Quality of Financial Accounting and Financial Reporting Report

This report provides a comprehensive analysis of the quality of financial accounting and reporting practices, specifically focusing on Wesfarmers Limited. It begins with an executive summary and an introduction to financial accounting and reporting, emphasizing the importance of annual reports for stakeholders. The report then delves into the company's accounting policies, including revenue recognition, inventory valuation, and key estimates related to various financial statement items. It explores the flexibility afforded to managers in adopting accounting policies and the potential impact on financial reporting, including the motives behind manipulating financial figures like earnings per share and earnings before interest and tax. The analysis evaluates the accounting and reporting strategies employed, highlighting potential deviations from generally accepted accounting principles and their implications. The report also covers disclosure requirements, red flags in accounting, and the company's compliance with the conceptual framework of accounting, concluding with an overall assessment of the company's financial accounting and reporting practices. The report uses Wesfarmers Limited's financial statements for the year ending June 30, 2017, and the preceding year, as the basis for its investigation.

QUALITY OF FINANCIAL ACCOUNTING AND FINANCIAL
REPORTING
9/24/2017

EXECUTIVE SUMMARY
Financial accounting and financial reporting are the two concepts which provide the company
with the results of the operations of the company and also the edge that the company has over its
competitors. The objective of the study is to investigate into the affairs of the company with
regard to its accounting policy that the company has adopted the strategies through which the
company is performing its functions and the result achieved thereon. The other objective that has
been detailed is to achieve the quality of disclosure of the financial information along with the
non financial information. This objective is coupled with the analysis of the discrepancies
identified in the financial statement of the company. These are further analyzed with the
conceptual framework of accounting. The report has been made available with different sections
and headings.

Contents
EXECUTIVE SUMMARY.................................................................................................................................2
INTRODUCTION...........................................................................................................................................5
ESTIMATES AND ACCOUNTING POLICIES.....................................................................................................5
FLEXIBILITY IN ACCOUNTING.......................................................................................................................8
EVALUATING STRATEGIES............................................................................................................................9
DISCLOSURE REQUIREMENTS....................................................................................................................10
RED FLAGS IN ACCOUNTING......................................................................................................................10
ACCOUNTING FRAMEWORK......................................................................................................................11
CONCLUSION.............................................................................................................................................12
REFERENCES..............................................................................................................................................12
APPPENDIX................................................................................................................................................14

INTRODUCTION
Financial accounting is an activity through which the transactions entered into by the company
are recorded on the regular basis and the results thereon are provided to the management of the
company. Simultaneously the financial reporting is done. It is materialized with the preparation
of the report namely annual report. Annual report helps in providing the financial information for
the benefit of the stakeholders of the company. The report under study has followed the route
beginning from accounting policies adopted by the company and ending with the framework that
the company has followed for the purpose of financial accounting and reporting. For the purpose
of conducting an investigation and for the preparation of the investigation report, the company
has been selected from the Australia – Wesfarmers Limited. The company is incorporated in
Australia and listed in the Stock exchange of Australia.
The report has been started with the brief description of the accounting policies which are
detrimental for the organization and which helps in defining the factors which will help the
company in achieving the success with full hands. Then it moves towards the identification of
the leniency enjoyed by the managers in assessing and adopting the particular accounting policy
and the particular accounting treatment. This leniency is further analyzed with accounting
strategies that have been adopted which further had led the managers to distort the performance
of the company in any manner. Along with the degree of leniency the degree at which the frauds
and mistakes are being done at the accounting level and as well as at the reporting level has been
detailed. The study further proceeds with the introduction to the framework of accounting and
has detailed the company’s compliance with the conceptual framework of accounting. The
investigation has then ended up with the conclusion as to the financial accounting and the
financial reporting practices adopted by the company.
ESTIMATES AND ACCOUNTING POLICIES
Before preceding the investigation report, at first the brief introduction of the working of the
company shall be analysed. The company selected for the purpose of achieving the investigation
is Wesfarmers Limited. The company is incorporated in the country of Australia and with the

