HA2032 Corporate and Financial Accounting Report 2022

HA2032
Corporate and Financial Accounting
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Abstract
This report aim to review the sources of finances used Wesfarmers and Woolworth
during the last three years and make comparison on use of these sources by each company. It has
been evaluated that both the selected companies make use of equity as well as debt sources of
finance depending upon the requirement and to manage the capital funds needed. This report will
also evaluate classification of entities on the basis on small proprietary company, large
proprietary company and entities that are regarded as reporting entities.
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Contents
Abstract............................................................................................................................................2
Introduction......................................................................................................................................4
Part A: Use of different sources of finance for raising the funds....................................................4
A (i): Items recorded under owner’s equity section of both the selected companies with
detailed explanation of each of the item......................................................................................4
A (ii): Movement in each item of owner’s equity mentioned above during the period of three
years.............................................................................................................................................5
A (iii): Items of liabilities sections recorded by each of the selected company and
understanding of each item..........................................................................................................8
A. (IV): Movement in each of items recorded under each of items for both the selected
companies with reason.................................................................................................................9
A. (V): Advantages and disadvantages of each of sources of finance used by the selected
companies...................................................................................................................................10
Part B: Critical examination of the concepts of small proprietary company, large proprietary
company and reporting entity........................................................................................................12
Conclusion.....................................................................................................................................13
References......................................................................................................................................14
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Introduction
The purpose of this report is to evaluate the different sources of funds used by company
to make available funds to finance the assets. In addition to this, report will evaluate purpose of
classification of entities for reporting purposes. Sources of funds has been classified into two
board categories, they are internal sources of finance and external sources of finance. Internal
sources of finance are generated internally and there is no need to pay any additional charge or
dividend to make available such funds. Retained earnings are only source fund that can be
internally generated. Newly established organization cannot make use of retained earnings due to
non availability of profits during start up phase. On the other hand, external sources can be
obtained from various sources such as banks, financial institutions, and issue of ordinary shares,
preferences shares, bonds, debentures, venture capital, and many other sources. External sources
of funds can be classified as equity sources and debt sources depending upon the charge each
source bear with them. Examples of equity sources are ordinary capital, preference capital, and
retained earnings. On other hand, examples of debt sources of finance includes borrowing from
banks, debentures, venture capital, loans from financial institutions, and many more.
Two ASX companies selected to understand the use of sources of funds are Wesfarmers
and Woolworth. Annual reports of year 2016, 2017 and 2018 have been extracted for both
companies from their respective websites.
Part A: Use of different sources of finance for raising the funds
A (i): Items recorded under owner’s equity section of both the selected companies with
detailed explanation of each of the item
Owner’s equity refers to source of funds contributed by the owner’s of company ie
shareholders of such company. This source of funds is prominent and does not bear any fixed
charge. As discussed earlier, some of important items of owner’s equity are ordinary capital,
retained earnings and reserves.
Owner’s equity items presented in balance sheet of Wesfarmers Group:
 Issued capital
 Retained Earnings
 Reserves
(Wesfarmers: Annual Report, 2017 and Wesfarmers: Annual Report, 2018)
Owner’s equity items presented in balance sheet of Woolworth Group
 Contributed Equity
 Reserves
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 Retained Earnings
(Woolworth: Annual Report, 2018 and Woolworth: Annual Report, 2018)
Explanation of each of owner’s equity items
 Issued Capital/Contributed equity: Issued capital is also referred as ordinary share
capital as it contributed shareholder’s of the company. Listed companies have authority
to issue their shares in market and subscribed by common people. In financial tem issued
capital refers to amount received on number of shares issued and allocated to
shareholders of the company. It is part of authorized capital that has been allowed to be
issued in market to raise the funds. According to the requirement of raising the funds,
company makes issue of ordinary shares and allocates shares to shareholders. These
shares can either be issue at premium, par or discount depending upon the market
position of the company.
