Managers Accounting And Reporting Choices -Myassignmenthelp.Com

Question: Discuss about the Managers Accounting And Reporting Choices. Answer: Introduction The function of finance of every organization whether small or whether big plays a very important role. It is because its only the finance function around which the working of the whole of the organization depends. For instance in order to make the purchases, finance is required and in order to receive the payments from the customers then also finance is required. Finance is performed by following the correct method of accounting and underlying accounting rules and procedures. Through this report the annual report of the company Woolworths Limited have been analysed for the year ending 30th of June 2016 and 30th of June 2015. In the first section, the accounting policy of the company for key items have been discussed and simultaneously the assessment of the flexibility in accounting have been done as to what extent it can be distorted by the managers of the company. In the third section, the strategy that the company has adopted in doing the accounting has been critically evaluated with reference to the position of the competitors. Section four has evaluated the quality of the disclosure that the management has made in their financial statements of the company. In the section five, the issue that has shown some discrepancies in the accounting policy or the strategy adopted by the management has been analysed. In the last section of the body of the investigation report, it has been analysed whether the company has followed the conceptual framework of accounting or not. With these sections, the report has been ended with the appropriate conclusion. History Of Company And Adopted Key Accounting Policies For the purpose of conducting the investigation report, the company Woolworths Limited has been selected. The company is a listed company in stock exchange of Australia and has been founded in the year of 1924 when it was the small store providing daily items for the consumer. With the passage of the time, the company has been growing with the multiplicity of factors on year on year basis and has stepped into the market of India by opening the joint venture as Croma. Since its formation, the company has made the focus on the daily consumer needs and has changed their products according to the needs of the consumer. In the current scenario, company is working as the supermarkets where all the items are readily available for the consumers at the cheap price. It includes from the products like fresh fruits, vegetables to the electronic items which in the todays era is very necessary for every household (Company Official Website, 2017). The financial year of the company usually ends as defined in the Corporations Act, 2001 ends on 25th of June every year. On looking after the financial statements of the company for the financial year ending 25th of June 2017, the following key accounting policies and estimated have estimated have been mentioned below: As per note number 1.3 of the financial statements of the company, the directors are authorized to make the judgments, estimates and assumptions that will affect the items as reported in the financial statements. The estimates, judgments and assumptions are based on the historical experience of the company as to how they have made the above in the earlier years. The matters involving the higher risk of having the material effect over the items as shown on the financial statements have been mentioned separately under the separate heads for Useful life assets for estimating the depreciation, impairment of the assets, onerous leases and operations that have been discontinued which includes the impairments and other details (Anastasia, 2015). For instance the company has adopted the accounting policy for the assets of the company is that the asset will be value at the cost incurred to bring asset to the present location and condition less the value of the depreciation as calculated on the basis of the estimated useful life of an asset less the amount of impairment loss if any as indicated by the conditions. With the aforesaid accounting policy, the major accounting estimate taken by the management is the measurement of useful life an asset. It is also regarded as the key success factor for every organization as the noncurrent assets forms part of the net worth of the company and the investors are at first willing to have the asset information immediately after knowing the earnings per share. There are other accounting policies too that is regarded as the critical success factor of the company recognition of the revenue, measurement of inventories, etc. Assessment of Accounting In the every organization, every managers of the company to some extent have the liberty to make the estimates or judgments at their comfort level which means in the manner which is leading the benefits to the managers (Weygandt, 2012). The most common motive for adopting the flexibility in the accounting is to have the increase in their remuneration. The company provides the remuneration to their managers on the basis of the two plans. One is as known by the name of the short term incentive and the other plan is the long term incentive. In this it is mentioned that if the revenue is increased by such percentage then the managers will receive the amount as remuneration. It is because of this factor the managers of the company are generally motivate to inflate the sales figure and thereby getting the higher remuneration. In this way the accounting policies of the company are considered as flexible by the managers (Cooper, 2015). The same can be noticed from the annual report of the co mpany that the companys revenue has been increased from $53473 million for the year ending 2016 to $55475 for the year ending 2017. It has been made despite of the fact that the company is in the process of saving the risk due to the foreign exchange currency and the closure of the BIG W business (Bryer, 2013). The company has very clearly defined in the annual report