Impact of IFRS on Financial Reporting Quality

This assignment examines the effects of International Financial Reporting Standards (IFRS) on the quality of financial reporting. It requires you to investigate how IFRS adoption influences accounting policy choices, the role of external auditors, and corporate governance structures. The analysis should consider empirical evidence from various sources such as academic research, case studies, and regulatory pronouncements.

RUNNING HEAD: Accounting policies and estimates used by firm
1
Name of the Student-
Title-Research proposal (Reaction of capital market to financial reporting)
University Name-

Accounting policies and estimates used by firm 2
Table of Contents
Introduction.................................................................................................................................................3
Present description of company..................................................................................................................3
Accounting policies followed by Wesfarmers..............................................................................................4
Estimates used by Wesfarmers plc..........................................................................................................5
Estimates used by rivals...........................................................................................................................6
Comparison of accounting policies and estimates used by Wesfarmers and Morrison plc.....................6
Assesse accounting flexibility..................................................................................................................8
Evaluation of accounting strategies and policies.........................................................................................8
Changes in accounting estimates by the Wesfarmers.............................................................................9
Suggestion for accounting policies and estimates prepared by Wesfarmers........................................10
Red flag in accounting report of Wesfarmers Plc......................................................................................10
Conclusion.................................................................................................................................................13
References.................................................................................................................................................14

Accounting policies and estimates used by firm 3
Introduction
In this report, it is given that reporting frameworks of organization are depends upon the
accounting standards and reporting framework of organization. Accounting policies are the
standard and specific rules, procedure and accounting implication which are implemented by the
organizations to prepare their financial statements. This report reflects the study on the principles
rules, procedure and consistency in adoption of accounting policies used by organization. With a
view to understand the practical implication of accounting policies and measures, Wesfarmers
Plc has been taken into consideration in this report. This company has adopted international
financial reporting standards and establish harmonization in its GAAP rules and regulation and
application international accounting standard.
Present description of company
Wesfarmers plc is an Australian conglomerate company having headquartered in perth.
This company has increased its total turnover by 25% as compared to last five years data and
resulted to overall total revenue to 65.98 billion AUD in 2016. Company has been preparing its
financial statement by following GAAP rules and IFRS accounting standards in determined
approach. This level of compliance in preparation of financial statement helps company to
adhere with the international financial accounting system (Kieso, Weygandt and Warfield,
2010).

Accounting policies and estimates used by firm 4
With the increasing ramification of economic changes, adoption of international policies
for preparation of financial statement has become necessary. Accounting policies are very
important for the proper understanding of the information provided in the financial statements.
Accounting disclosure is also an important part as many international accounting policies and
standards allow companies to make alternative treatment for same transactions. However, an
entity is not allowed to change its adopted accounting policies for the particular transactions for
consecutive period (Cairns, et al. 2011).
Accounting policies followed by Wesfarmers
There are several accounting policies followed by Wesfarmers Plc while reporting its
transactions in the financial statements (Irvine and Moerman, 2017).
 Wesfarmers plc has adopted written down value method to reflects the true value of its
assets as per the IFRS rules and standards (Hussey and Ong, 2017).
 As per the AASB16 lease, Wesfarmers has made a provision to recognize the right-of-use
assets representing to use underlying leased assets.
 All the consolidated financial statement of company and financial details shown would be
disclosed as per the AASB-5 IFRS rules and standard.
 All the intangible assets will be gone through under the impairment test each and every
year. Loss arise from the impairment test firstly deducted from the goodwill amount then
after from the other cash generating units of company as per the adopted IAS 136 by
Wesfarmers (de Ricquebourg and Jonathan, 2013).

Accounting policies and estimates used by firm 5
 As per the AASB 101 all the required details and basis of financial statements have been
shown in the notes to accounts of company.
Estimates used by Wesfarmers plc
In the process of applying the group’s accounting policies and standards management
department of Wesfarmers plc has applied number of judgments and estimates of future
events such as income tax payment, valuation of inventories, impairment of non-financial
assets, associated and joint ventures transactions and commitment of company and identified
contingencies (Clinton, Pinello and Skaife, 2014). In addition to this, Wesfarmers has relies
on the estimates given by its subsidiaries companies while preparing consolidated financial
statements. Company has also estimated that there will be no amendments and new
circulations of IFRS rules and standard and complied with the present IFRS standards and
accounting policies to prepare its financial statement as per the AASB 101. However there
are key success factors for the Wesfarmers after adoption of international accounting policies
and standards (Nobes and Stadler, 2015).
 All the international investors would make easy interpretation of the financial data and
will showcase the international regulatory compliance
 All the consolidated financial statement of company and financial details shown would be
disclosed as per the AASB-5 IFRS rules and standard (Steman, 2016).
 Wesfarmers has adopted international financial reporting standards and establish
harmonization in its GAAP rules and regulation and application international accounting
standards.
 Wesfarmers has estimated that after implementation of IFRS rules and IAS-136
impairment test, company has shown true and fair view of its assets to shareholders.

