Financial Analysis of Australian Companies

This assignment tasks students with analyzing the financial reports of two prominent Australian companies, Woolworths Limited and Wesfarmers Limited. The analysis covers key aspects such as accounting policies for intangible assets and property, plant, and equipment; lease arrangements including values of leased assets and liabilities; voluntary disclosures made by each company; and the auditing reports issued in accordance with relevant standards.

Master of Professional Accounting
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Contents
Introduction......................................................................................................................................3
Part A: Company- Introduction, Business & operating activities, Finances and Financial
performance.....................................................................................................................................3
Brief introduction to the selected company and about its competitor..........................................3
Financial Structure of the company.............................................................................................4
Director’s Declaration in the annual report..................................................................................5
Events are the reporting date........................................................................................................6
Change in Accounting Polices.....................................................................................................6
Part B: Assets – PPE and Intangibles..............................................................................................7
Information regarding the carrying amount of each class of Property, Plant and Equipment.....7
Description of the accounting policies relating to property, plant and equipment......................8
Intangible assets and their composition.......................................................................................9
Accounting policies regarding the Intangible assets..................................................................11
Part C: Leases and Voluntary Disclosures.....................................................................................11
Values of the leased assets and liabilities..................................................................................11
Voluntary disclosures.................................................................................................................12
Auditing.....................................................................................................................................12
References......................................................................................................................................13
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Introduction
Financial reporting is the most part in the accounting process and there are international
accounting standards issued to regulate the process of whole system of financial reporting.
Financial reporting means the process of preparation of financial statements and notes to
accounts using the accounting issued by the respective country after giving regards to the
international accounting standards.
In this report, a company listed on the Australian stock exchange has been selected to
make analysis on various aspects. Together with this competitor analysis has also been done to
perform comparisons between the selected companies in the same industry. The main company
selected from the list provided is Woolworth and its competitor is Wesfarmers. Both these
companies belong to the retail industry of Australia.
Part A: Company- Introduction, Business & operating activities, Finances and Financial
performance
Brief introduction to the selected company and about its competitor
Woolworth is the multinational company that is operating is many nations. In Australia,
company mainly operates in supermarket chain and it has more than 1000 stores across
Australia. The core business activity of Woolworth includes selling of groceries items such as
vegetables, food products, all types of consumer durables and many more. Woolworth is
regarded as the biggest super market chain in Australia and it was established in year 1924, in
Sydney. The rival company of Woolworth in Australia is Wesfarmers and it was first set up in
year 1914 as the Australia farmers’ cooperative and currently it is one of the largest growing
companies in Australia. The company has its business in few countries like Australia, New
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Zealand, Ireland and United Kingdom (About Wesfarmers, 2017). The Wesfarmers deal in
supermarkets, departmental stores, office supplies, home improvement goods and services, safety
products, coal production and distribution, chemicals and many others. Headquarter of the
Wesfarmers was located in Perth, Australia (About Woolworth, 2017). It has been reported that
about 80 % of the retail industry was under control of Woolworth and rest is enjoyed by its
competitor. The growing business of Wesfarmers in Australia will provide huge competition to
the Woolworth in future time period.
Woolworth and Wesfarmers both operate in retail industry of Australia. Retail industry in
Australia is growing and there is huge scope for the companies to earn good return. The main
competitors of Woolworth are Wesfarmers, Myer and David Jones.
Financial Structure of the company
There are mainly two sources of finance. They are internal source of finance and external
source of finance. Internal source of finance means the owner’s own capital has been used to
finance the business and retained earnings are put to use in the business development. While
external sources of finance includes issue of equity shares and taking loan from banks. Generally
companies use external sources of finance to fund their business. Issue of equity shares was most
common source of finance for public listed companies like Woolworth and Wesfarmers. Equity
capital is also regarded as the owner’s capital as shareholder’s become the owner’s of the
company. After analyzing the capital structure of the Woolworth Group it can be said that in year
2016, 5727.6 million dollars of debt and 5347.00 million dollars of equity capital was financed
through external sources of finance while 3124.5 million dollars is of retained earnings which is
regarded as internal sources of finance (Annual Report 2016: Woolworth Group). Wesfarmers
has 7410.00 million dollars of debt and 21937.00 million dollars of equity capital was financed
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through external sources of finance while 874.00 million dollars is of retained earnings which is
regarded as internal sources of finance (Annual Report 2016: Woolworth Group).
