Contemporary Accounting in Detecting Potential †MyAssignmenthelp

Question: Discuss about the Contemporary Accounting in Detecting Potential. Answer: Introduction: Accounting policies are the set of different accounting principles, rules, and regulations that are used by the business firms in preparation of financial statements for the specific year. The accounting policies involve the policies related to inventory management and pricing, depreciation on business assets, cost of research and development activities, and consolidation of the business financial statements. The company selected for this report is Wesfarmers, company is the Australias Supermarket chain, and business operations of the company cover the convenience stores, departmental stores, liquor, hotels, energy and fertilizers, home improvements and industrial health and safety products. The AASB (Australian Accounting Standards Board) works for the development and maintenance of the financial reporting standards. AASB stated that management of business organizations need to make the decisions and assumptions regarding the business assets and liabilities on basis of historical pe rformance. As per the guidelines provided by the AASB, it is essential that businesses must make the estimation of the company intangible assets for the preparation of financial statements. Along with this, this report also discusses the accounting policies in relation to assets and liabilities, income tax, and depreciation. The flexibility in accounting policies discusses the necessary changes in the used accounting system to make the changes based on the business operations and efficient management and need for transactions. This report also presents the discussion on the accounting strategy and quality of the disclosure in the company financial statements. Furthermore, the report analyses the potential red flags and conceptual framework used by the Wesfarmers. It is also essential for the business that they discuss the changes adopted in preparation of financial accounts in their reports and must follow the accounting policies. Furthermore, disclosure term refers to releasing of all the necessary information in the company financial statements that is important to the company and its stakeholders that also has an impact on the investors decision-making process. Red f lag refers to the subjective concept that represents the potential errors and issues in relation to company financial statements. The company Wesfarmers follows the ASX standards for the better business growth with preparing the financial statements accordingly. Background of the Wesfarmers and evaluation of accounting policies: Wesfarmers is a leading Australian company that was founded in the year 1914 as Western Australian farmers. The company is the Australias largest listed company and headquarters of the company is situated in the Western Australia. The company operates their business across the United Kingdom, Australia, Ireland, and New Zealand. The business operations of the company include the supermarkets, convenience and departmental stores, a division of chemicals, hotels, liquor, and fertilizers. The company is also listed on the Australian Securities Exchange from the year 1984 with the name WES. Along with this, the company operates their business with more than 222,000 employees and 530,000 (in the year 2016) shareholders worldwide that make the company as Australias largest employer (Wesfarmers, 2016). The company also focused on the research and development activities to improve the level of services and development of new products for the clients satisfaction. The financial statements of the company in the year 2016 and 2017 involve the controlled entities and economic entities. The involved different components in Westerners Annual report are as below: AASB defined that it is essential for the business organizations that make the business decisions and assumptions on basis of historical performance of the business firm in terms of assets and liabilities. The results of the financial statements may differ from the judgement and assumptions made regarding the reporting of transactions. In this way, the judgement made by the business accordingly with the accounting standards has an impact on the reliability and accuracy of the financial reports (Cheung et al, 2010). The investment of whole company is separate as the company controlled the assets separately to use the equity method. However, in the use of equity method, the Wesfarmers carried the investment in associates in the groups consolidated balance sheet. The Wesfarmers also make the investigation of the investment made in the subsidiaries and intangible assets. It was found that in the annual report of company there is no loss to the company in terms of return on investment, go odwill and assets in the subsidiary companies (Bloom, 2013). Along with this, the company also has to pay the income tax and other taxes that are applicable according to Australian government rules and regulations. Principles of consolidation: The principles of the consolidation in accounting involve the different principles such as the principle of Minority Interest, Capital profit, Elimination of Investment Account, and Goodwill (Futamura, 2010). The Wesfarmers is efficient and effective in building the decisions regarding the financial and operational policies of the subsidiary companies that supported the company in achieving overall organizational goals and objectives. The financial statements of the company for the year 2016 and 2017 involve the list of the different controlled entities such as Coles (Wesfarmers, 2017). The balances of the different groups in the groups annual report are eliminated in the preparation of consolidated reports. Along with this, the company also provides the information about the change in ownership as non-financial information. Business Combinations: The company accounted the business combination with the help of acquisition method of accounting because the business combination is the company gains over the different subsidiaries. In the business combination situation, business organization followed the principles of GAAP to state the control of the parent company over the acquired company (AASB, 2014). The financial statements of the Wesfarmers involve the merger and acquisition date with the fair value of the business entities. The annual report of the company also involved the information about the liabilities incurred from the merger and