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Conceptual Framework of Accounting

Table of Contents

Introduction

Applicability of Conceptual Framework for Financial Reporting

Qualitative characteristics of useful financial information

Relevance

Faithful representation

Amended and New Standards Adopted by the Group

AASB 15 for Revenue from Contracts with Customers

AASB 16 for Leases

AASB 136 for Impairment of Assets

Transition to AASB 16

Impact on the adoption of AASB 16 Leases

Conclusion

References

Introduction to Woolworths Group

Woolworths Group is a top 100 ASX listed company in Australia. The company is engaged in the business of retailing throughout Australia and New Zealand. Woolworths Group is the second biggest company in Australia by revenue after Wesfarmers. Also, it is the biggest liquor retailer within the territories of Australia. The typical business of the company is operating and managing supermarkets, general merchandise consumer stores, and procurement of liquor and food products. It is also operating various hotels including accommodation, gaming operations, and pubs. Woolworths is a recognizable brand of Australia, and the Group includes various other well-known and well-established Australian brands like Dan Murphy's, BWS and BIG W (Woolworth, 2020).

The Accounting Conceptual Framework (ACF) provides a detailed set of fundamentals and objectives of accounting, developed by the Australian Accounting Standards Board (AASB) to ensure commonness in both reporting and interpretation of various accounting principles and methodologies. It provides definition to the users and objectives of the financial statements. It provides consistency of comprehension and establishes a ground for discussion as well as dispute resolution as it sets principles of common interpretation of various elements in financial statements. It provides the general characteristics and makes accounting information material and useful for the elements of financial statements including Profit and loss, liabilities and assets, provisions, etc. to report their standard comprehension and their purpose.

The report will critically analyze the effectiveness of the Woolworths Group Ltd to meet the obligations of the conceptual framework of accounting. The analysis will mainly focus on the new and amended accounting standards that are required to be adopted by the Group as proposed by the Australian Accounting Standards Board (AASB) (Campbell, et al. 2019).

Applicability of Conceptual Framework for Financial Reporting

As per AASB, the Conceptual Framework applies to the following entities:

i. The profit earning (or for-profit) entities of private sector that are publicly accountable and by legislation are required to comply with the AAS (Australian Accounting Standards)

ii. All other for-profit entities that have voluntarily elected to comply with the Conceptual Framework and the substantial amendments.

The Conceptual Framework as per AASB is applied to periods starting from 1 January 2020 and onwards. Prior application is permitted only if the entity is also complying with the amendments made by AASB 2019-1 at the same time.

Woolworths Group Ltd is a for-profit entity that is a publicly listed company and thus has public accountability and under legislation is required to comply with the Australian Accounting Standards. In other words Woolworths have an applicability of Conceptual Framework for Financial Reporting (Gabric 2018).

Qualitative Characteristics of Useful Financial Information

As per Conceptual Framework, the qualitative characteristics of financial or accounting information are that it needs to be material and useful. For financial and accounting information is to be material and useful, it is required to be relevant and represent the information faithfully that it professes to represent. The materiality and usefulness of financial and accounting information is enhanced if it is verifiable, comparable, understandable and timely.

The fundamental qualitative characteristics are faithful representation and relevance.

Relevance

Financial information is very important and needed to be relevant as it has the capability those users decisions making process is based on such information. Also such information is capable of creating differences in the initial decisions. The financial information is considered to be relevant when it has confirmatory value or predictive value or both.

Materiality: Information is material if misstating, obscuring or omitting it can influence the decisions made by the primary users of financial reports that have been made on the basis of those original reports that provided accounting information about a particular reporting entity (Barker and Teixeira 2018).

Faithful Representation

Financial reports present the financial health of an entity in numbers and words. To be useful, such financial information is required to be represented faithfully. For financial information considered to be perfectly faithful, the representation will required to have 3 characteristics. It would be neutral, free from error and complete. However, perfection is seldom to achieve, therefore the objective of the board and management should be to maximize the above mentioned qualities to the extent possible.

