Critical Analysis of Wesfarmers' Compliance with Conceptual Framework of Accounting

This report critically analyses the effectiveness of Wesfarmers to meet the requirements set out in conceptual framework of accounting. It examines the compliance of Wesfarmers with qualitative characteristics of financial information as set in conceptual framework.

Accounting Theory and Issue
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Introduction
The purpose of this report is to critically analyse the application of general purpose
financial reporting by Wesfarmers while preparing its financial report. The conceptual
framework set out the principle and guidelines on how to make compliance with requirement of
financial reporting. In this report the primary purpose of report is to critically analyse the
effectiveness of Wesfarmers to meet the requirements set out in conceptual framework of
accounting. Wesfarmers has listed in ASX100 and has to ensure that its financial report meet the
obligations of conceptual framework. In order to check the effectiveness of financial reporting
performed by Wesfarmers it has been decided to judge its financial report with characteristics of
financial information as given in conceptual framework.
Critical Analysis of ASX Listed Corporation Wesfarmer’s to meet Conceptual Framework
of Accounting
Wesfarmers is the one of biggest company of Australia that deals in retail industry.
Wesfarmers prepares its financial report (Annual report) every year and make compliance with
conceptual framework of accounting. Wesfarmers uses Australia Accounting Standards as the
basis of preparation of financial report. The main purpose of conceptual framework of
accounting is to provide the fundamental concepts for the preparation of financial report and
guide the International Accounting Standard Board (IASB) in developing the International
Accounting Standards (Henderson and Howieson, 2015). The aim of conceptual framework is to
make sure that accounting standards are conceptually consistent and transaction of same nature
are shown in financial report in same way so that it will provide investors with useful
information. Conceptual framework has been derived from the normative accounting theory that
provides the management at organization must work for their stakeholders through providing
useful information in form of annual report. Thus, it is most important for the listed entities to
prepare their annual report through making compliance with qualitative characteristics of
financial information as set in conceptual framework (Carlon, 2012).
The conceptual framework of accounting developed by the IASB for improving the
quality of financial reporting has stated the qualitative characteristics that business corporations
need to comply during development of general purpose financial statements. The fundamental
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qualitative characteristics are relevance and faithful presentation of information to the end-users
of financial information (Bazley and Robinson, 2014). The financial information is said to be
relevant if it has both a predictive and confirmatory value. The predictive value provides an
estimation of the future performance of an entity based on analysis of past and present financial
information. The confirmatory value provides an estimate of the actual financial position of an
entity based on its current financial position. As such, Wesfarmers have complied effectively
with this qualitative characteristic of financial reporting as it has provided both predictive and
confirmatory value of financial items (IFRS Conceptual Framework, 2018). The predictive value
is estimated with the use of accounting policies and judgments that provides a prediction of the
future events such as for income, expenses, inventories, provisions and contingencies
(Wesfarmers Annual Report, 2017). The confirmatory value is depicted with the use of AASB
accounting standards and interpretations for reporting the value of key financial items.
(Source: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-
annual-report.pdf?sfvrsn=0)
In accordance with the faithful presentation of information characteristics of conceptual
framework of accounting, the businesses need to depict the financial information that is
complete, neutral and error-free (Henderson and Howieson, 2015). The financial statements of
Wesfarmers are complete, neutral and error-free as stated by the director’s and audit declaration
statements that can be depicted as follows:
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(Source: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-
annual-report.pdf?sfvrsn=0)
As such, it can be stated from the directors and auditors’ declaration that the financial
statements are developed as per the international accounting standards and policies to provide
complete and true value of the financial position of the company. The company has developed
the financial statements as per the Corporations Act 2001 and AASB standards to provide
financial information that is neutral and complete in all aspects, Also, the company has adopted
the use of professional judgement of auditors in key maters to ensure that the financial
information is free from any type of materialistic error (IFRS Conceptual Framework, 2018).
ASX listed entities also need to comply effectively with the qualitative characteristics of
financial reporting as provided by the conceptual framework of accounting. These include
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comparability, understandability, verifiability and timeliness (Gaffikin, 2007). The most
important qualitative characteristic of financial information is understandability that provides
that financial information provided in financial report should be provided in such format that it is
readily understandable by the users of the financial statements. So according to this qualitative
characteristics of financial information Wesfarmers must present the financial data in presentable
manner together with the notes to accounts in form of supportive information that helps to
understand the financial statements in more precise manner (Wesfarmers Annual Report, 2017).
On the basis of analysis of financial report of Wesfarmers, it can be said that company
has provided its financial information as per the format described in the conceptual framework of
accounting and there are sufficient accounting disclosures provided in notes to accounts that
clearly shows that Wesfarmers make compliance with conceptual framework of accounting. One
more important point that need to be consider for checking the effectiveness of financial report is
that company must follow the accounting policies that are used to report the different elements of
financial statements. It has been seen that Wesfarmers has make compliance with accounting
policies as described in accounting standards. Following images shows that Wesfarmers has
presented the financial information as required to be shown according to conceptual framework.
Another main characteristic of financial information is comparability that requires companies to
present financial information for all the years so that it can be compared. It has been seen that
Wesfarmers has provided annual report for the years that helps the users to make comparison of
financial information (Wesfarmers Annual Report, 2017).
Verifiability characteristic of financial reporting states that the financial information
disclosed must be verifiable. A such, it is important for the business entities to provide
information relating to all assumptions, methods and context used for assessing the value of the
key financial items such as assets, liabilities, equity and others. In accordance with this
characteristic of financial reporting, the company has presented verifiable information as its is
numerically depicted so that it can be verified by the use of relevant accounting policies and
methods used for its calculation (Wesfarmers Annual Report, 2017). The general purpose
financial statements have disclosed the value of the key financial items in numerical form with
the relevant disclosure of the policies adopted for its calculation as depicted below:
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(Source: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-
annual-report.pdf?sfvrsn=0)
The timeliness characteristic of conceptual framework of accounting states that a
business entity need to develop and disclose the financial information in a regular and timely
manner. It can be stated form the analysis of annual report of Wesfarmers that it has complied
with this characteristic as it develops and discloses the financial reports on an annual basis
(Wesfarmers Annual Report, 2017).
Conclusion
It can be stated form the overall critical analysis carried out in the report that Wesfarmers,
an ASX listed entity, has complied effectively with the principles and obligations of conceptual
framework of accounting. It has developed quality financial statements as they present relevant,
faithful, comparable, understandable, verifiable and timely financial information. The financial
reports are developed as per the standard accounting policies and methods and thus it can be
stated that the financial reports have provided quality financial information.
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References
Bazley, M. and Robinson, P. 2014. Contemporary Accounting PDF. Cengage Learning
Australia.
Carlon, S. 2012. Accounting, Google eBook: Building Business Skills. John Wiley & Sons.
Gaffikin, M. 2007. Corporate Accounting in Australia. UNSW Press.
Henderson, S. and Howieson, B. 2015. Issues in Financial Accounting. Pearson Higher
Education AU.
IFRS Conceptual Framework. 2018. Conceptual Framework for Financial Reporting. [Online].
Available at: https://www.ifrs.org/-/media/project/conceptual-framework/fact-sheet-project-
summary-and-feedback-statement/conceptual-framework-project-summary.pdf [Accessed on: 3
September 2018].
Wesfarmers Annual Report. 2017. [Online]. Available at:
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0 [Accessed on: 3 September 2018].
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