ACCT1048 Financial Accountability | Primary Activities of Wesfarmers

Introduction

The aim of this report is to identify various accounting principles and concepts practiced by Wesfarmers Ltd along with the changes in their financial and social performance within the last 3 years. The following discussions are made based on the company’s annual reports for the 2015-2017 financial year.

1.As one of the top leading Australian listed companies, Wesfarmers Ltd is a major retail conglomerate company founded in 1914 where its main headquarters is located in Perth. The company has a diverse range of operations predominantly within Australia and New Zealand, these main activities involve retail, chemicals, energy, fertilisers, coal mining, industrial and safety products. As the largest private employer in Australia, with around 223,000 employees and a shareholder base of 515,000 in total, Wesfarmers held the largest revenue figure of $65.98 billion in the 2016 financial year, overpowering companies such as Woolworths and BHP Billiton. Due to its wide range of distinct operations, Wesfarmers act as a parent organisation to top retail businesses such as Coles, Bunnings, Kmart and Target, including companies such as Blackwoods and Workwear Group from the industrial sector. Apart from that, the company represents itself as a major investor in the BWP Trust and Wespine industries, owning 50% of the sawmill company. The financial performance of Wesfarmers has improved immensely in the last 3 years, with a 3.82% increment in the company’s sales revenue from 2016 to 2017 and an increase of 5.49% from 2015 to 2016. As for its social performance, Wesfarmers has made major progresses on different aspects of the business, such as safety, ethical sourcing & human rights, diversity and community contributions. The injury rate has been reduced to 16% in the previous year compared to 15.2% in 2015; Diversity has expanded from over 3,000 indigenous workers to 4231; The company has also contributed more than $73 million in direct funding to community organisations in 2017.

2.The profit and loss statement of the year of 2017 has been compared with the 2016 and 2015 statement of the company in order to identify the financial performance improvement of the company. On the basis of the annual report (2017) of the company, it has been found that the financial performance of the company has been improved at great level with 3.7% increment in the sales revenue(65,981,000,000 in the 16/17 annual report to 68,444,000,000 in the 17/18 annual report), The main differences in revenues between the two financial years was their increase in sale of goods in which (65,500 million to 68,033 million) and gain on disposal of assets which doubled (61 million to 123 million) wesfarmers has also stated that they believe this rise may have come from the increase in the use of their loyalty program which increased from $246 million in expected revenues to $267 million as well as an increase in the use of gift cards which also increased from last year from $198 million in expected revenues to $217 million .

608.33% in net profit margin of the business (Morningstar, 2018). The net profit level has been improved at huge level because of the various economical impact on the company in the year of 2016 (Sustainability report, 2017) . Due to which, the profitability level has been reduced form 2015 to 83.32%

3.Wesfarmers has engaged in operating lease commitments as a lessee for a total of $19,554,000,000 however this can be further narrowed down to contracts ending within a year($2,410,000,000), greater than one year but not more than five years ($7,986,000,000), and more than five years ($9,158,000,000). Under the old accounting of leases method (AASB 17) there was a large amount of restrictions as to what would be place onto the however, with the new accounting standard for leases(AASB16) introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless underlying asset is of low value. As a lessee Wesfarmers would be required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligations to make lease payments. Therefor as Wesfarmers a required to recognise the right to use of the asset the total lease liability for an individual lease will be reduced, but separated into another expense of the amount recognised as right to use, in which will reduce the cash asset in the balance sheet.

4.Intangible asset is an asset which does not have any physical evidence such as intellectual property, goodwill, brand recognition etc. the recognition of intangible asset in an organization could be done in various ways on the basis of the nature of the company. On the other hand, the goodwill is one of the intangible asset which is managed by each of the company. the valuation of goodwill is complex for the business because it could be changed at any time.

In case of Wesfarmers limited, the annual report (2017) explains $ 18,936 million goodwill and intangible assets of the company in the year of 2017 which has been lowered from $ 19,073 in 2016. Below is the process of intangible calculations of the company.

Figure 1: Intangible assets

(Annual report, 2017)

The above image of the goodwill and intangible asset explains that the company follows the impairment testing in the below situations:

• The company at least identifies the intangibles and goodwill amount annually.
• If there is any indication about the impairment of the assets which has already been impaired in last year impairment testing process
• If there is any indication that the previously recognized assets worth has been changed (Annual report, 2017).

If the assets of the business do not make independent cash inflows and the value of the assets which is in use, could not be estimated around its fair value than the asset is tested for the impairment process as the part of cash generating unit (CGU) (Annual report, 2017).

The annual report (2017) of the company further explains that initially, it has been measured by the company at cost (cost of the business combinations – net fair value) of the company. But along with the time, few changes have been done by the business to get the better worth of the goodwill.

Further, in case of intangible assets, it has been recognized that all the intangible asset of the company has been calculated on the basis of the cost method only. However, the management team and revaluation team of the company evaluates the amortization period and method periodically and measure the outcome in order to make the required changes in the performance of the business.

Financial not 17 of annual report (2017) adds that the impairment process is done by the business annually and at the time of recognition of any changes in the assets etc. the impairment process is done by the business on the basis of DCF, net asset valuation model etc. It expresses that the Wesfarmers has recognized the performance and valuation in better manner.