Corporate and Financial Accounting: Financial Reporting Regulation and Analysis of ASX Listed Retail Companies

The report discusses the regulation and voluntary disclosure of financial reporting, AASB's participation in global accounting standard-setting process, and analysis of financial statements of four ASX listed retail companies. It also provides an understanding of owner's equity and a comparative analysis of debt and equity capital position of the selected companies.

Corporate and Financial Accounting
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Executive Summary
The report has been undertaken to gain an insight into the various aspects of the financial
reporting process. As such, it has specifically discussed the differing views and opinion of the
accountants in relation to regulation or non-regulation of the financial reporting process. It has
also been inferred that AASB is having a significant role in the development of a global set of
accounting standards as it has fully implemented IFRS in its financial reporting process. The
report has also carried out examination of the financial statements of four ASX listed retail
companies of Australia, that are Harvey Norman, JB Hi-Fi, Woolworths and Wesfarmers.
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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Corporate Regulation.......................................................................................................................4
Part i: Critical Discussion to analyze whether financial reporting should be regulated or
manager to be allowed to disclose financial reporting voluntarily..............................................4
Part ii: Critical Explanation of Australian Accounting Standards Board Participation of Global
Accounting Standard-Setting Process & Non-compulsion of IFRS by IASB Member Countries
......................................................................................................................................................5
Owner’s Equity................................................................................................................................7
Part iii: Statement of change in equity.........................................................................................7
Part iv: Comparative Position of debt and equity capital in case of all the four selected
companies...................................................................................................................................17
Conclusion.....................................................................................................................................17
References......................................................................................................................................18
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Introduction
The report is developed for presenting a critical discussion regarding regulation or
voluntarily disclosure of accounting formation by business entities. This is followed by critical
explanation of the participation of AASB in development of global accounting standard-setting
process. It has also provided a discussion of the non-compulsion of IFRS adoption by the IASB
member countries. The next section of the report has analyzed the footnotes of the financial
statement of four public limited companies listed on ASX. The companies selected for the
context are Harvey Norman, Jb Hi-Fi, Woolworth’s and Wesfarmers operating within retail
industry of Australia. The analysis of financial statement is carried to list the equity items and
describe the changes in equity of all these selected firms for past four years. At last, a
comparative analysis of the debt and equity position of the four selected firms has been
presented.
Corporate Regulation
Part i: Critical Discussion to analyze whether financial reporting should be regulated or
manager to be allowed to disclose financial reporting voluntarily
There have been ongoing many debates in relation to financial accounting standard setting.
The debate has put forth the views of many accountants about regulation of financial reporting
process or allowing the companies to voluntarily disclose the accounting information. The
importance of regulating the financial accounting or reporting process has been out forward as a
regulation approach by the accountants. The policymakers believe that regulation of financial
market is required for protecting the interest of the stakeholders. This is because development of
accounting regulation and policies to be followed by business entities during financial reporting
will enable in providing a framework to them to be complied (Camfferman, 2016). This would
ensure that business entities disclose reliable and complete materialistic information about their
financial performance to the end-users. Thus, the regulatory approach can be regarded as specific
means of achieving the interest of public through providing the approaches to them to achieve
the needs of the public as stated in the public interest theory. The presence of accounting
regulations would help in ensuring that business entities continually disseminate the complete
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and error-free materialistic facts to the end-users. It will help in ensuring that business managers
do not manipulate the financial information for the sake of their own profit maximization. Also,
the presence of a standardized framework for financial reporting would facilitate the decision-
making process of investors by enabling them to easily compare the financial information
disclosed by different entities (Wolk, Dodd & Rozicky, 2012).
On the other hand, the voluntarily disclosure of the financial information is explained by
the free-market approach that has stated that market mechanism itself caused the need for
business to disclose the reliable and relevant financial information for facilitating the decision-