Amended and New Standards Adopted by the Group

Under the conceptual framework, the Group has been adopting all amended and new Accounting Standards that are relevant upon the company as issued by the Australian Accounting Standards Board (AASB). The company has also disclosed that none of the amendments to standards or new standards that can be considered to be mandatory have affected any of the amounts materially in any prior period and in the current period, also the changes are not likely to materially affect the nearly future periods (Schroeder, Clark & Cathey 2019).

AASB 15 for Revenue from Contracts with Customers

The new accounting standard AASB 15 has replaced AASB 111 Construction Contracts and AASB 118 Revenue. AASB 15 has established a principle-based approach for construction contracts, goods and services that requires identifying discrete performance obligations in transactions and allocation of associated transaction price to those obligations. Also the revenue recognition is done only after satisfying the performance obligation and after transferring the control of goods or services at the point of sale.

In the annual report of the Group, is has been duly stated that the Group adopted AASB 15 during the FY 2019 period. The group used the modified retrospective approach, a cumulative catch-up adjustment is required to retained earnings and there is no requirement to restate the comparative amounts.

The company has conducted a detailed analysis of the possible impacts due to adoption of AASB 15 and concludes that the amount and timing of revenue recognition as per AASB 15 remains consistent with the previously followed accounting standards as the Group’s majority transactions are related with sale of goods online and in-store. Also the performance obligation gets satisfied as soon as transfer of control occurs, which happens at the point of delivering the goods or making sales to the customer). Thus, adjustment to retained earnings was not required (Kober, Lee and Ng 2020).

AASB 16 for Leases

The new accounting standard AASB 16 Leases (AASB 16) has replaced existing accounting standard AASB 117 for leases. As per AASB 117, leases were previously classified as either finance leases or operating lease, based on their nature

  • Financial Lease: It is recognized in the Consolidated Statement of balance sheet, or
  • Operating leases: It is not recognized in the Consolidated Statement of balance sheet.

Earlier the operating lease expense were recognized on a straight-line basis over the overall lease term, and recognizes liabilities and assets only to the extent that there is a difference of timing between the expense recognized and actual lease payments.

The Group has disclosed that it is a lessee and under AASB 16 there is no distinction between finance leases and operating leases. Under the new system, the Group has to make lease recognition in the Consolidated Financial Position Statement as mere lease assets and its liabilities associated with lease.

The short term leases will remain an exception to the above mentioned new system. For these leases, the Group has chose to continue the previous structure where the lease payments will be accounted as an expense over the lease term. Apart from that, an interest expense is going to be accounted on the lease liabilities and a depreciation charge for the lease assets will also be recognized (Linsmeier 2016).

The company has stated that it will make assessment for its lease assets for impairments as per the new accounting standard AASB 136 for Impairment of Assets. However, the accounting for leases as a lessor for the Group remains majorly unchanged under AASB 16 and thus, the Group will be able to continue to make classifications of its leases as either operating or finance leases.

AASB 136 for Impairment of Assets

AASB 136 defines accounting principles for impairment of assets including leases which has a definite life span and intangible assets which cannot be accurately measured and have no definite life span and hence regular depreciation methods cannot be applied.

AASB 136 aims at ensuring that the entity’s assets are not carried at higher amounts than their recoverable value. In other words, the standard specifies the amount that accumulates in a financial position statement that is the higher of the following:-

1. The value as currently presented in the balance sheet and

2. The market value less the disposal value

Under AASB 136, the Group is required to carry an impairment test when there is any indication for impairments.

Transition to AASB 16

For a successful transition to the new accounting standards, the Group conducted a system implementation, it determines the impact of such transition or changes on the Group’s Consolidated Statement of Financial Position for the FY 2019 and it also set-up the relevant accounting processes and policies to manage the ongoing requirements of accounting (Barker et al. 2017).

