Financial Accounting: Compliance Analysis of Wesfarmers and Rio Tinto

This report assesses the financial reporting compliance of Wesfarmers Ltd and Rio Tinto Ltd, two companies from different industries listed on the ASX. It examines their adherence to Australian Financial Reporting Standards, focusing on key areas such as the concept of a reporting entity, disclosures related to liabilities and intangible assets, and income tax disclosures. The report highlights the importance of following accounting standards to ensure transparency and accountability in financial reporting. It analyzes the qualitative characteristics of financial information, including relevance, faithful representation, comparability, verifiability, timeliness, and understandability, as demonstrated in the companies' annual reports. Specific examples from Wesfarmers and Rio Tinto are used to illustrate compliance with accounting standards related to provisions, interest-bearing securities, trade payables and other liabilities. Desklib offers a wealth of similar solved assignments and resources for students.

Running head: FINANCIAL ACCOUNTING
Financial Accounting
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Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Concept of Reporting Entity........................................................................................................2
Disclosures of Liabilities.............................................................................................................6
Disclosures Relating to Intangible Assets.................................................................................10
Disclosure Relating to Income Tax Expenses...........................................................................15
Conclusion.....................................................................................................................................18
Reference.......................................................................................................................................20

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Introduction
The main purpose of the assessment is to analyse reporting framework which is followed
by two entities which belong to different industries. The assessment analyses the reporting
framework of two different companies of different industries is to identify the compliance
requirements which each of the businesses follow as per the accounting standards introduced.
The companies which are considered for this assessment are Wesfarmers ltd which is engaged in
retail and consumer goods and Rio Tinto ltd which is engaged in the business of mining and
extraction of minerals (Riotinto.com. 2019). The report would be discussing the concept of
reporting entity for both the businesses and how the same is important from the perspective of
providing appropriate disclosures relating to the operations of the business. The assessment
would also deal with the disclosures which is provided by the business relating to liabilities and
intangibles assets of the business. In addition to this, the assessment would also be discussing
regarding the income tax disclosures which are provided by the management of the respective
companies in the annual reports which is prepared. The report would be focusing on the
application of relevant accounting standards which are applied by businesses in order to enhance
the quality of reports which is formulated by the businesses.
Discussion
Concept of Reporting Entity
The concept of reporting entity is important which deals with how the businesses needs to
report financial information so that the potential users of the financial statements can consider
the information and take decisions regarding the same appropriately. The concept of reporting
entity relates with the reasonableness that there exist users who are dependent on the disclosures

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provided in the financial statements for taking important decisions regarding investments
(Fasb.org. 2019). The concept requires all businesses to incorporate relevant and useful financial
information in the annual reports so that the same can be used by the users for taking appropriate
decisions.
It is the responsibility of those charged with governance of the company to identify
primarily if the entity is a reporting concern or a non-reporting concern (Pkf.com.au. 2019). If
the former is the case, then the management of the company needs to prepare a general purpose
financial report. This also signifies that the entity needs to follow all relevant accounting
standards while formulating the general purpose financial report.
As per paragraph 10 of SAC 1 Definition of The Reporting Entity, the management of
the companies need to consider themselves as reporting entities and be identified by reference to
the existence of users who are dependent on general purpose financial reports for information for
making and evaluating resource allocation decisions (Aasb.gov.au. 2019). The provisions which
are stated in the SAC 1 clearly shows the application of reporting entity of the business and
classifies the different aspects which are considered similar to reporting entity concepts such
legal entity concept. The financial statements which are prepared by the management of the
company are done so that full disclosures are provided by businesses regarding every aspect of
the business and how the same can improve the transparency and accountability of the business.
It is a known fact that most of the businesses follow conceptual framework of accounting
which is followed across the global in order to ensure that there is consistency and accountability
in the information which is presented in the financial statements of the business. Such a
framework includes accounting standards, principles, conventions and rules on the basis of
which an entity prepares its financial statements. The annual reports which are prepared by the

