Accounting Concepts and Measurement Methods Used by Harvey Norman

This assignment covers various accounting concepts and methods used by Harvey Norman, including accrual, going concern, and consistency concepts. It also analyzes the company's valuation methods and management responsibility for financial statement preparation.

HA 3011
Advanced Financial Accounting

Table of Contents
Structure...................................................................................................................................................................................... 2
Introduction.................................................................................................................................................................................. 3
Description of Accounting Concepts............................................................................................................................................. 4
Conceptual Framework and the issue of measurement............................................................................................................... 7
Fundamental Qualitative Characteristics – Understanding of relevance and Representational Faithfulness.............................12
Conclusion.................................................................................................................................................................................. 13
References................................................................................................................................................................................. 14
pg. 1

Structure
In this assignment various accounting terms, concepts and methods used by one of the listed company Harvey norman will be covered and
described with citing some examples. It will be explained in detail in the later part of the assignment. It explains how various accounting
fundamental concepts are used and applied using appropriate assumptions in line with conceptual financial reporting framework. This
assignment also covers how estimates are made or what is the basis of accounting estimates. Besides accounting estimates, various valuation
methods used by Harvey norman is also analyzed and discussed. It also explains about the management responsibilty of preparation and
presentation of financial statement.
pg. 2

Introduction
Management of the company are accountable for preparing financial statement which gives a true and fair view and must be complied with
Australian accounting standards and the Corporations Act, 2011. Books of accounts of the company are prepared applying accrual concept of
accounting and such method of accounting is regularly employed by the company. Three major funadamental accounting concepts such as
accrual concept, going concern concept and consistency is regularly followed by company as per applicable financial reporting
framework.Annual report is prepared to meet the needs and expectations of various stakeholders. In broader aspects there are mainly two types
of stakeholders, one is internal stakeholders and second is external stakeholders (Andiola, Lambert, & Lynch, 2018). Internal stakeholders are
those who are internally related to company in the operation of company. Few examples of internal stakeholders are employees, board of
directors, managers, investors etc. In contrary external stakehloders are those who are not engaged in the operation of company but they are
indirectly affected by company’s performance. Examples of external stakeholders are financial institution such as banks, Government agencies,
consumers, investors, supplier’s etc. After preparation of annual report these are presented to shareholders or investors to show how the
company is working. It is also circulated to stakeholders to meet their desired expectations and know about the operations of the company.
pg. 3

Description of Accounting Concepts
There are major three types of accounting concepts which are compulsarily required to be followed and adopted in preparation of books of
accounts. Those accounting concepts are consistency, accrual and going concern. These fundamental accounting concepts are not required to be
disclosed if they are regulary applied but in case of any deviation or if company is not following those concepts then company should make
proper disclosure in the financial statement along with reason for not following accounting concepts. Disclosure is required because it can affect
the users of financial statements (Alexander, 2016).
Accrual concepts of accounting which is most fundamental principle of accounting requires that all incomes should be recorded as and when the
income is earned and not at the time they are actually received in cash likewise in case of expenses, expenses should be recorded and recognized
in books as and when they are incurred not when the expenses are actually paid. Accrual as an expense which is recorded in the current period
for which invoice from supplier is not received or as an income when billing is not made to debtors. Thus, second affect of accruals in the
income statement can be either assets or liabilties in the balance sheet. Harvey norman does its accounting on the basis of accrual concepts of
accounting, therefore disclosure is not made in the financial statement.
Going concern is a type of accounting concept which is based on the assumption that business will carry its operations for an forseeable future
alternatively it means that company will not be forced to stop its operations unless there is chances of liquidation where company can’t carry out
its operations. Therefore while preparing financial statement it is presumed that company has follwed the going concern concept and if there is
risk of continuity of operations then it should be properly disclosed in the financial statement. It is the responsibilty of management to asess
whether company will run its business for a forseeable future following going concern requirement. In case of Harvey Norman, there is no
question on going concern however,there could be some conditions or future events which could cause the group to think on going concern
assumption (Jones, 2017).
Consistency concept of accounting explains that method of accounting once adopted by company must be consistently followed in future periods
also with consistency. However, there are mainly three exceptions to that, such as: a.) Method of accounting could be altered due to change in
regulation or required by law b.) Accounting method could be changed due to change in australian accounting standards c.) Accounting
principle or method could be changed for better presentation of financial statement. Harvey Norman is consistently following the consistency
concept of accounting.
Apart from three major accounting concepts there are more accounting concepts such as conservatism concept, cost , Economic entity , Full
disclosure, Matching concept, Materiality concept, Reliability concept, Revenue recognition concept, Time period concept.
pg. 4