 Retained Earnings: Retained earnings is part of profit left after meeting all the expenses
during each period. It can be regarded as earnings left after paying the dividend to
shareholders. Value of retained earnings depends upon the profit margin and dividend
policies of respective company. Retained earnings are regarded as free funds as they are
not entitled to be used for specific purpose.
 Reserves: It is also referred as part of retained earnings but they are set aside for some
specific purpose unlike in case of retained earnings. Reserves are regarded as part of
profit set aside to pay the liabilities expected to arise in future.
A (ii): Movement in each item of owner’s equity mentioned above during the period of
three years
Movement in items of owner’s equity can be reviewed from the statement of changes in
equity presented as part of financial statement in annual reports of each company.
Statement of movement in each items of Owner's Equity
Woolworth Group
Particulars
Contributed
Equity Retained earnings Reserves
Balance on 26 June, 2015 $ 5,064.90 $ 5,830.10 $ 95.10
Profit/(Loss) after income tax $ (1,234.80)
Other comprehensive income/(loss) $ (3.90) $ 192.50
Dividend Paid $ (1,471.20)
Dividend Received $ 4.30
Issue of shares (DRP) $ 282.10
Share based payment expenses $ 20.80
Non-controlling interests $ (153.40)
Balance on 26 June, 2016 $ 5,347.00 $ 3,124.50 $ 155.00
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Profit/(Loss) after income tax $ 1,533.50
Other comprehensive income/(loss) $ 2.20 $ 0.10
Dividend Paid $ (859.60)
Dividend Received $ 2.20
Issue of shares (DRP) $ 316.50
Issue of share from underwrite of
DRP $ 55.50
Share based payment expenses $ 51.60
Non-controlling interests $ -
Other $ (5.60) $ 5.30
Balance on 25 June, 2017 $ 5,719.00 $ 3,797.20 $ 212.00
Profit/(Loss) after income tax $ 1,724.00
Other comprehensive income/(loss) $ (1.00) $ (41.00)
Dividend Paid $ (1,208.00)
Dividend Received $ 2.00
Issue of shares (DRP) $ 482.00
Issue of share from underwrite of
DRP
Share based payment expenses $ 58.00
Adjustments $ (243.20)
Other $ 2.00
Balance on 24 June, 2018 $ 6,201.00 $ 4,073.00 $ 229.00
(Woolworth: Annual Report, 2018 and Woolworth: Annual Report, 2018)
Statement of movement in each items of Owner's Equity
Wesfarmers Group
Particulars Issued Capital Retained earnings
Total
Reserves
Balance on 1 July, 2015 $ 21,844.00 $ 2,742.00 $ 195.00
Profit/(Loss) after income tax $ 407.00
Other comprehensive income/(loss) $ (3.00) $ (75.00)
Dividend Paid $ (2,272.00)
Issue of shares $ 93.00
Share based payment expenses $ 15.00
Other $ 3.00
Balance on 30 June, 2016 $ 21,937.00 $ 874.00 $ 138.00
Profit/(Loss) after income tax $ 2,873.00
Other comprehensive income/(loss) $ (3.00) $ 21.00
Dividend Paid $ (2,235.00)
Issue of shares $ 331.00
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Share based payment expenses $ 3.00
Other $ 2.00
Balance on 30 June, 2017 $ 22,268.00 $ 1,509.00 $ 164.00
Profit/(Loss) after income tax $ 1,197.00
Other comprehensive income/(loss) $ (1.00) $ 151.00
Dividend Paid $ (2,529.00)
Issue of shares
Share based payment expenses $ 9.00
Other $ (14.00)
Balance on 30 June, 2018 $ 22,277.00 $ 176.00 $ 301.00
(Wesfarmers: Annual Report, 2017 and Wesfarmers: Annual Report, 2018)
Explanation of movement in each item for both companies
Items of Owner’s equity Wesfarmers Woolworth
Issued capital or
Contributed Equity
The change in issued capital
was mainly due to issue of
new share capital in each year
and payment received for
share based payments. There
was no payment paid for buy
back of share capital during
last three years. Balance of
issued capital has increased
from $21844 million to
$22277 million in last three
years. It can be said no major
share issue has been made by
company to raise the funds
(Wesfarmers: Annual Report,
2017 and Wesfarmers: Annual
Report, 2018).