Director’s Declaration in the annual report
Directors of the Woolworth Group have declared following elements of financial performance:
 As per the opinion of the directors company will be able to discharge all its debt when it
is become due in normal course of business.
 In the views of directors the financial statements of the company present clear picture of
financial health of company and they are prepared in compliance with the International
Financial Reporting
 Standards, as stated in Note 1 to the financial statements.
 The company financial statements and notes to accounts are made in accordance with the
Companies Act 2001 and it also compliance with the accounting standards issued by the
Australian Accounting Board. The statement provides the true and fair view of the
financial performance of the company (Annual Report 2016: Woolworth Group)
Following declaration has been provided by the directors of the Wesfarmers:
 The financial statements and its related notes to accounts are being prepared as per the
Corporation Act 2001.
 Financial Statements provide true and fair view of consolidated financial position as on
reporting date and also performance of the year ended on the reporting date
 The financial statements compliance with the Australian Accounting Standards and
interpretations and other regulation of the Corporation Act
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 All the financial statements are prepared in accordance with the International Financial
Reporting Standards
 Company will able to pay its debt as and when it arises (Annual Report 2016: Woolworth
Group)
It can be said that director’s declaration is almost same in the both the companies.
Events are the reporting date
Events that occur after the balance sheet date and are important to be disclosed in the
notes to account are known as subsequent events. Subsequent events have been disclosed by the
Woolworth in their annual report under notes to account. The subsequent events that are
disclosed by the Woolworth are related to its Home Improvement business unit. “As per details
this event took on 24 August, 2016 and according to mention information, company and/or
entities in the Hydrox Group entered into a series of arrangements related to the company’s exit
from the Home Improvement business” (Annual Report 2016: Woolworth Group).
In case of Wesfarmers a small event took place after the reporting date. Company has
declared fully franked final dividend of $0.95 per share that amount to final dividend of $1070
million and it has been paid on 5 October, 2016 (Annual Report 2016: Woolworth Group).
Change in Accounting Polices
As per the notes to account of the Woolworth Company there has been no change in the
accounting policies in the reporting period of Annual report 2016 (Annual Report 2016:
Woolworth Group). Similarly in case of Wesfarmers, there has been no information in the notes
to accounts regarding the change in accounting policies (Annual Report 2016: Wesfarmers
Group).
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Part B: Assets – PPE and Intangibles
Information regarding the carrying amount of each class of Property, Plant and
Equipment
In order to present the information regarding the carrying amount of property, plant and
equipment extract form the annual report of the Woolworth has been taken as below:
Table Showing the Value of Carrying Value of Property, Plant and Equipments as on
year ended 2016
Amount in million dollars
Items under Assets Section (PPE)
Cost at starting
of Year
Accumulated
Deprecation
Carrying
Value
DEVELOPMENT PROPERTIES $ 358.30 $ (1.60) $ 356.70
FREEHOLD LAND,
WAREHOUSE, RETAIL AND
OTHER PROPERTIES $ 1,435.50 $ (116.00) $ 1,319.50
LEASEHOLD IMPROVEMENTS $ 3,269.60 $ (1,474.10) $ 1,795.50
PLANT AND EQUIPMENT $ 13,937.00 $ (9,145.90) $ 4,791.10
TOTAL $ 19,000.40 $ (10,737.60) $ 8,262.80
(Annual Report 2016: Woolworth Group)
Below is the table that shows the carrying value of property, plant and equipment that is
presented in the annual report of Wesfarmers:
Table Showing the Value of Carrying Value of Property, Plant and Equipments as on
year ended 2016
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Amount in million dollars
Items under Assets Section (PPE)
Cost at starting
of Year
Accumulated
Deprecation Carrying Value
Freehold land
$
1,470.00 $ -
$
1,470.00
Buildings
$
1,082.00 $ (156.00)
$
926.00
Leasehold improvements
$
1,682.00 $ (757.00)
$
925.00
Plant, vehicles and equipment
$
12,860.00 $ (7,030.00)
$
5,830.00
Mineral lease and development
$
996.00 $ (535.00)
$
461.00
TOTAL
$
18,090.00 $ (8,478.00)
$
9,612.00
(Annual Report 2016: Wesfarmers Group)
Description of the accounting policies relating to property, plant and equipment
Companies make use of accounting to figure out the value of property, plant and
equipment and they disclose these policies under notes to account.
