Financial Statement Analysis: Harvey Norman Holdings Limited Report

This report provides a comprehensive financial statement analysis of Harvey Norman Holdings Limited. It begins by outlining the accounting policies employed by the company, including revenue recognition, depreciation methods, and inventory valuation. The analysis then assesses the accounting flexibility within Harvey Norman, considering its multi-chain operational strategy and the impact of accounting choices on reported financial figures. An evaluation of the company's accounting strategy follows, comparing it to competitors and examining the adoption of IFRS standards. The report also scrutinizes the quality of disclosures made by Harvey Norman. Furthermore, it identifies potential red flags within the financial statements, such as managerial manipulation and distortions caused by accounting standards. Finally, the report suggests adjustments that Harvey Norman could implement to mitigate these distortions, such as adhering to a single accounting standard and seeking professional advice on resource allocation. The report concludes with references and appendices to support the analysis.

Running Head: FINANCIAL STATEMENT ANALYSIS
FINANCIAL STATEMENT ANALYSIS
Name of the Student
Name of the University
Author Note

1FINANCIAL STATEMENT ANALYSIS
Table of Contents
Accounting Analysis..................................................................................................................2
Step 1- Identifying Accounting Policies................................................................................2
Step 2- Assessing Accounting Flexibility..............................................................................3
Step 3- Accounting Strategy Evaluation................................................................................3
Step 4- Disclosure Quality Evaluation...................................................................................4
Step 5- Identification of Potential Red Flags.........................................................................5
Step 6- Undo Accounting Distortions....................................................................................6
Reference....................................................................................................................................7

2FINANCIAL STATEMENT ANALYSIS
Accounting Analysis
It is important for any financial professional for knowing the way firm’s financial
statement is to be analyzed. It requires understanding of three significant areas, which are
structures of financial statements, economic characteristics of industry in which company is
operating and firm’s strategies for differentiating itself from the competitors (Hasibuan and
Syahrial 2019). Therefore, following are the steps of accounting analysis of the Harvey
Norman Holdings Limited:
Step 1- Identifying Accounting Policies
The accounting system of Harvey Norman is of retailing. The company received
income from selling its goods. Its financial report is prepared based on the historical cost,
excluding land & buildings, investment properties, debt & equity financial assets and
derivatives financial instruments that have been measured at the fair value. Moreover,
depreciation is carried out on the straight-line basis over the asset’s useful life. In addition,
residual values, useful lives as well as methods of the amortization are being reviewed and
adjusted, in case suitable, at the end of each financial year (Schroeder, Clark and Cathey
2019).
Figure 1: Depreciation of PPE
The intangible assets of company are being carried out at the cost less accumulated
impairment losses and the accumulated amortization. Moreover, the amortization of these
assets is based on the straight-line over its estimated useful lives, but not more than 8.5 years

3FINANCIAL STATEMENT ANALYSIS
(Static1.squarespace.com. 2020). The recognition of expenditure of development on
individual project are as intangible asset, when following are demonstrated by the Harvey
Norman:
Figure 2: Development Expenditure on Individual Project
The inventories of company are valued at lower of the net realizable value and cost
and it is recorded total of all rebates volume, settlement discounts and the business
development contribution.
Step 2- Assessing Accounting Flexibility
Harvey Norman is the retail company having operational multi-chain strategy, with
different retail locations and subsidiaries. It is having good degree of the flexibility in making
choice of different accounting policies as well as estimates in the certain circumstances,
which affects reported amount in consolidated financial statements. The example of this can
be seen in accounts receivables that is recorded large in amount each year from its
franchisees (Rocco, Colombo and Sciubba 2014). Moreover, there is no flexibility in costing,
as is based on weighted average. The receivables from the franchises of company have been
measured at the amortized cost. Lastly, effective interest method used by company helps in
providing flexibility for the amortization of the assets (Loughran and McDonald 2016).
Step 3- Accounting Strategy Evaluation
Adoption of accounting policies by the Harvey and Norman can be comparable to its
competitors such as Wesfarmers Limited. Harvey Norman is the leading retailer of the broad
ranges of products such as consumer electronic products, computers, cameras, furniture and

