Woolworths Limited Revenue Recognition and Accounting Policies

This report examines the revenue recognition practices of Woolworths Limited, focusing on the period from 2016 to 2018. It analyzes the company's policies for recognizing revenue from goods and services, highlighting that the company's revenue recognition policy remained consistent across the reporting periods. The report delves into the impact of AASB 15/IFRS 15, noting Woolworths' assessment and implementation of the standard, concluding that it had no material impact. Furthermore, it explores accounting policy choices in relation to AASB 15/IFRS 15, referencing positive accounting theory and its influence on these choices, including hypotheses related to bonus plans, debt/equity ratios, and political factors. The report also includes relevant references, providing a comprehensive overview of Woolworths' revenue recognition strategies and the factors that shape them.

PART 5
Review of the Annual Reports of Company over past three years in relation to Revenue
Woolworths Limited, a company listed in ASX has been chosen for the purpose of the review of
revenue recognition procedure and policy under different reporting periods along with the
variations in recognition over past years. The company was formed in 1924 with an aim of
creating a boom in retail sector in Australia. The company is providing all the goods under one
roof like super markets where complete needs to human are satisfied at one place in terms basic
daily needs of goods. The company has extended its operations in New Zealand and now its
second largest revenue generation company in Australia and New Zealand both in retail industry
(Woolworths Official Website).
Recognition of Revenue Policy or its variations in past three years:-
The revenue of the company is the combination of revenue from goods and revenue from
services (IAS 18). Revenue from goods and services has been recognized on the basis of the fair
value of consideration which is already been received by the company and which is going to be
received by the company in future years after taking into account the criteria of recognition of
revenue for goods and services separately as under:-
1. Revenue from Goods: - Revenue from goods shall be recognized when the ownership of
goods is transferred by company to its customers and all the significant risks and rewards
have been transferred to customer. It also takes into account that there are probable
chances of recovery of revenue in future and the amount of revenue is ascertainable
(Wagenhofer, 2014)
2. Revenue from Services: - Revenue from services shall be recognized using the
percentage of completion method in terms of contract(Christensen, 2016)
The revenue recognition policy is same in all reporting periods i.e. 2018, 2017 and 2016. There
is no variation in revenue recognition policy of the company over the past years.
The company has recognized the revenue in the Annual Report as follows:-
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(Amount in $million)
2018 2017 2016
Revenue from Sale of Goods and Services 56726 55475 58085
According to the Note No. 1 of the Significant accounting policies disclosed in the financial
statements of the company, the company is fulfilling all revenue criteria according to AASB 9.
Revenue Recognition policy in terms of AASB 15/ IFRS 15 in Woolworths Limited
AASB 15 is made effective from 1st January, 2018 but it has been issued before 2016. (AASB
15, 2014). In the annual report of 2016, the company has started the assessment of impact of
standard on the company’s financial performance. In 2017, the company has disclosed that the
AASB 15 will be applicable in financial year starting from 25th June, 2018. The assessment of
implication of standard has been completed and it has been concluded that AASB 15 will not
have material impact on financial performance of company. In the year 2018, when AASB 15
become effective, the company has decided to use cumulative approach for applying the impact
of AASB 15 on revenue and the impacts will become applicable in prospective manner. From
these, it can be concluded that there is no change in revenue recognition and it polices in
Woolworths Limited even after the AASB 15 becomes effective (Komninos and Cameron, 2017)
PART 6
Accounting Policy choice with regards to AASB 15/ IFRS 15
AASB 15/ IFRS 15 deal with revenue recognition in Contracts with customers. Accounting
policy are the principles and procedures which are used to prepare the financial accounts of any
company. Accounting policy with regard to AASB 15/IFRS 15 explains how the company is
recognizing its revenue in service contracts with its customers over a period of time. But only the
accounting policy doesn’t provide the correct recognition of information in financial statements.
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Accounting literatures and researches are also need to understand while choosing the accounting
policy for particular thing (Alayemi, 2015).
