Corporate Accounting: Funds, Liabilities, Assets & AASB 137 Report

This report analyzes corporate accounting practices, focusing on how companies raise funds, manage liabilities, and measure assets. It examines two companies, Wesfarmers and JB Hi-Fi, comparing their sources of funds (including debt, equity, and retained earnings) and how these have evolved over time. The report evaluates the merits and shortcomings of each funding source, including interest-bearing debts, issued capital, reserves, and retained earnings. It then delves into the different types of liabilities reported by the companies, including current and non-current liabilities, and explains the application of AASB 137, Provisions, Contingent Liabilities, and Contingent Assets. Furthermore, the report identifies the different categories of assets used by the companies, such as cash, receivables, inventory, and property, plant, and equipment, and explores the measurement bases applied to these assets, including amortized cost, fair value, and cost less depreciation.

CORPORATE
ACCOUNTIN
G
R A I S I N G F U N D S F O R C O R P O R A T E O P E R A T I O N S A N D
L I A B I L I T I E S , P R O V I S I O N S , C O N T I N G E N T L I A B I L I T I E S A N D
C O N T I N G E N T A S S E T S . M E A S U R E M E N T B A S I S F O R A S S E T S
( W E S F A R M E R S L I M I T E D A N D J B H I - F I L I M I T E D )

DIFFERENT SOURCES OF FUND
Wesfarmers
Interest bearing loans and borrowings, issued capital, reserves, retained
earnings and current liabilities (wesfarmers.com.au 2019).
JB Hi Fi
Borrowings, contributed equity, reserves, retained earnings and current
liabilities (investors.jbhifi.com.au 2019).

EVOLUTION OF FUNDS
WESFARMERS: Interest bearing loans and borrowings under current liabilities have decreased from 2017 to 2019; that
is $1347 million in 2017, $1159 million in 2018 and $356 million in 2019. The same trend can be seen in case of interest
bearing loans and borrowings under non-current liabilities. The main reason for this decrease is the large repayment of
borrowings. Issued capital has decreased over the years that is $22268 million in 2017, $22277 million in 2018 and
$15809 million in 2019 (wesfarmers.com.au 2019). The reserves have also decreased over the years and 2019 has
registered negative reserve and this is because of accumulated losses due to poor business performance. Wesfarmers
has also reported accumulated losses in 2019 after the reduction of retained earnings from 2017 to 2018
(wesfarmers.com.au 2019).
JB HI-FI: In JB Hi-Fi, the borrowings have decreased over the last three years that is $558.8 million in 2017, $469.4
million in 2018 and $439.1 million in 2019: and continuous repayment of borrowings is the main reason for this reduction
in the source of fund (investors.jbhifi.com.au 2019). Contributed equity has increased from $438.7 million in 2017 to
$441.7 million in 2018 and then decreased in 2018 that is $434.8 million. This is due to the deviation in the issue of
shares and share prices. JB Hi-Fi has increased its reserve from 2017 to 2019 continuously that is $33.2 million in 2017,
$42.7 million in 2018 and $53.7 million in 2019. Like reserves, retained earnings of the company has also increased
continuously from 2017 to 2019; that is $381.6 million in 2017, $463.2 million in 2018 and $555.6 million in 2019
(investors.jbhifi.com.au 2019).

PERCENTAGE OF INTERNALLY
GENERATED AND EXTERNALLY
GENERATED FUNDS
Wesfarmers
Particulars 2019 ($m) % 2018 ($m) % 2017 ($m) %
Externally Generated
Funds
Interest bearing loans and
borrowings (Current and
non-current) 3029 23.16% 4124 15.32% 5413 18.42%
Issued capital 15809 120.85% 22277 82.75% 22268 75.79%
Total 18838 144.01% 26401 98.07% 27681 94.22%
Internally Generated
Funds
Reserves -5549 -42.42% 344 1.28% 190 0.65%
Retained Earnings -208 -1.59% 176 0.65% 1509 5.14%
Total -5757 -44.01% 520 1.93% 1699 5.78%
Total Funds 13081 100.00% 26921 100.00% 29380 100.00%
JB Hi-Fi
Particulars 2019 ($m) 2018 ($m) 2017 ($m) %
Externally Generated
Funds
Borrowings 439.1 29.60% 469.4 33.13% 558.8 39.57%
Contributed Equity 434.8 29.31% 441.7 31.17% 438.7 31.06%
Total 873.9 58.92% 911.1 64.30% 997.5 70.63%
Internally Generated
Funds
Reserves 53.7 3.62% 42.7 3.01% 33.2 2.35%
Retained Earnings 555.6 37.46% 463.2 32.69% 381.6 27.02%