Accounting policies of the Woolworth regarding the property, plant and equipment
 The carrying value of property, plant and equipment means cost less accumulated
depreciation or any amortization. Accumulated impairment losses are also being charged
to the cost of the assets to calculate the carrying value of assets.
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 Depreciation is being done on straight line basis over the useful life of the assets. Useful
lives have to reassess every year and changes are made accordingly. The useful lives of
buildings are estimated at 25 to 40years, plant and equipment at 2.5 to 10 years and
leasehold improvements at maximum of 25 years for retail properties and 40 years for
hotels.
 Sale proceeds from the property, plant and equipments are recognised at value received
by the buyer on any date as per the agreement made (Annual Report 2016: Woolworth
Group)
Accounting policies used by the Wesfarmers in contest of property, plant and equipment
 Wesfarmers value their assets at cost less depreciation and impairment of assets
 Assets are depreciated on straight line basis over the estimated useful life of assets.
Buildings are estimated to be for 20 to 40 years and plant and equipment are estimated to
be of 3 years to 40 years.
 Any de-recognition or sale of assets is valued at the sale price and impact of this has been
shown in the cost of assets (Annual Report 2016: Wesfarmers Group)
Intangible assets and their composition
Below table will provide the composition of the intangible assets with regards to
Woolworth in year 2016
Table Showing the Value of Carrying Value of Intangible assets as on year ended 2016
Amount in million dollars
Intangible assets
Cost at starting
of Year Impairment Carrying Value
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GOODWILL $ 3,731.30
$
(94.00) $ 3,637.30
BRAND NAMES
$
285.40
$
(31.50)
$
253.90
LIQUOR AND GAMING
LICENCES $ 2,145.80
$
(135.90) $ 2,009.90
OTHER
$
173.70
$
(96.50)
$
77.20
TOTAL $ 6,336.20
$
(357.90) $ 5,978.30
(Annual Report 2016: Woolworth Group)
Following table will provide details of the carrying value of each intangible asset of Wesfarmers:
Table Showing the Value of Carrying Value of Intangible assets as on year ended 2016
Amount in million dollars
Intangible assets
Cost at starting
of Year Impairment Carrying Value
Goodwill $ 16,556.00 $ (2,108.00) $ 14,448.00
Trade names $ 3,838.00
$
(21.00) $ 3,817.00
Contractual and no contractual
relationships $ 84.00
$
(28.00) $ 56.00
Software $ 1,334.00 $ (738.00) $ 596.00
Gaming and liquor licenses $ 156.00 $ - $ 156.00
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TOTAL $ 21,812.00 $ (2,895.00) $ 18,917.00
(Annual Report 2016: Wesfarmers Group)
Accounting policies regarding the Intangible assets
Both the companies have calculated goodwill on the cost (determined at the time of
acquisition) and after that it is measured at cost less any accumulated impairment.
No impairment has been done in relation to property, plant and equipment.
Part C: Leases and Voluntary Disclosures
Values of the leased assets and liabilities
As analyzed from the annual reports of Woolworths Limited, the value of operate lease
commitments are $2,073.1m (Annual Report 2016: Woolworth Group). These are classified as
finance leases and are stated as expenses through the use of straight-line basis over the lease
term. On the other hand, the value of asset assets is $21 m and the value of leased liabilities is
$2,456 m. The leases are classified as operating and finance leases based on the ownership
structure of the company. The leases are measured through the use of straight-line method over
the lease term and are recognised as expenses in the income statement (Annual Report 2016:
Wesfarmers Group).
Voluntary disclosures
The Wesfarmers Limited have provided voluntary disclosures regarding its taxation
structure as per the tax transparency code (TTC) adopted by the Australian government. In
addition to this, the company also voluntary complies with the Food and Grocery Code of
Conduct (Annual Report 2016: Woolworth Group). These voluntary disclosures are provided by
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the company with the aim of improving its brand image in the global market. The voluntary
disclosures improve the transparency of business operations in the eyes of its stakeholders and
thus improving its growth and development. However, the Woolworths do not provide any
voluntary disclosures in its annual report (Annual Report 2016: Wesfarmers Group).
Auditing
The auditing of Woolworths has been done by Deloitte and the company provides a
qualified auditing report as per the AASB standards and Corporations Act 2001 (Annual Report
2016: Woolworth Group). The Wesfarmers have also developed a qualified auditing report
prepared by Ernst and Young in accordance with the Corporations Act 2001 (Annual Report
2016: Wesfarmers Group).
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