Executive SummaryWoolworthsis one of the top retailers in Australia with huge diversification in itsproduct range and large market capitalisation in terms of their 35.7% marketshare, as per the report at Roy Morgan, Aldi hits new high in supermarketwars, (Roy Morgan, 2017). This report has investigated into the accountingpolicies, estimates and practices adopted by Woolworths and the extent to whichthe disclosures provide a true and fair view of the financial statements.Themethodology employed throughout the investigation has highlighted thesignificant accounting policies used as part of the general framework forpreparing financial statements. Also, it has identified the critical estimatesmade by the company at various times during the year as per their own marketrequirements and circumstances.Theresults showed that the disclosures made by Woolworths in the form of the notesto the financial statements and the general layout adopted to present theoverall performance of the company and its subsidiaries is magnificent andprovides a true and fair view. None of the changes in the accounting estimateshad any material impact on the financial statements.
Along with an unmodifiedopinion by the auditor, the statements provide enough evidence to justify theassertions made by the management. 2. IntroductionWoolworthsLimited is one of the major retailers in Australia providing access to morethan 3,500 products. Its main operations include supermarkets (underthe Woolworths brand in Australia and the Countdown brand inNew Zealand), liquor retailing (as BWS in Australia), hotels and pubsunder the Australian Leisure and Hospitality Group (ALH Group) umbrella, anddiscount department stores under the Big W name in Australia.The financialhighlights in annual reports of Woolworths 2016, (woolworthsgroup.com.
au, 2017), show drop-in sales by 1.2% whichhas subsequently led to drop-in profits and earnings per share as compared tothe last year. However, in 2017, the sales have increased by 3.7% but earningsper share have still fallen by 5.1% as compared to 2016 as per Woolworths 2017 annual report, (woolworthsgroup.
com.au, 2017). Thechanges in the financials reflect the changes in the management’s strategies interms both operational and key strategic decision making.Thecompany uses Corporations Act 2001, Australian Accounting Standards andInterpretations, International Financial Reporting Standards (IFRS), forpreparing its consolidated financial statements. The consolidated statementsinclude all subsidiaries of Woolworths i.e. all entities over which Woolworthshas rights to return, ability to affect those returns and has the power todirect the activities of the entity.3.
Methodology3.1. Significant Accounting PoliciesThe significantaccounting policies used by Woolworths are as follows:1) Financial statements are consolidated as at 26 June 2016 that includesassets, liabilities and the financial statements of all subsidiaries. Anyunrealised gains and losses arising as a result of intra-group balances are notincluded while non-controlling interests in the equity are shown separately.2) Revenue is accounted for based on the rational value of theconsideration received or receivable as per the criteria for recognition asfollows: a.
Revenue is acknowledged and recorded in the books when the perils andrewards of ownership have been transferred and it is expected that the revenuewill be received and amount can be measured with reliability.b. Revenue for services is based on the contract completion stage. Cashand cash equivalents Cash and cash equivalents comprise cash balances and calldeposits with an original maturity of three months or less.3) Cash and cash equivalents involve all cash balances and call depositswith three months or less original maturity.4) Foreign currency transactions are based on the Australian dollarexchange rate based on the same dates when the transaction takes place.a.
Differences from foreign exchange rate recognised in Other comprehensiveincomeb. Differences from a monetary item are not planned. These items and otherhedges are considered as a category of the net investment in a foreignoperation.5) All assets and expenses are accounted for without GST except for caseswhen the GST cannot be recovered by the relevant authorities.In such case, GSTwill be included in expenses.6) Inventories are recorded in Income Statement and Balance Sheet at lowerof costs or net realisable value. It is net of all discounts and other factors.7) Carrying value of the assets is calculated using Cost less accumulateddepreciation and any accumulated losses.
8) Straight line method is used for the depreciation as part internalpolicy with useful lives being rechecked every period and assets with differentlives are treated separately. 9) Goodwill that is acquired as a result of business combination is valuedat fair value of the net assets less cost paid to purchase those assets.10) Cost less accumulated depreciation/ less amortisation/ or any impairmentlosses.
In a business combination, cost should represent the fair value forwhen the asset was acquired. Depreciation of intangible assets is recordedbased on the straight line method.11) There are two types of leases; operating and finance leases. Operatingleased assets are not recorded in the books as only rent is paid and the risksand rewards are not being transferred whereas finance leased assets are shownin the Non-current or current assets of the company.
Based on certainconditions, a lease can be classified as a finance lease or an operating lease.The depreciation on the finance leased assets is accounted for in the same wayas the non-leased assets. 12) Borrowing costs directly related to construction or production of anasset that qualifies the recognition criteria of an Asset, form part of thecapitalisation cost of that asset.13) Listed Equity Securities are valued at their fair value through othercomprehensive income. The initial recognition is based on fair value minus alltransaction costs. At disposal, any gains or losses in OCI are transferred toProfit and Loss Statement.
