Wesfarmers Financial Reporting Analysis

This assignment analyzes Wesfarmers' financial reporting strategies and accounting policies, focusing on their adherence to international standards. It investigates the influence of political pressures in the external market on their reporting practices. The analysis examines how Wesfarmers complies with the conceptual accounting framework and presents realistic financial information for stakeholders like investors and creditors.

Accounting theory and current issues

Executive Summary
The present report has been prepared for evaluating and analyzing the managers’
accounting strategy and reporting strategy choices of an ASX listed firm for ensuring their
compliance with the internationally accepted accounting rules and standards. The firm selected
for the purpose is Wesfarmers Ltd, a retail giant of Australia. As such, the report has
demonstrated the significance of adopting standard accounting policies for developing quality
financial reports and meeting the needs of end-users.

Introduction
The accounting department is a critical part of a business organization that is involved in
controlling and monitoring of its monetary resources. The accounting professionals of a business
entity need to prepare their financial statements as per the accounting policies and procedures
developed by the IASB (International Accounting Standards Board). These accounting policies
are major principles, rules and procedures that need to be followed by the management of a
business entity for developing and presenting its financial statements. The adoption of the IASB
developed accounting policies and procedures are essential for a business entity for meeting the
different needs and demands of its various stakeholders. The accounting policies and procedures
are developed on the basis of various accounting theories such as positive and normative
accounting theories (Henderson et al., 2015). In this context, the present report aims to analyze
and examine the importance of the accounting policies and procedures in a business entity
through selecting an ASX listed firm, that is, Wesfarmers Ltd. The report evaluates the
accounting policies used by a firm and analyze it with the accounting procedures used by its
competitor. In addition to this, the report evaluates the quality of accounting policies of the firm
by considering the impact of political pressures on standard-setting of accounting bodies.
Assessing accounting policies and estimates of Wesfarmers Ltd
Section 1: Identify Key Accounting Policies
Wesfarmers Limited is a recognized Australian company that along with its subsidiaries
is involved in retailing of chemicals, fertilizers, coal mining, industrial and safety products. The
Group composition consists of subsidiaries, joint ventures and associates. As per the annual
report of the company, it has effectively adopted and complied with the accounting policies of
AASB (Australian Accounting Standards) and the Corporations Act 2001. The Group has
mentioned the basics accounting policies adopted for developing its consolidated financial
statements as per the AASB standards. The Group has adopted the accounting policies such as
principles of consolidation, recognition and measurement policies for fixed assets on cost basis,
implementing accounting estimates and judgments as per the GAAP principles. The Group has
also disclosed proper policies in relation to risk management programs for minimizing the
occurrence of risk hazards. The Board has complied with all the necessary environmental

policies and legislations through developing a risk management program that has maintained
adequate provisions for meeting the associated costs due to violation of any Australian or
international environmental regulations. The auditor’s report has also advocated that the Group
has implemented a code of professional conduct that guides its overall business process and
procedures. The Group has also provided all the relevant information in relation to its future
compliance with new accounting standards such as IFRS 15 and AASB 15 (Wesfarmers: Annual
Report, 2016).
Section 2: Assess Accounting Flexibility
The accounting policies provide a framework to a business entity for developing its
financial accounts such a deprecation, goodwill recognition, inventory valuation and
consolidation of financial accounts (Sheridan, 2016). However, the business entities possess the
authority to select the accounting methods that proves beneficial for improving their profitability
and growth. However, the business entities need to conform to the Generally Accepted
Accounting Principles (GAAP) and IFRS while the adoption of specific accounting policies
during financial reporting. The Wesfarmers Ltd has implemented some flexibility in selection of
its accounting framework policies for maintaining its accounts such as deprecation, inventory,
goodwill and assets. The management of the Group has exercised some discretion in selection of
the accounting policies for valuing its assets, liabilities, leases and goodwill as per the fair value
accounting model. However, the board has adopted strict policies and procedure for monitoring
and controlling the managers operations so that they don’t take undue advantage of their
freedom. The management of the group through has the authority to select the accounting
policies as per the nature of business operations but the board ensures that the policies adopted
are in compliance with the AASB standards and Corporations Act (Wesfarmers: Annual Report,
2016).
Section 3: Accounting policies and estimates used by their competitors and comparison of
accounting policies and estimates used by the firm with one of its rival company
The major competitors of Wesfarmers Limited is Woolworths, Billabong, Coles can be
regarded to be a major rivals of the Group. The Group is recognized a global leader in retail
industry of Australia with its main competitor of Woolworths Limited. The Woolworths Limited

