Analysis of Owner's Equity and Liabilities in ASX Listed Companies

This report analyzes the components and movements in owner's equity and liabilities in two ASX listed companies, providing insights into compliance requirements and advantages of different sources of funds.

Running head: CORPORATE AND FINANCIAL ACCOUNTING
Corporate and Financial Accounting
Name of the Student
Name of the University
Author’s Note

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Abstract
The main purpose of this report is the analysis of different elements of owner’s equity
and liabilities in two ASX listed companies that are Wesfarmers Limited and
Woolworth Limited. This report provides understanding on each of the elements of
owner’s equity and liabilities in the selected companies. In addition, this report
discusses about the movements in these items with proper reasons. This report also
provides the compliance requirements of large and small proprietary companies.

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Table of Contents
Introduction...................................................................................................................3
Items under Owner’s Equity.........................................................................................3
Reasons for Movement in Owner’s Equity...................................................................3
Items under Liability Section.........................................................................................4
Reasons for Movement in the Items of Liability...........................................................4
Advantages or Disadvantages Each Source of Fund..................................................5
Small Proprietary Company, Large Property Company and Reporting Entity.............5
Conclusion....................................................................................................................6
References...................................................................................................................7

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Introduction
Business organizations use different sources in order to raise the required
capital for maintaining smooth business operations. The main aim of this report is the
analysis of different components of owner’s equity and liabilities in two of the ASX
listed companies. The selected companies are Wesfarmers Limited (Wesfarmers)
and Woolworth Limited (Woolworth). Different parts of the report discusses about
the components and movements in these components of owner’s equity and
liabilities in the selected companies. Moreover, this report discusses about the
implications of being classified as small proprietary company, large proprietary
company and reporting entity in terms of compliance and reporting requirements. A
conclusion is provided based on the outcome of the whole analysis.
Items under Owner’s Equity
As per the annual reports of Wesfarmers and Woolworth, the main items
under owner’s equity are issued capital, reserved shares, retained earnings,
reserves and contributed equity. These are described below.
Issued Capital – It refers to the amount that the shareholders of the companies
invest in the companies. This is the number of shares that a company issue to its
shareholders. Value of this changes with issue of new shares (Avdjiev, Chui and
Shin 2014).
Reserved Shares – It refers to the number of shares that a company reserves for a
specific administrative purpose and these shares are characteristically common
stock. One key reason for reserving the shares is to convert them into preferred
stocks later.
Retained Earnings – It is considered as a portion of a company’s profit that is not
distributed among the shareholders as dividend with the aim to reserve them for the
purpose of reinvestment into the business. This is used for working capital and for
purchasing fixed assets (Carpenter et al. 2013).
Reserves – A reserve can be considered as a profit that a company has
appropriated for a specific purpose. Companies arrange reserves for the purpose to
purchase fixed assets, to pay an expected legal settlement, to pay bonuses, to pay
off debts and others.
Contributed Equity – Contributed equity refers to the amount of cash and other
assets provided by the shareholders to the companies for the purpose of exchanging
stock. This can also be considered as a price that the shareholders pay for their
ownership in the company (Carpenter et al. 2013).
Reasons for Movement in Owner’s Equity
For Wesfarmers, issued capital has increased from 2016 to 2018 and the
main reason behind this is the increase in issuing share. For Woolworth, contributed
equity increases from 2017 to 2018 and decreases in 2019; and the reason is the
increase in the company’s earnings or capital from 2017 to 2018 and then decrease
in the same in 2019 (wesfarmers.com.au 2019). Reserved shares in Wesfarmers
have decreased from 2016 to 2017 and increased in 2018; and the reason behind
this movement is the fluctuation in shares issued to the employees under the share
loan plan. While high fluctuation can be seen in the retained earnings of
Wesfarmers, the same has only decreased in the current year in case of Woolworth;