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management of the company should have relevant information along with proper disclosures for
all the treatments which is shown in the financial statements of the business. In addition to this,
the financial statement should also be prepared according to the qualitative characteristic of the
financial statements (Christensen and Nikolaev 2013). The annual report of both Wesfarmers ltd
and Rio Tinto ltd shows that the management of the company has effectively followed relevant
accounting standards and has been consistent with the reporting of different items which are
presented in the annual reports of the business. The disclosures which are provided in the annual
reports confirm with the policies which are followed by most of the businesses following the
reporting framework in the business (Edmonds et al. 2016). In order to enhance the quality of the
financial statements, the information which are included in the annual report should contain the
following qualitative characteristic of the generally accepted financial reports.
Fundamental Qualitative Characteristics
 Relevance: The financial information which are included in the annual report of the
business should be relevant to requirements of the users so that appropriate decisions can
be provided on the basis of the information which are shown in the annual report of the
business (Barth 2013). The information and disclosures are considered to be relevant if
proper accounting standards are followed by the business. The annual reports of both
Wesfarmers ltd and Rio Tinto ltd shows that the business has disclosed all relevant
standards which are used by the management for preparing the financial statements of the
business.
 Faithful Representation: The information which are shown in the annual reports should
be appropriate and free from any material misstatement. The concept of reporting entity
states that the information would be considered by the users for taking important

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decisions. It is therefore a requirement that the information which is presented in the
financial statement should be free from any omission or material misstatement. If a
financial statement is audited than the risks of material misstatement is significantly
lowered as the same is shown the case with Wesfarmers ltd and Rio Tinto ltd.
Enhancing Qualitative Characteristics
 Comparability: The information which is shown in the annual reports of the business
should be comparable with performance of the business in next financial year (Chen et al.
2014). The users would be comparing the performance of the business with that of
previous years in order to take major decisions regarding investments.
 Verifiability: The information which is presented in the annual report should be
verifiable by the users of the financial statements. This principle states that the treatments
which are shown in the annual reports for different items must be verifiable by the users
by assessing the disclosures which is provided in the notes to account section of the
annual report of the business (Henderson et al. 2015).
 Timeliness: The information which are to be recorded in the financial statement should
be presented to the users in a timely manner so that the same can assist the users to take
major decisions regarding the business (Stice and Stice 2013). The timing of providing of
the financial statements are normally at the end of the financial year of the company. The
provisions of Para 36 of AASB 101 states that an entity shall present a complete set of
financial statements (including comparative information) at least annually (Aasb.gov.au.
2019). This shows that the management of the company needs to formulate the
accounting standards at least annually depending on the reporting period which is
followed by the management of the company.

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 Understandability: The financial statement should be such that it can be easily be
understood by everyone (Stent and Dowler 2015). It is stated that the application of more
numeric and percentages figures would help the users to understand the information
which is covered in the annual reports of the business.
The above guidelines help the management of the company to make improvements in the
reporting framework and thereby also enhances the quality of financial reports which are
presented to the users of the financial statements. The financial information which is shown in
the annual report of both Wesfarmers and Rio Tinto ltd needs to adhere to the principles which is
stated in the above paragraph. However, the management of both the companies can still
improve the reporting framework which is followed by adding more disclosures and notes so that
the users are easily able to interpret the performance of the business.
Disclosures of Liabilities
The annual reports of the business also show the liabilities which are incurred by the
business during the period. As per the analysis of the financial statements of both Wesfarmers
and Rio Tinto ltd, the management of the respective companies has appropriately shown the
liabilities which are associated with the business. The presentation of the information in the
financial statement should be fair and free from any material misstatement as per the
requirements of AASB 101 (Aasb.gov.au. 2019). The disclosure regarding the liabilities which is
presented in the annual report of Wesfarmers ltd and Rio Tinto ltd are appropriately discussed
bellowed.
Wesfarmers ltd

