Adherence to Conceptual Framework of Accounting: A Case Study of Wesfarmers

This report analyzes Wesfarmers' adherence to the conceptual framework of accounting, including general purpose financial reporting, recognition criteria, and fundamental qualitative characteristics. The report also provides recommendations for improvement.

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CONTEMPORARY ISSUES

Wesfarmers
Executive Summary
Conceptual framework is one of the important factors when it comes to the performance of a
company because it stress upon the fact whether it has complied with all the regulations. It
helps the user of the financial statements to make decision in an appropriate manner. For this
report, Wesfarmers has been selected and due consideration has been provided on general
purpose reporting framework, recognition principle, etc. Considering the mentioned factors,
an analysis is done.
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Contents
Introduction...........................................................................................................................................3
Adherence to General Purpose financial reporting...............................................................................4
Recognition criteria...............................................................................................................................4
Fundamental qualitative characteristic.................................................................................................6
Recommendation..................................................................................................................................8
Conclusion.............................................................................................................................................9
References...........................................................................................................................................10
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Wesfarmers
Introduction
In the current corporate environment, consideration of conceptual framework objective is
very vital for both users and preparers of financial statements as it allows them to interpret
financial information in a far better way. This can, in turn, assist them in making appropriate
financial decisions based on the information that has been interpreted by them. Furthermore,
consideration of conceptual framework of accounting also assists in enhancing qualitative
characteristics of financial information such as comparability, timeliness, reliability, faithful
representation, etc (Wesfarmers, 2017). This sheds light on the fact that companies who not
prioritize adherence to the conceptual framework of accounting may fail to sustain in such
complicated corporate environment wherein decision-making process on the part of preparers
and users is crucial. This report assists in assessing Wesfarmers’ endeavor in satisfying the
requirements of the conceptual framework of accounting.
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Wesfarmers
Adherence to General Purpose financial reporting
Wesfarmers Ltd complies with the AASB and conceptual framework of accounting in order
to make sure that its stakeholders are offered better and advanced financial information that
can assist them in making proper decisions. In response to the exposure draft of IASB, the
companies remain consistent in its strategies to consider the goals of the conceptual
framework (Wesfarmers, 2017). Further, the company has guaranteed reliable access to the
users in order to facilitate the availability of appropriate information that can, in turn, assist
them in understanding the characteristics and quality of corporate reporting. In addition,
Wesfarmers also offers relevant details regarding its policies and procedures that help users
in understanding the significance of available financial information, thereby shedding light on
the company’s consideration of accounting conceptual framework (Deegan, 2011).
Furthermore, the company has offered relevant information together with notes to financial
statements in order to ensure meaningfulness and reliability on the part of users in making
effective decisions (Davies & Crawford, 2012). Moreover, sustainability also forms part of
the company’s financial statement that ensures adequate disclosure of both financial and non-
financial performances of the Group. In addition to this, Wesfarmers also offer significant
details of its past five years performance history to its stakeholders that easily facilitates in
understandability and comparability on their part. Nevertheless, the methods taken into
account by the company in relation to discharging its obligations for the fulfillment of
strategic purposes has also been disclosed by the Group for considering the obligations of the
conceptual framework (Wesfarmers, 2017). Overall, the company has offered accurate and
adequate information to the users about its financial performance during a period by
depicting alterations in its claims and financial resources except those obtained from
investors and creditors so that past and future ability of total cash flows can be generated
(Parrino et. al, 2012). This highlight the Group’s consideration of accounting conceptual
framework.
Recognition criteria
The accounting policies of Wesfarmers have been created based on AASB, Australian
Accounting Standards, IFRS, IASB, and requirements of Corporations Act 2001
(Wesfarmers, 2017).
Revenue
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The Group’s revenue is measured at fair value of received consideration or receivable.
Further, it is recognized if it addresses the following criteria. In relation to the sale of goods,
revenue is identified when potential rewards and risks of goods ownership that has been
passed to the buyer and can be reliably measured. Further, revenue from rendered services is
recognized based on completion of such services. In relation to interest, revenue is identified
as the interest accrues on the associated financial asset (Carmichael & Graham, 2012). Lastly,
revenue from dividends is identified when the company’s right to obtain the payment is
created.
Employee benefits expense
Contributions to stated contribution funds are recognized as costs as they become payable.
Further, prepaid contributions are recognized as assets that a reduction or cash refund in
future payment is prevalent (Peirson et. al, 2015).
Operating Leases
Payments associated with operating lease are recognized as expenses in the income statement
over the lease term on a straight-line basis. Further, operating lease incentives are identified
as a liability when they are attained and released to the income statement over the term of the
lease. Further, fixed-rate enhancements to lease payments are recognized in the same way
(Wesfarmers, 2017).
Contingent rental payments
Such payments are made as an outcome of either movements or turnover-based rentals in
significant indices. These payments are recognized in the statement of income as they are
incurred.
Finance costs
These costs are recognized as expenses when they have incurred apart from interest charges
associated with potential projects with significant development and phases of construction
