Financial Reporting International Financial Reporting Standards

Question: Discuss about the Financial Reporting for International Financial Reporting Standards. Answer: Introduction To The Companies Wesfarmers Wesfarmers Limited is an Australia-based conglomerate, founded in 1914, with its headquarters at Perth. The company predominantly specialises in New Zealand and Australian retail, together with fertilisers, industrial and safety products, coal mining and chemicals. It has become the biggest Australian company in terms of revenue with AU$62.7 billion in the year 2015, surpassing mining giant BHP Billion and retail competitor Woolworths Limited. Wesfarmers is also the biggest private employer in the country, with a workforce of 205,000 people (IBIS Wrold, 2015). Initially established as a co-operative to offer merchandise and services to Western Australian farmers, the company was listed on the Australian Stock Exchange in 1984 and henceforth grew into a big retail conglomerate. On becoming a public organisation, it diversified its interests through a series of mergers and acquisitions. Wesfarmers purchased Cole, an Australian supermarket, convenience, fuel and liquor retailer in 2007 (Who we are, 2015). Another division of the Group is the Home Improvement and Office Supplies which is made up of the Bunning Warehouse, a retailer of outdoor living and home improvement products, serving commercial and home consumers in New Zealand and Australia; and Officeworks, a supplier and retailer of office merchandise for home, education and business in Australia. Wesfarmers department store business is restructured into a single division named Department Stores wherein Kmart and Target are two major department store retailers. The company is also into industrial businesses i.e. Chemicals, Energy and Fertilizers; Industrial and Safety; and Resources (Wesfarmers Sustainability Report, 2012). The Group has 8 subsidiaries and 79 executives. The organisational structure is divisional with every division having its own structure. Decision making is reserved for the senior management in every division. Wesfarmers has secured many national and international awards and accolades for outstanding works in different streams. A 12% increase in export sales during 2008/09 in the site of the worst and biggest fall in global demand in 40 years, helped Wesfarmers Curragh secure the countrys most esteemed business exporting honour for the Minerals and Energy category (Wesfarmers Resources, 2012). Woolworths Limited Woolworths Limited is an Australian firm with widespread retail interest all across New Zealand and Australia. It is the second biggest company in terms of revenue in Australia after Wesfarmers and the second biggest in New Zealand. Moreover, it is the biggest takeaway liquor retailer in the nation. The main operations of Woolworths Limited, which was founded in 1924, include liquor retailing (as Dan Murphys and BWS in Australia), supermarkets (under the brand name Countdown in New Zealand, and Woolworths in Australia), discount department chains as Big W in Australia, and pubs and hotels under the ALH Group umbrella (IBIS World, 2015). The Group enjoys market leading positions in all the major markets. It is 30% larger in Australian Food and Liquor than its closest rival. Masters stands second in the immensely appealing Home Improvement market. Woolworths is also the biggest domestic internet based retailer in Australia (McArthur, 2013). Again a divisional hierarchical structure is followed in the organisation, with the BOD acting on behalf of its shareholders in controlling the functions and preserving good corporate governance. The Management Board is also charged with the responsibility of managing decisions and operations. As a brand, Woolworths has come to signify outstanding quality and has attained an iconic status in a country where people fondly refer to it as Woolies. The Group has also been bestowed with several awards for its sustainable development initiatives. It was awarded the Disability Employment Award at the Australian Resources Institutes Diversity Awards in 2013 for its disability recruitment drive. Together with its partner WorkFocus, the company was recognised for developing a booklet How to Guide for Recruiting People with Disability. This was designed to help store managers across the organisation to better comprehend the processes and benefits of hiring disabled people (Woolworths Limited, 2013). Sources of Finance Short Term Finance Wesfarmers The business uses short-term business finance to grab quick opportunities which require the business transaction to be finished in short time. The total short-term finance as per companys balance sheet for the year ended June 2015 amount to AU$1,913. These include bank overdrafts (AU$6), Corporate bonds (AU$1,584), and other bank loans (AU$323) (Wesfarmers, 2015). Bank overdrafts