is also a retail giant in Australia with its main operations in supermarket, liquor retailing, hotels
and pubs and discount department stores. The analysis of the annual report of both Wesfarmers
and Woolworths reveals that they have adopted and implemented accounting policies and
estimates in accordance with the AASB standards. However, there exist some significant
differences between the accounting policies and estimated of Woolworths and Wesfarmers as
evident from their notes to the financial statements section. The net carrying value of assets and
liabilities are valued at their fair value and incorporates the use of hedge accounting for hedging
the risks (Wesfarmers: Annual Report, 2016).
On the contrary, Woolworths does not implement the use of hedge accounting for
recognizing any gain or loss in the consolidated financial statements. Also, the structure of
income statements prepared for both the groups has major differences. The income statement of
Wesfarmers have clearly defined the main elements such as income, expense and profit while in
case of Woolworths the structure of the statement is not very clear. The Wesfarmers have
recorded expenditure in their income statement on the basis of employee benefits and
considering the depreciation and amortization. On the other hand, Woolworths have recorded
expenses on the basis of administration expenses and not considered the depreciation and
amortization. However, both the firms have adopted the changed accounting policies and
estimates but the policies implemented are as per the AASB standards and thus are agreeable and
acceptable (Hussey and Ong, 2017).
Section 4: Accounting Strategy
The analysis of accounting policies and estimates of Wesfarmers with that of industry
peers such as Woolworths have indicated that there exists flexibility in the accounting
framework of business corporations. The business corporations select the accounting methods as
per their nature of operational activities as evident form the difference in accounting policies and
estimates adopted by Woolworths and Wesfarmers. However, there is only minor difference
between the accounting policies of Wesfarmers as compared to that of its peers such as
Woolworths as analyzed from their financial reporting system. Both the Groups have adopted
similar accounting methods in preparation of cash flow statement, statement of changes in equity
and also adopt the use of fair value accounting model in developing their balance sheet and
income statement. Thus, it can be said that Wesfarmers and its peer group select the accounting

policies as per their business operations but follow the standard accounting norms directed by
AASB. The change in the accounting policies in respect to that of industry norms is explained
adequately in the annual report of the Group (Wesfarmers: Annual Report, 2016).
As analyzed from the financial report of Wesfarmers Limited, the change in the structure
of the accounting transactions is as per the accounting objectives of the group. The Wesfarmers
is placing emphasis on enhancing the cash flow by selling its assets while Woolworths is
increase its cash flow by enhancing its asset base. Thus, Wesfarmers are incorporating the use of
hedge accounting and fair value model for increasing the revenue by selling the asset base. The
flexibility in the accounting framework is implemented by the managing directors of the
Wesfarmers Limited for improving its profitability position. The Board has introduced short-
term and long-term incentives plan for the management depending on the firm’s financial
position. The incentives plan is developed to provide motivation to the management to
implement the accounting policies that help in increasing the financial performance of the Group
but by complying effectively with all the AASB accounting principles (Mirza and Ankarath,
2012). The Board ensures that flexibility in accounting choices provided to the managing
directors is in accordance with the standard accounting rules for restricting the occurrence of any
fraudulent activities (Wesfarmers: Annual Report, 2016).
Section 5: Evaluating the Quality of Disclosure
The Wesfarmers Limited have strictly implemented and adopted the standard accounting
policies and regulations for improving its quality of financial reporting. The Group have
disclosed effectively the AASB standards implemented for valuing its financial instruments and
also the future compliance with the new AASB standards. The notes to the financial statements
section of the annual report have provided all the necessary information about the accounting
policies and estimates used by the Group for developing its financial statement by explaining the
significance of each. The notes to the financial statements section have sufficiently explained the
financial performance of the firm and are in consistence with its current financial position. The
accounting policies depicted in the notes and that adopted for preparing the financial statements
are same without any differences. There is adequate disclosure in the notes section relating to
board composition, remuneration policies, risk management policies and policies adopted for
promoting the sustainable growth of the Group. Also, there is sufficient information relating to

the key judgments and estimates used by the Group relating to recognition and measurement of
income, inventories, PPE, goodwill and other accounting information (Wesfarmers: Annual
Report, 2016).
The GAAP principles has assisted the Group in reflecting its key measures of success
such as basis of consolidation, the accounting policy adopted for measuring the foreign currency
transactions, goodwill, impairment and other funding activities. These all activities are carried
out by the Group as per the AASB and IFRS standards advocated by the Generally Accepted
Accounting Principles (Mirza and Ankarath, 2012). The notes to the financial statements section
of the Group has also disclosed adequate information relating to the functions of its operating
segments. The Group has organized and managed separately its operating segments as per the
nature of products and services. Each segment if the Group represents a strategic business unit
that is involved in providing different products and services as per the external marketplace. The
financial performance of each of its operating segments is evaluated on the basis of operating
profit or loss while interest income and expenditure is not allocated to each of its operating
segments that is managed on group basis (Wesfarmers: Annual Report, 2016).
Section 6: Identifying Potential Red Flags
The annual reports of the Group over the last two years have indicated that it has strong
financial position in the year 2015 and 2016. The financial reporting of the Group has been done
as per the basis of historical cost except for some financial instruments that are measured at fair
value. This change in the accounting policies of the Group has not been adequately explained by
the Group in its financial reports. Thus, there is not appropriate explanation about the change in
the accounting adopted by the Group in different set of circumstances. The Group has
implemented different method of recording its accounting transactions related to its expenditure
in the income statement without its adequate disclosure as compared to the industry norms. The
expenses are classified on the basis of employee benefits, depreciation and amortization unlike
the normal categorization of administration, operating and interest expenses on the income
statement (Pietra, McLeay and Ronen, 2013). Thus, all these other expenses of the Group are not
able to quantify as per the normal expenditures listed across the income statements and thus it is
required to provide a proper explanation of such expenses in the notes to accounts section as
evident from the screenshot:

It is also evident from the financial reports of the Group that it has maintained a huge
inventory level and thus leading to decline in its liquidity position. The monetary fund’s of the
Group has been tied up in the accounts receivable and thus resulting in increase in its accounts
receivables as comparison to the sales. Also, the Group is increasing its cash flows by selling its
assets that can result in enhancing the gap between net income and cash flows. This is due to
increase in the cash flows of the Group resulting in accounting profit higher than the taxable
income and thus creating a gap between net income and taxable income. However, the annual
report of the Group does not indicate any presence of R& D partnerships for financing its
operations but the group is utilizing the cash received from sale of its assets for carrying its
business operations. The Group has also recorded a decrease in its operating cash flow of about
11% as compared to that in the year 2015. This can be regarded as a point of major concern for
the Group as it needs to increase its investment in acquiring assets for maintaining its cash
inflows. However, there is no evidence of fourth-quarter adjustments or related-party
transactions in the annual report of the Group. There is also increase in the asset write-offs of the
group in the financial year 2016 as compared to that of the financial year 2015 as depicted in the
screenshot below:

Section 6: Compliant with the Conceptual Framework
The financial reports of Wesfarmers have been prepared by the management in strict
compliance with the AASB and IFRS standards as directed by the accounting standard-setting
bodies. The Australian Securities and Investment Commission (ASIC) have directed the
corporations listed on ASX to carry out their operational activities as per the AASB accounting
rules and conventions. The IFRS have been developed by the IASB (International Accounting
Standards Bodies) for promoting harmonization between the financial reporting standards of
corporations across the world (Wolk, Dodd and Rozycki, 2012). As such, the Wesfarmers is
complying with both the accounting standards as indicated from its financial reports. The notes
to the financial statements section of the group has effectively disclosed all the accounting
policies adopted in preparation of its consolidated statements as per the mandates of AASB and
IASB. The proper accounting disclosures have been mandated by the accounting standard-setting
bodies for improving the transparency in business operations and protecting the interests of all its
overall stakeholders. As such, business corporations listed on ASX in Australia are bound to
follow the principle of conceptual accounting framework in development of their financial

reports. The principles are relevance, reliability, comparability and completeness. These
principles are required to be integrated in the financial reporting system of business entities for
ensuring the development of quality financial reports that effectively meet the needs of all the
end-users (Wesfarmers: Annual Report, 2016).
The group has also adopted some flexibility in its accounting framework as per the nature
of its business operations as discussed in the above sections of the report. These accounting
choices have been made by the group for improving its financial conditions as per its operational
activities. However, the Group has maintained its compliance with the standard accounting rules
while implementing particular accounting choices and disclosures. The difference in the
accounting choices of Wesfarmers and the business corporations in other parts of the world are
due to the impact of political factors in the external marketplace (Kenny, 2009). The difference
in the disclosure process of the corporations around the world is due to lack of development of a
comprehensive conceptual theory of accounting that can result in harmonization of accounting
standards. The accounting choices made by the business entities are significantly influenced by
the economic conditions present in the external market place. The government institutions,
professional associations, industry groups and also ASX influences the accounting choices and
estimates made by the corporations operating in Australia. The Wesfarmers have adopted fair
value rules and changed lease rules as per the economic conditions of the Australia. As such, the
changed accounting rules can help the group to get a favorable treatment by the auditors and thus
improve their financial performance (Knight, 2004).
The FASB and IASB have mandated the firms to adopt the accounting standards that help
them to produce economic favorable results. However, the lack of harmonization of accounting
policies is creating need for adopting different accounting choices by the firms across the world.
Thus, it can be said that accounting rules adopted by a business entity can provide an undue
advantage to one party as compared to the other due to the absence of a comprehensive
conceptual theory of accounting (Albrecht, 2010). However, ASX have prioritized the need of
investors over those of the companies and therefore it is required on the part of Australian
companies to adopt the accounting standards that are in accordance with the conceptual
accounting framework. This is essential to provide maximum value to the stakeholders including
investors and creditors by providing them all the necessary and realistic financial information. As

such, it can be stated that Wesfarmers have complied with all the principles of conceptual
accounting framework by providing all the necessary financial information in its annul
disclosures (Mirza and Ankarath, 2012).
Conclusion
It can be inferred from the overall discussion held in the report that Wesfarmers has
implemented accounting and financial reporting strategies as per the international accounting
standards and policies. The difference in the accounting policies and estimated used by the
Group are due to the impact of political pressure present in the external marketplace where it
operates.

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