Financial Accounting: Analysis of JB-HiFi's Annual Report

This article provides an analysis of JB-HiFi's annual report, covering topics such as PPE revaluation, derecognition of assets, intangible assets, and non-current asset revaluation.

qwertyuiopasdfghjklzxcvbnmqwertyui
opasdfghjklzxcvbnmqwertyuiopasdfgh
jklzxcvbnmqwertyuiopasdfghjklzxcvb
nmqwertyuiopasdfghjklzxcvbnmqwer
tyuiopasdfghjklzxcvbnmqwertyuiopas
dfghjklzxcvbnmqwertyuiopasdfghjklzx
cvbnmqwertyuiopasdfghjklzxcvbnmq
wertyuiopasdfghjklzxcvbnmqwertyuio
pasdfghjklzxcvbnmqwertyuiopasdfghj
klzxcvbnmqwertyuiopasdfghjklzxcvbn
mqwertyuiopasdfghjklzxcvbnmqwerty
uiopasdfghjklzxcvbnmqwertyuiopasdf
ghjklzxcvbnmqwertyuiopasdfghjklzxc
vbnmqwertyuiopasdfghjklzxcvbnmrty
uiopasdfghjklzxcvbnmqwertyuiopasdf
ghjklzxcvbnmqwertyuiopasdfghjklzxc
FINANCIAL ACCOUNTING

JB-Hifi
Introduction
A financial statement is important for every organization and it helps the related parties to frame
a decision regarding the prospect of the company. Financial reporting comprises of disclosures
and other relevant accounting policies that enables preparation of the report. JB-HiFi is a
reporting entity and discloses the relevant information for the users (Deegan, 2011). The
preparation of the task is done with the help of the annual report. It is from the annual report that
various information regarding PPE its recognition and revaluation is done. Further, the balance
sheet is evaluated and researched to trace the intangible assets and its reporting. The noncurrent
assets are even put to a discussion where the evaluation in part is discussed whether it went
upward or downward. Hence, the total discussion and explanation have been done with the help
of the annual report. For an entity, all the major information is present in the annual report and
the same is considered by the stakeholders for the purpose of decision making.
JB the Hi-Fi Limited
1. Items of PPE revalued by the entity during the current FY or the last year
Plant, property, and equipment (PPE) form a major part of the company’s non-current assets. In
order to procure such PPE, the company requires balances of cash that will result in the decline
of figures of cash and cash equivalents. Therefore, an increase in the company’s property, plant
and equipment, will also result in an increment in depreciation expense. The accounting policy
followed by the company is that Plant and Equipment and leasehold improvement are reported at
historical cost net of any impairments and deprecation accumulated till the reporting date. The
historical cost comprises all such expenses which can be related directly to the assets reported.
The straight-line basis method of calculation of depreciation is used so as to facilitate the net cost
of the asset being written off over the useful life of the asset expected with consideration to its
estimated residual value. A review of the methods of depreciation, net realizable values of the
assets and the expected useful and productive life of the assets is undertaken at the end of the
each reporting period to account and provide for any such changes and the effect of the same is
done on a prospective basis. If the carrying value of the asses exceeds its net realizable value,
then an impairment loss is recognized (JB-Hifi, 2017). Alternatively, the higher of the fair value
of the asset and its value in use is also taken to be the net realizable value of the asset.
2

JB-Hifi
From the information available in the annual report, it can be said that evaluations of Property,
Plant and equipment and leasehold improvements have not been reported to have taken place
during the current year or the previous year.
2. Items of PPE derecognized during the year. Disclosure of the profit and loss made from the
derecognition of the assets.
Any asset is considered to be productive and value generating as long as there are tangible
returns from the same. Once the returns and benefits from the asset are stopped, then such asset
is considered to be non performing and non value generating and thus it has to be written off or
derecognized. In case this treatment is required to be adopted for any asset, then the net of the
carrying amount of the asset and the sale proceeds received is to be recognized in the Income
statement either under other expenses or under other income depending upon the amounts
realized (Hamilton et. al, 2011).
From the Annual report, it can be ascertained that the breakup of the various items that are
clubbed under other expenses has not been provided, hence it is not possible to provide the
financial amounts involved in the derecognition of such assets which might or might not be
forming a part of the other expenses.
3. Intangible Assets – Types and amounts involved with the accounting treatment of Goodwill
From the Statement of Financial Position for period ending 30/06/2017, reported amount of
intangible assets is $1,026.6m whereas it was $98.5m for the previous year ending 30 June 2016
(JB-Hifi, 2017).
An extract from the Annual Report is as under:
3