allow the company to write checks for an amount greater than what they have in their account during a given period of time. This is especially beneficial when the cash flow moves in and out several times in a month. Moreover, it ensures timely payments thereby avoiding penalties. Corporate bonds which make up the highest proportion of Wesfarmers short-term borrowings, prove to b a highly flexible means of raising debt capital. Wesfarmers has both unsecured current and unsecured non-current corporate bonds, however, the figure mentioned above is in respect of unsecured current corporate bonds (Ehr hardt and Brigham, 2008). These bonds stabilise the companys financed by having significant debts at a fixed interest. This provides protection against the dynamic economic changes and variable rates of interest. Short term Bank Loans enables the retailer to repay the loan amount in a shorter duration and with less interest (Rigby, 2011). Woolworths Woolworths also makes use of short-term sources to finance its short-term business needs. The total short-term finance of the company for the year ended June 2015 was AU$1,645. This included short-term money market loans (AU$10), bank loans (AU$23.8), short-term securities (AU$1,609.9), and finance leases (AU$1.7). All these are unsecured sources of funds. With help of a lease, the company does not need to buy a product which may not be required in the long term, and this source also reduces the business costs (Woolworths Limited, 2015). Long Term Finance Long Term Debt Wesfarmers The company uses long-term debts to finance its fixed asset needs, to fund its permanent component of working capital, to expand its divisions and many other purposes. Long-term debt comprises of financial obligations and loans lasting for more than one year. Wesfarmers total long-term borrowings for the year ended June 2015 were AU$4,615 (Wesfarmers, 2015). This comprised of non-current unsecured corporate bonds of the same value. This implies that the company did not take any long-term bank loans and funded its long-term needs completely through corporate bonds. WoolworthsWoolworths also depends on long-term debts for buying fixed assets, increasing facilities and business expansion purposes. The companys total long-term borrowings for the year ended June 2015 amount to AU$3,079. Woolworths, however, has a diversified portfolio of long-term borrowings, including long-term securities (AU$2,384.6), Finance leases (AU$2.9), and Woolworths Notes II (AU$696.5) (Woolworths Limited, 2015). Equity This is the ownership capital of a company. Any public limited firm can raise funds from promoters or public as equity share capital via the issuance of ordinary equity shares. The owners of Ordinary shares get their return on capital and dividend once the preference shareholders are paid (Kumar and Francisco, 2005). Wesfarmers The shareholders equity in the company for the year ending June 2015 was AU$21,844. These include own shares acquired (Wesfarmers. 2015). Woolworths The owners own equity in Woolworths for the year ending June 2015 was AU$5,064.9. These include fully paid ordinary shares (AU$4,850.1), shares issued because of share options and rights exercised under employee long-term incentive plans (AU$.3), and shares issued because of dividend reinvestment plan (AU$6.5) (Woolworths Limited, 2015). Capital Structure and Financial Ratio Analysis Capital Structure Wesfarmers The main goal of Wesfarmers capital structure is to give a suitable return to its shareholders. Wesfarmers capital is a combination of net debt, shareholders equity and reserves. As an important enabler of delivering suitable returns to shareholders, the company aims to hold an effective capital structure which is aligned with a powerful credit rating and strong investment grade. Robust free cash flow generation, supported by regimented portfolio management has allowed the organisation to undertake capital management (Wesfarmers. 2015). Wesfarmers debt levels rose during the year but they are still low. The component of equity in the capital structure is quite higher as compared to debt. Woolworths Woolworths manages its capital structure with an aim to enhance long-term shareholder value by optimising its weighted average cost of capital whilst withholding flexibility to chase growth and take capital management initiatives. The company has a long-term debt financing policy that entails an inclination toward long-term debt from the capital markets for matching long-term assets; minimizing the risks of refinancing by staggering debt maturities and making use of diverse sources of debt; and, completely hedging foreign currency exposure and interest rate to form certainty around funding costs (Woolworths Limited, 2015). Despite this policy, the company is currently employing very low levels of debt in comparison to equity. Financial Ratios Ratios Wesfarmers