In case of Woolworth
movement in contributed
equity was only to issue of
shares under DRP scheme.
There was no buy back of
shares by Woolworth in last 3
years and no right issue has
been made to raise further
capital. The value of
contributed equity increased
from $5064.90 in year 2015 to
$6201.00 in year 2018
(Woolworth: Annual Report,
2018 and Woolworth: Annual
Report, 2018).
Retained Earnings Retained earnings have been
impacted by three major
components and they are net
profit (loss) during the year,
dividend paid and changes in
other comprehensive items. In
year 2016, value of retained
earnings got decreased due to
In case of Woolworth major
change in retained earnings is
caused due to impact of profit
or loss made during the year,
dividend paid and some
amount of dividend received.
Retained earnings are mainly
used to pay the dividend only
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lower net profit and higher
dividend paid during the year.
and there is no plan of
company to make use of
retained earnings in any other
payments.
Reserves Reserves are impacted only
due to the change in other
comprehensive income items,
share based payments. They
are specific in nature and used
only for payment of selected
liabilities.
The change in balance of
reserves is due to change in
values of other comprehensive
income items, non controlling
interest and share based
payments. All this reserve is
set aside to meet the
requirement of some specific
requirement that arises every
year (Gibson, 2011).
A (iii): Items of liabilities sections recorded by each of the selected company and
understanding of each item
In this section only those liabilities items have been considered are being used as sources
of funds. Items such as derivatives, trade payable, income tax payable and other items have been
ignored as they are part of working capital and completely depend on how company manages its
working capital.
Following items have been reported by Wesfarmers in liabilities section
 Interest bearing loans and borrowings
1. Bank Loans
2. Capital market debt
 Provisions
(Wesfarmers: Annual Report, 2017 and Wesfarmers: Annual Report, 2018)
Following items have been used by Woolworth as debt capital and shown under liabilities
section:
 Borrowings
1. Bank loans
2. Securities
3. Finance leases
4. Notes payable
 Provisions
(Woolworth: Annual Report, 2018 and Woolworth: Annual Report, 2018)
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Explanation of each of items shown under liabilities
 Bank loan: The amount of funds taken from financial institutions, banks or from any
lender that requires company to pay fixed charge (Interest expenses). Bank loans is
comparatively easy to use for raising funds as compared to equity funds but there is need
to bear interest expenses on amount of capital raised. This expense is fixed charge on
company and it has to paid whether there is profit or not during the respective year.
 Capital market debt/Securities: Capital market represents instruments used to raise
funds through issuing them in open market. Examples of capital market debts are bonds,
debentures, leases, bills of exchange, etc. Financial instruments that are being brought
and sold in capital market are represented as capital market instruments and instruments
that create the financial obligation on entities are regarded as capital market debt.
 Financial leases: It is type of financial instrument that requires lessee to pay defined
amount on each interval. Liabilities of finance lease are offset from the amount of right to
use assets shown in asset section of balance sheet. Entities make an arrangement of lease
to take over the required assets as there is no requirement to pay complete upfront cash at
the same times. Instead all such payments are deferred to series of lease payments
represented in form of liabilities (Baker and Powell, 2010).
A. (IV): Movement in each of items recorded under each of items for both the selected
companies with reason
Statement of movement in each items of liabilities
Woolworth Group
Particulars
Banks loans
(Current &
Non Current)
and market
loans
Short and
long term
securities
Financi
al
Leases
Notes
Payable
Balance on 26 June, 2016 $ 936.20 $ 2,738.70
$
3.30 $ 99.10
Add: any additions during the year $ - $ - $ - $ -
Less: payment paid $ (154.30) $ (477.00) $ (0.90) $ (699.10)
Balance on 25 June, 2017 $ 781.90 $ 2,261.70 $ 2.40 $ -
Add: any additions during the year $ - $ - $ -
Less: payment paid $ (137.90) $ (93.70) $ (2.40) $ -
Balance on 24 June, 2018 $ 644.00 $ 2,168.00 $ - $ -
(Woolworth: Annual Report, 2018 and Woolworth: Annual Report, 2018)
Statement of movement in each items of liabilities
Wesfarmers Group
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(Wesfarmers: Annual Report, 2017 and Wesfarmers: Annual Report, 2018)
Reason for movement in items of liabilities
The main reason of movement is due to cash and non-cash movement in each of debt
items and also the transfer made from long term liabilities to short term liabilities. Movement
also takes place due to adjustments in foreign exchange differences, fair value changes in debt
instruments and hedging instruments.