passage of time has listed itself over the recognized stock exchange of India. Earlier it was only a
cooperative society in the year of 1919 and now is regarded as the largest company in the
Australia. Wesfarmers Limited has been in the same line of business since its inception. It is in
the business of providing the all household items and appliance at one place so that the
consumers are not required to deviate from one shop to another shop. Thus, the company has
been working as the super departmental store and is the one of the biggest competitor of
Woolworths Limited. The company also has the industrial division wherein chemicals and
fertilizers are supplied. The items that the company provides consist of fresh fruits, fresh
vegetables, ovens, mixer and grinder and other similar household items and appliances.
(Company Official Website, 2017).
On 30th of June 2017, the financial year has ended up and the annual report of the company has
been analysed for that year and the immediately preceding previous year. The investigation has
been started with the identification of the key accounting policies that the company has adopted
and mentioned in the notes to accounts of the annual report. These are:
- In the starting of the notes to the financial statement, it has been mentioned that the
company has made the various judgments and estimates for future events while applying
the accounting policies at the whole group level which have the material effect to
financial reporting. The judgments and the estimates so made are related to the nine
major items. It includes income, tax expense, inventories, Property Plant and Equipment,
Goodwill and Intangible assets, Provisions, Impairment, Joint ventures and
contingencies.
- In note number of 1 of the notes to the financial statements of the company, the
recognition of the income has been described. As per the recognition principle so given,
the revenue is valued at the market value of the amount that will be received or receivable
from the customers for selling the goods. It is recognized when the risk related to the
goods and the related rewards thereon has been passed on to the buyer and the amount so
recognized as revenue can be measured in the reliable terms. The related risks and
rewards are considered to be transferred when the buyer of the goods receives the
possession of the goods. In the case of services, the revenue is liable to be recognized
depending upon the stage of completion of the services. Interest on the advances given to

other parties are recognized at the time when it get accrues to the company and is
measures by using the effective interest rate which covers the discounted future cash
flows over the life of the financial asset. Other component of revenue is the dividend
which is recognized at the time when the company receives the right to have the
dividend. In case of the revenues, the company has made the two key estimates – one is
related to the loyalty program and other one is related to the gift cards. In the former the
revenue is recognized at the time when the points are redeemed and therefore the revenue
is deferred in the next year. In the later the revenue is recognized at the time of redeeming
the card and the purchase of goods made by the customers with company’s cards or when
it is explicit that the card is no longer to be used whichever is earlier. In the former case
the company has deferred the revenue of 267 million dollars in the financial year ending
30th of June 2017 and in case of latter, the amount of 217 million dollars in the financial
year ending 30th of June 2016 (Anastasia, 2015).
- In accordance with the note number six of the financial statements of the company, the
inventory is valued at the lower of cost or the value which can be fetched from the
market. Fetching value is equals to the selling price of the product less the cost that will
be incurred in selling the product. The company has recorded the value of 6530 million
dollars as the inventory for the financial year ending June 2017. The inventory consists of
three items – raw material, work in progress and finished goods. Raw material are
measured at the purchase cost on the basis of the weighted average price method, Work
in progress is measured at the amount equivalent to the amount of the direct materials
paid for acquisition and the amount of the direct labor expense and the relevant portion of
the manufacturing expenses and the overhead on the basis of the normal operating
capacity and lastly finished goods are measured at total cost less the discounts and rebates
if any. The key estimate that the company has mentioned is in relation to the rebates that
the supplier provides to the company. Here the management estimates are made available
on the basis of the turnover level and the related forecast level.
Other key estimates are related to tax expense, Property Plant and Equipment, Goodwill and
Intangible assets, Provisions, Impairment, Joint ventures and contingencies and are regarded as
the critical success factors for the company.