Conservatism concept of accounting explains that all expenses and liabilities should be recorded in books of accounts at earliest, however
income and assets should be recorded if there is surety that such income or revenue will be received. This concept is on the thought that losses
should be recognized earlier rather than later. Harvey Norman consistently follows the conservatism principle of accounting.
Cost principle of accounting explains that assets, liabilities and equity investments should be recorded or recognized at cost but not on fair value
or market value. However, on the contrary there are some accounting standards which requires assets and liabilities to be recorded at their fair
values. Harvey Norman consistently follows cost principle of accounting except where specifically accounting standard need to be followed in
such case they are recorded at their fair values (Smith, 2015).
Economic Entity concept says that business transactions should be separate from business owners and their businesses.
Full disclosure concept says entity should include all the relevant information along with financial statements of business so that readers of
financial statements such as shareholders, financial institution, suppliers gets the clear understanding of the financial statements. Harvey norman
has appropriately followed full disclosure concept by making full disclosures wherever required alongisde the financial statements.
Matching Concept explains that when revenue or income is recognized in the books all related expenses related to such income should also be
recorded at the same time. For example when revenue from sale is recorded at the same time inventory is charged to cost of goods sold.
Matching conceot is used by those entity who is using accrual concept rather than following cash method. Entity which is following cash
method of accounting they don’t adhere to matching concept (Mun, 2018). Harvey norman does its accounting on the basis of accrual method
of accounting on the same time it also follows the matching concept of accounting.
Materiality concept says that transaction should be recorded in the accounting records if it is not complete so it could alter the decision making
process of person reading the financial statements of entity.
Monetary unit concept says entity should record only that transactions which could be presented in form of value of currency. For example ,
purchase of machinery can be easily recorded in the books since it is in the form of unit of currency in contrary value of controls in the company
can’t be recorded as it is not in the form of value of currency.
Reliabilty Concept says only that transactions to be recognized or recorded in the books which could be easily proved. For example ,bill or
invoice from the supplier could be the proof that expenses are recorded.This concept is very useful for the auditors as it helps auditor to gather
evidences (Walker, 2007).
Revenue recognition concept as per generally accepted accounting priciples (GAAP) says that revenue should be recognized or recorded in the
books on ly when revenues are realizable and they are earned. Revenues are considered to be earned only when goods are transferred along with
the risk and rewards or services are rendered or provided irrespective of the fact that when cash is actually received by the company.Australian
pg. 5

accounting standard 15 deals with the revenue recognition .Harvey norman stricyly follows the revenue recognition concept of accounting as
per generally accepted accounting principles. It has the followed the application of Australian accounting standard 15 with regards to recognition
of revenue.
Time period concept says that company shall show results of its operations within a prescribed or applicable time line. This concept is based on
the idea to make defined set of comparable periods, which is helpful in case of trend analisys. Harvey Norman reports its results of operations
well within a prescribed timeline.It shows that the company is very efficient and follow the strict deadlines. It helps company a lot in making
trend analisys. Trend analisys is done on the basis of figures of current period transactions compared with that of figures of transactions of
previous period (Dopuch & Sunder, 1980).
pg. 6

Conceptual Framework and the issue of
measurement
Annual report of Harvey was analyzed and was observed that it has prepared its financial statement on the basis of applicable Australian
standards of accounting that are mandatory to be followed by a company which is listed as per the Corporation Act, 2001. Various items of
balance sheet is measured appropriately in preparation of financial statement. Australian accounting standard 139 deals with the recognition and
the measurement of financial instruments.
Financial Assets: Company records all its financial assets initially at fair value with addition to transaction costs subject to exception in case of
assets recorded at fair value through p & l account (ICAEW, 2011).
Financial assets of the company are classified into four parts for the requirement of subsequent measurement:
1.)Financial assets on fair value through P&L account
2.)Investments held till maturity
3.)Loans and receivables
4.)Financial assets which are held for sale
Financial Liabilities :Company records all its financial liabilities at fair value through profit and loss it also includes financial liabilities which
are held for trading. Company classify its financial liabilities as held for trading if such financial liabilities are purchased for the purpose of sell
in near period. If there is any gain or loss on liabilities which are held for trading are recorded in the income statement. Fiancial liabilities are
recorded at fair value in initial recognition when it meets the criteria of AAS 139.
Loans and Borrowings: Company measures loans and advances at amortized cost by using EIR method. If there is any gain or loss then they are
recorded in the income statement after the derecognition of liabilities.
Derecognition of financial liabilities: Company derecognise a financial liability if the obligation which is under liability gets discharged.
Measurement of property, plant and equipment : Company value its property, plant and equipment at fair value. However, there are various
methods used by company for the purpose of valuation. For the purpose of valuation of its retails properties in New Zealand initially income
capitalization method was used subsequently discounted cash flow method of valuation was also used to check if there is any material
pg. 7

differences on applying different methods but no differences were found applying both the methods of valuation. Various methods which are
used by company for the purpose of valuation are as follows: Income capitalization, cash flow , sale comparison , net market rent, capitalization
rate , terminal yield method, discount rate, price per square metre (Dichev, 2017).
Below table shows the reconciliation of properties- lands and buildings at fair value :
pg. 8

