HA2032 Corporate and Financial Accounting: Equity and Debt Analysis

This report provides a comprehensive analysis of corporate and financial accounting, addressing key aspects such as corporate regulation, accounting standard setting, and the analysis of owners' equity and debt components. The report begins by examining the importance of financial information disclosure, discussing the merits of both voluntary disclosure and regulated financial reporting, and highlighting the role of managers in providing relevant and reliable financial data to stakeholders. It then delves into accounting standard setting, specifically focusing on the role of the Australian Accounting Standards Board (AASB) in relation to international standards (IFRS) and the reasons some countries, like the United States, have not fully adopted IFRS. The analysis extends to examining the owners' equity of four Australian companies (A2 Milk Company, Bega Cheese Limited, Wesfarmers Limited, and Woolworths Group Limited) over a four-year period, detailing changes in share capital, retained earnings, and reserves. Finally, the report compares the debt and equity components of these firms, assessing their capital structures and financial risk profiles, and concludes by highlighting key financial metrics and the overall financial health of the selected companies. The report utilizes data from company annual reports and provides insights into the financial performance and position of each entity.

RUNNING HEAD: CORPORATE AND FINANCIAL ACCOUNTING
Corporate accounting

Corporate and financial accounting 2
Executive Summary
The report provides a brief summary about the corporate regulation and setting of accounting
standards. In the first section, it deals with the importance of disclosing the financial information
voluntarily and regulating the corporate financial reporting. The section provides insights about
the fact that it is very important for the manager to disclose the relevant and reliable financial
information that is important for the stakeholders. It also highlights the fact that the financial
reporting should be regulated properly so that no misstatement or error can be occurred. In
addition, it defines the role played by AASB in setting international standards and the reasons
why some members have not accepted IFRS yet. In the later part, the report discusses the items
of owners’ equity of the four Australian firms and identifies the changes in the equity.
Furthermore, it also compares the debt and equity components of the firm. In the last, a
conclusion is provided which states that Wesfarmers has low financial risk and the share capital
of Bega Cheese has been the highest among all.

Corporate and financial accounting 3
Contents
Contents.......................................................................................................................................................3
Corporate Regulation...................................................................................................................................4
Question 1...............................................................................................................................................4
Accounting standard setting........................................................................................................................5
Question 2...............................................................................................................................................5
Owners’ equity............................................................................................................................................7
Question 3...............................................................................................................................................7
Question 4.............................................................................................................................................10
Conclusion.................................................................................................................................................12
References.................................................................................................................................................13

Corporate and financial accounting 4
Corporate Regulation
Question 1
Many researches conducting in field of accounting and reporting suggested that the disclosure of
financial information has become very much necessary for the businesses and the managers.
Reporting of financial data in respect of a company has become significant in the last few years
due to the complexity of the businesses and their operations. The management of the company
communicates all the relevant and reliable information to the stakeholders through the annual
reports which consists all the data in financial and non-financial aspect. The stakeholders are
those people who hold some percentage of interest in company’s profits and are authorized to
have all the information about the performance and position of the entity. Disclosure of financial
information helps the shareholders to determine that whether the company is financially sound or
not. Specifically, external stakeholders that include government, investors, creditors and other
individuals who are not involved in the day to day activities of the firm require more information
about the operations and activities of the business in order to assess its overall performance from
all the aspects. There are various aspects which are kept in mind while analysing the financial
performance of an organization. They are known as liquidity, solvency, efficiency and
profitability. As far as non-financial performance is considered, factors like corporate social
responsibility, sustainability reporting and compliance with standards like GRI are analysed
(Campbell, 2015)
As the above paragraph reflects the importance of financial information, the regulation and
management of reporting the same should be the essential function of the managers. They must
disclose the accounting information voluntarily to all the stakeholders so that they do not need to

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develop such data which reflects false image of the entity. The objective of preparing financial
information is to assess the true position or situation of the company, to determine the amount of
return it could offer to its potential investors and others. In order to accomplish such motives, it
is very important for the managers to regulate its financial reporting procedure on periodic basis
and in an appropriate manner (Faulkender, Hankins and Petersen, 2018). It will bring
harmonization and uniformity in the function by applying the various accounting standards that
are relevant for the business as per its size and nature. The consistency in financial reporting will
eventually help the stakeholders to understand the data easily and compare the same with the
competitors. It will avoid the manipulation of the figures and misstatement of the financial
statements. Voluntary disclosure and regulation will help the managers and company to avoid the
possibility of falsification of accounts and will result in desirable and reliable results (Collins,
Hribar and Tian, 2014)
Accounting standard setting
Question 2
Accounting standards are the authoritative standards applied at time of preparing financial
reports. They are the primary source of Generally Accepted Accounting Principles (GAAP).
Such standards lay down the procedures for conducting an accounting treatment of some specific
business transactions and events. Australian Accounting Standard Board is a government agency
formulated with an objective to develop and maintain the financial reporting standards that will
be applicable to all the private and public entities operating in Australia. AASB has played a
vital role in process of setting global accounting standards. The authorized body responsible for
setting the global standards is the international accounting standard board (IASB) and it has