FLEXIBILITY IN ACCOUNTING
Managers of the company are particularly given the specific function to be performed. At some
level, these managers enjoy the flexibility in adopting the policies and practices at their own.
Similarly on the same path, the importance of the accounting function has been analysed and the
managers to some extent carries the flexibility in the accounting procedures and the practices and
also to some level in the financial reporting practices. If the manager enjoys the high degree of
flexibility at which the accounting can be done and mould according to the need then it delivers
that the manager not only can follow the wrong practices but will also distort the true and correct
picture of the working and the operation of the company (Weygandt, 2012). The motive to adopt
the wrong accounting and financial reporting practices are basically comes from the view of the
stakeholders and the shareholders of the company or from the own benefit of the managers of the
company holding the key managerial position or executives at same level in the company.
One motive that is explainable from the statement of the profit and loss is the earnings per share
which helps in determining the wealth of the shareholders of the company. The earnings per
share of the company have been considerably increased from $36.2 for the financial year ending
2016 to 254.70 for the financial year ending June 2017. The increase in the earnings per share
has not been made suddenly but is totally a drastic move which has increased the wealth of the
investors including the shareholders of the company approximately 800 times of the previous
year’s wealth (Cooper, 2015).
Second motive that is explainable from the statement of the profit and loss is the increase in the
earnings before interest and income tax expense. The increase is from 1346 million dollar in the
year ending 2016 to 4402 million dollars in the year ending 2017. The increase may be to cover
the covenant that may be imposed by the financial institution or the other investor or else it may
be the internal decision made by the management of the company (Bryer, 2013).
The above two increase has made the investigators to have suspicion that the managers have the
sufficient motive to play with financial figures and the report so as to achieve the objective. It
exhibits that the company has given the high degree of flexibility to the managers of the
company in choosing the policies and the estimates.

EVALUATING STRATEGIES
Strategies are defined as the thought of doing or performing the act in the defined manner so as
to achieve the objective or goal. The accounting and reporting strategy so adopted by the
company has given further length to the managers to enjoy the flexibility in adopting the
accounting practices and the reporting procedures. The two deviations as indicated in the
preceding section dictates the interest of the managers.
As per the generally accepted accounting principles and procedures, each company shall perform
the function in the uniform and consistent manner so as to facilitate the comparability and
understandability across the globe. A mere deviation shall be reported fully and completely.
In the first deviation where the earnings per share have been considerably increased within the
period of one year, it has been observed that the managers might have been forced to present the
high earnings per share so as to meet the requirements of the shareholders. As they will meet the
requirements of the shareholders more and more investors the company will in the future and
thus will increase the net worth of the company and the reputation in the market will also go
stronger (Kothari and Ball, 2014).
In the second motive the earnings before interest and income tax expense is much higher as
compared to previous year. The revenue has increased from 65981 million dollars in the year
2016 to 68444 million dollars in the year 2017. With this increase in revenue the earnings before
interest and tax has been increased from 1346 million dollar ion the year 2016 to 4402 million
dollar in the year 2017 (Company official Website, 2017). The increase in earnings before
interest and tax is approximately to 300 times of the earlier year despite of only eight percent
increase in the revenue of the company. The main motive for this increase is that the manager’s
remuneration totally depends upon the figure of the revenue (Ingram, 2008). The more the figure
of the revenue the higher will be the amount of the remuneration that the managers of the
company will receive. It is because the one component of the remuneration consists of an
incentive plan which is totally related to the amount of business that the particular manager will
bring for the company which in turn will of course increase the revenue. These plans are
exhibited from the remuneration report. Thus, the managers have managed to increase the
earnings and thus have changed the accounting and reporting strategies.