of the company that the company has followed all the accounting policies and the accounting procedures as defined in the accounting standards and the international reporting framework standards and has also complied with the conceptual framework of accounting. But as per the policies relating to the remuneration to be given to the directors of the company and the companys strategy to increase the wealth of the shareholders of the company, there are chances that the company might have involved in the manipulation of the figures of the items as shown in the financial statements of the company. They have used the estimates at their own judgmental level for instance the useful life of an asset that the company has estimated is at the discretion of the management and secondly the cash flows that the company has estimated for checking the impairment of the BIG W business is totally at the discretion of the manager of the company. Th ere might be the chance of distortion because of which the company has written off the impairment loss of $35.3 million in the financial year ending 2017. Thus, it can be very well inferred that there are the chances of having the higher degree of flexibility in choosing policies and estimates. Evalution of Strategy in Accounting Continuing with the accounting flexibility, the strategies that the company has adopted has in some manner has given an extended arm to the managers of the company to make the amendment and provide the distorted picture of the financial information of the company to the stakeholders including the shareholders of the company. As per the accounting norms and principles, each and every company shall comply with the generally accepted accounting policies and procedures that are universally applicable and made. Therefore, as per the industry norms, the accounting strategy is to the major extent flexible. But it has been reduced with the introduction of some normative theories of accounting like conceptual framework of accounting, continuous disclosure regime, etc. These two facilitates that the financial statements shall be relevant, shall be consistent, shall be error free and shall represent the faithfulness of the operations of the company. The increase in the revenue figure is totally the distortion of the financial information that the company represents to the stakeholders of the company. The further flexibility that the managers have taken, as depicted from the figures in the consolidated profit and loss account, by having the increased profit percentage. For the financial year ending 2016, the company has earned the earnings before interest and income tax at the rate of 2.79 % and for the year financial ending 2017 the company has earned the earnings before interest and income tax at the rate of 4.14 %. It is clubbed with the major that the revenue has been increased only by 3.74% (Company Official Website, 2017). It has very clearly dictated that the managers are truly and fully involved in the distortion of the figure of earnings before interest and income tax (Kothari and Ball, 2014). It is because by having the earnings before interest and income tax as higher the wealth of the shareholders will increase and th ereby will increase the interest of the shareholder to invest more in the firm. Similarly, in order to have the additional borrowings from the bank there might be the possibility that financial institution which is ready to extend the loan has decided to bring the level of debt equity to the level at below 1.40. As per the consolidated balance sheet, the debt equity ratio for the company has been decreased from the level of 1.67 at the yearend 2016 to 1.32 at the yearend 2017 (Ingram, 2008). As per the concept of the positive accounting theory, the accounting treatment of any transaction is governed by the understanding of the behavior of persons employed in the accounting department. According to this theory, the managers of the company will act in the manner in which they think it will actually fit. Therefore, as per the analysis made, there are high chances that the managers would have distorted the financial information of the company for the benefit of themselves and for the company. And it has also been inferred that the transactions have been greatly structured for the achievement of the objectives of the company in full. Evaluation Of Quality Disclosure With the introduction of the continuous disclosure regimes, the companies are required to disclose each and every information whether financial or non financial to the stakeholders of the company as quickly as it can. The information shall be of the nature which can affect the position of the company in the market by materially affecting the share price of the company (Sinha, 2012). On the plain reading and the analysis of the financial statements of the company, the adequate disclosures have been made. And more importantly along with the information that the company has disclosed in the annual report of the company, the auditors of the company has also disclosed the relevant information and the important matters in accordance with the new auditing standard number 701 on communicating the key audit matters to the client management. It facilitates that the company has followed the accounting standards and the accounting principles in true spirit. The notes to the financial statements have provided all the information relating to the particular item. For instance note number 3.3 of the financial statements of the company have fully described as to how the property plant and equipment will be valued at the end of every year, on what basis the useful life of an assets have been estimated and how the depreciation have been calculated. Before ending of this note, the company has disclosed the critical accounting estimates regarding the useful life of an asset and carrying value of properties (Company Official Website, 2017). For the former it says that the estimates of the useful life are reviewed at the end of each year and where it is changed then the written down value of the asset is