Accounting policies and estimates used by firm 6
 It has set estimation for liabilities for wages and salary including non-monetary
transactions and explained that all the transaction should be set off within 12 months
from the reporting period.
Estimates used by rivals
Tesco, Woolworth and Morrison plc has also implemented this proper level of IFRS rules
and accounting policies estimated for preparing their financial statement. However, as per
their management strategies, they have different basis for bifurcating their loss and expenses
as revenue and capital losses. In addition to this, these companies have also harmonized IFRS
rules and domestic accounting rules in their accounting policies to prepare financial
statements (Mardini, Crawford and Power, 2015).
Comparison of accounting policies and estimates used by Wesfarmers and
Morrison plc
Accounting rules Wesfarmers plc Morrison plc
IFRS-5 ( Rehabilitation of
funds
Company has treated this
transaction as capital nature
transaction and booked
entries to record the
rehabilitation of funds in
balance sheet of company
(Cline, Garner and Yore,
2014).
Treated as capital nature
transaction and created
provision for the same in
case of contingency.

Accounting policies and estimates used by firm 7
IAS-136 Implementation of
impairment test on annual
basis and charging the
impairment loss from
goodwill and other cash
generating units
Impairment test implemented
whenever need arises.
Charging the impairment loss
from goodwill and remaining
loss from cash generating
units.
ASSB- 5 Preparation of consolidated
financial statement
estimating all the details and
statements shared by
subsidiaries company true
and fair
Preparation of consolidated
financial statement as per the
AASB-5 and taking
management representation
letter from subsidiaries
company.
IFRS-23 (treatment of
income tax payment
This expenses has been
charged as revenue expenses
and other tariff and traits
imposed on company will be
charged from the provision
created by company (Chen,
Cumming, Hou, and Lee,
2016).
Company charged income
tax payment from its profit
and loss account and
recording of deferred income
tax payment is done by
including the same in
liabilities side of company.

Accounting policies and estimates used by firm 8
Assesse accounting flexibility
After evaluating the financial statement of Wesfarmers plc, it is considered that management
department has allowed accountant of company to measure the value of assets as per the
estimated fair value (Christensen, et al. 2015). However, changes in the same could be made on
the basis of strong backup and invoices. Interest payment has also been deducted from the profit
and loss account of company which could be converted into capital expenses on the basis of
changes in accounting treatment and changes in treatment of banks charges. It is observed that
the self- insured risk liabilities of the Wesfarmers plc is based on number of management
estimates including future inflation, investment return, application of accounting standard and
valuing of fair value of assets of company (Ball, Li and Shivakumar, 2015).
Evaluation of accounting strategies and policies
The estimation adopted by management department of Wesfarmers plc allows them to
distort the information and manipulate the earned profit of company in easy and determined
approach. Management department has charged some of the hedge fund loss from it profit
and loss account which not only reduces the overall profit but also decrease the tax payment
to government. In addition to this, while preparation of consolidated financial statement,
Wesfarmers has estimated that all the information disclosed by company is based on the
financial and non-financial transaction of company. Wesfarmers has also faced problem due
to application of GAAP rules and accounting standard due to different international financial
accounting standard. Wesfarmers had problem in recording of its assets liabilities in its books
of account due to different rules and standards (Sytnik, 2014). For instance, plants and

