Financial Accounting Report: Compliance of ASX Listed Companies

This report analyzes financial accounting practices, focusing on compliance with Australian Financial Reporting Standards (AASB) for ASX-listed companies. The report begins with an introduction to investment decisions and the importance of transparent financial information. It then explores the characteristics of a reporting entity and the concept of capital maintenance, including physical capital maintenance and its features such as cost of replacements, measuring income, and price changes. The report also discusses the decision usefulness of financial information by implementing physical capital maintenance. Furthermore, the report compares the disclosure of provisions, contingent liabilities, and contingent assets of Woolworths Group and Crown Resorts, assessing their compliance with AASB 137. The study emphasizes the importance of financial reporting transparency and provides recommendations to enhance accounting data accuracy.

Financial Accounting

Abstract
An investment decision can be referred to decision made with respect to application of funds
required to be deployed in an investment. The available investment opportunity can be judged
appropriately only when financial, as well as financial information relating to same, is
available in transparent manner. The present report provides discussion relating to reporting
entity and capital maintenance. The study asserts that management is able to judge that
whether organization is having adequate level of income through application of aspects of
physical capital maintenance. Disclosure relating to provisions, contingent liabilities and
contingent assets have been analysed regarding Woolworths Group and Crown Resort. It has
been assessed that both the companies have complied with provision of AASB 137 in an
appropriate manner.

Table of Contents
Introduction................................................................................................................................4
Part 1:.........................................................................................................................................4
Part 2..........................................................................................................................................6
Part: 3.........................................................................................................................................9
Conclusion................................................................................................................................11
References................................................................................................................................12

Introduction
An investor takes investment decision after assessing financial statements in detail manner
regarding any entity. Investment decision could be taken with ease if the accounting
information provided in the financial report is transparent (prices (Talamo and Atta, 2019).
The present study emphasizes discussion relating to characteristic of reporting entity and their
classification for the purpose of drafting financial statements. Further the concept of capital
maintenance has been explained in detail manner. Lastly, disclosure of provision, contingent
liabilities and contingent assets of Woolworths Group Ltd and Crown resorts have been
compared, and recommendation has been provided in order to increase the transparency of
accounting data by considering the provision of AASB 137.
Part 1:
Reporting entity can be referred as an alternative term for accounting entity. It is an
organization on which users can depend for making appropriate decision relating to financial
and non-financial information provided in general purpose financial report (GPRF). The users
could be shareholders, investors, members or creditors. The reporting entity could be an
individual entity, or a group consists of parent along with all of its regular subsidiaries. This
definition is given in AASB 1053 is consistent with definition within IASB and AASB
conceptual framework to significant extent (Saha, Morris and Kang, 2019). If any entity is
not deemed as reporting entity then this will be not essential for producing GPRFs, not even
required for complying with every accounting standard. When an organization is defined as
reporting entity it is necessary for same to provide GPRF which eventually leads to
compliance with applicable Australian Accounting Standard (Talamo and Atta, 2019).
However, in case of special purpose financial report is drafted than it is not necessary to
apply all Australian Accounting Standards and disclosure of the specified fact is stated in
financial statements. Specifically, its users could be members, shareholders, creditors,
potential investors and lenders. The main characteristics are that it is essential for preparing
GPFR as it signifies that all Australian Accounting Standards should be complied in
preparation of financial report.
An organization is categorized as reporting entity which is drafts its financial statement on
the basis of requirement of its users. On same basis entity has capability for commanding the

