Caltex Limited's Financial Reporting: An Analysis of AASB 101 & 102

This essay provides an analysis of Caltex Limited's financial reporting practices in relation to the Australian Accounting Standards Board (AASB) Conceptual Framework, AASB 101, and AASB 102. It discusses the measurement of inventory, the inventory system used by Caltex (perpetual inventory syste...Read More

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Introduction
Australian Accounting Standards Board (AASB) has offered important directives and
frameworks in financial reporting. The AASB helps in setting standards for financial
reporting for listed companies in Australian (Needles, Powers, and Crosson, 2013). All
companies in Australia are required to comply with AASB accounting standards when
reporting their financial performance. AASB conceptual framework is a system of ideas that
form basis for consistent standards that rules to be used in accounting standards and
accounting policies (Legislation.gov.au, 2004). AASB 102 inventory was updated as a result
of amendment from the International Accounting Board. This is to give a clear principle,
objective and key definitions of inventory that qualify for recognition and entry in the
financial statements. AASB 102 helps reduce errors of recognition, definition and
measurement of inventory. The AASB Conceptual Framework is therefore developed to offer
guidelines to accounting standards and companies board for developing accounting policies
where there are no accounting standards (Rankin et al., 2012). This enables firms’ financial
reports to have the same interpretation to all financial information users. The following essay
discusses the Caltex Limited annual financial report in relation to AASB 101 and AASB 102
inventory standard. Caltex is one of the leading companies in transportation and distributors
of petroleum to other suppliers. This has enabled the company to grow and gain dominance in
its operations. Caltex financial report is important investors, government, management,
lending institutions, employees and other stakeholders.

Measurement of inventory
Companies tend to choose a preferable measurement of inventory. The cost of an entity’s
inventory is incurred either by acquiring or production of products that are ready for selling
(Cairns et al., 2011). In terms of measurement inventory, Caltex uses standards that are
within the AASB standards. This has enabled Caltex not only to be under regulations but also
evaluate lower cost. Caltex has used measuring cost of inventory such as purchase cost,
conversion cost and other cost. Purchase cost was cost incurred until commodities possessed
by the company. They include import duty, purchasing price, irrecoverable tax, transportation
costs and handling cost. Deductions were made due to trade discount, recoverable tax and
rebate and government grant or subsidy. Conversion costs are expenditures that the company
incurred during processing of raw material into finished goods. This may include variable
product, fixed production and wages. Other cost like royalties paid.
FIFO costing method
Caltex limited decided to use FIFO costing method to evaluate its inventory. According to
accounting theory, FIFO is the oldest method used compared to last in, first out method and
weighted average (Muller, 2011). FIFO uses its revenue to match against its cost of goods
sold to consumers or retailers (Jesswein, 2010). Recent commodities that were purchased are
added at the ending of every inventory. The advantage of using FIFO is that, profit will
always be higher after deduction of taxes. According to Caltex Limited financial report,
inventory gained rose from US dollars 54/bbl 2016 to US 64/bbl 2017. The disadvantage of
using LIFO, revenue tends to be lower than after tax. This will lead to misallocation of funds
and high cost of purchasing goods. Since, all cost will be assigned to goods sold. All old cost
incurred remains in inventory. Weighted was not suitable for Caltex to use since inventory
will be lower compared to FIFO methodology. Calculation is done when units sold in
addition with ending inventory. Weighted average method heavily depends on average cost
per unit sold.

Perpetual inventory system
A perpetual system is a progressive inventory system that allows companies or firms, to track
all available commodities for sale (Horngren et al., 2012). Most leading companies like
Caltex Limited will choose to use perpetual inventory system over period system. Since the
work load is cumbersome and perpetual system tends to simplify inventories. They are many
advantages of using perpetual inventory system.
1. Inventories are error free because of high accuracy. All inventories are
recorded on different ledgers.
2. the system enables business owners to identify consumer`s preferences and
taste.
3. Encourages proper recoding of stocked goods in the enterprise. Risky
expectations example shortage of goods and inflation will not occur. The
inventory system allows centralization of multiple locations.
4. The system is time conservative since ledgers are updated on daily or hourly
bases.
5. The system is less tiresome. All received stocks are added to its inventory and
deducts products sold. Making all stock count significant to Caltex limited.
Perpetual system has minimum disadvantages such as loss, damages, scanned
errors and improper inventory counts.
Impact of costing methods
There is a significant impact of using different costing methods on Caltex financial
statements. First in First out is commonly used by Caltex limited. This is because their profit
(which was US 64/bbl) will be higher after taxation comparing to LIFO and weighted. If
Caltex decided to use LIFO, its profits would be lesser after tax ($60/bbl). All cost will be
assigned to commodities sold when oldest cost remain inventory. This would be discouraging
to the company due to misleading inventories (Horngren, 2009). Weighted average method
heavily depends on average cost per unit sold. Its profits will be approximately $62/bbl. The
advantage of using weighted average is that it gives accurate estimates of profits (Weygandt,
Kimmel, and Kieso, 2009). This encourages companies to expand and grow in terms of
distribution or labour.

In conclusion, Caltex has adhered to accounting standards according to Corporation Act 2001
and Accounting Standards. AASB conceptual framework is a standard that requires updating
of most framework conceptual and presentation. AASB 102 inventory was amended by
international accounting board. This is to give a clear principle, objective and key definitions
of inventory that qualify as entities. With this, Caltex limited is able to use appropriate
costing methods like FIFO. FIFO enabled them to have better profits after mandatory taxation
laws. Perpetual inventory system was best used by the company to evaluate its inventories.
This makes measurement easier and more accurate. Encouraging proper recoding of stocked
goods in the enterprise. Risky expectations example shortage of goods and inflation will not
occur. The inventory system allows centralization of multiple locations. Impact on change in
inventory cost method would be a reduced profit for Caltex limited company.

References
Cairns, D., Massoudi, D., Taplin, R. and Tarca, A., 2011. IFRS fair value measurement and
accounting policy choice in the United Kingdom and Australia. The British Accounting
Review, 43(1), pp.1-21.
Horngren, C., Harrison, W., Oliver, S., Best, P., Fraser, D. and Tan, R., 2012. Financial
accounting. Pearson Higher Education AU.
Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education
India.
Jesswein, K.R., 2010. The changing LIFO-FIFO dilemma and its importance to the analysis
of financial statements. Academy of accounting and financial studies journal, 14(1), p.53.
Legislation.gov.au. (2004). AASB 101 - Presentation of Financial Statements - July 2004.
[online] Available at: https://www.legislation.gov.au/Details/F2005B01183 [Accessed 23
May 2018].
Muller, M., 2011. Essentials of inventory management. AMACOM Div American Mgmt
Assn.
Needles, B.E., Powers, M. and Crosson, S.V., 2013. Financial and managerial accounting.
Cengage Learning.
Rankin, M., Ferlauto, K., McGowan, S.C. and Stanton, P.A., 2012. Contemporary issues in
accounting. Milton, Australia: Wiley.
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2009. Managerial accounting: tools for
business decision making. John Wiley & Sons.