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Introduction

Accounting can be illustrated as the process of recording and analysing the financial transactions of the firms on a day to day basis for establishing the financial performance of the company. Thereafter, for ascertaining the financial performance of the company and to provide the relevant data and statistics about the standings of the company to the stakeholders, the businesses should follow a predefined set of standards, policies and principles for establishing and analysing the financial information of the company. 

The statutory and regulatory bodies provide the global business landscape with policies, standards and frameworks which are accepted and followed globally. The Australian Accounting Standards Board or AASBand theInternational Accounting Standards Board or IASB are the national and global regulatory bodies for financial reporting. They set up common standards and principles for businesses operating in the global and national landscape for assessing their financial performance.

Wherein, the Australian Accounting Standards Board or AASB is the regulatory or statutory body of Australia for the formulation and upkeep of policies, principles and framework for the companies operating in the Australian economic landscape to assess their financial performance. Thereafter, providing a proper framework for the companies to convey the financial standings to the interested parties and the stakeholders of the business.  

Background of the company

Woolworths Supermarkets is an Australian retail company that has been catering to the needs and demands of Australian customers since 1924. In the current landscape, the company employs over a workforce of 115,000 able-bodied individuals in over 964 locations in Australia. In the fiscal year ended 2019, the Woolworth supermarkets groups reported a revenue of over $59,984 million AUD, along with an estimated profit before tax of $2,724 Million AUD and an aggregate profit of 29.1%. Thereafter, the company is extensively engaged in reducing its environmental impact and generated over 10,686 Megawatt Hour, from solar power and reduced its carbon emissions by 18% in comparison to 2015(woolworthsgroup.com.au, 2019)
 

1- From the annual report of your selected company and in addition, to providing examples identify and describe the accounting concepts used.

The firm Woolworths utilises the accounting concept of Going Concern, which is established through analysis of the annual report of the firm for the fiscal year that ended in 2019. The firm utilises the concept of Going Concern for preparing its financial statements and annual reports. The going concern concept defines that a company or business will continue to operate and exist until it is mandatorily wound up or is declared bankrupt. According to the concept the company has a separate legal and perpetual existence(Brunelli, 2018). Thereafter, the company's financial accounts and statements are prepared on this basis, whereby the costs and expenses that the company has to bear to be stretched out and effectively written away in successive periods of time, instead of a single accounting year. [Referred to Appendix 1]

For Example: If a firm QWERTY Plc. ltd. suffers a loss of $100,000 AUD in one accounting year due to external or internal reasons, under the concept of Going Concern, this loss can be effectively written off in successive years as the company enjoys perpetual existence. Thus, the firm can effectively write off this whole amount of loss in one successive year or write off in parts through a couple of years. 

In the global business landscape and economy, there are various concepts and principles that guide the businesses and firms for assessing and evaluating their financial performance, some of them are established below:

1. The Accrual Concept of Accounting: In accordance with the Accrual Concept of Accounting, the firms should recognise revenues and incomes for the year when they are actually received rather than when they are accrued. Under this concept, any pre-received income or revenue should not be considered as an income until the service or the utility is provided to the clients(Pilcher & Gilchrist, Differential reporting: What does it really mean for the public sector?, 2018). Thereafter, the expenses that are incurred by the business should be recorded in the books of accounts in the period in which they are sustained rather than when they are actually discharged or paid for. 

For Example: If a firm DOTW Pvt ltd, incurs an expense for raw materials in the current accounting period and dutifully discharges its obligation in the next accounting period, then the transaction or the expenses would be realised in the previous financial year, or the year in which they are incurred and not on the year in which they are discharged or paid off.

2. The Money Measurement Concept: In accordance with the Money Measurement concept, the business of the firm should record only those transactions that can be defined and expressed in terms of money or finances. Any other change in the internal or external environment of the firm that can affect it’s directly or indirectly is not recorded in the books of accounts of the firm, irrespective of the level of significance of the event(Newberry, 2015)

For example: If in a firm, an event like change in theworkplace which leads to dis-satisfaction amongst employees and hampered productivity would not be recorded in the books of accounts of the firm, as it cannot be established in monetary terms. Wherein, if the management decides to replace the employees with machinery which requires an outflow of cash and inflow of assets, this event will be recorded in the books of accounts of the firm. 