(Wesfarmers, 2017).
Deferred taxes
Deferred income taxes (liabilities) are recognized for every taxable temporary difference and
deferred income tax (assets) are recognized for every deductible temporary variation, carried
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forward unused tax losses and assets to the extent it becomes feasible that taxable profit will
be prevalent to utilize them.
Intangible assets
The company’s intangibles are procured separately and are measured on initial recognition at
cost. Further, cost of such intangibles is their fair value at the acquisition date. After initial
recognition, intangibles are carried at cost minus impairment losses and amortization
(Wesfarmers, 2017).
Trade receivables
Such trade receivables recognized initially at their fair value and subsequently at amortized
expense utilizing the efficient interest method minus an allowance for impairment.
Supplier rebates
The recognition of such item in the statement of income of the Group necessitates
management to estimate both the purchase volume that will be made in a period and the
associated product that is sold and remains in the inventory at the final reporting date.
Fundamental qualitative characteristic
The Group has complied with various fundamental and enhancing guidelines that have
assisted it to remain firm in its industry and allow the stakeholders in the proper decision-
making process through enhanced disclosure strategies (Choi & Meek, 2011). It has a
materiality guideline within its framework that has allowed it to ascertain the materiality of
any information, facts, or scenarios in relation to the principles of ASX, in particular, the
characteristics significant to evaluating the independence of directors. Further, such
materiality guideline is applied by the company in accordance with the AAS (Wesfarmers,
2017). This allows Wesfarmers to comply with the materiality qualitative characteristic of
financial reporting that is a crucial element in fulfilling the obligations of the conceptual
framework of accounting. The company is also committed towards effective sustainability
practices that allow it to report significant information related to its corporate social
responsibility and other relevant data (Petersen & Plenborg, 2012). Besides, the annual report
of the Group aligns with the comprehensive choice wherein all signs and potential details of
crucial segments are reported by the company. Nonetheless, this also assists the company in
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complying with the fundamental qualitative characteristic of relevance in its reporting
approach (Gowthrope, 2011).
In addition to this, the company has also adhered to a risk management guideline within its
affairs that assists it in managing both internal and external risks posing a major threat to its
overall operations. For such purpose, an internal control function is also adopted by the
Group so that in times of contingencies, proper actions can be immediately undertaken
(Bodie et. al, 2014). This sheds light on the fact that disclosing such information to the
stakeholders is very risky because they may find the company vulnerable or prone to risks,
but yet Wesfarmers has disclosed such significant information with clarity and conciseness
(Brigham & Daves, 2012). Nonetheless, this easily helps the Group in fulfilling the reliability
qualitative characteristic of financial reporting in its framework that can make the
stakeholders rely upon the same in making relevant financial decisions for the future
(Wesfarmers, 2017). In addition, the Group also has a compliance program within its
framework that is assisted by its vital guidelines like identification of risks, taxation
compliance, financial reporting controls, information technology guidelines, the
environmental concerns, etc. In relation to this, such information is provided to the
stakeholders in a timely manner, thereby fulfilling the timeliness fundamental qualitative
characteristic of corporate reporting as a whole (Madura & Fox, 2011).
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Recommendation
Although Wesfarmers has been effective in reporting financial information useful to the
stakeholders in their decision-making process, the prevalence of non-financial performance
information is offered on a very low scale. In relation to this, it must be noted that in order to
enhance the meaningfulness of a financial statement, the presence of both financial and non-
financial measures is compulsory. Moreover, if this information is not relevant to the users,
they must not be reported in the statements but key non-financial performance measures must
not be avoided by any company (Wesfarmers, 2017). Nonetheless, based on the current
scenario, in order to fulfill all obligations of a conceptual framework for corporate reporting,
every company must give due importance to the disclosure process so that users are not
discarded of any significant information that has a material impact on its performance.
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Conclusion
Wesfarmers Ltd has complied to the conceptual framework of financial reporting within its
framework and for such purpose, it has fulfilled all the obligations like adherence to
fundamental and qualitative characteristics of corporate reporting, recognition criteria, etc.
Besides, these details can easily assist stakeholders in making accurate and clear decisions
regarding the company’s overall performance in the industry and whether investing in the
company can fetch adequate returns as a whole. Lastly, the fundamental and enhancing
guidelines of the company have also played a key role in fulfilling the conceptual framework
obligations except for the fact that additional non-financial performance measures must have
been disclosed. Overall, the company has emphasized the significance of conceptual
framework through required disclosure approaches.
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References
Bodie, Z., Kane, A. and Marcus, A. J. (2014) Investments. McGraw Hill
Brigham, E. and Daves, P. (2012) Intermediate Financial Management. USA: Cengage
Learning.
Carmichael, D.R. and Graham, L. (2012) Accountants Handbook. Financial Accounting and
General Topics, John Wiley & Sons.
Choi, R.D. and Meek, G.K. (2011) International accounting. Pearson .
Deegan, C. M. (2011) In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
Davies, T. and Crawford, I. (2012) Financial accounting. Harlow, England: Pearson.
Gowthrope, C. (2011) Business accounting and finance for non specialists (3rd ed.). South
Western
Madura, R. and Fox, J. (2011) International financial management (2nd ed.). South Western
Parrino, R, Kidwell, D. and Bates, T. (2012) Fundamentals of corporate finance. Hoboken,
NJ: Wiley
Peirson, G, Brown, R., Easton, S, Howard, P. and Pinder, S. (2015) Business Finance, 12th
ed. North Ryde: McGraw-Hill Australia.
Petersen, C. and Plenborg, T. (2012) Financial statement analysis. Harlow, England:
Financial Times/Prentice Hall.
Wesfarmers. (2017) Wesfarmers Annual report and accounts 2017
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0 [17 April 2018]
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