procedure to develop customized financial statements with reference to specific need of the
information. This type of identification is dependent on professional judgment. In case
information is pertinent to decision making is not within reach to specific users who are
judged for focusing on general objective of financial statements to significant extent. It is to
create and evaluate decisions related to allocations of resources and entity is directly deemed
for being as reporting entity (Perdana etal., 2018). However, dependence is not apparent,
Statement of Accounting Concept No. 1 has suggested about factors which represent
reporting entity as it considers:
 Separation of management through with an entity’s economic interest as the spread of
possession and increment in the separation of ownership and management, so entity’s
likelihood is considered for being a reporting entity (Pereraand Chand, 2015).
 The political or economic impact of the entity on other parties as to its governance
within market along with potential impact on welfare of increment in external parties,
such that entity’s likelihood is considered as reporting entity.
 The entity’s financial features as sales amount, assets value, the extent of
indebtedness, increment in number of employees and customers such that likelihood
of entity is replicated under-reporting entity (Brown and Tarca, 2010).
The Australian Accountings Standards board is an Australian Government agency with
objective to develop, maintain and issue principal based external standards of reporting for
Australia which attains the needs of the users, maintenance of confidence of the investor with
Australian economy and contributes for development of international external reporting
standards(Talamo and Atta, 2019). The functions and powers of AASB are set out within the
Australian Securities and Investments Commission Act 2001. Moreover, AASB optimizes the
conceptual framework for evaluating and developing accounting standards. The key priorities
are stated in portfolio budget considers application of International Financial Accounting
Standards as beginning point to develop, maintain and issue Australian Accounting Standards
(Nichita, 2018). Undertaking role of leadership to shape Australian Reporting framework
consists of improving the differential framework of reporting along with assisting the
regulators and objectively to determine that entities must lodge and prepare general purpose
financial reports.
Consequently, Australia has issues International Financial Reporting standards equivalent
standards as it could be replicated as Australia adopts IFRS content with minor and minimal
alterations for adopting the Australian legislative environment. Henceforth, audit report of

company’s financial statements has stated that they have been fully prepared for IFRS
compliance(Saha, Morris and Kang, 2019). Thus, it is indicated that issue of differential
reporting is still very significant concern to AASB and is major priority of board in the
present scenario. The important characteristics are level of subjectivity is because of
differential reporting method which Australia utilizes. The degree of subjectivity in
application of reporting entity up brings that financial reporting delivers necessary
information at required standards. With AASB, there was presence of shift from laying
emphasis on reporting entity to GPFR along with clarifying the definition of statements
within Australia (Palmer, 2013). The reporting entity is on basis of differential reporting, and
numerous constituents have implied concern of application of method of reporting entity
which engaged degree of subjectivity and opens terms to differing interpretations. Therefore,
legislation of this concept underlies the subjectivity of method as per SAC 1 and this
determines major factors which identify the existence of users which is dependent on GPFRs
as spread of ownership, economic or political importance and financial characteristics such as
size etc. The SAC 1 has laid emphasis on existence of external users which might be
dependent on entities financial report for decision making. On the contrary, this criterion has
remained as indication or presentation only (Jerry, 2018). Thus, decision remained generally
on basis of principles and AASB has modified type of entities that are essential for producing
GPFRS and ridding burden to report for specific entities.
Part 2
The term physical capital maintenance means profit is earned only through physical capacity
of production or operating capacity of the company at the end of the period higher in
comparison to physical productive capacity at the starting of period (Bradbury, 2015). This,
however, does not include any distributions made and contributions from owners during the
course of time. In relation to this, IFRS has initiated this conceptual framework with respect
to realize firm’s profit attained during the period. For instance, physical capital would
segment of output that is generated or produced on daily basis. In simple words, it is the
ability of company for sustaining its future cash inflows (Jianu, Jianu and Țurlea, 2017). This
means that with the help of this concept, small business can avoid cash flow pitfalls which
are important for enhancing overall operations and working capital.
Features of Physical capital maintenance