depreciated accordingly. For the latter it is mentioned that for estimating the carrying value of the property plant and equipment the opinion of the external agencies are obtained at the end of every three year. It exhibits that the estimates or judgments made by the management will be checked and reviewed by the third part agencies also. Another important disclosure that the company has made for the BIG W is adequate as it has outlined all the major situations and the circumstances and the estimates that will prevail and according to that the company has detailed the analysis by following the sensitivity analysis for determining the impact of the key assumptions made on the recoverable amount of the BIG W and its has been analysed that there will be 45% set off the losses in the future years. Along with the above the company has made the proper disclosure of the segments. The company has the following segments which are reportable as per the accounting standards: Australian Food New Zealand Food Endeavour Drinks BIG W The annual report has detailed the separate profit and loss account for each segment as per the operations and as per the geographic location. In this manner, the quality of the disclosure of the information in the annual report is high. Identification Of Discrepancies The following discrepancies have been observed from the annual report of the company which requires further information to form the opinion: The debt equity ratio has been considerably decreased from 1.67 in the year 2016 to 1.32 in the year 2017. Information is required as to why it has been considerably decreased. Is there any debt covenant which has imposed by the financial institutions or the company wants to make the company as debt - free? It is because it has not been revealed from the annual report of the company that it has been decreased (Phillips and Heiser., 2011). The earnings before interest and taxes are at the increased level as compare to the previous year. The relation between the sales and the earnings before interest and taxes are as equivalent to the double proportionate value of the previous year. No explanation or disclosure has been made as to why the company has received the higher percentage of earnings before interest and tax. Although the company has made the impairment loss for the BIG W business, but the correct reason for continuing the same has not been detailed. It shall be supported by the external agency report or any other third party opinion. The auditor has communicated the three key audit matters to the management of the company identified during the audit. First matter is related to the discontinuance of the Home improvement business. It has been disclosed because of the complexity in the nature of accounting. The accounting details will be required for further investigation. Second is related to the recognition of the BIG W impairment and the third is related to the provisioning of inventory. In this way, there are discrepancies which require further information. Compliance With The Conceptual Framework The conceptual framework of accounting consists of the three qualitative characteristics. One is the faithful representation, second is relevancy and the third is consistency. Faithful representation states that the financial statements shall be free from error and neutral. Relevancy means it should be relevant for the users of the financial statements of the company and consistency means that the financial statements shall be prepared in consistent manner (Capital Markets Advisory Committee Meeting, 2013; International Accounting Standards Board, 2010). As per the notes to accounts of the financial statements and the significant policies of the financial statements, the company has followed the conceptual framework of accounting in full. It is because all the accounting policies have been mentioned and more importantly the critical accounting estimates and the judgments have been mentioned for estimating the useful life of an asset and carrying value of properties, calculation of impairment of assets, provisions for leased assets and the estimates made for the discontinued operation of the Home Improvement (Weiss, 2014). It has been further full filled when the auditor of the company has communicated the key audit matters in their audit report and that too only for the benefit of the stakeholders of the company. It depicts that even the company has not forced the auditor to not to disclose the information publicly rather hide it for the benefit of the company. For instance, the valuation of inventory, discontinued operation of BUG W, etc. Thus, the company has complied with the conceptual framework of accounting. Conclusion The accounting and finance part of every company plays a significant role in the success of the business. There have been many instances where the business has been collapsed only because of the wrong method of accounting adopted by the company and the working strategy adopted by the company regarding the disclosure to be made in the financial statements of the company. In the report, the accounting policy of the company Woolworths Limited have been analysed and the strategies that the company has adopted for the compliance with the conceptual framework, compliance with the required disclosures in accounting framework and the discrepancies if any in the annual report has been analysed and somewhere critically described with the competitor company Wesfarmers Limited. To conclude the investigation report, the company has been following the prescribed accounting policies and has adopted best strategy for the accounting and disclosure of the information. Referance Anastasia, (2015), Financial Statement Analysis : An Introduction available on https://www.cleverism.com/financial-statement-analysis-introduction/ accessed on 16-09-2017 Bryer, R.A., 2013. Double-entry bookkeeping and the birth of capitalism: accounting for the commercial revolution in medieval northern Italy.Critical perspectives on Accounting,4(2), pp.113-140. 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