Corporate Accounting: Sources of Funding and Entity Classification

This paper discusses the different sources of funding used by companies and the advantages and disadvantages of each source. It also examines the movement of equity and liability components in the financial statements of Treasury Wine Estates and a2 Milk Company. The paper further explores the concepts of small and large proprietary companies and reporting entities, and their implications in terms of reporting and compliance requirements.

Running head: CORPORATE ACCOUNTING
Corporate accounting
Name of the Student
Name of the University
Author Note

CORPORATE ACCOUNTING
Executive summary:
The paper is developed to discuss about the different types of sources of funding used by the
companies along with explaining the advantages and disadvantages of each of such source.
The movement of the items of each of the components such as liabilities and equity section
for both the companies has been done by analyzing the annual report of the company. The
annual report has been downloaded for the period of three years to analyze the trend of
movement in each of the items of the equity and liabilities.

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Table of Contents
Introduction:...............................................................................................................................4
Discussion:.................................................................................................................................5
Part A:........................................................................................................................................5
Answer to requirement i:............................................................................................................5
Answer to requirement ii:...........................................................................................................5
Answer to requirement iii:.........................................................................................................5
Answer to requirement iv:..........................................................................................................5
Answer to requirement v:...........................................................................................................5
Part B:.........................................................................................................................................5
Critical examination of the concepts of small proprietary company, large proprietary
company and reporting entity:...................................................................................................5
Implication of the classification of the companies in terms of reporting and compliance
requirements:..............................................................................................................................5
Conclusion:................................................................................................................................5
Reference list:.............................................................................................................................8

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Introduction:
The paper is developed to gain an understanding of the possible sources used by the
companies to raise funds and demonstrate an understanding of various classification of
entities for the purpose of reporting. For the evaluation of the different types of funding
source, a comparative analysis of the funds sources have been done by choosing two
companies listed on the Australians stock exchange and these two companies for the analysis
purpose include a2 Milk company and Treasury wine estates. Analysis has been done by
retrieving the relevant data from the annual report of the companies for the period of last
three years. Furthermore, the various sources of funding used by these companies has been
explained by presenting their advantage and disadvantages.
Treasury wine estates is one of the largest wine companies listed on the stock
exchange of Australia and is focused on meeting the evolving needs of the customers through
brand marketing and world class winemaking. Then focus of business is on principle
activities such as winemaking, sourcing and grape growing and marketing led by brand. A2
Milk Company on other hand listed on the stock exchange that commercializes the a2MC
branded and milk products and other related products and has remained the premium leading
milk brand and is the only range of brand that is available in the supermarket of Australia.

CORPORATE ACCOUNTING
Discussion:
Part A:
Answer to requirement i:
For Treasury wine estates company, the items recorded under the equity section of the
statement of financial position includes reserve, contributed equity and retained earnings. On
other hand, the equity items recorded in the equity section of the statement of financial
position of a2 Milk Company is share capital, retained earnings and reserves. The
understanding of each of these items is done separately in the paragraph below:
Contributed equity- Contributed equity is the amount of investment that is made
directly into the company by buying its shareholders. This contributed equity can be split into
the common stock account and additional paid in capital account.
Retained earnings- Retained earnings incorporate the earning of the organization and
represent the amount of profits that is left after distributing it to the shareholders (Bogdanova
et al. 2017). Hence, it is the amount of earning that is left by the stockholders to be reinvested
in the corporation.
Reserves-The amount earned by the company in excess of the profits generated and is
kept separately for the purpose of reinvestment forms the part of reserves. There are different
types of reserves that can be created by the company such as capital reserve or revenue
reserve. In the event of company making loss, this section is eliminated and no record under
reserve section is made.
Share capital- Share capital is one of the methods used for funding by the company
that creates obligations and should be paid back. It is the claim of the owners over net assets