Woolworths Current Ratio (Current Assets/Current Liabilities) 9,093/9,726 = .93 7,661/9,169 = .84 Debt-Equity Ratio (Long term debts/Total Equity 4,615/24,781 = .19 3,076/10,834 = .28 Interpretation: The current ratios of both the companies are below the industry standard. The above results of the current ratio show that both the organisations ought to adjust and enhance the value of their current assets because a number of current liabilities cannot be efficiently covered by their current assets. The ratio reveals how best the companies can bail out their short-term debts. The operational efficiencies of both the organisations are not satisfactory (Gibson, 2012). The Debt-Equity ratios of both the companies are also very below the ideal ratio of 2:1. This implies that the company is not adequately leveraged and relying on owners capital. Although the capital structure policies of both the companies are debt favouring, still neither is following it (Helfert, 2013). Companies Financing Structure and Financial Reporting Framework Ever since the worldwide recession of 2009, the Australian economy has witnessed various uncertainties and fluctuations. This financial crisis also ended up hurting the retail sector as domestic demand and customer confidence fell drastically, while unemployment increased from 4.8% in 2008 to 6.2% in 2009. The recent Eurozone crisis and the unhealthy dependence on the resource sector are another challenges in front of both Wesfarmers and Woolworths. Although there is no direct trade flows between Australia and Europe, but the damages are extended through China which is a major exporter of Australia (Abdelsamad, 2010). In light of these uncertain economic conditions, it is presumed that the use of higher equity financing is a protection against situations of loss. Woolworths recorded its biggest loss of AU$1.235 billion in the first quarter of FY16. In such situation, it is wise to use lesser debt and greater equity. However, Wesfarmers recorded high profit in the previous year and se ems to be doing great business. Consequently, the company can opt for debt financing because there would not be a problem of non-payment of dividends (Jenster and Hussey, 2011). Similarities and Differences between Wesfarmers and Woolworths The main similarities between the sources of finance and financial reporting framework of Wesfarmers and Woolworths are that both use greater equity in their capital structure and both follow the Australian Accounting Standards Board (AASB) framework for financial reporting. The main reasons behind these similarities include the nature of their industry and the resemblance of their scale of operations. Both the companies are operating in Australias retail sector and hence are subject to the same environmental changes. Moreover, the nature and scale of their operations are also similar. Besides this, the reason behind following the same financial reporting framework can also be attributed to operating in the same industry and hence being required to follow a generally accepted financial reporting framework. Differences can be seen in the composition of long-term debt and equity sources of finance of the two companies. While Wesfarmers has been conservative in their financing options and has relied only on corporate bonds and owners equity respectively, Woolworths has diversified its composition of both long-term debt and equity. The reason behind this may be attributed to the financing policies of the two companies and their comfort level with different sources. Summary The report highlighted the importance and drawbacks of obtaining finance from different sources i.e. short term and long term. Secondly, the report concludes that no company relies on only a single source of finance. They always use a blend of different sources to create an optimum financial leverage. Thirdly, despite having policies favouring long-term debt financing, both companies appeared to be reluctant in their use of debts. Lastly, irrespective of their size and reputation, both companies have poor operational efficiencies. Recommendations: Both companies are recommended to increase their debt financing. They should be wiser in selecting their creditors who have better credit policies. Both the companies are required to better manage their cash and liquidity. References Abdelsamad,M.H., 2010.A guide to capital expenditure analysis. New York: AMACOM. Ehrhardt, M. and Brigham, E., 2008. Corporate Finance: A Focused Approach. Cengage Learning. El-Firjani, E. R., Faraj, S. M. (2016). International Accounting Standards: Adoption, Implementation and Challenges. Economics and Political Implications of International Financial Reporting Standards, 231. Gibson, H. C., 2012. Financial Reporting and Analysis. Cengage Learning. Helfert,E.A., 2013.Techniques of financial analysis. 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