Financial Analysis Report: Wesfarmers Financial Statements 2017

This report provides a financial analysis of Wesfarmers, examining its expense classification methods, which are based on the nature of expenses rather than functional allocation. It delves into the company's accounting policies, particularly focusing on AASB 108/IAS 8, including valuation methods for goodwill, intangible assets, and provisions, along with revenue recognition practices related to loyalty programs. The report also analyzes the notes to the 2016 financial statements, detailing depreciation and impairment methods for assets, including the use of the straight-line method for depreciation and impairment testing procedures. Key management assumptions and the treatment of asset derecognition are also discussed, providing a comprehensive overview of Wesfarmers' financial reporting practices.

2017
Financial Analysis

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By student name
Professor
University
Date: Januray 30 , 2018.
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Contents
Task 1…………………………………………………………………........................................................3
Task 2…………………………………………………………………………………………………………………………4
Task 3………………………………………………………………………………………………………………..………6
References.....…………………………………………………………….....................................................9
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Part 2
Task 1: Analysis of Expense
a) In case of Wesfarmers the expenses are classified based on nature like depreciation,
impairment, rent expenses, wages etc. In this there is no allocation of the expenses to specific
functions like selling, administration etc. It is a simple method of cost allocation and makes it
easy to present the same in the income statement of the company (Abbott & Kantor, 2017). It is
mostly employed by small businesses as it makes it easy for them to calculate the profit, but in
case of Wesfarmer same has been followed. An extract of the same has been attached below
from the annual report of the company, that throws some light on the kind of method the
company employs in cost differentiation and allocation.
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b) A different method of cost allocation has been followed because it makes the overall process
easy for the company. There are various expenses that the company incurs and given the
complexities involved in the accounting of the same, it is not always feasible to differentiate the
same based on function, thus cost allocation has been done based on nature. It makes the
overall process easy for the company and helps in calculation of revenue and makes it easy to
present the same on the balance sheet of the company (Alexander, 2016). The only drawback of
this kind of method is that it does not allow calculation of the gross profit, but given the
company is not a manufacturing concern, this is not an issue and hence allocation can be easily
done based on nature for the company.
Task 2: Accounting Policy
The AASB 108 /IAS 8 are important standards that provides insights into the accounting
estimates made by the company, accounting policies adopted by the company and in case there are any
errors then same is reflected through this standard.
In case of Wesfarmers there are three points that are disclosed in the annual report of the company
with respect to the above stated standards –
 The notes to account section of the annual report contain details about the method of valuation
that the company follows with respect to goodwill and other intangible assets and any changes
in the method is also stated briefly. In case of Goodwill it is measured at cost as it is acquired in
a business combination whereas in case of other intangible assets they are measured at cost in
case of initial recognition and then impairment on the same is calculated with respect to the
overall carrying amount of the asset (Maynard, 2017). All these policies with respect to the
business are stated in the annual report of the company. An extract with respect to the same is
attached below:
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 With respect to valuation of provision it has been stated that they are ascertained by
discounting the expected future cash flow of the company at pre- tax rate and reflects the
current liability position with respect to the prevailing market price of the company. Key
estimates with regards to the employee benefits is also stated with focus on the discount rates
that are being used to calculate the same. An extract for the same has been attached
highlighting the major accounting policies about the same-
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 There is also a section in the notes to account that specifies the valuation of the loyalty program
followed by the company, as per which customers are issued certain points whenever they
purchase certain products in the retail shop of the company (Dichev, 2017). The total
considerations that the company earns is locked between the points issued and the products
that are sold. Later the value of these considerations is calculated on deferred basis by taking in
consideration the prevailing market price of the same. This is an important policy of revenue
recognition followed by the company. An extract of the same is attached below-
Task 3: Notes to the 2016 financial statements
In case of Wesfarmer 2016 annual report, the total amount of depreciation is $1296m and total
amount of impairment expenses are $2172m. The recognition and measurement method followed in
case of depreciation is stated as cost of the asset less the total amount of depreciation and impairment
related to the same. For calculation of the amount of depreciation in case of plant property and
equipment straight line method is followed, where the total depreciable value is divided by the total
useful life of the asset. In case of buildings the useful life is mostly between 20 to 40 years and in case of
equipment the life is mostly between 3 – 40 years. In case of total cost of the assets, the cost of
replacement is also included for the asset. In case of the expenditures that the company does on the
mining areas, the same is amortized over the useful life of the mines. The rate of amortization is based
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on other economically reversible mines. In case of leasehold improvements, the same is amortized over
the useful life of the lease (Chiapello, 2017).
This estimation of the useful life, depreciable value and the carrying amount of the asset
requires the discrimination and judgement of the management of the company. In case there is any
change in the method followed, the same is applied on a prospective basis by the company (Iasplus,
2017). These revisions are mostly required when there are changes that are due to changes in the
economic structure for the company affecting the overall cost of the asset and the depreciation
calculated. It is a very rare phenomenon and no simple change results in a drastic change in the method
of depreciation, impairment, allocation of cost etc.
In case any property plant or equipment is sold, or is completely depreciated then the same is
derecognized from the balance sheet and any profit or loss resulting for the sale of the property is
reflected in the balance sheet of the same.
With respect to impairment of the asset, the same is calculated based on the carrying amount of
the asset by taking in consideration the fair value of the asset. And same is then recognized on the
income statement of the company. For intangible assets the overall impairment testing is done by
dividing the same into blocks known as cash generating units and on the same the result is calculated. In
case of Goodwill different method is followed by the company and is not part of any block (Chariri,
2017). Key assumptions by the management in this regard is that there are no major economic changes
that might affect the performance of the asset. Impairment loss is calculated based on internal and
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external factors that might affect the overall performance of the company in the long run. An extract
with respect to the same is attached hereunder-
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References
Abbott, M., & Kantor, A. (2017). Fair Value Measurement and Mandated Accounting Changes: The Case
of the Victorian Rail Track Corporation. Australian accounting Review.
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-
431.
Chariri, A. (2017). FINANCIAL REPORTING PRACTICE AS A RITUAL: UNDERSTANDING ACCOUNTING
WITHIN INSTITUTIONAL FRAMEWORK. Journal of Economics, Business and Accountancy, 14(1).
Chiapello, E. (2017). Critical accounting research and neoliberalism. Critical Perspectives on Accounting,
43, 47-64.
Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), 617-632.
Iasplus. (2017). www.iasplus.com. Retrieved december 07, 2017, from
https://www.iasplus.com/en-ca/projects/assurance/research-projects/iaasb-revisions-to-isa-
315-identifying-and-assessing-the-risks-of-material-misstatement-through-understanding-the-
entity-and-its-environment-research
Maynard, J. (2017). Financial accounting reporting and analysis (second ed.). United Kingdom: Oxford
University Press.
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