The Group has applied AASB 16 from the beginning of the financial year 2018 – 2019. It used the modified retrospective approach to conduct the process of transition. As per this approach, the company has recognized its entire leased assets as if AASB 16 was always applicable, and the lease liability has been represented as an outstanding liability as per the lease contract by applying the adjusted borrowing rate.

The impact of adopting AASB 16 on the financial position of the Group is based on a various key judgments and estimates which include determination of reasonable lease term, the application of an appropriate discount rate and the valuation and identification of non lease components.

Upon transition, the company has elected to apply the following measures under AASB 16:-

  • The leases which have left with less than 12 months of term from transition date are going to be expensed on a straight-line (SLM) basis as previously;
  • Grandfather* the assessment for leases transactions, AASB 16 will be applied to contracts that have been previously determined as leases; and
  • Utilization of hindsight for determination of lease term in which the lease arrangement has the option to terminate or extend the lease (Campbell, et al. 2019).

* The clause of grandfather provides an exemption to the entities to conduct or continue with their operations or activities that were valid and applicable before the implementation of amended rules, laws or regulations. In the case of Woolworths Group Ltd, the law or rule is the implementation of accounting standard AASB 16 or leases.

Impact on The Adoption of AASB 16 Leases

Impact on Consolidated Statement of Financial Position as At 1 July 2019

Recognition of lease assets                              12.2

Recognition of lease liabilities                          14.7

Recognition of new net deferred tax assets      0.7

Reduction in retained earnings1                      -1.4

All amounts in $ billion

Conclusion on Conceptual Framework of Woolworths Group

The implementation of new accounting standards like AASB15, 16 and 136 have that capacity of creating a dichotomy in the accounting methods to recognize and measure assets, liabilities and other elements of financial statements. Such divisions can force various companies to make manipulations in the financial information or hide information which is material for the users that includes governments, investors, etc.

The contradiction is due to a result of existence of different principles and various accounting standards. For example in this case Woolworth’s accounts for leases under AASB 16 which is the new system where operating and financial leases are not differentiated but the company applied a grandfather clause to account for short term lease assets through which it can treat its leased assets and liabilities as previous (Woolworths 2020).

However the company makes all the disclosures and thus complied with the conceptual framework characteristics of relevance, materiality and Faithfull presentation (Kober, Lee and Ng 2020)

References for Conceptual Framework of Woolworths Group

Barker, R. and Teixeira, A., 2018. Gaps in the IFRS conceptual framework. Accounting in Europe, 15(2), pp.153-166.

Barker, R., Penman, S., Linsmeier, T.J. and Cooper, S., 2017. Moving the conceptual framework forward: Accounting for uncertainty. Contemporary Accounting Research.

Campbell, J. L., D'Adduzio, J., Downes, J., & Utke, S. 2019. Do Investors Adjust Financial Statement Ratios when Financial Statements Fail to Reflect Economic Substance? Evidence from Cash Flow Hedges. Evidence from Cash Flow Hedges (April 2019).

Gabric, D. 2018. Determination of Accounting Manipulations in the Financial Statements Using Accrual Based Investment Ratios. Economic Review: Journal of Economics and Business, 16(1), 71-81.

Kober, R., Lee, J. and Ng, J., 2020. Australian not‐for‐profit sector views on the conceptual framework, accounting standards and accounting information. Accounting & Finance.

Linsmeier, T.J., 2016. Revised model for presentation in statement (s) of financial performance: Potential implications for measurement in the conceptual framework. Accounting Horizons, 30(4), pp.485-498.

Schroeder, R. G., Clark, M. W., & Cathey, J. M. 2019. Financial accounting theory and analysis: text and cases. New Jersey: John Wiley & Sons.

Woolworths. 2020. Annual Report 2019. https://www.woolworthsgroup.com.au/icms_docs/195582_annual-report-2019.pdf

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