A. (V): Advantages and disadvantages of each of sources of finance used by the selected
companies
Advantages Disadvantages
Ordinary share
capital/Issued Capital
The major advantage of using
this source of fund for the
selected companies is that
shareholders have the right to
vote.
This method of raising capital
enables in promoting fund
expansion without incurring
debt
The funds acquired by issuing
ordinary shares can be
regarded as a major source of
gaining long-term finance
The major drawback
associated with this method is
that it proves to be highly
expensive for companies due
to cost involved in
underwriting the issue,
brokerage costs, legal and
auditor’s fees
The companies are required to
provide higher rate of return to
the shareholders due to more
operational risks undertaken
by them
The issue of shares to the
general public can result in
disclosing the confidential
information to them that can
have a negative impact on the
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competitive position of
companies (Brigham and
Michael, 2013)
Retained earnings The major benefit of this
source of fund for business
entities is that would not result
in incurring any significant
cost to the companies as it
does not have any floatation
costs
It does not have any
possibility diluting the owner
control that can result from
issuing of new shares
The use of this type of funding
options would also enable
companies to improve the
financial stability
The larger accumulation of
retained earnings for using
source of fund can lead to
over-capitalization within the
companies
The higher use of this type of
funding option can result in
causing dissatisfaction among
the shareholders due to their
limited earnings
The conservative dividend
policy followed by the
companies using retained
earnings as a source of fund
could result in restricting
promoting its long-term
growth with limited funds
invested from the investors
(Damodaran, 2011)
Bank Borrowings/Debt/Loan The bank loans could be
regarded as cheapest source of
fund due to lower fixed
interest provided by the banks
The companies are required to
pay only the interest amount
and this result increasing the
retained earnings
There is no risk of diluting the
ownership of business as that
exist in issuing shares to
shareholders
There is increased risk for
business of not able to meet its
financial obligation resulting
from interests on the principal
amount on time
It can also result in reducing
the monthly cash flow for
companies as thus can hinder
business growth and
expansion (Davies and
Crawford, 2011)
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Capital market
debt/Securities
It allows the companies to
invest both in time and money
as compared to issuing new
shares
It proves to be a quick source
of finance as compared to the
venture capital markets
It enables the companies to
select their own investors
having similar objectives
This can reduce the potential
of companies to raise funds
with the issue of new shares
that can have a negative effect
on the value of business
The companies are using only
limited number of potential
investors and this restrict the
inflow of larger amount of
fund within the companies
(Krantz, 2016)
Part B: Critical examination of the concepts of small proprietary company, large
proprietary company and reporting entity
Proprietary Company can be regarded as a form of privately held company within
Australia which means that its shares are not offered for general public. This means that the
major distinction that exist between a proprietary and public company is that proprietary
company’s shares are available only few shareholders whereas public companies shares are
available to the general public for trading. The proprietary companies are classified as either
small or large on the basis of following criteria:
Small Proprietary Company: The small property companies need to be met following criteria:
 The consolidated revenue at the end of a financial year for the companies and its entities
under control to be less than $25 million as before 30 June, 2019 and less than $50
million after 1 July, 2019
 The overall value of consolidated gross assets at the end of a financial year should be less
than $12.5 million till 30 June, 2019 and $25 million on and after 1 July, 2019.