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and the reason for this is the change in the plans of these companies regarding
dividend payment, purchase of fixed assets and others (woolworthsgroup.com.au
2019). There is a fluctuating movement in the reserves of Wesfarmers where
Woolworth has increased their reserve over the years; and the main reason for this
kind of movement is the change in these companies’ plans regarding purchase of
fixed assets, payment of legal settlement, payment of debts and others
(wesfarmers.com.au 2019).
Items under Liability Section
Both the companies have recorded current and non-current liabilities in the
liability section. These are described below.
Trade and Other Payable – It refers to the total amount payable by a business for
purchasing goods or availing services as a part of the business operations.
Interest-bearing Loans and Borrowings (Current) – These refer to the short-term
debts of a company which the company is expected to pay off within a year.
Income/Current Tax Payable – This is considered as a specific type of account that
includes the taxes due to the government that the company needs to be within a
year.
Provisions (Current) – This refers to an amount that a company puts aside for
covering a future liability within the time of 12 months (Mathuva 2015).
Derivatives (Current) – This can be considered as a financial security with a value
that is dependent on or derived from an original current asset or group of current
assets.
Interest-bearing Loans and Borrowings (Non-Current) – These refer to the long-
term debts of a company which the company is expected to pay off in more than one
year.
Provision (Non-current) – This refers to an amount that a company puts aside for
covering a future long-term liability within the time of 12 months
Derivatives (Non-Current) – This can be considered as a financial security with a
value that is dependent on or derived from an original non-current asset or group of
current assets.
Other Financial Liabilities – These financial liabilities include derivatives, holding of
the company in listed as well as unlisted investments and loans to related parties
(Mwangi, Makau and Kosimbei 2014).
Reasons for Movement in the Items of Liability
It can be seen from the annual reports of Wesfarmers that the total current
liabilities of the company has decreased from 2016 to 2018; and the main reason
behind this is the initiative of the company to pay off their current liabilities for
improving the liquidity position. The same aspect can be seen in case of non-current
liabilities as this has reduced from 2016 to 2018 due to repayment of long-term
borrowings by the company (wesfarmers.com.au 2019). In case of Woolworth, total
current liabilities have increased from 2017 to 2018 and then decreases in 2019 and
the main reason is that Woolworth has paid off their current liabilities with current
assets. Total non-current liabilities of the firm have decreased in 2018 from 2017 and

5CORPORATE AND FINANCIAL ACCOUNTING
the increases in 2019; and the main reason behind this is that the company has used
increased debt capital for raising the required capital of their business operations
(woolworthsgroup.com.au 2019).
Advantages or Disadvantages Each Source of Fund
It can be seen from the annual reports of both of these companies that they
have used both the equity capital and debt capital for their businesses; and the
following discussion shows the advantages of these two sources of fund.
Equity Capital – One major advantage of equity capital is that it does not have any
requirement of fixed payment and thus, fixed costs of the companies do not increase
due to the investment (Drover et al. 2017). Moreover, this is a kind of financing that
is collateral-free; and the companies can ensure the long-term financing with the
help of this. These are the major advantages of equity capital (Belo, Lin and Yang
2018).
Debt Capital – The key advantage of financing through debt capital is that the
ownership stays with the company as the lender does not have any say in the
management of the company. This enables the existing management team to retain
the full control of the business (Wang and Lin 2013). After that, the interest payments
on the term debts are tax deductible which provides the companies with major tax
advantage. In addition, the companies are not needed to share profit under this.
These are the major advantages of debt financing (De Rassenfosse and Fischer
2016).
Small Proprietary Company, Large Property Company and Reporting Entity
The concept of proprietary companies is a major concept in Australian for the
classification of the companies. In order to be proprietary companies, the companies
are needed to be registered under the Corporations Act. According to the
Corporations Act, a property needs to be classifies wither as a large proprietary
company or a small proprietary company. It needs to be mentioned that there are
certain implications of being classified as either small proprietary company or large
proprietary company or a reporting entity in terms of compliance and reporting
requirements (deloitte.com 2019). These are crucial implications that need to be
taken into account and these are discussed below.
Small Proprietary Company – According to the Corporations Act, two of the
following conditions need to be satisfied for a business to be classified as small
proprietary company:
 Consolidated revenue of the company and its controlling entities is less than
$50 million;
 Consolidated gross assets at the end of the financial year of the company and
its controlling entities is less than $25 million;
 The company and its controlling entities have fewer than 100 employees at
the end of the year (deloitte.com 2019).
In case a company satisfies two of the above conditions, then it will not be
required to prepare and lodge audited financial statements with ASIC as per
Corporations Act 2001 s292(2). In case the company is a SGE (Significant Global
Entity), it will be needed to prepare as well as lodge general purpose financial
reports with the ATO. These general purpose financial reports must comply with the

