Woolworths Annual Report Analysis: Accounting Concepts and Leases

This report provides an in-depth analysis of Woolworths Group's financial accounting practices, focusing on the application of key accounting concepts such as going concern, accrual accounting, money measurement, and the cost concept within its annual report. It examines the implications of the new AASB 16 lease accounting standard, comparing it to the previous AASB 117 standard, and assesses the impact of this transition on Woolworths. The report highlights the company's disclosures regarding lease accounting, including the recognition of right-of-use assets and lease liabilities, as well as the effects of transitioning from the old to the new standard. The analysis includes specific examples from Woolworths' annual reports, illustrating how these concepts and standards are implemented in practice. The report also discusses the challenges and complexities associated with implementing AASB 16, particularly for companies with extensive operating leases, and the importance of clear communication to stakeholders regarding changes in financial reporting. The report concludes by summarizing the key disclosures made by Woolworths regarding lease accounting and the transitional provisions related to the adoption of AASB 16, emphasizing the need for enhanced disclosures and training of accounting professionals to effectively manage the changes in financial reporting.

Advanced Financial Accounting
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Executive Summary
This report has been undertaken mainly for the purpose of illustrating the significance of
accounting concepts and standards in the financial reporting process of business entities. In this
context, it has been depicted from analysis of the annual report of selected ASX listed entity that
is Woolworths Group, that it has effectively applied all the relevant accounting concepts in
development of its financial report. Also, the annual report evaluation of Woolworths as depicted
that through it is still adopting the sue of AASB 177 for reporting of its leases but it would apply
the new lease standard of AASB 16 in the future period. It has also provided adequate
disclosures regarding the impact of this transition on its financial performance.
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Contents
Introduction......................................................................................................................................4
Part 1: Identification and Description of the Accounting Concepts used in Woolworths Limited. 4
Going Concern Concept...............................................................................................................4
Accrual Accounting Concept.......................................................................................................5
Money Measurement Accounting Concept..................................................................................5
Cost Concept................................................................................................................................6
Part 2: New Accounting Standard Leases of AASB 16 and it’s Impact On Selected Company....7
Part 3: Summarizing the Key Disclosures that Company makes in context for Lease accounting
as per new standard and the impact of its transitional provision from AASB 117 TO AASB 16. .9
Conclusion.....................................................................................................................................10
References......................................................................................................................................12
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Introduction
The report has been undertaken to analyze and examine the annual report disclosures of a
selected ASX listed entity. The examination of the annual report disclosures is undertaken to
identifying the accounting concepts used for presenting and disclosing the financial information.
The next section of the report discusses the changes that have been incorporated within the new
accounting standard for leases AASB 16. This is done in reference to the selected ASX listed
company. Lastly, it examines the key disclosures that the company has made in relation to the
leases and analyzes the impact of the transition from AASB 16 to AASB 117. The ASX
Company selected for the evaluation purpose in the present report is Woolworths Limited, a
leading supermarket giant of Australia.
Brief Description of the Company
Woolworths Limited is a recognized and leading retail chain of Australia having the
presence of about 300 stores across the country. The major products provided by its retail stores
include items of grocery, liquor, home improvements and is also involved in carrying out diverse
businesses of hotels and pubs. It is recognized to be one of the largest companies within
Australia in terms of revenue. The company strategic priority is to create better experiences for
its customers and delivering them higher value (Woolworths Group, 2018).
