671

4066

Total stockholders' equity

19825

20252

22949

23941

The debt to equity ratio of Wesfarmers Company has increased to 32% which is 4% lower as compared to last year data. The main reason of increased debt to equity ratio of company is that company has increased the equity portion in its books of account (Wesfarmers plc, (2018).  It has reflected that company has increased the equity portion but it might negatively impact the overall cost of capital of company and may also result to negative financial impact on the overall return on capital employed (Yahoo Finance, 2017).

 

 

Woolworths Company Cash Flow Flag INCOME STATEMEN

Fiscal year ends in June. AUD in millions except per share data.

2014

2015

2016-06

2017-06

Total stockholders' equity

15745

16578

$ 18254

$ 19254

Long-term debt

4253

4542

$ 4542

$ 5252

The debt to equity ratio of Woolworths Company shows that it has maintained stable financial leverage in all the two years. However, it has kept 65% debt to equity which may result to higher financial leverage and may be negative if company does not have adequate profit in its business. The higher debt capital in business will surely reduce the cost of capital of Organizaiton (Yahoo Finance, 2017).

Treasury Wine Estates Ltd

2014

2015

2016-09

2017-09

Total stockholders' equity

3,048

3,048

3,048

3,048

Total long-term debt

531

987

896

1144

The debt to equity ratio of Treasury Wine Estates Ltd has increased to 15 % which might be negative as low profitability may increase the overall costing of the busienss. It will also increase the overall outcomes and business efficiency in long run Treasury Wine Estates Ltd should identify the point where it will have balanced financial leverage and cost of capital (Yahoo Finance, 2017).

The a2 Milk Co Ltd

2014

2015

2016-09

2017-09

Total stockholders' equity

59

133

241

556

Total long-term debt

0

0

0

0

The debt to equity ratio of The A2 Milk Company shows that it has increased its equity capital and maintained zero debts which have resulted to zero financial leverage (The A2 Milk Plc, 2017). However, The A2 Milk Company still needs to lower down its financial leverage as it is already having more than 62 % debt capital in its capital structure.

Comparative analysis

This could be inferred that The A2 Milk Company has maintained zero financial leverage which is very negative for the cost of capital of company. it might face issue of low return on capital employed as compared to other companies.

Conclusion 

Every company needs to manage their financial leverage and cost of equity first to its business more sustainable and international reporting frameworks to keep business more transparent. This could be done by setting up harmonization in reporting frameworks. The crux of this report is that keeping the optimum capital structure is very much required for the sustainable busienss practice. High financial leverage and high cost of capital both could be negative for the organization in long run.

 

References

Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), pp.332-338.

Bloomberg, 2017, Financial details [online] Available from https://www.bloomberg.com/asia, , [Accessed on 25th September 2018]

Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.

Cassar, G. (2011). Discussion of the value of financial statement verification in debt financing: Evidence from private US firms. Journal of Accounting Research, 49(2), PP. 507-528.

Ehiedu, V.C., 2014. The impact of liquidity on profitability of some selected companies: The financial statement analysis (FSA) approach. Research Journal of Finance and Accounting, 5(5), pp.81-90.

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. Australia: John Wiley & Sons.

The A2 Milk Company Plc, (2017) Annual Report [online] Available from https://thea2milkcompany.com/wp-content/uploads/The-a2-Milk-2016-2017-Annual-Report-spreads.pd., ,  [Accessed on 25th September 2018]

Miao, B., Teoh, S.H. and Zhu, Z., (2016) Limited attention, statement of cash flow disclosure, and the valuation of accruals. Review of Accounting Studies, 21(2), pp.473-515.

Treasury Wine Estates Ltd, (2018) Annual Report [online] Available from  https://www.google.co.in/search?q=Treasury+Wine+Estates+Ltd+anual+report&oq=Treasury+Wine+Estates+Ltd+anual+report&aqs=chrome..69i57j69i60l3.2757j0j7&sourceid=chrome&ie=UTF-8., ., [Accessed on 25th September 2018]

Wesfarmers Plc, (2018) Annual Report [online] Available from https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn.,  [Accessed on 25th September 2018]

Weygandt, J. J., Kimmel, P. D., and Kieso, D. E. (2015). Financial & managerial accounting. 2nd ed, Australia: John Wiley & Sons.

Wong, R.M., Lo, A.W. and Firth, M., (2015) Managing Discretionary Accruals and Book?Tax Differences in Anticipation of Tax Rate Increases: Evidence from China. Journal of International Financial Management & Accounting, 26(2), pp.188-222.

Yahoo Finance, 2017, ‘Financial details [online] Available from  https://in.finance.yahoo.com/quote/DEB.L/., [online] Available from [Accessed on 25th September 2018]

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