Wesfarmers PPE Valuation Analysis

This assignment critically examines the property, plant, and equipment (PPE) valuation practices employed by Wesfarmers Limited in accordance with the Australian Accounting Standards Board (AASB) guidelines. It analyzes whether Wesfarmers' disclosures adequately meet the qualitative characteristics of relevance and understandability outlined in the conceptual framework. The report identifies areas for improvement, recommending the adoption of fair value accounting and adjustments to useful lives and depreciation methods to enhance the accuracy and transparency of PPE reporting.

Master of Accounting

Executive Summary
The present report analyses the market disclosure made by an ASX listed company
for understanding the importance of meeting the objectives of general purpose financial
reporting for business corporations. This is done to ensure that the financial reports meet the
objective of general purpose financial reporting. The qualitative characteristics outlined by
the conceptual framework (CF) developed by IASB are relevancy, reliability,
understandability and comparability. The report has been prepared on the perspective of an
accounting graduate submitting the analysis of disclosures of the company selected in relation
to PPE to the Chief Financial Officer (CFO).

Contents
Introduction................................................................................................................................4
Explanation of General purpose financial reporting objectives and the qualitative
characteristics of useful financial information as per CF...........................................................4
Extent of Wesfarmers Limited annual report meeting the disclosure requirements for PPE as
per AASB 116............................................................................................................................5
Critical analysis of extent of disclosures on PPE of Wesfarmers to satisfy the fundamental
and enhancing qualitative characteristics of useful financial information.................................6
Critical discussion to the extent of the disclosures of Wesfarmers on PPE aligned with the
objective of general purpose financial reporting and recommendations for improvement.......7
Conclusion..................................................................................................................................8
References..................................................................................................................................9

Introduction
The business corporations around the world are emphasizing on developing high-
quality financial reports as per the qualitative characteristics of conceptual accounting
framework. The IASB (International Accounting Standards Board) has directed all the
business corporations to develop their financial reports as per the qualitative characteristics
prescribed in its conceptual framework for financial reporting. The report specifically
addresses the deviations observed in meeting the objective of general purpose financial
reporting by the company in relation to Property, Plant and Equipment (PPE). The company
selected for the purpose is Wesfarmers Limited, a supermarket giant in Australia involved in
variety of business operations including chemicals, fertilizers, industrial products, home
improvement and many others. The report reviews the disclosures made by the company in
relation to PPE and their alignment with the CF objective and qualitative characteristics
based on board of director’s decision on the perspective of an accounting graduate.
Explanation of General purpose financial reporting objectives and the qualitative
characteristics of useful financial information as per CF
The objective of general purpose financial reporting as advocated by the IASB is to
provide useful financial information of a reporting entity to the end-users including potential
investors, lenders and creditors. The disclosure of all the necessary financial information to
the stakeholders of a business entity is essential for supporting their decision-making process
through gaining a complete understanding of its financial resources. The decisions include
buying or lending equity and debt instruments, providing or settling loans and similar
investment decisions. As such, the IASB has developed conceptual accounting framework for
financial reporting that has stated the qualitative characteristics that financial information of a
reporting entity must possess in order to meet the needs of end-users. The fundamental
qualitative characteristics are relevance, faithful presentation, understandability and
comparability (Macve, 2015).
The relevance principle of CF states that financial information should be relevant
enough to make a difference in the decisions of the end-users. Thus, as per this qualitative
characteristic, the financial information disclosed must have both predictive and confirmatory
value. The confirmatory value should provide feedback about its current and past
performance while predictive value should be able to provide an analysis of its future

performance. The faithful presentation of the financial reports states that financial
information disclosures should be complete, neutral and error-free. Thus, it should provide an
in-depth understanding of the phenomena involved through depicting all the necessary
descriptions and explanations. On the other hand, the comparability qualitative
characteristics requires that financial information provided to the end-users must provide an
analysis of the increase or decrease in the current financial performance of an entity in
comparison to the past performances. In addition to this, the understandability of financial
information ensures that it is simple to be understood by the end-users within involving any
complexity (Harvey, McLaney and Atrill, 2013).
Extent of Wesfarmers Limited annual report meeting the disclosure requirements for
PPE as per AASB 116
The accounting standard of AASB 116 has provided the guidelines to all the ASX
listed business entities to value the property, plant and equipment (PPE). The standards has
prescribed to take into account the carrying amounts and the deprecation and impairment
charges related to PPE at the time of their measurement during financial reporting. As per the
standard, the carrying value of an asset is recognized after deducting all the accumulated
deprecation and impairment losses. The useful life of an asset is the period over which an
asset is expected to be available for future use by an entity. The recoverable amount of an
asset is said to be higher of either fair value of an asset loss cost to sell or its value in use. The
impairment loss can be recognized to be the amount by which its carrying value exceeds the
recoverable amount. The annual report of Wesfarmers Limited has stated the effective
compliance of the company with the AASB 116 in relation to identification and recognition
of property, plant and equipment (Compiled AASB 116 Standards, 2017).
The carrying value of PPE is measured on the cost basis through deducting all the
significant deprecation and impairment losses as per the AASB 116. The items of property,
plant and equipment is put to sale or is disposed when it is regarded to bring no future
economic benefits to the company. The significant gain or loss arising from its sale is
reported in the income statement of the period when the corresponding items is derecognized.
The company has also provided disclosure regarding the key estimates taken by the
management in estimating the useful life, residual value and amortization methods for its
items of PPE (2017 Annual Report: Wesfarmers, 2017). Thus, it can be said that Wesfarmers