Accounting policies and estimates used by firm 9
machinery has been booked by company at their cost value after deducting depreciation as
per the IFRS rules and standards. On the other hand, as per the GAAP rules these assets
would have shown at the market value or book value whichever is higher. This level of
conflict result to misinterpretation of financial statement to stakeholder of company.
Nonetheless, company has been disclosed material information of company on quarterly
basis and consolidated financial statement of company is filed on the annual basis to
domestic and international authority. The notes to accounts of company disclosed by the
company are as per the AASB 101 of the international accounting standard which discloses
all the material information about the company (Brochet, Naranjo and Yu, 2016).
Changes in accounting estimates by the Wesfarmers
After evaluating the financial statement of company, it is observed that company has
changed its accounting policies to books its hedge funds contracts and change in accounting
estimates shall be recognized by prospectively by including it in its profit and loss account. It
is observed that due to changes in accounting estimates if any loss arise in the valuation of
assets and liabilities of company then it will be treated as impairment loss and will be
deducted from the cash generating units of Wesfarmers plc (Bischof, Brüggemann and
Daske, 2014).
Suggestion for accounting policies and estimates prepared by Wesfarmers
It is evaluated that Wesfarmers plc has applied number of judgments and estimates of
future events such as income tax payment, valuation of inventories, impairment of non-
financial assets, associated and joint ventures transactions and commitment of company and
identified contingencies (Barth, 2013). This has shown that estimation of tax payment should

Accounting policies and estimates used by firm 10
be based on the past results and trend analysis of company. In addition to this, company has
also charged consideration payment in its strategic alliance as capital nature expenses.
Therefore, it could be inferred that if company have conflict in compliance with the domestic
and international financial reporting standard then it should comply with the IFRS rules and
standards. Nonetheless, all the estimates and provisions created by company should be based
on the actuaries’ method of calculation and their contingency plan should be based on past
result of organization (Aobdia, Lin and Petacchi, 2015).
Red flag in accounting report of Wesfarmers Plc
Red flag in accounting reporting of Wesfarmers plc could be defined as potential
problems and issues faced by company while accounting and reporting of its financial
statements. There are several factors that could be taken into account by the company to
identify the red flag in accounting report of Wesfarmers plc (Atkins and Maroun, 2015).
Monitor revenue and capital expenditure of company
One of the main problematic areas for Wesfarmers plc arises from the allocation of
revenue and capital expenditure. Accountant of Wesfarmers plc has charged all the
borrowing cost as revenue cost and charged the same from the profit and loss accountant.
This has shown that company has treated borrowing cost as revenue expenses with a view to
reduce the overall profit. However, as per the IFRS rules and standard, company could treat
their borrowing cost as revenue cost or capital cost. This has shown that Wesfarmers has
treated all of its borrowing cost as revenue expenses with a view to save tax payment to
government. This is one major Red Flag which reflects that company has followed particular
working process to reduce the tax payment.

Accounting policies and estimates used by firm 11
Determination of depreciation amount to identify the true value of assets
It is evaluated that companies in Australia are could follow different methods to charge
depreciation on the fixed assets of company. It is evaluated that some time it is necessary to
follow straight line method for charging depreciation on the fixed assets of company. For
instance, Wesfarmers has charged written down value method to charge depreciation on its
plant and machinery. It is observed that due to high complexity of machinery values and
determining the overall capital expenditure of plants and machinery, company should have
charged all of its assets by using straight line method. Wesfarmers has used written down
value method for charging its assets and determining the true and fair view of assets. This has
increased red flag in the accounting policies and issues of organization (Jaggi, et al. 2016).
Inventory valuation method
As per the IFRS rules and IAS-3 each and every listed company should follow FIFO and
LIFO method in inventory management. However, Wesfarmers has followed FIFO method
in its inventory management. It is considered after evaluating the annual report of
Wesfarmers that company has followed FIFO method in acquiring and managing inventories
in its warehouse. It becomes complex for the organization to maintain its inventory through
LIFO method. As per the IFRS rules, company has to follow particular inventory
management method for complete reporting year. However, Wesfarmers has been making
inventory management method by changing its FIFO method to LIFO method. Wesfarmers
has also manipulated its economic order quantity which could be found by computing overall
total turnover of company since last five years. This level of inventory management policies
has increased its overall total turnover by average 30% as compared to last five year data. In

Accounting policies and estimates used by firm 12
addition to this costing of company has also increased by 20% by using this FIFO method
which will decrease the overall tax payment. Moreover, the impairment loss charged by
company from its cash generating units which has destructed the value of overall assets.
Changes in net income, cash flow and related party transactions impact
As per the IAS24, Wesfarmers plc should not enter into any transactions with the
company to which it has pecuniary and material relation. However, company has allowed
payment to directors without passing special resolutions. However, disclaimer for the same
has been given in the notes to accounts. This has reflected the biggest red flag for the
company. Company has also charged contingent amount of expenses from its profit and loss
which has decrease its overall profit but due to the no amount of cash outflow from the
business operation of Wesfarmers, it has shown no impact on the cash flow statement.
However, as per the accounting policies, recording of transactions in both case is relevant but
from the broader point of view it may allow auditors to pass auditors remark on the same.