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applicable standards of the Australian Accounting Standards Board (AASB). In case
of Tier 2 companies, the general purpose financial statements must comply with all
the applicable standards of reduced disclosure regime. These are the requirements
as well as compliances for the small proprietary companies in Australia
(williambuck.com 2019).
Large Proprietary Company – In Australia, a company will be considered as a
large proprietary company in case it satisfies two of the following conditions in
accordance with Corporations Act 2001 s45A(3):
 Consolidated revenue for the financial year of the company and its controlling
entities is $50 million or higher;
 Consolidated gross assets at the end of the financial year of the company and
its controlling entities is $25 million or more;
 The company and its controlling entities have 100 or more employees at the
end of the year (asic.gov.au 2019).
The company is needed to prepare as well as lodge audited financial statements
in accordance with Corporations Act 2001 s292(1) in case it satisfies two from the
above conditions. However, this is not applicable in case the company is a wholly
owned subsidiary of a closed group as per ASIC Instrument 2016/785 or it has not
been audited in any financial year since 1993 as per ASIC Instrument 2016/784 or it
is a grandfathered large proprietary company (williambuck.com 2019).
In case the company satisfies two of the above three conditions, the company will
be called a large proprietary company and it will be considered as a reporting entity.
Since this is a reporting entity, it will have the obligation to prepare and present the
general purpose financial statements. In case it is a Tier 1 company, it will be
needed to comply with the applicable standards of the Australian Accounting
Standard Board; and in case it is Tier 2 company, it will be needed to comply with
the applicable standards of the reduced disclosure regime. In case it is a non-
reporting entity, it will be needed to prepare and present special purpose financial
statements while complying with all the required applicable requirements of
measurement and recognition in the standards of AASB in accordance with ASIC
Instrument 2015/841. These are the compliance as well as requirements that a large
proprietary company will be needed to adhere to (williambuck.com 2019).
Conclusion
It can be seen from the above discussion that the large business
organizations use equity capital and debt capital as two of the major sources of
finance for their business operations because of the presence of many advantages
of these two sources. The above discussion demonstrates that both owner’s equity
and liabilities have many components and the movements in these components is
essential in the presence of analysing the reasons behind these movements. It can
also be seen from the above analysis that both debt financing and equity financing
have certain advantages that contribute towards the use of these sources of finance.
The above discussion also indicates towards the crucial aspect that the companies
are needed to satisfy certain conditions in order to become small proprietary and
large proprietary company which leads to the preparation and presentation of
general purpose financial statements.

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References
Asic.gov.au. 2019. Are you a large or small proprietary company | ASIC - Australian
Securities and Investments Commission . [online] Available at:
https://asic.gov.au/regulatory-resources/financial-reporting-and-audit/preparers-of-
financial-reports/are-you-a-large-or-small-proprietary-company/ [Accessed 2 Sep.
2019].
Avdjiev, S., Chui, M.K. and Shin, H.S., 2014. Non-financial corporations from
emerging market economies and capital flows. BIS Quarterly Review December.
Belo, F., Lin, X. and Yang, F., 2018. External equity financing shocks, financial flows,
and asset prices. The Review of Financial Studies, 32(9), pp.3500-3543.
Carpenter, S.B., Ihrig, J.E., Klee, E.C., Quinn, D.W. and Boote, A.H., 2013. The
Federal Reserve's balance sheet and earnings: a primer and projections (pp. 2013-
03). Division of Research & Statistics and Monetary Affairs, Federal Reserve Board.
De Rassenfosse, G. and Fischer, T., 2016. Venture debt financing: Determinants of
the lending decision. Strategic Entrepreneurship Journal, 10(3), pp.235-256.
Drover, W., Busenitz, L., Matusik, S., Townsend, D., Anglin, A. and Dushnitsky, G.,
2017. A review and road map of entrepreneurial equity financing research: venture
capital, corporate venture capital, angel investment, crowdfunding, and
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Mathuva, D., 2015. The Influence of working capital management components on
corporate profitability.
Mwangi, L.W., Makau, M.S. and Kosimbei, G., 2014. Relationship between capital
structure and performance of non-financial companies listed in the Nairobi Securities
Exchange, Kenya. Global Journal of Contemporary Research in Accounting,
Auditing and Business Ethics, 1(2), pp.72-90.
Wang, H.D. and Lin, C.J., 2013. Debt financing and earnings management: An
internal capital market perspective. Journal of Business Finance & Accounting, 40(7-
8), pp.842-868.
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[Accessed 2 Sep. 2019].
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