have effectively complied with AASB 116 standard during financial reporting if its items of
property, plant and equipment that can be depicted as follows:
Source: http://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-
annual-report.pdf?sfvrsn=0
Critical analysis of extent of disclosures on PPE of Wesfarmers to satisfy the
fundamental and enhancing qualitative characteristics of useful financial information
It can be said on the basis of analysis of PPE disclosure of Wesfarmers that it has
effectively complied with all the AASB 116 standard requirements. However, the company
has not satisfied the fundamental and enhancing qualitative characteristics of useful
financial information. For example, the company has incorporated the use of historical cost
basis for measuring the carrying value of its fixed assets of property, plant and equipment
(2017 Annual Report: Wesfarmers, 2017). The use of historical cost basis indicates that the
financial information provided by the company is not relevant. For example, the company has
estimated the useful life of its buildings between 20-40 years and plant and equipment to be
in 3-40 years. Thus, there is n change in the useful life of assets during measuring its value
after 20 years. This indicates that the company financial information relating to property,
plant and equipment is not error-free as the building purchased 20 years ago would have

different material value in the current market. Thus, the financial information is not relevant
as it has not taken into account the current value of property, plant and equipment through
adjusting their useful life as per the current market conditions (Compiled AASB 116
Standards, 2017).
In addition to this, the company calculates deprecation value through the use of
straight-line basis that is not effective method for measuring deprecation on some of the
equipments of the company such as computers due to rapid development in technologies.
Also, the method does not accurately reflect the difference in asset use from one period to
another and it does not match the costs with revenues of different types of long-term assets.
Thus, it can be said that the company does not comply with the understandability qualitative
characteristics of useful financial information through implementing the use of straight-line
deprecation method (2017 Annual Report: Wesfarmers, 2017). The end-users are not able to
match the revenue with expenses of long-term assets of the company with the use of the
depreciation method (Alexander, Britton and Jorissen, 2007).
Critical discussion to the extent of the disclosures of Wesfarmers on PPE aligned with
the objective of general purpose financial reporting and recommendations for
improvement
The objective of general purpose financial reporting is to protect the interests of end-
users through providing them materialistic financial information that can be used by them for
making investment decisions. As analyzed form the annual report of Wesfarmers Limited, the
company has valued the items of property, plant and equipment as per the AASB 116
standards. However, the company has not adequately met the relevancy and understandability
qualitative characteristic of conceptual accounting framework. Therefore, the company has
not appropriately aligned its PPE disclosures with the objective of general purpose financial
reporting. This is because the company has not provided the relevant and understandable
financial information relating to PPE to its end-users (2017 Annual Report: Wesfarmers,
2017). The company as such is recommended to incorporate the use of fair value accounting
in recognizing the carrying value of its long-term assets. The AASB 13 standard has provided
the guidelines to the business corporations regarding the use of fair value in measuring the
value of its fixed asset such a property, plant and equipment. The use of fair value would help
in identification of accurate value of recoverable amount, residual and useful life of assets
based on current market conditions (AASB 13, 2015).

The company is recommended to adjust the useful life of assets relating to items of
property, plant and equipment in order to record the realistic and reliable value of property,
plant and equipment. This is required by the company to provide relevant and reliable
information to the end-users about its items of PPE. In addition to this, the company is
recommended to incorporate the use of reducing balance method for calculating deprecation.
This method of deprecation is simple to be understood by the end-users as deprecation for
every year is calculated on the opening balance of an asset in his method. Also, it easily
matches the cost and revenues of the business and therefore simplifies for users to understand
the financial statements developed by the company as per the understandability principle of
conceptual accounting framework (Harvey, McLaney and Atrill, 2013).
Conclusion
It can be inferred from the overall discussion held in the report that business
corporations should satisfy the qualitative characteristics of conceptual accounting
framework for meeting the objective of general purpose financial reporting. The Wesfarmers
though have effectively complied with all the necessary AASB standard in relation to
property, plant and equipment need to incorporate some changes in its valuation techniques
for meeting the objective of financial reporting.

References
2017 Annual Report: Wesfarmers. 2017. [Online]. Available at:
http://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0 [Accessed on: 4 September 2017].
AASB 13. 2015. Fair Value Measurement. [Online]. Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf [Accessed on: 4
September 2017].
Alexander, D., Britton, A. and Jorissen, A. 2007. International Financial Reporting and
Analysis. Cengage Learning EMEA.
Compiled AASB 116 Standards. 2017. [Online]. Available at:
http://www.aasb.gov.au/admin/file/content102/c3/AASB116_07-04_ERDRjun10_07-09.pdf
[Accessed on: 4 September 2017].
Harvey, D., McLaney, E. and Atrill, P. 2013. Accounting for Business. Routledge.
Macve, R. 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat? Routledge.