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Textual Analysis And International Financial Reporting

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Question:

Discuss about the Textual Analysis and International Financial Reporting.
 
 

Answer:

Introduction

The present assignment states the financial reporting analysis based on two Australian listed companies, Woolworths Limited and Wesfarmers Limited. The required analysis has been done based on the annual reports of latest financial year. The companies are strong competitor and engaged in the business of retail industry specialising in the sale of various products. The present report consists of discussion on conceptual framework compliance and AASB standards for recognizing and representing financial information for the benefit of stakeholders. The study also covers the concept of prudence level by considering the corporate reporting disparity together with the identification of disclosure differences in the company’s financial information.

Woolworths Limited, second largest Australian retailing company was founded in 1924 operates its business in Australia, New Zealand and India. The organisation is ASX listed with a present value around $30.2 billion and operating income $1.6 billion[1]. It has been noted that the company has employees’ capacity of around 202,000 that operates in approximately 3800 Australian region. The company is involved in Australian food as well as petrol retailing business with $ 39.4 million revenue consists of two- third of total sales[2].

Wesfarmers Limited is considered as largest conglomerate company in Australia which was founded in 1914. The company is listed on Australian Stock Exchange with a value of around $40.4 billion and operating income $3.6 billion with 205,000 number of employees’ strength. The major business of the organisation associates with the supermarkets in full- service, liquor shops, hotels as well as fuel stores[3].

Conceptual framework compliance and requirements of AASB standards

Conceptual framework means analytical model which incorporates certain variations and standards to recognize and represent financial information to measure the company’s performance and financial position. Australian companies are regulated by the standards of AASB in terms of nature, time and extent of company’s financial information. The standards of conceptual framework involves recognition of financial information based on the level of prudence, accrual system and going concern to measure the assets, liabilities and report the incomes and expenses[4].

The major requirement of conceptual framework involves accrual basis as well as going concern for measuring the company’s sustainability and accountable profitability. In view of the financial report of Woolworths Limited, the company followed accrual method and going concern method to reflect the changes in earnings[5]. Disclosure of consolidation income, sales value for group business before and after tax represents compliance of principles of accounting. Amount of consolidation profit $2,146 million has been determined by incorporating relevant standards and principles[6]. Similarly, for recognizing the amount of dividend paid and payable, interim dividend has been reported in the income statement whereas final dividend reported in the financial position statement (refer appendix 1 and 2).

The major element of conceptual framework associates with the level of prudence, reliability and relevance to present the financial statements in true and fair manner. It is essential to incorporate the financial information and disclosures as per the materiality and relevance so that the reliable performance information can be determined by the users of financial statements. Preparation of financial statements involves prudence level which provides that the company should maintain conservative approach while recognizing the business incomes and expenses. Conceptual framework requires that the incomes should not be overestimated while expenses should not be underestimated since it would reflect the unrealistic profitability[7].

Considering the annual report of Wesfarmers Limited, it can be said that the company followed the conceptual framework requirements. The amount of incomes and expenditures has been recognized by following the accrual method and prudence level that reflected the transparent and fair value of company’s performance (refer appendix 3). Subsidiary companies’ accounting has been conducted by following the AASB standards to recognize the foreign currency and related translation to the currency of Australia (refer appendix 4). To present the disclosure on organisational material future events has been reported in accordance with the group estimates and relevant accounting policies[8]. Segment information has been represented and disclosed as per AASB standards to provide information of business activities as per geographical region and different business segments (refer appendix 5).

Prudence level addressing the disparity in Corporate Reporting

In order to prepare the financial statements, compliance of prudence level is essential for making reasonable estimates and judgments to report the incomes, expenditures and future losses. It is important to consider that income should not be overestimated and expenses should not be underestimated so that the financial statements reflect true amount of profit. Corporate reporting includes reporting of business information, relevant disclosures together with the reporting of corporate governance as well as corporate social responsibility[9]. In order to present the corporate governance report, it is important to incorporate the directors’ contribution, management performance and regulatory compliance. The statement of corporate governance of Woolworths Limited presents equity shareholding information together with the information on largest shareholding (refer appendix 6)[10]. Besides, corporate governance report of Wesfarmers represented an overview on business values, shareholders information, compliance frameworks and responsibilities of organisational board members. It has been noted that the company reported the management of water use and process of recycling that helps in reducing the waste products resulting in production increase[11].