JB-Hifi
(JB-Hifi, 2017)
Goodwill can be typically construed as the extra cost paid by the company to acquire another
company. This extra cost is understood in relation to its fair value of the assets of the company
acquired and the actual amount paid for the same. The useful life of goodwill cannot be defined
typically and so it is considered to be indefinite. Hence the reporting amount of goodwill is
shown as the net of any impairments, losses and write offs. The same has been shown in the
financial statements with the noted containing a proper highlight to the same. Thereby, it can be
said that the information is portrayed in a diligent manner (JB-Hifi, 2017).
Apart from goodwill, assets like brand names, Location premiums, and rights to share in profit
can also be construed to have indefinite useful lives and follow the same treatment as goodwill.
Another reason for the same can be seen in a way that the management intends to use these
assets indefinitely in the future periods (Kieso et. al, 2010). Whenever such events or
circumstances take place which provide reasons for a change in the assessment of the indefinite
useful life, then an assessment is done to review the same and in most cases this is done on an
annual basis.
For impairment evaluation, grouping of assets is done at such stages where they are able to
independently generate cash flows and not in any Cash Generating Unit to the extent possible.
Moreover, at each reporting period non financial assets apart from goodwill are also tested for
impairment. To benefit from the synergies, goodwill is clubbed with the CGU or the CGUs of
other entities within the group (JB-Hifi, 2017).
4

JB-Hifi
Where a visible impairment in goodwill is calculated, it is first accounted towards the amount of
goodwill and then to write down the value of other assets within the CGU or group of CGU.
Such amount of impairment loss is accounted for in the Income Statement. Thus it can be
understood that the impairment is allocated on a pro rata basis and first towards goodwill and
then towards other assets.
When any operation is disposed, then the profit or loss on disposal of goodwill is accounted for
in the Income Statement.
An extract of the reported amounts from the Annual Report in relation to goodwill and
impairment testing is presented below:
(JB-Hifi, 2017)
Upon acquisition of the Good Guys, the goodwill arising of $701.5m has been reasonably
allocated to JB Hi-Fi Australia CGU ($134.6m) and the balance to The Good Guys CGU
($566.9m) which is based upon the earnings the group is expected to contribute as a result of the
acquistion (JB-Hifi, 2017).
The calculation of the recoverable amount is on the basis of the value in use calculations. The
management approves the financial budgets for a period of five years and cash flow projections
are used at a discount rate of 10.00%. For the time period beyond five years, a long term steady
growth rate of 2% has been used as it is the average industry growth rate and usually used by the
consumer industry.
5