Accounting Policy choice in relation to accounting literature i.e. Positive Accounting Theory
The other Research literature which impacts the choice of accounting policy is Positive
Accounting Theory. Positive Accounting theory explains and provides the unidentified
phenomena and provides various observations based on past experience and data. The theory
provides what has to be done but does not provide any specific guiding factor that how the
desired result has been achieved. These means that this theory helps in understanding that
accounting policy needs to applied in preparation of financial statements but it does not describe
which particular accounting policy needs to be applied. For example, positive accounting theory
indicates that most of the companies has to disclosed their tangible fixed assets at historical cost
and few companies has to disclosed their tangible assets at fair market value but it does not help
in understanding the method at which the tangible assets are valued or what valuation policy
should be adopted by the company in terms of tangible assets.
Watts and Zimmerman being the founder of Positive Accounting Theory literature laid down that
this theory helps in understanding that there are several factors which impact the choice of
accounting policy( Watts and Zimmerman, 2015). The basis of the theory is that employees in
the company have different self interest behavior and their understanding to the company
working. The theory provides three hypotheses which majorly impact the choice of accounting
policy in a company which are as follows:-
1. Hypothesis of Bonus Plan: - This hypothesis of the theory encourages the management of
the company to enhance the bonus for its employees so that their self interest can be
fulfilled. For this the management has to enhance the revenue by recognizing the revenue
from contracts in same period rather than making them deferred revenue for future years.
This will impact the accounting policy be chosen in relation to deferred revenue
recognition.
2. Hypothesis of Debt/Equity: - If the Debt- Equity Ratio is high, then the management of
the company will chose the revenue policy which provides the high revenue in initial
years which helps in reducing the financial costs and debt burden on the company’s
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financial assets in short run. The management of the company will tend to choose the
policy having high cash inflows rather than commitments for providing the funds and
move towards that policy (Srivastava,2014)
3. Hypothesis of Political factors: - There are chances that accounts of the company is
required to be audited if the tax liability of the company is higher than particular limit,
then the management of the company will have the tendency to defer the revenue so that
net profits for taxation will be low and the company is not liable for audit (Khan, 2015).
Thus, from the above, it can be clearly analyzed that accounting policies are chosen by
considering relevant standards, factors and accounting literatures.
REFERENCES
AASB 15,(2014), “Revenue from Contracts with Customers”, available on
http://www.aasb.gov.au/admin/file/content105/c9/AASB15_12-14.pdf accessed on 22/01/2019.
Alayemi A, (2015), “Choice of Accounting policy : Effects on Analysis and Interpretation of
Financial Statements” available on https://www.google.co.in/url?
sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwiIjfz6-
uvTAhXGRY8KHQRqCqIQFggvMAE&url=http%3A%2F%2Ffiles.aiscience.org%2Fjournal
%2Farticle%2Fpdf%2F70200037.pdf&usg=AFQjCNE7xDAf38p2oUXi6PpDZfzjwFe8WQ
accessed on 22/01/2019.
Christensen, H.B., (2016) Accounting information in financial contracting: The incomplete
contract theory perspective, Journal of accounting research, 54(2), pp.397-435
IAS 18, (2011), “Revenue”, available on
http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias18_en.pdf accessed on
22/01/2019.
Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public
Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.
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Komninos, J. and Cameron, R.B., 2017. IMPACTS OF REVENUE RECOGNITION
CHANGES IN THE CONSTRUCTION INDUSTRY
Srivastava, A., (2014) Selling-price estimates in revenue recognition and the usefulness of
financial statements, Review of Accounting Studies, 19(2), pp.661-697
Wagenhofer, A., 2014. The role of revenue recognition in performance reporting, Accounting
and Business Research, 44(4), pp.349-379
Watts R. and Zimmerman L. (2015), “Positive Accounting Theory: A Ten
YearPerspective”,availableon http://faculty.etsu.edu/pointer/watts%26zimmerman2.pdf
accessed on 22/01/2019
Woolworths Official Website, “Annual Reports, available on
http://www.woolworthsgroup.com.au/icms_docs/185865_annual-report accessed on 22/01/2019
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