acquisition of another company (Wesfarmers, 2012). Income Tax: The Wesfarmers also make the provision of the income tax on the revenue or income of the company over the year that is paid to the government of different countries in which they operate. The company also calculates the value of income tax based on the predetermined government tax rates. The company calculates the taxes based on the taxable income and company considered the taxes as a business liability. Along with this, the tax liability of the company is also different in the specific accounting years as it is calculated on basis of company income. The different subsidiary company of the Wesfarmers has the different tax liabilities based on the business transactions (Daley and Coates, 2015). In this way, all the subsidiary company contributes their share to overall company tax liability and making a profit of the company. Operating Leases: The Company makes the payment of operating leases as a business expense in the financial statement of the company including in income statement. The company recorded the transaction based on the straight line for the lease term. Along with this, the company recognized the operating lease incentives as the business liability when the company released to income statements (on basis of the annual report 2017 and 2016) (Wesfarmers, 2017). The company also recognized the assets and liabilities to measure the difference between the lease expenses and the amount paid. In the annual report of the company for the year 2017 and 2016, Wesfarmers stated the two different types of earnings such as Basic earnings per share and Diluted earnings per share. The company also provides the information about the accounting policy in the measurement of earnings per share (Wesfarmers, 2016). In this way, it is found that company calculates the basic earnings per share through dividing the net profit attributable to all the company shareholders through a weighted average number of the Wesfarmers ordinary shares. Whereas company calculated the diluted earnings per share based on the basic earnings per share and it involves the effects of the interest and dividend that is related to dilutive potential ordinary shares. Employee benefits: The company in its financial statement also makes the company provision of the employees benefit for all the years including the year 2016 and 2017. It is the accounting and estimates policy of the Wesfarmers that company measures the employee benefits provision through using the discount rates that selected from the HQCB (High-Quality Corporate Bond) (Wesfarmers, 2016). Along with this, the company also represents the employees benefit from the specific accounting year and provision in the financial statements represents the incentives accrued and annual leave by the company employees (Daft and Samson, 2014). The company also included the annual leaves, wages, overtime, salaries, paid and sick leaves employees benefit in the company policies. The company has depreciated its assets including the equipment, property, and plants over every financial year. The Wesfarmers have used the straight-line method for the depreciation over their useful lives. The land of the company is not depreciated but the building, plant, and equipment are depreciated. Therefore, company estimate that life of the building is around 20 to 40 years and plant and equipment is around 3 to 40 years as per the annual report 2017 (Wesfarmers, 2017). Assess Accounting Flexibility Accounting flexibility is required in every organization in the modern time. This is the adaptation capability of the organization to change in its accounting system as per the needs, and operation. Companies have to undergo the changes due to changes in external environment, which can cause changes in the accounting system and procedure of organizations (Olad and Amiri, 2016). The flexible accounting system makes the organization able to track the financial growth. The flexible accounting procedure makes the firm able to accommodate the unexpected and contingent transactions to determine the accuracy of accounting and reporting (Denis and McKeon, 2016). The organizations with the highly flexible accounting system are highly adaptive to the changes in the external and internal environment. The flexibility of accounting allows the accommodation of unexpected and unplanned changes in the financial values of the organization. There are different accounting/financial components that are globally taken as the flexible items such as financial leverage including debt, liquidity, and others. Apart from this, cash holdings such as money in the bank, overdraft, and others are also included in the flexible accounting policies (Koch et al., 2012). Wesfarmers Limited, which is an international retail chain, uses flexible accounting system to record the transactions and report the financial information to its stakeholders. The company prepares a budget using the flexible budgeting system based on the previous budget. The flexible budget helps Wesfarmers in detecting the deviation from the last budget and determining the budget for current or next year accordingly. The flexible budget can also help in reducing the gap between actual values and budgeted values for the organization. Apart from this, the Wesfarmers operates in different countries, where it accepts the provision of local accounting and reporting standards of the respective countries (Wesfarmers, 2016). This indicates that how flexible accounting system the Wesfarmers uses. Woolworths is the biggest competitor of the Wesfarmers, which also do use the flexible accounting system. Woolworths also adapt to the local accounting standards to the different economies. The fle xible accounting system helps both the organization to accommodate the changes in the values as per the market situation to assure the accuracy and updated information (Wesfarmers, 2017). The companies include the value of the previous year and current year in the balance sheet, income statement and cash flow statement so that the deviation between two years can be identified. Evaluate Accounting Strategy Accounting is an important and compulsory activity that must have to be done in the all the organizations throughout the world. The accounting can be defined as the process in which the information is collected, recorded, classified, summarized and interpreted to make it useful and meaningful. The accounting and financial information are required to make an effective