Part 1: Identification and Description of the Accounting Concepts used in Woolworths
Limited
The accounting concepts largely assist the development and implementation of various
accounting principles within business entities. The different accounting concepts as provided by
the IASB (International Accounting Standards Board) guides the overall, process of developing
and presenting the financial statements. They can be regarded as wide conventions that have
been developed for the purpose of providing a basic framework to financial reporting. The
different accounting concepts that have been adopted by Woolworths in developing and
presenting its financial statements are described as below:
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Going Concern Concept
The business entities tend to develop their various financial statements on the basis of the
assumption that they will continue to operate for an indefinite future period of time. As per this
concept, business entity need to value its assets on a non-liquidation basis and fixed assets should
be amortized over their useful lives in comparison to that for a shorter period. For example,
Woolworths Limited adopts the use of historical cost measurement approach for value of its
fixed assets and they are amortized over their useful lives (Kiabel and Nwanyanwu, 2014). The
extract from its annual report illustrating same has been depicted as follows:
(Source: Woolworth’s Annual report 2018)
Accrual Accounting Concept
The concept stated that a business entity need to record the expenses and income relating
to particular accounting period in which they have been incurred or earned irrespective of the
cash basis. As such, in accordance with this concept the income earned need to be recognized in
the accounting period in which it arises rather than reporting it in future period in which it is
expected to be realized. Similarly, expenses also need to be recognized within same accounting
period in which they are incurred irrespective of the fact when they need to be paid. For
example, Woolworths Limited has recognized revenue on fair value in respect of the
consideration received or likely to be received in the future period of time (Unegbu, 2014).
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Money Measurement Accounting Concept
The money measurement concept of accounting has identified the need for businesses to
develop and present their financial information in monetary terms. Woolworths Limited has
adequately applied this accounting concept for preparation of its different financial statements as
it all the financial transactions within the statements have been recorded in monetary terms as
illustrated below:
(Source: Woolworth’s Annual report 2018)
Cost Concept
The concept can be regarded as developed on the basis of going concern concept that has
required the business entities to record the assets at historical cost. The market value is regarded
to be irrelevant for accounting purposes as the business is estimated to continue for long period
of time. For example, the fixed assets of the company are measured at cost less any depreciation
or amortization losses (Kiabel and Nwanyanwu, 2014). The extract form the annual report in this
context can be depicted as follows:
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(Source: Woolworth’s Annual report 2018)
Part 2: New Accounting Standard Leases of AASB 16 and it’s Impact On Selected
Company
AASB (Australian Accounting Standards Board) has directed all the ASX listed entities
to comply with the IFRS accounting standards provided by the IASB for increasing
comparability and homogeneity in the financial reporting process. The IASB has developed and
implemented new standard for leases that is IFRS 16 leases that has identified the need for
introducing a new model that require lessees to recognize all leases on the balance sheet with
only exception of short-term leases and leases related to assets having underlying lower value.
The changes have also been adopted by the AASB and are expected to become effective within
the financial reporting system of business entities within Australia from the period of 1 Januarys
2019 (Mitchell, 2017). The changes to be introduced in the lease accounting model is expected
top cause significant changes within Australian entities especially those dealing in high amount
of operating leases. The business entities are required to gain a proper understanding of the new
lease standard to effectively comply with the new accounting standard and disclose information
as per the standard needs and requirements. The major objective behind the introduction of the
standard is to eliminate the classification between operating and finance leases and has
recognized the need for capitalizing all leases by recognition of lease liability and right of use of
an asset on the balance sheet (Grossman and Grossman, 2010).
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The new accounting standard for leases that is AASB 16 has replaced the previous
existing accounting standard for leases of AASB 117. There is no need for depicting the future
obligations on a company on its operating leases and thus it is associated with the drawbacks of
not accurately depicting the financial position of a company. It has been estimated as per the
previous accounting standard for leases that there are about $3 trillion worth of future payments
for leases that are not adequately recognized on the balance sheet. This has caused the need for
IASB to introduce changes within its accounting standard for leases and thus AASB 16 has been
introduced for promoting transparency within lease commitments of businesses and adequately
reflecting the economic reality. The new standard would largely be beneficial for facilitating
investment decision of users by providing a better disclosure of the financial performance of an
entity (New leasing standard (AASB 16) brings significant impacts, 2016).
However, the major challenge that is present before business entities in regards to
implementing the new accounting standard for leases is the increasing level of complexity and
risk in the financial reporting due to its significant impact of the standard on profitability position
of companies. AASB 16 requires providing complete disclosure in regards to lease commitment
that can be provided as a complex and time-consuming process. Also, the businesses are required
to provide significant training to its accounting professionals to make significant changes in its
balance sheet as per the new standards (Green, 2018). The training is required to enhance the
understanding of the accounting professionals in regards to reporting of leases in accordance
with the new standard. This is essential because new standard of recognition and measurement of
leases requires completely reviewing the lease contracts for determination of lease term, right of
use of an asset and its associated liability. In addition to this, there is increasing concern among
the business entities regarding the impact of the new lease standard on the expenses recognition
as instead of using straight line rental expense it is required to expense it more in early years as
compared to the later years and this would have a large impact on earning position of entities.