Cost of replacements
It is one of the major aspects of physical capital maintenance where income is generated only
when company’s replacement costs are dealt with and cleared off. This means that till all
replacement costs are not realized or met, income cannot be earned in any manner. It is,
therefore, called maintenance of productive capacity for such reason(Jianu, Jianu and Țurlea,
2017). The replacement costs in this particular circumstance are being referred to those
components of organization which generates earnings, or its infrastructure generates. For
example, computer equipment being given on lease for particular time period comes under
infrastructure which generates income in form of lease payments to business. The main
problem arises here to figure such costs because different figures might represent one
particular replacement cost (Nobes, 2015). Moreover, figures may be on the basis of paid past
prices or maybe current value of the asset.
Measuring income
Another aspect of physical capital maintenance is to determine the real or actual income of
organization with respect to its assets held at particular time period. Historical prices form the
basis for company’s valuation in the best manner possible. However, for ascertaining
company’s ability for maintaining physical capital, value is determined by using current costs
in an effectual way(Bradbury, 2015). In addition to this, rising prices may initiate change in
overall figures in determining income of enterprise in relation its assets held. It then makes
ascertainment of required physical capital on a difficult note. For example, business’ annual
revenue is $500,000, and costs are around $300,000, then if same costs rise up to $100,000, it
will curtail profit. In order to eradicate or avoid this, business would have to stretch to
$600,000 revenue so as to maintain profitability in relation to costs. If level is not maintained,
then firm may start incurring losses up to a major extent.
Price changes
It is another feature of physical capital maintenance. The changes in prices can be used in
which assets are held for determining replacement costs ineffectual manner. It then results in
recognition of losses and gains during the period. The business also needs to differentiate
between general price changes and specific price changes. In addition to this, general price
changes are on the basis of average value over time. While, specific price changes occur
particularly in relation to asset held over the time period (Yaremko et al., 2016). It can be

further explained with examples. If enterprise buys computer tool worth $10,000 which needs
to replace after some time, and it is determined that tool can now be replaced for $7.500.
Here, it can be analysed that price difference of replacement cost is noted and not original
price of $10,000. This is called specific price change. While general price change is based on
average price of the computer tools for the period being owned by enterprise and is different
from former(Jianu, Jianu and Țurlea, 2017).
Decision usefulness of financial information by implementing physical capital
maintenance
The decision making can be done by stakeholders by using financial information. The
physical capital maintenance helps to ascertain income generated over the particular year.
The management is able to determine and maintain financial health at which organization’s
income need to be maintained so as to keep business viable. It is required else the company
starts earning losses and become bankrupt. Owners and stakeholders often have incorrect
picture of using physical capital maintenance (Brown, 2016). The reason behind same is that
they make assessment on income valuations which are partially ascertained by assets sold
during when economic trouble prevails.
By selling, assets could cost company a lot more money especially in the long run because of
rise in replacement costs. Moreover, if owner requires replacing assets being sold off already,
then there are chances that he will pay more because of rising prices (Talamo and Atta,
2019). This is where decision making can be made because looking at physical capital
maintenance; firm can ascertain level of income. It acts as financial tool helping owners and
management to avoid cash flows and related pitfalls by maintaining consistent income levels
quite effectually.
Apart from this, holding gains would be distributable to the extent that it does not diminish
physical productive capacity of enterprise. In addition to this, approach to financial
accounting seeking to keep purchasing power of entity intact will then permit payments of
dividends to the level, ability of purchasing power is not eroded or degraded relative to it
what the figure was at the beginning of the period (Lozano and Sánchez-Silva, 2019). In
relation to this, physical capital maintenance is helpful in offering more logical approach for
dividend distribution than normally allowing distributing the gains. Thus, it can be said that
not only this concept is helpful in seeking financial health of company (Frankel et al., 2018).