financial decision in the organization (Hoyle et al., 2015). Accounting and financial reports of the organization are considered to be the best and authorized source of information for the investment and financial decisions. The organizations mostly prepare the strategies based on the historical data. The companies summarize the financial information in financial statement retrieved from the notes of the financial statements. This strategy helps in getting the insight that how the specific value in the statements is derived from and how they have been computed (Bonin, 2013). The historical information helps in comparing the performance of the company with current year performance so that effective decision can be taken to improve the performance. Wesfarmers Limited is one of the largest global players in the market. It uses consistent accounting policies. The company uses consolidated financial statements which include the financial information of the all the units of the organization. Along with this, it includes the employees' benefit expenses, remuneration, and taxation and other information. It uses hedge accounting policy for managing the risk. Apart from this, the acquisition accounting is used by the organization for tax consideration and ongoing work valuation (Wesfarmers, 2016). The company uses tax consolidation policy in which it tax liability of the subsidiaries of the company is shared among all. The Wesfarmers should review its accounting data periodically to ensure the recording of accurate data. Wesfarmers publish the annual report two times in a year. The Wesfarmers is a giant organization that merged and acquired many organizations over the years. This uses acquisition accounting policy to accommodate the acquisition transactions. It reviews the financial performance and accounting data to take the decision regarding investment (Wesfarmers, 2017). The consistent accounting policy of the company helps it to be consistent with the changes in the accounting values and update it regularly. Evaluate the Quality of Disclosure Disclosure can be described as the reporting of financial information to the stakeholders of the company to meet their objectives. The shareholders and investors of the company are more intensive to know about the financial performance of the company. There are different rules and guidelines for the financial accounting and disclosure, which are provided by ASX and Australian Accounting Standard Board (Basu and Forbes, 2014). The ASX and AASB focus on the protection of the interest of the investors and shareholders in the company. Along with this, the organization has to prepare one interim report and one annual financial report. Wesfarmers Limited is listed on ASX in Australia. The report and disclosure of information by Wesfarmers is of good quality. This is because the company prepares the reports according to the requirement mentioned in the Corporation Act 2001 for financial reporting and disclosure. The financial report of the company includes the director's report, CEO's report, the board of members, risk and risk management strategies, remuneration policies and others (Wesfarmers, 2017). The report includes the notes of financial statements that provide detailed information about the financial performance of the company. Apart from this, the company follows the provision and guidelines determined under International Financial Reporting Standards, Generally Accepted Accounting Principles, Australian Accounting Standard Board, and International Accounting Standard Board. It represented the financial information in a comparative way where it requires. These all the standards and accounting boards provide guidelines to record and report the information (Shroff, 2017). This ensures the quality of the information in the report that is published by the Wesfarmers Limited. Identify Potential Red Flags Red Flag means the potential issues and challenges with the financial statements and report of the company. The Red Flag is the indicator of worst. Therefore, the red flag to any investor can be deemed to be same for other shareholders and investors of the company. This can support in finding out the problems (Putra, 2013). The company should track for the red flags and try to remove it instantly. The organization may use different policies and techniques to identify and remove red flags in its report. For example, when the inventory in the report is higher over the previous year but there is no alteration in the values derived from inventory. This is interpreted as there are issues and mistake in the recording and calculation of inventory. The issues of accounting calculation and recording can be caught by analyzing the financial statements of the company (Heshin-Bekenstein, M. and Hashkes, 2015). This happens similarly in case of trade receivables if the company shows decreased trade debtors but there is no change in the profit accordingly. Apart from this, lower cash flow, higher liquidity, higher debt, non-operating income and other items can be the red flags for assessing the financial statements of the company. Compliant with the Conceptual Framework The organizations in the Australia have opportunity and advantage of choosing the option out of two (accounting framework and legal framework) for preparing their financial report. Most of the organization faces the issue of compliance in financial reports. It is because firms want to show higher profitability to attract the investor. So, they may mistake in the accounting and reporting to attract a large number of investors (Oluku and Ojeka, 2011). The large organizations generally do this. Companies listed on Australian Security Exchange has to prepare the simple annual report that the auditors can easily audit and make avail for everyone. ASX requires the organizations to provide periodic financial highlights and interim financial reports. The Wesfarmers follows the guidelines and rules of ASX for preparing its report and disclosing the information. It discloses the financial and non-financial information in its report that meets the IFRS, GAAP, and Australian Accounting Standards (Wesfarmers, 2016). Conclusion: Based on the above analysis, it can be summarized that the report has effectively analyzed the accounting policies used by the Wesfarmers Limited. The Wesfarmers limited uses critical accounting judgments, the principle of consolidation, business combination, income tax, and other policies. 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