Thus, it can be said that major changes that are likely to be adopted within the balance sheet of
companies need to be adequately explained to its investors and shareholders (Vengadasalam,
2019).
As analyzed from the annual report of Woolworths Limited, it has applied the accounting
standard of AASB 117 for reporting of its lease commitments. The leases are classified on the
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basis of operating and financial leases and it has not yet adopted the new accounting standard of
leases that is AASB 16. The current requirements has resulted in classifying the leases on the
basis of their nature and finance leases are recognized in the balance sheet while operating leases
are not recognized within its statement of financial position (Woolworth’s Annual report, 2018).
The extract form the annual report disclosing the reporting of operating leases has been depicted
as follows:
(Source: Woolworth’s Annual report 2018)
However, the company has declared the adoption of the new accounting standard for
leases of AASB 16 after it becomes effective, i.e., from 1st January 2019. The changes introduced
are however impacted on the financial position statement of the company due to large volume of
operating leases used by the entities of the retail sector. The company is required to recognize the
lease liability and right of use of an asset as per the new accounting standard of AASB 16. It
would be highly complex for the accountants of Woolworths Group Limited to comply with all
new accounting treatments provided under the AASB 16. This is because capturing all the
information required for calculation of lease liability and the associated disclosures is a very
complicated process. This is because lease agreements have complex and inter-related elements
that need to be analyzed adequately across large volume of operating leases that the retailers
possess. Therefore, the company to face larger issues in relation to developing and presenting
enhanced disclosures about its lease contracts within its financial reports which can be a
challenging task for the accounting managers (IFRS Spotlight, 2016).
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Part 3: Summarizing the Key Disclosures that Company makes in context for Lease
accounting as per new standard and the impact of its transitional provision from AASB
117 TO AASB 16
As stated within the annual report of Woolworths Limited, it has been adequately
disclosed that the company will replace existing accounting treatment for leases as per AASB
117 standard with the new standard for leases, that is, AASB 16 from 1ST of July 2019. The
AASB 16 adoption of accounting standard for leases would require the company to recognize the
right of use (ROU) of an asset and its associated liability in a lease contract that need to be stated
on its balance sheet (Dhaliwal, Lee and Neamtiu, 2011). The lease liability would represent the
present value of future lease payments and interest expenses would be recognized on the lease
liabilities and depreciation would be charged and recognized on the right of use value of an asset.
The accounting for leases as a lesser is likely to remain unchanged as per the new accounting
standard for AASB 16 (Jose and Constancio, 2018). In this context, Woolworths is likely to
undertake an implementation project that determines the significant changes required within the
accounting policy, states the budgetary requirements, costing involved in the transition process,
identifies the systems requirements and processes identified for execution of the implementation
plan.
The transition process that is replacement of AASB 117 with the new accounting
standard for AASB 16 would be done as per the use of modified retrospective approach as stated
within the annual report of the company. The overall effect on implementation of new
accounting standard for leases would be illustrated as adjustment to the opening balance of
retained earnings on the date, 1st July 2019. Woolworth Group has also decided to implement
different practical expedient in its transition process on the basis of lease by lease basis at the
time of applying the modified retrospective approach. The potential impact of these expedients
would be assessed under the implementation project undertaken by Woolworths(Woolworth’s
Annual report, 2018).