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as it represents the amount which the investors invest in the business for running its day to
day activities. Share capital forms one of the major line items in the balance sheet and can be
segregated in to the various types of equity issued by the firm or business.
Answer to requirement ii:
The movement in each components of the equity discussed in the above section is
explained by analyzing the figures for the last three years period. It can be observed from the
annual report of Treasury Wine Estates that the amount of contributed equity decreased from
$ 3528.6 million in year 2017 to $ 3235.4 million in year 2018 and this again increased to $
3243.8 in year 2019 respectively. This fall in the value of contributed equity was due to on
market buy back of shares by the company and then cancelling the nil shares and the increase
in value in current year is because of reacquisition of equity instruments by the company. For
reserves, value stood in negative figures at $ 23.9 million in year 2017 and this increased to $
0.4 million in year 2018 and significantly increased to $ 33.8 million in the current year that
is 2019. This negative value of reserve in year 2017 is attributable to negative amount
reflected in the foreign currency translation reserve and this reduced in the coming years
which made the reserve value positive. Now looking at the figures of retained earnings, it is
observed that the amount increased from $ 99.6 million in year 2017 to $ 256.2 million and $
424.4 million in year 2018 and 2019 respectively. Increase in the value of retained earnings is
attributable to increase in the amount of profits generated by the organization (tweglobal.com
2019).
Using the annual report of a2 Milk Company, it is observed that the value of share
capital has consistently increased from $ [phone] in year 2017 to $ [phone] and $
[phone] in year 2018 and 2019 respectively. This increase in the value of share capital
is due to increased investment made by the investors in the company. Value of retained

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earnings has considerably increased from $ (000) 95017 in year 2017 to $ [phone] in
year 2018 and further increased significantly to $ [phone] in year 2019. It is indicated
by the figures that there has been continuous increased earnings retained by the organization.
This increase in the value of retained earnings is due to increase in the comprehensive income
and an increase in profit after tax and transfer made to and from reserves
(thea2milkcompany.com 2019). Furthermore, it is noteworthy to mention the increase in
value of reserves that increased by the significant value to $ [phone] in year 2018
compared to $ (000) 12163 in year 2017 and then declined considerably to the value of $
(000) 64917 in year 2019. Fall in value of retained earnings in the current year is because of
transfer made to the account of retained earnings (thea2milkcompany.com 2019).
Answer to requirement iii:
Items recorded under the liability section of treasury wine estate includes trade and
other payables, borrowings, tax liabilities which include deferred and current, provisions and
other tax liabilities. On other hand, items recorded under liability section of a2 Milk company
includes trade and other payable and income tax payables, income tax payable and customer
contract liabilities (Boone et al. 2015).
Current and deferred tax liabilities- Deferred tax liability is the amount of tax that
has been assessed or the payment and is yet to be paid. Current tax liability is the amount of
tax that is owed by the company to the corporation in the current year and has to be paid
(Stent and Dowler 2015).
Trade and other payable- Trade payable is the liability that is accrued to the
suppliers of the company for supplying the materials to run the ordinary course of business.

CORPORATE ACCOUNTING
Borrowings- It is the amount of money borrowed by the company to finance their
operations and some specific activities and they are required to make interest payment on
such value (Glaeser 2018).
Provisions- It is the amount that is set aside from the profit in an account for
accounting depreciation or covering the known liability.
Customer contract liabilities- This liability represents the obligation of entity to
make transfer of goods and services for which the consideration has been received (Dumay et
al. 2016).
Answer to requirement iv:
Looking at the financial report of Treasury wine, it is observed that the amount of
trade and other payable has increased continuously from $ 662.5 million in year 2017 to $
702.9 million and $ 724.7 million in year 2018 and 2019 respectively. Deferred tax liabilities
reduced from $ 233.9 in year 2017 to $ 190.8 million 2018 and has increased to $ 194.1 in
year 2019. In addition to this, there has been consistent increase in the borrowing figures
from $ 596.4 million to $ 875.3 and $ 1147.7 in year 2018 and 2019 respectively. This higher
borrowing has caused an increase in the net finance cost followed by the buyback of the
market share. Higher borrowing has been related to unfavorable currency translation and
syndicated facility (tweglobal.com 2019).
Trade payable of a2 Milk Company has been increasing significantly from $ (000)
71350 in year 2017 to $ [phone] and $ [phone] in year 2018 and 2019
respectively. There has been increase in the customer contract liabilities from $ (000) 898 in
year 2018 to $ (000) 1431 in year 2019. Income tax payable on other hand has increased from
30998 in year 2017 to $ 50557 in year 2018 and thereby reduced to $ 43710 in year 2019
(thea2milkcompany.com 2019).