Below table explains the measurement at fair value and techniques of valuation used by the company :
pg. 9

Sensitivity information relating to PPE is described in below table:
Investments : Investment property of the company is shown at fair value. Every property of the company is the cause of lease or license in
favour of some other parties including a Harvey Norman, Domayne, And Joyce Mayne francisee. The fair value which is used by company for
each property is calculated using the income capitalization and current rental market value. All the investments are reviewed semi annually by
the review committee but the final determination is done by directors of the company. At reporting period approximately 1/6th of its portfolio is
independently valued by outside valuers while others is valued by Directors (Flower, 2015).
Below table explains the fair value and techniques of valuation used for Investment Properties :
pg. 10

All the transactions were properly recorded in the balance sheet with proper notes to accounts and appropriate disclosures wherever required.
pg. 11

Fundamental Qualitative Characteristics –
Understanding of relevance and Representational
Faithfulness
Preparation and presentation of quality financial statement is the primary responsibilty of management. Financial statement of company depicts
the financial ability of the company. Relevance of financial information really matters a lot to various stakeholders as on the basis of relevance
of financial position of the company shareholders or stakeholders invests money. As investors are not directly engaged in the operations of the
company so it becomes difficult for them to make decisions without proper financial relevant information.
Company properly make disclosures wherever required such as depreciation schedule is properly presented for current period with comparative
figures of previous period . It clearly shows that company is very much interested in providing relevance of financial information to outsiders or
stakeholders (Lavassani & Movahedi, 2017).
Below table shows the consolidated depreciation, amortization and impairment:
pg. 12

Company’s application of various accounting concepts, principles and policies shows the relevance and faithfulness to its users who are
ultimately the stakeholders of the company. It can be analyzed that company has given all the relevant financial information and data to the
stakeholders or investors well on time so that informed decisions can be taken by them (Gooley, 2016).
Conclusion
On the basis of above data it could be concluded that Harvey group has properly fulfilled its responsibility of preparation and presentation of
financial statement as per applicable financial reporting framework. Company has properly applied various accounting principles and methods as
per fundamental accounting concept. Company has also complied with Australian accounting standards wherever required. Company has also
explained the basis of accounting estimates and assumptions. Company Harvey Norman has also presented the director’s statement which is
required by the statute which depicts that company has followed compliance requirements. Auditor has also formed unqualified opinion on the
state of affairs of the company, thus it can be said that company is running its operations effectively and efficiently.
pg. 13

References
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-431.
Andiola, L., Lambert, T., & Lynch, E. (2018). Sprandel, Inc.: Electronic Workpapers, Audit Documentation, and Closing Review Notes in the Audit of
Accounts Receivable. Issues in Accounting Education, 33(2), 43-55.
Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), 617-632.
doi:https://doi.org/10.1080/00014788.2017.1299620
Dopuch, N., & Sunder, S. (1980). FASB's Statement on Objectives and Elements of Financial Accounting: A Review. The Accounting Review, 1(1), 16-18.
Flower, J. (2015). The International Integrated Reporting Council: A story of failure. Critical Perspectives on Accounting, 27, 1-17.
Gooley, J. (2016). Principles of Australian Contract Law (2 ed.). Australia: Lexis Nexis.
ICAEW. (2011). Measurement of Financial Reporting. Financial Reporting Faculty, 6-22.
Jones, P. (2017). Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.
Lavassani, K., & Movahedi, B. (2017). Applications Driven Information Systems: Beyond Networks toward Business Ecosystems. International Journal of
Innovation in the Digital Economy.
Mun, K. a. (2018). A close look at the role of regulatory fit in consumers’ responses to unethical firms.
Smith, G. S. (2015). The Accountant Stereotype: Positive or Negative? The Research Gate, 10(3), 1-3.
Walker, R. (2007). Reporting Entity Concept: A Case Study of the Failure of Principles-Based Regulation. Abacus, 43(1), 49-75.
pg. 14

pg. 15