But is further helpful in taking decision to deploy or distribute dividends in the most suitable
manner.
Part: 3
Assessment of disclosure of provision, contingent liabilities and contingent assets of
Woolworth Group and Crown Resorts
AASB 137 Provision, Contingent Liabilities and Contingent Asset apply to financial
statements which are held out as general purpose financial statements. As per Para 14 of
specified standard, an organization is required to recognize provision when it has a present
obligation due to past event, and it is probable that economic benefits will be required to
settle that obligation (Compiled AASB Standard. AASB 137, 2018). The last condition is that
reliable estimation of same is possible. Further, Para 27 of AASB asserts that an entity should
not recognize contingent liability. However, as per Para 89 it is necessary to disclose unless
the probability of outflow of resources is very less. The same provisions are required to be
applied in case of contingent asset.
Woolworth Group
The three core business of Woolworths Group is Australian Food, New Zealand Food and
Endeavour Drinks. It is Australia’s largest supermarket chain and is running 995 stores across
Australia. The contingent liabilities of the company comprises guarantees in normal course
of business having relation with sale of properties and guarantees against worker’s
compensation self-insurance liabilities as per State Work Cover Authorities. The company
does not make any provision regarding contingencies in financial statement. But a provision
of $596 million has been made in relation to self-insured risk which includes liabilities in
relation to worker’s compensation claim (Woolworths Group, 2018). However, the
commitments in relation to lease and capital expenditure do not comprise contingent turnover
rentals which are charged on various premises land. The company recognizes provision only
when the Group has existing legal or constructive liability due to past event and probability
of outflow of economic benefit exists. Provisions are recognized relating to employee
benefits, self-insurance, restructuring and onerous contracts along with storage exist cost
(Woolworths Group, 2018). The provision relating to onerous contract is made on the basis of
lower of inescapable net cost of meeting all leases and other obligation and management
budgeted estimate of compensation expected to be paid to landlord and third parties at the

end of contract(Compiled AASB Standard. AASB 137, 2018). Even the amount of provision
recognised in the books of accounts is best estimate of consideration which is necessary for
accomplishment of present obligation at reporting date. The risk and uncertainties are also
considered while evaluating the amount of provision.Lastly, the changes in carrying value
due to revision in estimation are recognized in profit and loss account of group(Woolworths
Group, 2018). It would be appropriate to state that company has appropriately complied with
provisions of AASB 137 with respect of provisions and contingent asset and liability.
Crown Resorts
Crown Resorts is one of Australia’s largest entertainment groups which provides significant
contribution to Australia tourism, training and social accountability program. It has interest in
various digital businesses which comprise Betfair Australasia, DGN Games and Chill
Gaming. The contingent liabilities of company comprises penalty imposed by Australian
Taxation Office which is approximately $362 million including tax, interest and penalty
(Crown Resorts, 2018). The company has taken appropriate action in relation with amended
assessments and notices; however same has been disallowed by ATO. In accordance with
management no significant impact on financial position of company would be there due to
outcome of legal proceeding relating to same. Crown Resorts does not have any contingent
liability except this. Further contingent consideration due to business combination is value at
fair value at date of acquistion. Any changes in same are recognised in accordance with
AASB 9 in profit and loss account of the group (Crown Resort, 2018). AASB 9 Financial
instruments have been followed by the company in order to evaluate provision for doubtful
debts and expected loss relating to impairment model. The management of company has
practice of evaluating position of provisions on periodic basis in order to comply with
applicable tax regulation in respect with taxes. Crown Resorts recognizes provision only in
case when legal or constructive obligation exists to make future outflow of funds due to past
transaction. Moreover, it is also assessed whether the specified obligation can be measured on
reliable basis. Thus, it would be appropriate to state that company has complied with all the
provision of AASB 137 Provisions, Contingent Liabilities and Contingent Assets(Compiled
AASB Standard. AASB 137, 2018). The expense in relation with provisions are recognized
in profit and loss account after reducing reimbursement if received.
After analysing the financial report of both companies, it could be cited that provision of
AASB 137 has been complied by them. However, in case of Crown Resorts, contingent

liability should be reassessed again that whether probability of outflow of economic benefits
exists or not(Crown Resorts, 2018). The decision should not be taken on the basis of whether
the result of case will significantly affect financial statements or not. In case economic
benefits will outflow in future than same should be recognized as provision. Further,
provisions are also required to the provided in detail manner, i.e. in relation with other
provisions so that extent of transparency could be increased.
Conclusion
It can be concluded from the above discussion that ‘differential reporting’ is one of the vital
issues for investors, users of financial report and AASB, thus required to be resolved to ease
the complex investment decision. Further, physical capital maintenance assists in evaluating
income generated over the particular year so that management could assess whether the level
of income is appropriate or not. The financial statements of Woolworth Group and Crown
Resort have complied with all the provision of AASB 137, but the details provided in case of
Woolworths Group are clear and more transparent comparatively. Due to some reason
investor would be able to take decision adequately after considering financial as well as non-
financial data.

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