Woolworths has also provided adequate disclosures regarded the estimated impact of the
transition process within its annual report on its statement of financial position. The new lease
liabilities are estimated to amount $14 to $15 billion and the right of use asset will amount to $12
to $13 billion and would be recognized in context of its retained earnings. The major impact of
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the standard would be on the accounting treatment for property leases that includes it’s retain
spaces, warehousing facilities, centre of distribution and support offices. Also, the impact of
adopting AASB 16 on the financial statements in the preliminary periods would also depend on
the economic conditions and its borrowing rates in the future context. It would also be dependent
on the lease portfolio of the company, extent of application of practical expedients and adoption
of new accounting policies that would have an impact on the application of AASB 16 accounting
standard by Woolworths Group (Woolworth’s Annual report, 2018). The extract from the annual
report of the company depicting the impact of adopting the AASB 16 lease standard is depicted
as below:
(Source: Woolworth’s Annual report 2018)
Thus, it can be said that the adoption of the new standard would result in improving
transparency and reducing the assumptions that are associated in determining the lease liabilities.
However, it would also have a major impact on the key financial indicators of the company such
as gearing ratios and the earning potential. The likely change would be depicted within profit and
loss statement of the company such as changes in its EBITDA due to charging of depreciation
and interest expense on lease liabilities as compared to rental expenses. Therefore, it is essential
for the company to understand properly the likely benefits and challenges in adoption of AASB
16 before it become effective within its financial reporting processes (IFRS 16 – The new leases
standard, 2016).
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Conclusion
The discussion held above has illustrated that it is very essential for business entities to
develop their financial reports in accordance with key accounting concepts and standards. They
provide a framework for developing and present the relevant financial information to the end-
users and thus assisting the decision-making process for its primary users. In this context, as
illustrated within the report that new accounting standard for leases, that is AASB 16, has been
developed for improving transparency and reliability within financial reporting process of lease
commitments of business entities. However, its adoption is associated with large number of
challenges before business entities that they to address adequately for ensuring its effective
compliance. As examined from the annual report of Woolworth group that it has not yet adopted
the new standard for leases but has provided adequate disclosures regarding the date, transition
process and the impact of the transition on its financial performance within the report.
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References
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https://www2.deloitte.com/ce/en/pages/finevare/article/irrs-16-leases-impact-challenges-and-
solutions.html [Accessed on: 5 October 2019].
Dhaliwal, D., Lee, H.S. and Neamtiu, M. 2011. The Impact of Operating Leases on Firm
Financial and OperatingRisk. Journal of Accounting, Auditing &Finance 26(2), pp. 151-19.
Green, J. 2018. What challenges might you face in applying IFRS 16 leases? [Online]. Available
at: https://www.accountancyage.com/2018/08/01/what-challenges-might-you-face-in-applying-
ifrs-16-leases/[Accessed on: 5 October 2019].
Grossman, A.M. and Grossman, S.D. 2010. Capitalizing Lease Payments. CPA Journal, 80(5),
pp. 6-11.
IFRS 16 – The new leases standard. 2016. [Online]. Available at:
https://www.pwc.com/gx/en/services/audit-assurance/assets/ifrs-16-new-leases.pdf [Accessed
on: 25 September 2019].
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Research Journal of Finance and Accounting 5(7), pp. 197-201.
Mitchell, S. 2017. Wesfarmers, Woolworths liabilities to double under lease accounting change.
[Online]. Available at: https://www.afr.com/companies/retail/wesfarmers-woolworths-among-
retailers-bracing-for-new-lease-accounting-rules-20170706-gx69ij [Accessed on: 5 October
2019].
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New leasing standard (AASB 16) brings significant impacts. 2016. [Online]. Available at:
https://www.hlb.com.au/new-leasing-standard-aasb-16-brings-significant-impacts/ [Accessed on:
5 October 2019].
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and Diversities in Use. Research Journal of Finance and Accounting 5(19), pp. 1-16.
Vengadasalam, V. 2019. AASB 16 New Lease Standard: 1st January 2019. [Online]. Available
at: https://www.accru.com/2018/10/aasb-16-new-lease-standard/ [Accessed on: 5 October 2019].
Woolworths Group. 2018. About Us. [Online]. Available at:
https://www.woolworthsgroup.com.au/page/about-us/our-approach/strategy-and-objectives/
[Accessed on: 5 October 2019].
Woolworths Limited. 2018. Annual report. [Online]. Available at:
https://www.woolworthsgroup.com.au/icms_docs/195396_annual-report-2018.pdf [Accessed on:
5 October 2019].
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