RELATIVE MERITS AND SHORTCOMINGS
OF SOURCES OF FUNDS USED
Interest Bearing Debts or Borrowings
• Merits – The main merits is that it allows the companies to keep the ownership of the business unlike equity financing.
After that, large amount of funds for the purposes of large purchases or business expansion can be acquired by using this
source of fund. It provides flexibility to the companies along with providing the opportunity to improve the credit ratings
(Wang and Lin 2013).
• Shortcomings – This source of fund creates key obligation on the companies to make the repayment of the borrowed
funds irrespective of the fact that whether the company has made profit or not. In addition, this source of fund comes with
high interest rate. In addition, collaterals need to be maintained by the company in most of the cases (Zhang 2016).
Issued Capital or Contributed Equity
• Merits – Fund raised through issue of shares can be used for the business operations as well as growth of the companies.
Unlike debts, the companies are not required to repay it. Companies can use the proceeds from the sales of shares
however they want in the absence of any obligation (Rossi 2014).
• Shortcomings – Companies have to incur high costs for raising funds through issue of shares. Most importantly, raising
funds through the issue of shares divides ownership of the company among the shareholders by providing the voting
rights to them. This can make the corporations vulnerable (Finnerty 2013).

RELATIVE MERITS AND SHORTCOMINGS
OF SOURCES OF FUNDS USED
Reserves
• Merits – The main advantage is that this provides the companies with the ability to meet the future losses and this ads
stability to the whole financial position of the companies. In addition, reserves can be used in the lean financial years in order
to cover the abnormal losses. It is a useful tool to the companies at the time of financial crisis ( Brief and Peasnell 2013).
• Shortcomings – The main shortcoming associated with this is that the purpose of audit cannot be achieved since the true
and fair financial position of the company is not possible to show. Sometimes, misuse of this kind of reserves can be seen that
is not good for companies (Maurer et al. 2016).
Retained Earnings
• Merits – It is a powerful business strategy to fund a business through retained earnings since this does not add to the
company’s debt profile. In addition, the option of conservation allows the companies in maintaining full control over the
business. This provides the companies with the opportunity to fund the business growth internally ( Yusra, Hadya and
Fatmasari 2019).
• Shortcomings – The main shortcoming is that it is a slow process to fund the business through retained earnings as the
businesses can miss the crucial business opportunities at the time of building up the required funds. Devoting large amount
of retained earnings for business growth can hamper the present business operations of the companies ( Royer 2017).

TYPES OF LIABILITIES
Wesfarmers
Wesfarmers has reported two types of liabilities that are current liabilities and non-
current liabilities. They are Trade and other payable, Income tax, Provision and Hedging.
Interest-bearing loans and borrowings are the only interest bearing liabilities
(wesfarmers.com.au 2019).
JB Hi-Fi
JB Hi-Fi has reported both current and non-current liabilities in the balance sheet. They
are Trade and other payables, that includes goods and services tax payable and other
creditors and accruals, Deferred revenue, Provision and Other liabilities including lease
accruals, lease incentives and other financial liabilities. The only interest bearing liability
is borrowings which is bank loans (investors.jbhifi.com.au 2019).

PROVISIONS UNDER AASB 137
• AASB 137 Provisions, Contingent Liabilities and Contingent Assets provides the Australian listed companies with appropriate
recognition criteria and measurement bases for provisions, contingent liabilities and contingent assets (aasb.gov.au 2019).
• As per Paragraph 14 of AASB 137, a company needs to recognize provision when it has a present obligation because of a past event
which probable the outflow of resources associated with the economic benefit for settling the obligation and this can be estimated
reliably (Moerman and van der Laan 2013).
• As per Paragraph 27 and 31 of AASB 137, it is not required for an entity to report the contingent liabilities and contingent assets. As
per Paragraph 28 of AASB 137, a contingent liability is required to be disclosed unless there is a remote possibility of the outflow of
resources associated with the economic benefit. As per Paragraph 34 of AASB 137, a company needs to disclose the contingent
assets where there is a probability of the outflow of economic benefits (Hudson 2016).
• According to Paragraph 36 of AASB 137, the amount recognized as a provision needs to be the best estimate of the required
expenditure for settling the present obligation at the end of the accounting period. Paragraph 42 of AASB 137 puts the obligation on
the companies to take into account the risks and uncertainties surrounded many events and circumstance at the time to reach to
the best estimation of a provision. As per Paragraph 84 of AASB 137, a company needs to disclose certain aspects related to
provision; they are end of the period carrying amount, additional provision made, amount used during the period, reversal of the
amount of unused provision, increase in provision during the year. As per Paragraph 85 of AASB 137, the disclosures associated with
each class of provision include brief description of the provision, indication of the uncertainties and any amount of expected
reimbursement (Wardani et al. 2019).