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Answer to requirement v:
It has been found that the companies raise their funds from the sources such as
borrowing, share capital, retrained earning and contributed capital.
Advantages of borrowings:
 Lower rate of interest on the funds borrowed and there can be a fixed interest rate
payment
 Benefits of tax shield
 Organizations would be provided capital for the daily activities
Disadvantages of borrowing:
 Risking the assets of the company in the event of unable to make the repayment of
loan
 Issue of cash flow
Advantages of share capital:
 Absence of the requirements and attachments
 Lower risks to the business
Disadvantages of share capital:
 Reduced ownership and control over the company
 Additional cost is imposed as the dividends cannot be deducted in the events when
shares are repurchased.
Advantages of retained earnings:
 One of the cheaper funding source as it is not required to impose cost for acquiring it.
 Providing stable dividend to shareholders

CORPORATE ACCOUNTING
 Providing financial stability and strengthening financial position of the business
(Gooris and Peeters 2016).
Disadvantages of retained earnings:
 Risk of over capitalization due to accumulation of retained earnings
 The full benefits of actual earnings made by the company cannot be enjoyed by the
shareholders (Velte and Stawinoga 2017).
Part B:
Critical examination of the concepts of small proprietary company, large proprietary
company and reporting entity:
Classification of proprietary limited company is done as small and large proprietary
company. The financial report of the small proprietary is not required to be prepared in
accordance with the Corporation Act and other reporting framework. The foreign entity can
and cannot control the small proprietary company and the small proprietary company is the
one of which the consolidated gross operating revenue for the entities being controlled by it
for the financial year is less than $ 25 million. Such companies do not have to prepare their
financial report under any reporting obligations and don not have financial accounts
(Henderson et al. 2015). On other hand, large proprietary companies are those for which the
consolidated revenue for the entities controlled at the end of the financial year is $ 50 million
or more than that as per the threshold applicable from 2019 July. Reporting entity is the entity
whether it is expected by the users to gain an insight into the functions and the financial
performance of the company using the general purpose financial report. Decision made by the
users of the reporting entity is done based on the information that is published in their
financial report (Asic.gov.au 2019).

CORPORATE ACCOUNTING
Implication of the classification of the companies in terms of reporting and compliance
requirements:
Large proprietary entities in accordance with the requirement of compliance have to
comply with certain obligations and for every financial year, they have to lodge the audited
accounts. That is, in accordance with the ASIC (Australian securities and investment
commission), such companies are required to prepare director’s report, annual financial
report and auditor report. Such companies are obliged to implement the policy of whistle
blowing. For the small proprietary companies, they are not subjected to such obligations, but
they are required to audit their financial reports and should be able to keep sufficient financial
records if it has been directed by the requirements of ASIC (Asic.gov.au 2019).
The obligations of the financial reporting requirements for the small proprietary
companies are intended to reduce the costs. Moreover, the requirement by the regulatory
bodies for the reporting entity to prepare their financial reports in accordance with the
financial reporting framework helps in enhancing their framework of the corporate
governance. Along with the fulfillment of such requirement, the accounting standard of
Australia is also applicable so that the appropriate measurement and the criteria of
recognizing has been applied (Www2.deloitte.com 2019). However, such obligations
imposed in terms of reporting and compliance requirements comes with providing benefits as
well as risks. The negative side is associated with the cost of preparing the accounting
records. However, with such requirements, stakeholders are provided with relevant and
valuable information that would assist them in their decision making process. Disclosure
level is one of the risks associated with the people charged with governance in the reporting
entity. If the small proprietary companies are not able to fulfill the criteria of having
consolidated revenue at $ 25 million, they are required to lodge or file the financial report of
the company (Asic.gov.au 2019).

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In the event of the preparation of the financial report by the company, the concept of
the classification of the companies as small and large proprietary companies and reporting
entity is considered to be crucial because of the risks and benefits associated with such
system or framework. The reporting entities preparing the financial annual report causes an
increased enhancements of the disclosures of the financial information and its importance to
the users in making decisions. Meeting the compliance and reporting requirements helps in
categorizing the companies and producing the financial reports as per the recommended
obligations of the regulatory standard (Fecht et al. 2018).
Conclusion:
The report discussing about the importance of the source of financing used by the
companies have found that the major source used are contributed capital, retained earnings
and borrowing. Each of the sources have their own advantages and disadvantages and the
company uses the source depending upon the benefits that would be received by the
company. The two companies that is Treasury Wine and a2 Milk Company has been assessed
for their liabilities and equity items by the classification of the items and has been found that
there are different items report and some of them are similar to these companies. The later
section of report demonstrating the classification of the companies have ascertained that the
reporting requirements places advantage in terms of the identification of the type of company.

CORPORATE ACCOUNTING
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Fecht, F., Hackethal, A. and Karabulut, Y., 2018. Is proprietary trading detrimental to retail
investors?. The Journal of Finance, 73(3), pp.1323-1361.

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Glaeser, S., 2018. The effects of proprietary information on corporate disclosure and
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Appendix:

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