making process of investors. The approach can be explained by the use of agency theory which
has stated the business managers are agents that have the responsibility of maximizing the
welfare of the owners, that are, the principal. As such, the disclosure of financial information
helps in reducing the conflict of inertest between the two by aligning their goals and objectives.
The business managers develop and publish the accounting information for maximizing their
own welfare as their remuneration is dependent on the firm performance. On the other hand, the
release of accounting information helps in promoting capital inflows to a firm by gaining capital
inflows from the investors and such maximize the return for shareholders by increasing its
profitability position. Thus, it can be said that business managers voluntarily disclose the
accounting information for attracting the investor by promoting transparency in their business
operations. As such, the free-market approach has eliminated the need for implementing
accounting regulations on business entities to publish the accounting information. This is
because the business entities voluntarily disclose the accounting information for increasing their
wealth and marinating their operating cost at minimum level. The demand for financial
statements comes from the end-users such as investors and creditors and thus managers are likely
to put forth their efforts for maximizing their own utility and acting in the interest of the
shareholders (Sorrentino, 2015).
Part ii: Critical Explanation of Australian Accounting Standards Board Participation of
Global Accounting Standard-Setting Process & Non-compulsion of IFRS by IASB Member
Countries
AASB (Australian Accounting Standards Board) is a professional body in Australia
holding the responsibility of establishing the type and nature of financial statements to be
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developed by the entities. The accounting standards are developed by the AASB as per the
Corporations Act 2001 and its overall functioning is regulated and controlled as per the
Australian Securities and Investment Commission Act 2001. AASB is currently placing larger
emphasis on implementation of International Financial Reporting Standards (IFRS) provided by
the International Accounting Standards Board (IASB) for promoting the uniformity in the
accounting standards across the world. IASB is highly committed in developing a single set of
high quality global accounting standards for promoting transparency and comparability across he
financial reporting. AASB is actively participating with IASB in achieving the objective of
converging accounting standards with IFRS for achieving congruency in accounting standards at
a global level. It has adopted IFRS for developing financial reports in the year 2005 as per the
Corporations Act 2001. It has also maintained a neutrality policy for recording the similar type of
accounting events or transactions in similar manner by profit or non-profit entities whether
operating in a private or public sector. It has developed revised IFRS for addressing the specific
requirements of non-for-profit entities within Australia (AASB, 2018).
The adoption of IFRS is still not mandated by the IASB as business entities requires large
changes to be incurred in their accounting system and processes for complying with the
standards. It requires significant investment and effort on the part of the companies and thus
require considerable amount of time to successfully adapt to the standards. In addition to this, the
accounting professionals such as auditors are required to gain an extensive knowledge about all
the changes that have occurred in the accounting process with the IFRS adoption (IFRS, 2018).
This requires adequate amount of training to be given to them so that they can meet their revised
roles and responsibilities with the convergence of accounting standards. Also, many jurisdictions
have maintained that their domestic accounting standards or regulation such as GAAP are similar
to IFRS and thereby have eliminated the need for adapting to IFRS. Some jurisdictions have also
maintained that the specific needs of their financial reporting can be met by local standards as
US is following GAAP and is not aiming to converge with IFRS. These all issues have caused
the IASB to still not mandate the adoption of IFRS by its member countries (IAS Plus, 2018).
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Owner’s Equity
Part iii: Statement of change in equity
In order to perform this task it has been decided to select four public listed companies
that belong to the retail consumer industry. These retail companies are Wesfarmers, Woolworth,
JB HiFi and Harvey Norman. In order to analyse the owner’s equity section of all four
companies for last four years data has been extracted from their annuals reports of year 2017 and
2015 as annual report will provide data for year 2017 and 2016 and annual report of year 2015
will provide data for year 2015 and 2014.
As it is merely impossible to list all the items of the statement of owner’s equity
manually, so, it has been decided to provide the screenshot of the statement of shareholders
equity from the annual reports of selected companies. After analyzing the statement of owner’s
equity of each company of last four years, the items in common will be analyzed together and
any specific item in any of the company will be separately explained to have more clarity of
items of owner’s equity.
Statement of change in equity: Wesfarmers
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(Source: Wesfarmers: Annual Report, 2015)
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(Source: Wesfarmers: Annual Report, 2017)
Statement of change in equity: Woolworth
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(Source: Woolworth: Annual Report, 2015)
10