JB-Hifi
In relation to previously mentioned analysis, the key assumptions that have been utilized by the
Group in utilizing such computations consist of efficiencies of the costs, growth in sales, and
discounting rate (JB-Hifi, 2017). Furthermore, the assumptions in relation to the effectiveness of
CODB and growth in sales are dependable upon past experiences and the Group’s expectation of
financial and operating performance for each cash-generating unit (CGU). As the discount rate is
different for various risk profiles, the weighted average cost of capital is arrived at by working
out a reasonable average of these rates for varying risk profiles.
JB Hi-Fi New Zealand has shown a poor performance and so the goodwill of the same has been
impaired with the same being expensed off in the Income Statement. The same has been
highlighted in an appropriate manner. The presence of such elements leads to a proper decision
making and gives weight to the principle of the disclosure.
4. Revaluation of non-current assets upwards or downwards
The items included in Non-Current assets are Deferred tax assets, other noncurrent assets, plant
and equipments and intangible assets.
Items like Deferred tax of the Group are accounted for by utilizing the available balance on the
Statement of Financial position to provide for the temporary variations among the amounts
reported in the taxation purposes and balance sheet. The measurement rate of such deferred tax
items is anticipated where the period of settlement of the liability or asset realization is done on
the basis of the enacted rate of tax or significantly applied on the reporting date. Furthermore, it
must be taken into account that the deferred taxes of the Group will defer recognition if such
timing differences emerge from a first time recognition and the transaction is such that it can
neither impact the gains or taxability of the profits in relation to such assets and goodwill
(Parrino et. al, 2012). The Statement of Financial Position portrays a net position of the deferred
tax assets against the deferred tax liabilities. The offset between the deferred tax assets and
liabilities is possible only when it is in relation to the taxes levied by the same authority and there
is a possibility to carry forward and set off such taxes and liabilities against the assets in the
future years. The current tax and deferred tax usually form a part of the Income Statement.
Where the taxes relate to equity, it is recognized directly to equity and does not form a part of the
6

JB-Hifi
Income Statement. These balances contain the temporary differences attributable to provisions,
inventories, deferred revenues and other items (JB-Hifi, 2017).
The movements upon consolidation are shown as extracted from the annual report:
(JB-Hifi, 2017)
There is no upward or downward revaluation with respect to the deferred tax assets. The reason
for the same is due to the fact that the entities within the group have entered into a tax sharing
and funding agreement. In line with the principles of Consolidation, each entity within the group
agrees to pay to the head entity an amount equivalent to its liability and vice versa and such
amounts are disclosed as receivables or payables in the consolidated financial statements
(Peirson et. al, 2015).
With reference to intangible assets, impairment testing is carried out every year. Moreover, an
impairment loss for such intangibles is identified as the excess of the net realizable amount over
its carrying amount. The upward or downward revaluations are carried out by assessment of the
assets and the annual report contains the accounting principles adopted by the company in such
cases (Brigs, 2013).
The annual report contains all the specific details that are needed for decision making, however,
there are certain items where the details are not provided by the organization. The details of any
specific assets being revalued upwards or downwards are not available in the annual report. Due
to the take over of the Good Guys, goodwill is recognized. The annual report contains a detailed
note explaining the same.
7

JB-Hifi
Due to the unavailability of any specific information in the annual report, details of any upwards
or downwards revaluations of noncurrent assets cannot be provided. However, the details of total
non-current assets of the Group can be observable from the annual report. In the year 2016, such
total non-current assets amounted to $289.9 million whereas, in the year 2017, it increased to
$1281.6 million (JB-Hifi, 2017). This sheds light on the purchase of additional non-current assets
betwixt 2016 and 2017.
8

JB-Hifi
References
Brigs, A. (2013) Financial reporting & analysis, Mason, Ohio: South-Western.
Deegan, C. M. (2011) In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
Parrino, R, Kidwell, D. and Bates, T. (2012) Fundamentals of corporate finance. Hoboken, NJ:
Wiley
Peirson, G, Brown, R., Easton, S, Howard, P. and Pinder, S. (2015) Business Finance, 12th ed.
North Ryde: McGraw-Hill Australia.
JB-Hifi. (2017) JB-Hifi annual report & accounts 2017 [online]. Available from:
https://www.jbhifi.com.au/Documents/2017%20Annual%20Report.pdf [Accessed 27 April
2018]
Hamilton, K., Hyland, B. and Dodd, J. L. (2011) Impairment: IASB-FASB Comparison. Drake
Management Review.[online]. 1(1), pp. 55–67. Available from:
https://pdfs.semanticscholar.org/8d8f/5fd070193d6fa52e79d1dee9cc6632159d8a.pdf [Accessed
27 April 2018]
Kieso, D., Weygandt, J., Warfield, T; Young, N. & Wiecek, I . (2010) Intermediate accounting.
Toronto: John Wiley & Sons Canada.
9