Accounting Theory and Current Issues Report
Added on 2020-04-07
21 Pages4102 Words97 Views
Accounting Theory and Current Issues 1
Executive SummaryThe present report is developed for explaining and assessing the accounting policies andestimates of an ASX listed firm. The company selected for the purpose is Wesfarmers Limited.The key accounting policies of the company is identified and compared with the accountingpolicies of its competitors. The flexibility adopted by the management in implementing theaccounting policies is also discussed in the report. The accounting strategy and the quality ofdisclosure of the company have also been analyzed in the present report. In addition to this, theissues of concern that require more disclosure in the future are also discussed as red flags in thereport. 2
ContentsExecutive Summary.........................................................................................................................2Introduction......................................................................................................................................4Section 1: Identify Key Accounting Policies...................................................................................4Section 2: Assess Accounting Flexibility........................................................................................6Section 3: Evaluate Accounting Strategy........................................................................................7Section 4: Analysis of the disclosures made by the selected company...........................................9Section 5: Potential Red flags in the annual report........................................................................14Section 6: Compliant with the Conceptual Framework.................................................................17Conclusion.....................................................................................................................................17References......................................................................................................................................193
Introduction The business corporations need to develop and disclose all the relevant financial and non-financial information to the end-users for promoting transparency in the business operations. Thedevelopment and preparation of financial reports by a business corporation require the adoptionof specific accounting policies and procedures as directed by the IASB (International AccountingStandards Board). The accounting policies and procedures are developed by the IASB on thebasis of various accounting theories such as normative and positive theory of accounting. Theaccounting theories has lead to the development of a conceptual accounting framework that hasstated the four basis qualitative characteristics to be possesses by financial information (Marleyand Pedersen, 2015). These qualitative characteristics are relevancy, reliability, comparabilityand understandability that are required to be possessed by financial information for meeting theneeds and expectations of the end-users. The accounting policies help the businesses to developa specific accounting strategy for developing high-quality financial reports. In this context, thepresent report is aimed at analyzing and examining the specific accounting policies and estimatesof an ASX listed firm, that is, Wesfarmers limited. The compliance the financial reports of thecompany as per the standard accounting policies is evaluated in the report along with thecomparison of its accounting strategy with its rival companies, that is, Woolworths Limited.Section 1: Identify Key Accounting PoliciesThe accounting policies adopted by Wesfarmers in development of its financial reportsare in accordance with the Corporations Act 2001 and Australian Accounting Standards Board(AASB). The financial statements of the company are developed as per the historical cost basisexcept for investment held by associates, financial instruments and available for sale investment4
that are measured at the fair value. The financial figures in the general purpose financialstatements are presented in Australian dollar by rounding off to their nearest million values. Thecompany develops its general purpose financial statements as per the principle of consolidationaccording to Companies Act (Wolk, Dodd and Rozycki, 2012). The principle of consolidationrequires all business entities to integrate the financial information of all their subsidiaries as asingle economic entity. The acquisition of subsidiaries is accounted through the use ofacquisition method of accounting that involves identifying and measuring the fair value of assets,liabilities and non-controlling interest at the date of acquisition. The company has also adoptedsignificant accounting policies as per the AASB rules for monitoring and controlling the riskinvolved in its business operations. For example, the company have adopted AASB 7 standardfor controlling the risk exposure relating to the financial transactions involving transferring ofassets (Wesfarmers: Annual Report, 2016). 5
Source: https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4The risk management policy of the company is actively involved in managing andcontrolling the risk related to market exposure, foreign exchange, credit rating and liquidity risk.The company manages the liquidity risk through introducing flexibility in its capital structure byforecasting the ratio of debt and equity (Kenny, 2009). The company manages the market riskexposure through the use of sensitivity analysis that helps it in predicting the movements offoreign currencies. The company also uses hedging for addressing the foreign currency risk andtherefore minimizing its foreign currency risks (Wesfarmers: Annual Report, 2016).Section 2: Assess Accounting FlexibilityThe accounting mangers have authority to introduce some specific changes in thestandard accounting policies and procedures for achieving certain corporate objectives and goals.The fact can be supported from the findings of positive theory of accounting which states thataccounting managers selects the specific accounting policies that helps in maximizing the valueof firm. As per the theory, the accounting methods selected by a firm should reflect its bestfinancial performance and as such some discretion is provided to the management forintroducing flexibility in the accounting framework. Thus, the accounting regulationsimplemented by IASB should not eliminate the managerial flexibility and there should be leftconsiderable scope for accounting managers to influence the financial statements. As such, it can be inferred from the analysis of financial reports of Wesfarmers, that themangers have adopted certain judgments and estimates in the standard accounting policies. Forexample, the carrying value of assets and liabilities are estimated on the basis of future situations6
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