ACCG224 : Financial Accounting - Conceptual Framework for Financial Reporting - CFO - Assessment Answer

Financial Accounting Assignment

Case Scenario

As a new accounting graduate, you have just joined the financial reporting unit of a listed company* when your manager, the Chief Financial Officer (CFO), approaches you with your first task.

In their last meeting, the Board of Directors of your company discussed the importance of ensuring that their financial reports meet the objective of general purpose financial reporting and qualitative characteristics of useful financial information as outlined in the IASB September 2010 ‘Conceptual Framework for Financial Reporting’ (CF). Board members are concerned about the company's reputational standing in the market relating to deviations from these objective and qualitative characteristics, specifically in the area of Property, Plant and Equipment (PPE).

Therefore, the Board decided to have a review of the relevant disclosures in the company's latest annual report pertaining to PPE and whether these disclosures are aligned with the CF's objective and qualitative characteristics.

Assignment Task

Based on the Board's decision, the CFO asks you to draft a business research report addressed to the Board of Directors on the following:

Explain in your own words the objective of general purpose financial reporting and the qualitative characteristics of useful financial information according to The Conceptual Framework for Financial Reporting (covering OB1-OB21 and QC1- QC39)

Critically analyse to what extent the latest annual report of your company meetsthe disclosure requirements for PPE as per AASB 116 (10 marks).

Based on your findings in part b, critically analyse to what extent the disclosures on PPE satisfy the fundamental and at least one of the enhancing qualitative characteristics of useful financial information

d. Based on your findings in part c, critically discuss to what extent the disclosures on PPE align with the objective of general purpose financial reporting and, as a conclusion, recommend actions for improvement

Introduction

Woolworths is a retail supermarket chain within the Consumer staples industry of Australia and is listed on the ASX 200 (primary stock market index) with a market capitalization of $ 30,175,100,000 and a weightage of 1.98%. (ASX 200 List, 2016)

The report purports to critically analyse the relevant disclosures in Woolworths Ltd. 2016 Annual report with respect to adherence with AASB 116 and alignment with the Conceptual Framework.

A Review of Objective and the qualitative characteristics as per the Conceptual Framework

The objectives of the conceptual framework form the foundation of Financial Reporting (OB1-OB21) so as to provide useful financial information to the primary users (external as well as internal users) on the future expected cash flows, assets, liabilities, and the capability of the management and value of the entity. The framework also establishes the concepts for measurement and judgement. The financials ought to throw light on the consequent effect of transactions and events on the financial strength by indicating the effect of the nature and amount of resources used. Changes in the financial and investment decisions is best reflected through accrual accounting in conjunction with the cash flows so as to indicate the potential financial performance of the entity.

The qualitative characteristics (QC1- QC39) identify the useful information types and the different considerations in the application of these on the financial and cost concepts. The characteristics of a qualitative information are relevancy, faithful representation (considered fundamental), timeliness, usefulness, verifiability, consistency and comparability across time and industry. Provided information ought to be material enough so as to impact users in making predictions and provide feedback on the current and past performance so as to impact their decisions. It should also be complete and free from bias and error and mention reservations if any. These characteristics need not follow an order and the entity’s endeavour should be maximum compliance of these. The costs of provided information ought to justify its benefits quantitatively and qualitatively.(Ifrs.org, 2016)

B Critical evaluation of adherence to AASB 116

The 2016 financial report of Woolworth Ltd. adheres to AASB 116 by disclosing in Schedule 11 (Appendicle 2) the measurement bases used, depreciation methods and rates, details of the gross carrying amount duly reconciled and the starting and ending balances of accumulated depreciation. Other disclosures include Information on impairment and revaluations done during the year. The cost model duly represents the carrying amount for each class at cost net of accumulated depreciation and impairment losses. Revaluations seem regular and are done for all class items. Revaluation reserve for assets exists though no revaluations have been done during the year. Significant PPE with different benefit pattern are depreciated separately. Depreciation is allocated systematically over the useful life and reflects the expected benefit for each class of item. The residual value and expected benefits are reviewed annually and subject to impairment as per AASB 136. No Compensation is receivable from third parties during the year and the carrying amount of PPE is derecognised on disposal or on exhausting of future expected benefits.The Recognition criteria on the probability offlow of the expected benefits and reliable measurement of the cost including subsequent costs has been followed. Initial recognition of items of PPE is done on the basis of cash or cash equivalents paid or fair value of exchanged consideration. (Woolworthslimited.com.au, 2016) (Charteredaccountants.com.au, 2016)

C Critical evaluation of adherence to qualitative characteristics in the framework

The disclosures on PPE comply with the fundamental and enhancing qualitative characteristics in the framework and are relevantly and faithfully represented, at the same time being understandable. The information is clearly providing feedback on changes in previous evaluations and is material enough so as to provide feedback on the current and past to impact the user decisions. An idea of the Significant Accounting policies on carrying amount, depreciation, proceeds from sale, impairment and critical accounting estimates in respect of the estimated useful life and properties have been duly disclosed to clearly help the users to make informed judgements. The information is complete and free from bias and error in as schedule 11 describes the nature of the item and a numerical depiction clubbed with a description of the original cost and fair value. Where required significant policies and facts on the nature of the items and the estimation process have been disclosed. The nature of the estimating process is duly described and has been made on the basis of best available information. Irrelevant phenomena have not been reported. Complex phenomena like impairment have been included so that the information is complete and not misleading.(Woolworthslimited.com.au, 2016) (Ifrs.org, 2016)

D Critical evaluation of adherence to objectives described in the framework

The disclosures on PPE align with the objectives described in the framework so as to provide useful financial information to the primary users on the future expected cash flows, liabilities, and the capability of the management and effect on the value of the entity in regard to PPE. The disclosures also throw light on the consequent effect of transactions and events on the financials strength by indicating the nature and amount of PPE used. Changes in investment decisions is also reflected through accrual accounting and the cash flows for the PPE (Appendicle 1 indicating the payments for PPE) so as to indicate the potential financial performance and position of the entity.(Woolworthslimited.com.au, 2016) (Ifrs.org, 2016)

Conclusion and Recommendations

These disclosures align with the fundamental as well as enhancing qualitative characteristics of the framework by being relevant and faithfully represented and at the same time being understandable These also align with the framework objectives by providing relevant useful information to users. The 2016 annual report of Woolworth Ltd. adequately adheres to AASB 116 on PPE by disclosing the relevant information in Schedule 11 of the report.

It is recommended so as to further align with the Objective and the qualitative characteristics of the Conceptual framework to provide a Comparative ratio analysis with respect to past years and with Competitors and Industry averages like PPE turnover, ratio of PPE to total assets and accumulated depricitaion to total assets. This would also enhance the comparability, verifiability and usefulness of the provided information and help users take informed decisions on the effect of various events like disposal, discontinuance of operation as well as impairment on the value of the business.