 The companies and its controlled entities need to have less than 50 full-time employees till
30 June, 2019 and less than 100 employees after 1 July, 2019 (Dagwell, Wines and Lambert,
2009)
Also, this type of proprietary company is not requires to develop and disclose their financial
reports as corporation act until it has been controlled by a foreign company. As per the
Corporations Act, small proprietary companies controlled by a foreign entity are required to
develop and lodge its financial reports with ASIC (Australian Securities Investment
Commission). In addition to this, if five per cent or large number of shareholders request for
developing and disclosure of financial reports then such proprietary companies are required to
develop a financial report as per the relevant accounting standards (Deloitte, 2019).
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Large Proprietary Company: It should meet the following criteria as provided by the ASIC:
 The consolidated revenue for the financial year should be more than $25 million till 30
June, 2019 and more than $50 million after 1 July, 2019
 The overall value of consolidated gross assets at the end of a financial year should be
more than $12.5 million till 30 June, 2019 and more than $25 million after 1 July, 2019
 The companies and its controlled entities need to have more than 50 full-time employees
till 30 June, 2019 and more than 100 employees after 1 July, 2019
This type of proprietary companies is required to develop and lodge their financial reports for
each financial year as per ASIC (ASIC, 2019).
Reporting Entity Concept
The AASB standard has defined a reporting entity as an economic entity that is
recognized on the basis of existence of its users of general purpose financial reports that would
assist in them in making relevant decisions about allocating scarce resources. The concept of
reporting entity includes a publicly listed corporation, a borrowing corporation and company
which is subsidiary of a foreign company and its securities are listed to be quite on stock market
or are traded within stock market. However, the concept is not only limited to these types of
business corporations. As directed by the AASB, the reporting entities are required to develop
and present their genial purpose financial statements according to the statement of accounting
concepts and relevant accounting standards (Statement of Accounting Concepts, 2017).
Conclusion
It has been concluded from the overall analysis of sources of funds used by both the
selected companies that it is necessary to make the balance of both equity and debt capital in
order to reduce the dependencies on single source of funds. It has been also observed that both
companies has not used preference capital to raise the funds and instead has expanded their
dependencies on securities and capital market debts.
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References
ASIC. 2019. [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 on: 5 October 2019].
Baker, K. and Powell, G. 2010. Understanding Financial Management: A Practical Guide.
USA: John Wiley & Sons.
Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Canada: Cengage
Learning.
Dagwell, R., Wines, G. and Lambert, C. 2009. Corporate Accounting in Australia. Australia:
UNSW Press.
Damodaran, A, 2011. Applied corporate finance. USA: John Wiley & sons.
Davies, T. and Crawford, I., 2011. Business accounting and finance. USA: Pearson.
Deloitte. 2019. Clarity in financial reporting. [Online]. Available at:
https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-clarity-
changes-proprietary-company-thresholds-may-2019-310519.pdf [Accessed on: 5 October 2019].
Gibson, C. 2011. Financial Reporting and Analysis: Using Financial Accounting Information.
Australia: Cengage Learning.
Krantz, M. 2016. Fundamental Analysis for Dummies. USA: John Wiley & Sons.
Moles, P. and Kidwekk, D. 2011. Corporate finance. USA: John Wiley &sons.
Statement of Accounting Concepts. 2017. Definition of the Reporting Entity. [Online]. Available
at: https://www.aasb.gov.au/admin/file/content102/c3/SAC1_8-90_2001V.pdf [Accessed on: 5
October 2019].
Wesfarmers: Annual Report. 2017. [Online]. Available at:
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0 [Accessed on: 5 October, 2019].
Wesfarmers: Annual Report. 2017. [Online]. Available at:
https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf[Accessed on:
5 October, 2019].
Wesfarmers: Annual Report. 2018. [Online]. Available at:
https://www.wesfarmers.com.au/docs/default-source/asx-announcements/2018-annual-
report.pdf?sfvrsn=0 [Accessed on: 5 October, 2019].
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Woolworth: Annual Report. 2018. [Online]. Available at:
https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf[Accessed on:
5 October, 2019].
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