DISCLOSURE REQUIREMENTS
The annual report of the company has disclosed all the material facts and also the immaterial
effects in the notes to the accounts of the financial statements as well as in the section of the
significant accounting policies and procedures that the company has adopted. Therefore, the
disclosure made by the company seems to be an adequate (Sinha, 2012).
For instance the company has mentioned in the notes to accounts of the financial statements in
the annual report of the company in the beginning that the management has applied their
judgments and the estimates in the specific areas which are critical for the success of the
organization like income, tax expense, goodwill, property plant and equipment, etc. The items
have been mentioned with the reference to the notes and wherein it has been clearly mentioned
that whether the particular item has made the significant effect in the financial position and the
financial performance of the company. In each of the specific item the key estimates made by the
company has been detailed with the figures for the current year under consideration and the
immediately previous year (Company Official Website, 2017).
Secondly the auditors of the company has very well displayed the key audit matters that has been
communicated to the shareholders and stakeholders of the company through the independent
auditor report embedded in the annual report of the company. Thus, it shows that the auditors of
the company has followed the new auditing standard number seven hundred and one in full spirit
and hence it seems that not only the company has made the adequate disclosure but also the
auditors have followed the same.
Thus the company has made the adequate disclosure.
RED FLAGS IN ACCOUNTING
Red flag is described as the flaws of the discrepancies that are present in the annual financial
statements of the company which requires the urgent attention of the management. It is because
most of the collapses across the globe have happened only because of these red flags and non

consideration thereon made by the management of the company like Lehman Brother collapse,
ABC Learning collapse, etc. Following red flags has been observed and noticed:
 At first though the revenue has been increased by only 8% but the corresponding earnings
before interest and tax has been increased by 300 times as compared to previous year.
The costs are in the same proportion approximately. The amount by which the revenue
has been increased is nearly equivalent to the amount of increase in the earnings before
interest and tax expense (Phillips and Heiser., 2011).
 The second red flag that has been noticed is the net increase in cash and cash equivalents
amounting to 402 million dollars. It is despite of the fact that the company has paid the
borrowings of 1994 million dollars (Weiss, 2014).
The above two depicts that there are discrepancies in the accounting as well as reporting which
requires the management to intervene and take the strong actions.
ACCOUNTING FRAMEWORK
The framework is defined as the structure within which the particular activity is required to be
performed and delivered to the users. In the same way, in the accounting of the transactions and
reporting thereon, the conceptual framework of accounting is required to be followed. It states
three features that shall be satisfied to claim as working under the conceptual framework of
accounting. These are relevance, consistent and the faithful representation. Each has the
significant meaning (Capital Markets Advisory Committee Meeting, 2013).
In the notes to accounts and the significant accounting policies, it is stated that the company has
complied with the provisions of the corporations act, 2001 and the accounting standards that has
been developed by the Australian Accounting Standards Board and the same has been followed
by the company while accounting for the transactions as well as the reporting of the information
(International Accounting Standards Board, 2010). Secondly the company has made the segment
reporting separately and has correctly identified and disclosed the reportable segment in the
annual report of the company as Coles, Home Improvement, K Mart and Target.
Thus, the company has duly and fully complied with the conceptual framework of accounting.

CONCLUSION
Managers are the integral part of the organization which helps in planning and executing the
functions of the company. Each manager has different function. One has the finance function;
other has the production, sales, marketing, etc. Each company provides some degree of
flexibility to the managers to adopt the relevant business and accounting practices and
procedures. Through this report, the manager’s flexibility has been analysed in relation to
adoption of the accounting policies and the presentation of the financial information to the
stakeholders and the shareholders of the company – Wesfarmers Limited. The investigation has
also been made towards the quality of the accounting and disclosure of the information made
during the year and simultaneously the discrepancies have been found and listed. The
investigation then made to the framework of accounting whether the company is following the
conceptual framework of accounting or not. The investigation report has been concluded with the
analysis that the financial statements of the company displays that the managers have the high
degree of flexibility and has led the distortion of the picture of the financial statements stating the
state of affairs and the financial performance.
REFERENCES
Anastasia, (2015), “Financial Statement Analysis : An Introduction” available on
https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 25-09-2017