 

Identification of differences in corporation disclosures

Certain differences have been identified in the financial statements of both the companies with respect to the conceptual framework. The financial report of Woolworths Limited represents specific disclosure on the business risk, which was not disclosed in the financial report of Wesfarmers. Financial statements of Wesfarmers disclosed five years’ financial history while Woolworths reported capital management as well as space rollout plan. While considering the estimates and judgements to determine the value of business finances, Woolworths Limited considered historical records along with the prevailing market records. Besides[12], Wesfarmers used the future event bases to consider the estimates and judgements of incomes and expenses as well as valuation of certain assets and provisions[13]. Wesfarmers Limited presented detailed information with respect to the capital management fund activities for proceeds as well as borrowings along with the information on discontinued operations. However, financial report of Woolworths does not contain such information in a specific report for the current financial year.

Segment reporting disclosure reflected difference in both the organisation’s annual report, though compliance of AASB standards has been made. Woolworths Limited represented segment information disclosure on the basis of operating segment and geographical details together with the disclosure of material information[14]. On the contrary, Wesfarmers Limited represented description in terms of product and geographical facts. Woolworths Limited measured the business expenditures as well as contingent provisions on the basis of fair value whereas Wesfarmers Limited measured the transactions based on historical records. Woolworths Limited reported dividend amount for ordinary shares, DRP shares and shares under Treasury in specific report. Besides, information for dividend paid and payable by Wesfarmers had been reported in the income statement and balance sheet as proposed and balance for franking credit during the financial year.

Recommendation

As per the above discussion on compliance of regulatory frameworks of accounting and conceptual framework for selected companies, it can be recommended the management should follow appropriate accounting disclosures for business information. It is further recommended that the companies should follow a standard format to report and represent the financial information which is not present in the annual report of Wesfarmers. In addition, the companies are recommended to consider the mandatory regulations for reflecting the material business risk, capital management and borrowings. Since, the information helps the users in evaluating the performance of the companies for investment and business decisions, it is important to reflect the accountable and transparent information. Wesfarmers Limited is recommended to represent the segment information by stating the geographical statistics, product and service details and information on business operation. Woolworths limited is recommended to consider the future events for estimates and judgements instead of historical records as it represents fair and reasonable information.

Conclusion

In view of the analysis of financial statements and other statutory reports of both the organisations, it can be said that the companies complied the regulations of accounting standards. Regulations of conceptual framework and AASB standards have been considered while reporting the material disclosures. The companies followed the relevant norms for reporting on corporate social responsibility and corporate governance for the benefit of community and stakeholders. For the purpose of recognizing and representing the business information in true and fair manner, it is essential to follow the accrual basis, level of prudence and going concern. The companies followed the relevant accounting principles to present the financial data during the financial year for measuring the business performance level and financial position values.

 

Reference List

Depoers, F., Jeanjean, T. and Jérôme, T., 2016. Voluntary disclosure of greenhouse gas emissions: Contrasting the carbon disclosure project and corporate reports. Journal of Business Ethics, 134(3), pp.445-461.

Guerreiro, M.S., Rodrigues, L.L. and Craig, R., 2015. Institutional change of accounting systems: the adoption of a regime of adapted International Financial Reporting Standards. European Accounting Review, 24(2), pp.379-409.

Lang, M. and Stice-Lawrence, L., 2015. Textual analysis and international financial reporting: Large sample evidence. Journal of Accounting and Economics, 60(2), pp.110-135.

Wesfarmers.com.au. 2016. Home. [online] Available at: https://www.wesfarmers.com.au/ [Accessed 30 Nov. 2016].

Woolworths 2016. Woolworths Supermarket - Buy Groceries Online. Available at: https://www.woolworths.com.au/ [Accessed 30 Nov. 2016].

Xu, X. and Gursoy, D., 2015. A conceptual framework of sustainable hospitality supply chain management. Journal of Hospitality Marketing & Management, 24(3), pp.229-259.

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