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The management of the company has covered different liabilities which have a complex
treatment in the notes to account section of the annual reports so that the users of the financial
statements can easily understand the treatment which is undertaken by the management of
Wesfarmers ltd.
Provisions:
The provisions of the business are based on judgement of the management of the
company and the same are shown accordingly in the financial statements of the business.
Provisions, other than employee benefits, are determined by discounting the expected future cash
flows at a pre-tax rate that reflects current market assessments of the time value of money and
the risks specific to the liability (Simnett and Huggins 2015). The computation of the provisions
of the business are presented in the table below

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The above table represent that the different items on which provisions are created for the
current years and the total of the same are represented in the annual reports of the business. The
provisions of the business appropriately represent the losses which is anticipated by the
management of the company for the future period (Wesfarmers.com.au. 2019).
Interest Bearing Securities and Borrowings
The management of the company has appropriately presented the loans which are taken
by the business from securities market and borrowings which is taken from the banks in the
financial statements which is presented in the annual reports of the business.
The above graph shows that security market debts and bank debts and the anticipation of
the business to reduce the bank debts to zero in 2022. The current estimation shows that the
management of the company uses more of debt capital from bank at present.
Capital market debt includes foreign and domestic corporate bonds. The loans and
borrowings which are taken by the management are initially recognised at fair value, less directly
attributable transaction costs (Demir and Bahadir 2014). After initial recognition, interest-
bearing loans and borrowings are subsequently measured at amortised cost using the effective

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interest method. The carrying value of all assets and liabilities are also considered for the
purpose of recognition of the same.
Rio Tinto Ltd
The disclosures which are provided by the management of Rio Tinto ltd in the annual
reports of the business effectively are explained below:
Trade Payables:
The trade payables of the business which is represented in the financial statements are
approximates their carrying value of the liabilities which are presented. The table which is shown
below represent the carrying value of the trade and other payables of the business.
The notes are appropriate as the same allows the users of the financial statements to make
comparison between the data which is shown in the annual reports of the business.
Provisions
The provisions of the business are created for anticipated losses which the business
would incur in future period. The same are recognized as liabilities of the business. The main
assumptions used to determine the provision for pensions and post-retirement healthcare, and

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other information, including the expected level of future funding payments in respect of those
arrangements. The provisions cover different items which are to be reported by the business
(Velte and Stawinoga 2017).
The provisions which is created by the business and the basis on which the same is
created in provided in the notes to account section of the annual reports of the business.
The above discussion shows that the disclosures for Wesfarmers ltd is more appropriate
and in details in comparison to Rio Tinto ltd. The analysis further reveals that the management of
both the companies appropriately follows AASB 101 and effectively has presented the annual
reports showing all necessary adjustments and treatments of the business (Aasb.gov.au. 2019). It
can be recommended to both the companies to incorporate more disclosures and treatment of
other liabilities so that the reporting framework of the business can be further improved (Weil,
Schipper and Francis 2013). Therefore, the management of both the companies can make
improvements in the reporting framework and enhance the quality of audit reports if more
disclosures are provided in the financial statements of the business.

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Disclosures Relating to Intangible Assets
The accounting for intangible assets of a business is considered to be a complex process
and therefore businesses are expected to follow the provisions and guidelines which are stated
under AASB 138 Intangibles Assets. As per para 12 of AASB 138, an intangible asset is
identifiable if it is either:
 Is separable which means that the management of the company can sale it, transfer it,
license it, rent it or use the same for exchange.
 Arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable (Aasb.gov.au. 2019).
The intangible assets are recognized in the financial statements if the same are consistent
with Para 21 of AASB 138 (Aasb.gov.au. 2019). The para states that intangible assets can be
recognized if it is probable that the expected future economic benefits that are attributable to the
asset will flow to the entity and the cost of the asset can be measured reliably. The standard
effectively guides accountants regarding the disclosures which are to be provided in the annual
reports of the business.
In addition to the recognition and measurement criteria, the standard also provides a guide as
to what is to be included in the financial statements in the notes to account section of the annual
reports of the business (K. Johl et al, 2013). The standard requires companies to disclose the
useful life of the assets and also the amortization method which is considered for disclosing the
key aspects of the report of the business. The management of the company also needs to report
gross carrying amount and any accumulated amortisation on the intangible assets which is
reported in the balance sheet of the company.