Corporate and financial accounting 6
collaborated with many other national accounting setting bodies to bring harmonization and
consistency in the international standards (AASB. 2018).
AASB has created strategies to determine its role as a standard setter in the dynamic
environment. The board has formulated its strategies in such a manner that a proper alignment
can be maintained with IASB and its requirement. AASB assist IASB in identifying technical
issues and it also receives the feedback from many of the Australian companies which are taken
into consideration by IASB while setting the accounting standards. It submits some formal
documents and statement in order to get the feedback and seek comments from IASB for getting
the authority to develop such accounting standards.
Despite the worldwide acceptance, there are some countries where complying with IFRS is not
mandatory and the standards are not applicable. For instance, United States was one of the
original members of IASC and later IASB and many of the accounting standards are set in
accordance with the input of United States. The acceptance of GAAP and IFRS is a controversial
action and there are some reasons why US has not yet move towards IFRS. The foremost reason
was IFRS is costly and switching to it from GAAP will be costly for the country. Another reason
was that US will face the problem of comparability of financial statements and there will be no
common ground for making a comparison between the companies operating in different
countries. Apart from this, the IFRS standards do not have quality as the GAAP have and the
statements prepared will lack that quality factor. All such are the reasons why some members of
IASB have not yet applied IFRS in their process of financial reporting (Lam, 2015).

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Owners’ equity
Four ASX listed companies are selected that operates in consumer staples sector of Australia.
They are named as A2 Milk Company, Bega Cheese Limited, Wesfarmers Limited and
Woolworths Group Limited. All of them are listed on Australian Securities Exchange and
operate in the same industry. The items of equity for each company is analysed for the past four
years in the below sections. The data is derived from the annual reports of the selected
companies and on the basis of that the analysis has been done.
Question 3
A2 Milk Company
The table shows the changes in item of A2 Milk’s equity over the past four years. It can be
observed that the share capital of the firm has increased from $86,264 million to $134,302
million. The capital has continuously increased due to the increased market value of the
company and its good performance over the years. As the company has been focused on
producing profits and improving its performance, its retained earnings have turned positive as a
result along with the upsurge in its share capital
A2 Milk Company
(AUD in millions)
2014 2015 2016 2017
Share capital 86,264 86,303 130548 134302
Retained Earnings -23,974 -26,065 4371 95017
Reserve -3646 -1609 -1841 12163
Bega Cheese Limited

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An increasing trend has been noticed in all the items of Bega Cheese owners’ equity. Along with
its share capital, the reserves and retained earnings of the company has also increased over the
period of past five years. In 2014, it had capital worth $103,642 million and earnings amounted
to $188,356 million which rise to $224,692 million and $326,326 million in 2017 respectively.
This reflected that company has enhanced its market value and is focused on keeping its
financial risk low by issuing more and more capital.
Bega Cheese Limited
(AUD in millions)
2014 2015 2016 2017
Share capital 103,642 103,942 103,942 224,692
Retained Earnings 188,356 187,793 202,838 326,326
Reserve 22,390 20,931 21,058 21,656
Wesfarmers Limited
The share capital of Wesfarmers has increased in 2017 as compare to the past years. In 2014, it
was $22,708 million which reduced to $21,937 in 2016. Later on the capital again increased to
$22,268 million last year (Wesfarmers. 2017). The same fluctuating trend has been noticed in the
value of company’s retained earnings. The issue of shares under the dividend investment plan
resulted in the increased share capital of the firm (Wesfarmers. 2015).
Wesfarmers Limited
(AUD in millions)
2014 2015 2016 2017
Share capital 22,708 21,844 21,937 22,268

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Retained Earnings 2,901 2,742 874 1,509
Reserve 408 226 166 190
Woolworths Group Limited
The items of equity of Woolworths have shown an upward trend in respect of share capital
whereas the retained earnings have reduced in the past four years. The reason for reduced
earnings is the payment of high dividends to the shareholders. The company have declared high
dividends and also issued shares which ultimately increased its capital.
Woolworths Group Limited
(AUD in millions)
2014 2015 2016 2017
Share capital 4850 5065 5252 5615
Retained Earnings 5423 5830 3125 3797
Reserve 198 95 93.9 113.8
(Woolworths. 2017).
Items of equity are explained as follows:
 Ordinary share capital: It is the equity capital which is invested by the shareholders in the
company. It is known as the issued capital of the entity which comprises of other
elements also such as retained earnings, reserves and accumulated profit.
Among the four selected companies, Bega Cheese has the highest share capital with $224,692
million followed by A2 Milk Company with $134,302. Both the companies have higher share
capital than Wesfarmers and Woolworths and in comparison to their past data also. When