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others. The policy used by company helps in meeting strategy of company and optimizing its
processes. The company adopts policies of IFRS, which helps in providing comparable and
consistent measures for helping the investors for understanding current and the future
operating results (Hasibuan and Syahrial 2019). The recognition and measurement criteria of
the revenue and sales are specific and clear, which results in no adjustments done by
company as at July 1, 2018.
The company has adopted some of the standards and amendments for the very first
time, which are effective for the annual period that begins on or after January 1, 2018. These
policies are AASB 15 and AASB 9. Its application to the franchise agreements with the
franchisees needs consolidated entity for recognizing revenue from the franchisees based on
amount that it expects for receiving in the exchange for provision of the activities of
franchising operations to the franchisees. There was no impact of this standard on the
segment of franchising operations. The accounting policies of revenue according to AASB 15
are sales of goods and revenue from the services. In addition, the second standard adopted is
AASB 9, which sets new model to classify and measure the financial assets that is based on
contractual cash flow characteristics of financial assets and organizational business model to
manage financial assets. It has introduced credit loss model for financial asset’s impairment
and hedge accounting. Its adoption did not have any kind of material impact on other
financial instruments of consolidated entity (Chaloupka, Gruber and Warner 2015).
Step 4- Disclosure Quality Evaluation
The annual report of Harvey Norman is the in-depth report that covers all the
important aspects of business in detail and in fair and true manner. All the disclosures seem
adequate. The disclosures regarding segment-wise business of the company is also adequate.
It provides independence declaration of auditor, true financial position and complies with
AASB requirements (Static1.squarespace.com. 2020).

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Step 5- Identification of Potential Red Flags
When looking at consolidated financial statements of Harvey Norman, there issues
that indicated distortion. There are some of the red flags, which are as follows:
 Accounting standards of GAAP that is implemented by FASB may lead towards
distortions on financial statements of company as these principles provide great scope
to executive managers for interpreting accounting standards. The company is exposed
to the managerial manipulation because compensation of the executives is highly
correlated with the performance of company, as they may exploit accounting methods
for satisfying shareholders and receiving favorable outcomes. Further, company has
clearly outlined accounting process of the allowance recognition in the expected
credit losses, as it has been observed in the annual of company that there will be
discounting of expected cash flows at estimation of initial effective rate of interest
(Static1.squarespace.com. 2020).
 Harvey Norman is exposed to the distortions of accounting within the financial
statements of economics that subsequently leads to the inaccurate data. true This is
influenced by credit risk level as well as maturity at the initial recognition. This
distortion will have significant effect on true economic position of misinterpretations
of the impairments of assets and trade receivables (Static1.squarespace.com. 2020).
 As contingent liability is considered to be an obligation with the unique
characteristics, which can be incurred as liability dependent on future events
outcomes. When the uncertainty in its estimation increases, the distortions of
accounting within financial statements becomes unavoidable.
 The company was sued by one fashion brand company for assumed imitation of the
well-known trademark of Gorman and Dangerfield. This matter has already been

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taken in court, which will highly impact the company in terms of losing shares as well
as financial damages (Amara and Benelifa 2017).
 The liabilities reported before settlement could significantly differ with actual
liability. Therefore, these differentiations will result in administering profit proportion
for offsetting loan.
Step 6- Undo Accounting Distortions
As it has been discussed in above point that company is facing some of the potential
red flag; hence company is required to make some of the adjustments (Schroeder, Clark and
Cathey 2019). Following are some of the adjustments that can be done by Harvey Norman to
undo accounting distortions:
 The company should follow single accounting standard based on IFRS everywhere it
operates.
 As with the uncertainty in the estimation of liabilities, in general, management should
take advice from the professionals for diversifying the opinions and avoid the
significant risks.
 The company should be very careful in taking decisions related to resources
allocation and controlling cost.


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Reference
Amara, T. and Benelifa, S., 2017. The impact of external and internal factors on the
management accounting practices. International Journal of Finance and Accounting, 6(2),
pp.46-58.
Chaloupka, F.J., Gruber, J. and Warner, K.E., 2015. Accounting for “Lost Pleasure” in a
Cost–Benefit Analysis of Government Regulation: The Case of the Food and Drug
Administration's Proposed Cigarette Labeling Regulation. Annals of internal
medicine, 162(1), pp.64-65.
Dorazio, R.M., 2014. Accounting for imperfect detection and survey bias in statistical
analysis of presence‐only data. Global Ecology and Biogeography, 23(12), pp.1472-1484.
Hasibuan, R.P.S. and Syahrial, H., 2019, August. Analysis Of The Implementation Effects Of
Accrual-Based Governmental Accounting Standards On The Financial Statement Qualities.
In Proceeding ICOPOID 2019 The 2nd International Conference on Politic of Islamic
Development (Vol. 1, No. 1, pp. 18-29).
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A
survey. Journal of Accounting Research, 54(4), pp.1187-1230.
Rocco, M.V., Colombo, E. and Sciubba, E., 2014. Advances in exergy analysis: a novel
assessment of the Extended Exergy Accounting method. Applied Energy, 113, pp.1405-1420.
Schroeder, R.G., Clark, M.W. and Cathey, J.M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Static1.squarespace.com. 2020. [online] Available at:
<https://static1.squarespace.com/static/54803162e4b08e1b8a472201/t/

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5dac405a64fbcd1ae7b3bd58/1571569849947/HVN+2019+Annual+Report.pdf> [Accessed 6
April 2020].
Appendices
Figure 1: Depreciation of PPE
Figure 2: Development Expenditure on Individual Project

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Figure 3: Relationship between Remuneration and Company’s Performance

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Table 4: Remuneration of Executives