REFERENCES TO THE STANDARD OF
AASB 137 IN THE ANNUAL REPORT
• Wesfarmers and JB Hi-Fi that these companies have not mentioned about AASB 137 in their annual reports.
However, these companies have accounted for provision, contingent liabilities and contingent assets by complying
with the provisions of AASB 137 (Tran 2015).
• Both Wesfarmers and JB Hi-Fi have disclosed every element of their business provisions by complying with the
relevant paragraphs of AASB 137. For example, by complying with the paragraphs 84 and 85 of AASB 137, both the
companies have disclosed the opening balance of provision, development of new provision, utilized provision,
reversal of provision and carrying amount at the end of the period.
• By complying with the Paragraphs of 36 and 42, both the companies have taken into consideration the necessary
risk and uncertainty factors for the estimation of provision. Wesfarmers has disclosed the information on its
contingent liabilities associated with trading guarantees in the notes to the financial statements. The main reason of
the company behind the disclosure of information on contingent liabilities is the high probability that there could be
outflow of economic resources due to the presence of these liabilities (Richardson, Taylor and Lanis 2013).
• JB Hi-Fi has not reported any contingent liabilities and contingent assets because of the remote probability of
outflow of economic resources for the presence of these contingencies.

DIFFERENT CATEGORIES OF ASSETS
Wesfarmers
The firm has reported two categories of assets in its balance sheet; they are current assets and non-
current assets. The assets reported under the current assets include cash and cash equivalent, trade
and other receivables, inventories, derivatives and others (wesfarmers.com.au 2019). the assets
reported under the category of non-current asset includes investment in associated and joint ventures,
deferred tax assets, property, plant and equipment, goodwill, intangible assets, derivatives and other
(wesfarmers.com.au 2019).
JB Hi-Fi
The management of JB Hi-Fi has also categorized all of their assets in two categories; they are current
assets and non-current assets. The assets under current assets are cash and cash equivalent, trade and
other receivables, inventories and other current assets. On the other hand, the assets under non-
current assets include plant and equipment, deferred tax assets, intangible assets and other non-
current assets (investors.jbhifi.com.au 2019).

MEASUREMENT BASIS OF ASSETS USED
BY THE COMPANIES
Wesfarmers
• Cash on deposit are classified as financial assets that are held at amortized costs. Interests on cash at bank are earned at floating rate on the basis of
daily bank deposit rates (wesfarmers.com.au 2019).
• Trade receivables are of terms of up to thirty days and the company initially recognizes them as per its revenue policy and then, are measured at
amortized costs utilizing effective interest method.
• The valuation of inventories is undertaken at the lower of cost and net realizable value. The company a key estimation associated with the realizable
value.
• The company measures the derivative financial instruments at fair value on the date of entering into the contracts. Hedge accounting is classified as
fair value hedges and cash flows hedges by the company (wesfarmers.com.au 2019).
• Investments in the associated by the company are carried in the balance sheet at cost plus any post-acquisition changes in the company’s shares of
the net assets of the associated.
• Wesfarmers measure the current tax assets at the amount expected to be recovered from the authorities at the tax rates (wesfarmers.com.au 2019).
• The company measures the carrying value associated with property, plant and equipment as the cost of the assets less accumulated depreciation and
impairment. These assets are depreciated under the straight-line method of depreciation.
• The company measures acquired goodwill from business combination at cost that is measured as the cost of business combination less net fair value of
the acquired and identifiable assets, contingent liabilities and liabilities. Intangible assets that are acquired separately are measured at cost less
impairment losses and amortization (wesfarmers.com.au 2019).

MEASUREMENT BASIS OF ASSETS USED
BY THE COMPANIES
JB Hi-Fi
• Trade receivables have a credit period of 30 days and no interest is chargeable on it. JB Hi-Fi recognizes the
trade receivables at amortized cost less allowance for expected credit loss. The company has made an
allowance for the expected credit losses through the use of matrix based historical credit loss rates
(investors.jbhifi.com.au 2019).
• The company has stated its inventories at the lower of cost and net realisable value. The assignment of
costs is done to the individual inventory terms based on weighted average cost. Management judgment is
required for the determination of the net realisable value of inventory.
• JB Hi-Fi accounts for the deferred tax through the use of balance sheet liability method providing for
provisional difference between the carrying amount of assets and liabilities under the purposes of financial
reporting and taxation. The company recognizes them in the presence of this temporary difference
(investors.jbhifi.com.au 2019).
• The company states the property and equipment along with the leasehold improvements at cost minus
depreciation and impairment, if any. These assets are subject to depreciation on straight-line method. The
company tests these assets for impairment in the presence of any change in circumstances.
• JB Hi-Fi carries the intangible assets with indefinite useful life at cost minus accumulated impairment losses.
Goodwill represents the excess of the acquisition cost over the fair value of the firm’s share of the net

REFERENCES
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