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analysed, it is interpreted that Woolworth is growing at low rate in terms of share capital and
may have to face high financial leverage.
 Retained earnings: The other element of owner’s equity is retained earnings which show
the amount of profits retained by the company after paying all the amounts and
obligations. It is that amount which is utilized for making dividend payments to the
shareholders (Reid and Myddelton, 2017). Bega Cheese has the highest retained earnings
among the four companies in the past four years. Its retained profits have been constantly
increased over the years.
 Reserves: It reflects the amount set aside by the entities for a specific purpose. The
reserve maintained by A2 Milk was $12163 million and by Bega Cheese the amount was
$21656 million. The other two companies Wesfarmers and Woolworths have maintained
low value of reserves.
Question 4
The debt and equity are the parts of company’s capital structure and are required to be
maintained in an appropriate proportion. All the four selected companies have maintained their
debt and equity elements by keeping in mind the profitability and financial risk factor.
A2 Milk Company
(AUD in millions)
2014 2015 2016 2017
Total equity 58644 58629 133078 241482
Total Liabilities 17999 30238 77074 102448
The debt of A2 Milk has increased constantly from the past four years. However, along with the
upsurge in debt the equity also increased which keeps the ratio stable.

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Bega Cheese Limited
(AUD in millions)
2014 2015 2016 2017
Total equity 314388 312666 327838 572674
Total Liabilities 234249 239753 258836 483586
In case of Bega Cheese, the debt did not increased to a great extent from 2014 to 2015 as
compare to the changes in its equity. However, after 2016, the ratio of the company increased to
38% from 14% showing high financial risk.
Wesfarmers Limited
(AUD in millions)
2014 2015 2016 2017
Total equity 25987 24781 22949 23941
Total Liabilities 13740 15621 17834 16174
Wesfarmers’s debt portion has increased continuously till 2016 and after that it falls in 2017. The
ratio was 25% in 2016 which declined to 17% in 2017. This was due to the payments of
company’s net debt.
Woolworths Limited
(AUD in millions)
2014 2015 2016 2017
Total equity 10253 10,834 8782 9876
Total Liabilities 13611 14204 14,720 13039
Same fluctuations is observed in case of Woolworths as its debt increased in 2015 and 2016 but
reduced in 2017. However, company faces high financial leverage as the amount of its equity

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reduced in 2016 and 2017. This boosted up the ratio and increases the financial risk of the
company (Woolworths. 2015).
Conclusion
The above report concludes that the manager must disclose all the relevant accounting
information and regulating the financial reporting is very much necessary for avoiding errors and
mistakes. It also suggested that the Bega Cheese has the increased and highest share capital but
at the same time its financial risk is also high. While in comparison to it, the debt component of
Wesfarmers has reduced in 2017 making the company less risky.

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References
AASB (2018). The Standard-Setting Process. [Online]. Available at:
https://www.aasb.gov.au/About-the-AASB/The-standard-setting-process.aspx [Accessed 25
September 2018].
Campbell, J.L., (2015) The fair value of cash flow hedges, future profitability, and stock
returns. Contemporary Accounting Research, 32(1), pp.243-279.
Collins, D.W., Hribar, P. and Tian, X.S., (2014) Cash flow asymmetry: Causes and implications
for conditional conservatism research. Journal of Accounting and Economics, 58(2-3), pp.173-
200.
Faulkender, M.W., Hankins, K.W. and Petersen, M.A., (2018) Understanding the Rise in
Corporate Cash: Precautionary Savings or Foreign Taxes. Available at:
https://www.kellogg.northwestern.edu/faculty/petersen/htm/papers/faulkender%20hankins
%20petersen%20cash.pdf [Accessed 25 September 2018].
Lam, H. (2015). Why does the US Continue to Use GAAP and Will it Ever Converge to IFRS?
CMC Senior Theses. Available at: https://scholarship.claremont.edu/cgi/viewcontent.cgi?
referer=https://www.google.co.in/&httpsredir=1&article=2018&context=cmc_theses [Accessed
25 September 2018].
Reid, W. and Myddelton, D.R. (2017). The meaning of company accounts. UK: Routledge.
Wesfarmers (2015). Annual Report. [Online]. Available at:
https://www.wesfarmers.com.au/docs/default-source/reports/2015-annual-report.pdf?sfvrsn=4
[Accessed 25 September 2018].

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Wesfarmers (2017). Annual Report. [Online]. Available at:
https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-
report.pdf?sfvrsn=0 [Accessed 25 September 2018].
Woolworths (2015). Annual Report. [Online]. Available at:
https://www.woolworthsgroup.com.au/icms_docs/182381_Annual_Report_2015.pdf [Accessed
25 September 2018].
Woolworths (2017). Annual Report. [Online]. Available at:
https://www.woolworthsgroup.com.au/icms_docs/188795_annual-report-2017.pdf [Accessed 25
September 2018].