(Source: Woolworth: Annual Report, 2017)
Statement of change in equity: JB Hifi
11

(So
urce: JB Hifi: Annual Report, 2015)
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(Source: JB Hifi: Annual Report, 2017)
Statement of change in equity: Harvey Norman
13

(Source: Harvey Norman Holding Limited: Annual Report, 2015)
14

(Source: Harvey Norman Holding Limited: Annual Report, 2017)
Understanding of each items of statement of change in equity and changes in each item
over the past four years
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Some of common items that are found in statement of change in equity of all the
companies are issued capital (also known contributed equity), retained earnings and reserves.
Issued Capital: It is also popularly known as share capital or contributed equity and this item
aims to provide the change in balance of equity that has attributable to stockholders at the
starting of the year after making the changes in respect of accounting policies and any correction
of prior period errors. This item shows the issue of further equity shares under various plans,
redemption or buy of equity shares, any consolidations, share issue cost and any other value that
aims to change the value of share capital. So it can be said that share capital is the most
important items in whole statement of change in equity (Firer, 2012).
In case of Wesfarmers, the value of issued capital has been reduced from $23290 million
in year 2013 to $22708 in year 2014 and it was further reduced to $ 21844 in year 2015 due to
reason of consolidations of shares and buy of shares. In year 2016 there was increase in value of
issued capital by $93 million due to issue of equity shares and it was further increase by $331
million in year 2017. In case of Woolworth the value of issued capital has been increased in
increased in years 2014 and 2015 and it was further increased in year 2016 and 2017 due to issue
of share capital various plan such as dividend reinvestment plan and employee long-term
incentive plans. The value of contributed equity in case of JB Hifi has been reduced in all the
four previous years due to share buyback. The value of contributed equity has been increased in
year 2015, with further increase in year 2016 and 2017 due to issue of new equity shares.
Retained Earnings: The next most important item represented in the statement of change in
equity is retained earnings. Retained earnings represent the profits that are retained by the
company after paying the dividend to the equity shareholders. Retained earnings represent an
essential item from the point of investors as this income typically belongs to them (Deegan,
2013). In case of Wesfarmers the value of retained earnings have increased in year 2014 while it
got decrease in years 2015 and 2016 due to dividend paid is much greater than the net profit
earned by the company in the respective years. In year the value of retained earnings has
increased again due to substantial increase in net profit of Wesfarmers. In case of Woolworth the
value of retained earnings has been increased in years 2014 and 2015 due to higher level of net
profits as compare to dividend paid, while in last two years the value of retained earnings has
been decreased due to lower net profits as compared to dividends paid by the company. It has
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been seen in case of JB Hifi that value of retained earnings has been increased in all four
previous years and it is only due to lower dividend per share as compared to EPS. Similarly in
case of Harvey Norman the value of retained earnings has increased in all four years due to
company has decided to reserve some part of net profits every year.
Reserves: Reserves represents amount that is set aside to bear the major expenses in future years.
Such reserves can set aside to settle change in fair value of items, foreign currency changes, cash
hedging, for general purpose, revaluation reserve and many more as per the requirement of the
company. In order to understand the change in value of reserves it is better to refer the individual
statements of change in equity for each company.
Part iv: Comparative Position of debt and equity capital in case of all the four selected
companies
Debt Capital
Companies 2014 2015 2016 2017
Wesfarmers $ 13,740.00 $ 15,621.00 $ 17,834.00 $ 16,174.00
Woolworth $ 13,611.10 $ 14,204.80 $ 14,720.30 $ 13,039.70
JB Hifi $ 565.20 $ 551.50 $ 587.60 $ 1,598.80
Harvey Norman $ 1,715.00 $ 1,801.60 $ 1,743.10 $ 1,376.80
Shareholder's Equity
Companies 2014 2015 2016 2017
Wesfarmers $ 25,987.00 $ 24,781.00 $ 22,949.00 $ 23,941.00
Woolworth $ 10,525.40 $ 11,132.00 $ 8,781.90 $ 9,876.10
JB Hifi $ 294.00 $ 343.00 $ 404.70 $ 853.50
Harvey Norman $ 2,491.10 $ 2,556.80 $ 2,688.60 $ 2,812.90
Debt to Equity Ratio
Companies 2014 2015 2016 2017
Wesfarmers 52.87% 63.04% 77.71% 67.56%
Woolworth 129.32% 127.60% 167.62% 132.03%
JB Hifi 192.24% 160.79% 145.19% 187.32%
Harvey Norman 68.85% 70.46% 64.83% 48.95%
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(Source: Annual reports)
Conclusion
Thus, it can be inferred from the overall discussion held in the report that regulation of
financial reporting is opposed by the free-market approach that promotes voluntarily disclosure
of financial information. Also, AASB is playing an important role in development of global
accounting standard-setting process. However, some of the jurisdictions are still facing issues in
adoption of IFRS that need to be resolved for promoting the development of internationally
recognized set of accounting standards.
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References
AASB. 2018. The AASB’s For-Profit Entity Standard-Setting Framework. [Online]. Available
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[Accessed on: 27 September 2018].
Camfferman, K. 2016. The Challenge of Setting Standards for a Worldwide Constituency:
Research Implications from the IASB’s Early History. European Accounting Review 27(2).
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
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[Accessed on: 28 September, 2018].
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https://www.jbhifi.com.au/Documents/Annual%20Report%20-%202015.pdf [Accessed on: 28
September, 2018].
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September, 2018].
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Sorrentino, M. 2015. The “Production” of Accounting Information between Regulatory and Free
Market Approach: An (Eternally) Open Issue. Journal of Modern Accounting and Auditing 11
(1), pp.1-9.
Wesfarmers: Annual Report. 2015. [Online]. Available at:
https://www.wesfarmers.com.au/docs/default-source/reports/2015-annual-report.pdf?sfvrsn=4
[Accessed on: 28 September, 2018].
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