3. The Cost Concept: In accordance with the Cost Concept of accounting, the assets or the long term expenses of the frim are to be recorded in the books of accounting at their original cost and no further increase or fall in the market price of the assets or utilities would have an effect on the valuation in the books of accounts. Thereafter, the firm has to provide for depreciation of these assets in the subsequent years of the utilisation and acquisition of the assets. Thereby no increase or decrease in the market price of the assets would have an effect on the valuation in the books of account of the firm(Pilcher & Gilchrist, Differential reporting: What does it really mean for the public sector?, 2018)

For Example: If a firm WOTW Pvt ltd., buys an asset for $100,000 AUD, and days after the acquisition of the assets, the market price of the assets reduces by over 50%, the valuation in the firm's books of accounts of that assets would be at the value which they procured the assets less depreciation and not the market value of the product.

4. The Duality Concept: In accordance with the Duality Concept of accounting; economic as well as the legal identity of the business or the firms, is different from its owners. That is; the business enjoys a separate legal identity in addition to perpetual existence, wherein the financial transactions of the business should be recorded separately from its owners, as the business is recognised as a separate individual in accordance to the legislature(Birt, et al., 2019)

For Example: In the firm QWERTY plc., if the owners brought a car for their personal use from the business accounts it would be recorded as drawings of capital in business terms, whereas, if he bought the car for business use, the transaction would be recorded as assets.   

2- What changes have been incorporated in the new accounting standard for lease AASB 16? Using your selected company and discuss the issue with examples.

AASB 117, for lease recording, was incorporated in the year of 2005, wherein the lease were divided into two distinct and broad categories, financial leases and operating leases. Financial Leases are identified as a rental agreement, wherein, the ownership of the asset is transferred to the lesser wherein the company that has leased the asset can show it in its books of accounts and financial statements, wherein the lease amount or rental agreement are seen as an expense(Joubert, Garvie, & Parle, 2017). Whereas, Operating expense can be identified as a leasing procedure wherein the ownership of the firm is not transferred to the leased firm, wherein the rental agreement is termed as an Operating expense for the duration of the lease(Xu, Davidson, & Cheong, 2017)

Wherein in the AASB 16, that was instituted this year, highlighted that the differentiation of the leases between operating and financial leases, lead to the off-balance sheet activities. These activities and irregularity in reporting in the financial statements caused a major rift between the actual value as well as the standings of the companies, and the value that is being reported by the companies due to the inefficiency of AASB 117. These Off-balance sheet activities coupled with non-indulgence of necessary financial information led to wiping out of necessary financial information and data which were estimated at around US$3 trillion, during the fiscal year that ended in 2014 alone(woolworthsgroup.com.au, 2019).

For example, in conjunction with AASB 117, the firm that has overhauled an asset through an operational lease agreement, it would just record the value of the expense or the rent agreement of the asset and not the whole amount of the asset. Whereas, the firm that has leased the asset would record the amount it receives as rental agreement and not the amount of the asset. Thereby, effectively a loophole in the accounting procedure emerged wherein the value of the asset dwindled over time due to depreciation but no proper financial transaction or statement was recorded regarding its value. 

The AASB 16, was introduced in 2019 to present a clear and transparent image of the standings of the company and to get a better view of the firms leased and overhauled assets. In AASB 16, the broad difference between financial and operating leases ceased to exist, thereafter all the leases were integrated into the balance sheet. It states that all the necessary financial information about the lease of the company has to be presented in the balance sheet as well as the financial statement of the firm(treasury.nsw.gov.au, 2019)

Wherein, in the financial statements of Woolworths, the AASB 16, is integrated into the firm without a hiccup, through the consolidated statements of the financial position of the firm. The firm recognises all its lease arrangements in its financial statements and all the associated long term lease arrangements. Thereafter all the short term arrangements for leases and their related expenses are effectively not taken into consideration in the financial statements under the AASB 16(Dakis, 2016). Thereafter the depreciation of the leases as an asset would be done on the Slim Line basis. The firm in accordance with AASB 16, identifies and records its leased assets and liabilities and provides a summative assessment of its position in the financial statement of the firm. 

For Example, if a firm in accordance with AASB 117, divided its lease obligations into two broad categories of Financial and operating assets, wherein, recorded the value of assets in financial leases and the expenses in case of Operational leases. Therein, after the implementation of AASB 16, the firm has to mandatorily evaluate and provide a summative assessment of its lease assets in the financial statements. Thereafter, the firm has to reassess and evaluate its leases into long term and short term leases, and will have the option to bifurcate them on the basis of the time period and can effectively overlook the short term leaves. 

3- Summarise the key disclosures the company has made on its accounting for leases including on the transitional provision and effect of the transition to AASB 16 from AASB 117. Provide examples for your selected company.