Accounting policies and estimates used by firm 13
Conclusion
Accounting policies and measures reflects the methods, system and procedure for
presenting and disclosure of financial statements. After evaluating all the details and facts
given in the annual report of company, it is observed that if Wesfarmers Company does not
comply with the accounting policies and rules in determine approach then it will showcase
that company has non effective reporting frameworks. In addition to this, identified red flags
of Wesfarmers, it could be determined that company needs to adopt strict accounting policies
to mitigate possible problems in preparing financial statement.

Accounting policies and estimates used by firm 14
References
Aobdia, D., Lin, C.J. and Petacchi, R., 2015. Capital market consequences of audit partner
quality. The Accounting Review, 90(6), pp.2143-2176.
Atkins, J. and Maroun, W., 2015. Integrated reporting in South Africa in 2012: Perspectives from
South African institutional investors. Meditari Accountancy Research, 23(2), pp.197-221.
Ball, R., Li, X. and Shivakumar, L., 2015. Contractibility and transparency of financial statement
information prepared under IFRS: Evidence from debt contracts around IFRS adoption. Journal
of Accounting Research, 53(5), pp.915-963.
Barth, M.E., 2013. Global comparability in financial reporting: What, why, how, and
when?. China Journal of Accounting Studies, 1(1), pp.2-12.
Bischof, J., Brüggemann, U. and Daske, H., 2014. Fair value reclassifications of financial assets
during the financial crisis.
Cairns, D., Massoudi, D., Taplin, R. and Tarca, A., 2011. IFRS fair value measurement and
accounting policy choice in the United Kingdom and Australia. The British Accounting
Review, 43(1), pp.1-21.
Chen, J., Cumming, D., Hou, W. and Lee, E., 2016. Does the external monitoring effect of
financial analysts deter corporate fraud in China?. Journal of Business Ethics, 134(4), pp.727-
742.

Accounting policies and estimates used by firm 15
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.
Cline, B.N., Garner, J.L. and Yore, A.S., 2014. Exploitation of the internal capital market and the
avoidance of outside monitoring. Journal of Corporate Finance, 25, pp.234-250.
Clinton, S.B., Pinello, A.S. and Skaife, H.A., 2014. The implications of ineffective internal
control and SOX 404 reporting for financial analysts. Journal of Accounting and Public
Policy, 33(4), pp.303-327.
de Ricquebourg, D. and Jonathan, A., 2013. The usefulness of direct cash flow statements under
IFRS. University of Leeds.
Hussey, R. and Ong, A., 2017. Corporate Financial Reporting. Springer.
Irvine, H. and Moerman, L., 2017. Gambling with the public sphere: Accounting’s contribution
to debate on social issues. Critical Perspectives on Accounting.
Jaggi, B., Allini, A., Rossi, F.M. and Caldarelli, A., 2016. Impact of accounting traditions,
ownership and governance structures on financial reporting by Italian firms. Review of Pacific
Basin Financial Markets and Policies, 19(01), p.1650001.
Kieso, D.E., Weygandt, J.J. and Warfield, T.D., 2010. Intermediate accounting: IFRS
edition (Vol. 2). John Wiley & Sons.

Accounting policies and estimates used by firm 16
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.
Nobes, C.W. and Stadler, C., 2015. The qualitative characteristics of financial information, and
managers’ accounting decisions: evidence from IFRS policy changes. Accounting and Business
Research, 45(5), pp.572-601.
Steman, J., 2016. The post adoption impact of IFRS 8 on segment disclosure quality: evidence
from European and Australian listed firms (Master's thesis, University of Twente).
Sytnik, O.E., 2014. Comparative analysis of the guidelines for the preparation of financial
statements in accordance with IFRS and formed the Russian accounting rules. Сборник научных
трудов Sworld, 27(2), pp.27-31.

Accounting policies and estimates used by firm 17
Appendix

Accounting policies and estimates used by firm 18