The disclosures made by Woolworths Supermarkets, in its annual report that ended in 2019, in regards to its lease agreements for the transition from AASB 117 to AASB 16 utilising a modified retrospective approach. Wherein, the firm will recognise assets in accordance with AASB 16, in a way which states that AASB 16, was ever-existent and not a new concept or principle that has been introduced recently. Thereafter, the lease liability that the firms possess as on 1st July 2019 will be represented by Outstanding Liabilities under the existing agreement for lease in accordance with the incremental borrowing rate(woolworthsgroup.com.au, 2019).  

Therein, the firm also established that the contractual obligations that were previously identified as leases under AASB 117, would be identified and reported as Leases under the current directive. Also, the leases whose contractual obligation is under a year or 12 months would be an exception to AASB-16, alike with the contractual obligations not identified as leases under AASB-117. Thereafter would be continued to be depreciated using the Slim Line Method until their obligation is discharged. Thereafter, the firm would also utilise hindsight for reviewing and reassessing the time from the contractual obligation and would not fall under AASB 16(woolworthsgroup.com.au, 2019)[Referred to Appendix 3]

Thereafter, the transition provision that was created from the transition from AASB 117 to AASB 16, showed that the net value that the firm had in its accounts that were created after taking into account the net value of the leased assets and lease liabilities. Thereby the value is further adjusted against the deferred tax liability and also reversing the amounts charged using the straight-line method and the existing incentive lease liability along with the prepayments. Thereafter, the remaining value or amount has been recorded and recognised as Retained Earnings and nob information about comparisons about them are provided for them. 

Woolworths in its annual report for the fiscal year that ended in 2019, reported that they had Leased Assets worth $12.2 billion AUD, whereas, they had lease obligations of $14.7 billion AUD. Furthermore, the firm had net deferred tax liabilities of the value of $0.7 billion AUD, and net retained earnings of $0.4 billion AUD as per the financial statements. After adjusting for Net lease Liabilities and Net Deferred tax liabilities in connection with the lease, the firm had shown a reduction of $1.4 billion AUD, in retained earnings for the fiscal year of 2019.[Referred to Appendix 3]

 

Conclusion

Thus, in conclusion, it can be established that the accounting policies, principles and standards that are followed by the firm have a significant effect on the financial standings and the valuation of the firm. Where in the global and national business as well as economic landscape there are regulatory as well as statutory bodies that guide and monitor the financial reporting by companies and firms. These statutory and regulatory bodies work towards providing a common platform for financial reporting wherein, the stakeholders, as well as the injured parties, can effectively judge and ascertain the financial performance as well as financial standings of the company. 

Thereafter, these bodies in conjunction with the global and national practices and bodies modify and ramify the existing frameworks, policies, standards along with accounting principles on which the companies prepare their financial report. This ramifications and modification are undertaken to ascertain the correct and honest reporting of the financial performance of the firm in the business landscape.  

References

Birt, J., Chalmers, K., Maloney, S., Brooks, A., Oliver, J., & Bond, D. (2019). Accounting: Business reporting for decision making. . John Wiley & Sons.

Brunelli, S. (2018). The Firm’Going Concern in the Contemporary Era. In In Audit Reporting for Going Concern Uncertainty (pp. 1-25). Springer, Cham.

Dakis, G. (2016). Upcoming changes to contributions and leasing standards. Governance Directions, 68(2), 99.

Joubert, M., Garvie, L., & Parle, G. (2017). . Implications of the New Accounting Standard for Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance Sheet. . The Journal of New Business Ideas & Trends, , 15(2), 1-11.

Newberry, S. (2015). Public sector accounting: shifting concepts of accountability. Public Money & Management, 35(5), 371-376.

Pilcher, R., & Gilchrist, D. (2018). Differential reporting: What does it really mean for the public sector? In In Public Sector Accounting, Accountability and Governance (pp. 17-29). Routledge.

Pilcher, R., & Gilchrist, D. (2018). Differential reporting: What does it really mean for the public sector?. In In Public Sector Accounting, Accountability and Governance (pp. 17-29). Routledge.

treasury.nsw.gov.au. (2019). Guidance for AASB 16 Leases. Retrieved 2019, from https://www.treasury.nsw.gov.au/sites/default/files/2017-04/Guidance%20for%20AASB%2016%20Leases%20-%20New%20Lease%20Standards.pdf

woolworthsgroup.com.au. (2019). About Woolworths . Retrieved 2019, from https://www.woolworthsgroup.com.au/page/about-us

woolworthsgroup.com.au. (2019). Annual Report for 2019. Retrieved 2019, from https://www.woolworthsgroup.com.au/icms_docs/195582_annual-report-2019.pdf

Xu, W., Davidson, R., & Cheong, C. (2017). Converting financial statements: operating to capitalised leases. . Pacific accounting review, 29(1), 34-54.

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