3.2. Critical Accounting Policies and JudgementsAll theassumptions and estimations are made keeping in mind the past experience,previous and current trends that are adjusted for existing market conditionsand other factors taken under reasonable circumstances. These factors arereviewed on a regular basis.However, there might be a discrepancy between actual results andestimates. Some of these estimates might involve a greater level of complexitythat may have a significant impact on the next year’s assets and liabilities.These estimates are not limited to but may include:· Estimation of useful lives of assets;· Impairment of non-financial assets;· Valuation of put options over non-controlling interests;· Provisions; and· Discontinued operations including impairments, onerous leases andassociated tax balances.
Any change in the accounting estimate issignificant to that period only when the revision takes place. However, changesmight be made to both the current and future periods to allow accuratecomparisons and help in the decision making.3.3. Individual Significant Items from ContinuingOperationsAs per the wider review of all the company’sassets and liabilities, the consolidated statement of Profit or Loss includessignificant expenses before tax. These amounted to $958.6mn which was not partof the ordinary course of business.
Inparticular, these items related to operating model and strategic changes of$154.9 million, store network optimisation and property rationalisation of$344.2 million, and General Merchandise impairment of $459.5 million. The totalincome tax benefit recognised from the significantexpenses was $193.1 million, resulting in a $765.5 million impact on profit forthe period 1.
Note 5.1 represents individual items that aresignificantly related to the impairment of Home Improvement Assets and storeexit costs. The home Improvement Assets have been classified as discontinuedoperations.
$754.7mn is attributable to the equity holders of parent entitywhile $10.8 is allocated to non-controlling interests.3.4. Accounting FlexibilityTheaccounting estimates and practices adopted by the company are only subject tochanges with respect to any new amendments in the accounting standards followedor new policies adopted for disclosures.
The new policies for disclosures arein accordance with the basic accounting principle i.e. to show a true and fairview of the company.Themanagement of the company has only flexibility to change the adopted accountingpolicies so as to show a true and fair picture of the company’s performance toits shareholders. Otherwise, no other change adopted can be seen as an abuse tothe management’s power at Woolworths.
3.5. Comparisons with the Industry PeerComparisonswith Wesfarmer, a leading competitor, shows similar adoption of accountingpolicies as mentioned in the beginning, (wesfarmers.com.au,2017). Except for the fact that Woolworths has more elaborative financialStatements which is better because it shows that:· The company is moreconfident in terms of the accounting policies they have adopted· They have nothing tohide which clears many suspicions· The company is honestto its shareholders · The assertions made bythe management are all true and provides a fair view.
WhileWoolworths’ financial statements have an easy to understand layout with lessoverall headings and less horizontal division, Wesfarmer has more headings witha longer horizontal division. Hence, additionally Wesfarmer provides thefollowing set of headings· Risks· Capital· Group Structure · Unrecognised items.3.6. OthersTheremuneration of the management has remained stable from 2016 to 2017 withoutany significant changes with respect to the allowances made and any bonusesgiven. Retention share rights had been given to each of the key personnelincluding CEO, CLO and CFO.
Aspart of the business transformation, share rights were awarded which can becontinued based on the individual performance and continued employment.CriticalAccounting assumptions related to policies such as employee benefits, Discountrates, and actuarial assumptions were made but none of them has a materialimpact on the financial statements. Anychanges in fair values such as restructuring of onerous loans or any otherasset/ liability, the effect will be either taken to the profit and loss accountor other comprehensive income. For example, changes as result of thediscontinued operations were taken to profit and loss account in 2016.4.
LiteratureReviewWoolworth’sgroup has several different entities running within their umbrella. Therefore,disclosures are required for each and every segment of their business toprovide a clear picture and reasoning for the adopting certain changes to theaccounting estimates or why was one of their operations discontinued.Thefinancial statements of Woolworths first provide a segment wise performanceanalysis and then they are divided as per the accounting policies so that thedisclosures for all the segments are made together for each accounting policyin clusters. Each of these clusters provide all the required information asrequired by the standards. For example, in 2017, Woolworth provides a separatebox to explain the impairment of their Big W segment and as a result aturnaround plan for Bid W was formally approved.Thedisclosures made in the financial statements are sufficient enough to help theshareholders understand the reasoning behind the on-going activities of thecompany. The reasoning is further backed by the fact that the director’s reportsupports the evidence providedas notes to the financial statements.
Also, Deloitte being the auditor ofWoolworths has given a clean, unmodified opinion with respect to the compliancewith the code of Governance and compliance to the International FinancialReporting Standards.4.1. Potential Red FlagsBigW is not expected to be recovered in the near future because of the significanttransformation being carried out in terms of its structure and growth plans.While there is an expectation to see a positive customer response to lowerprices, better product solutions and a better customer shopping experience, itis still too soon to tell when this will translate into sales momentum andimproved profitability. Itis duly mentioned in 2017 financial statements that the next year is likely tobe the year of Investments, hence the profits will be low.Also,as per the auditor’s independent report, the Home Improvement exit has a numberof interrelated components, each of which required consideration, including: · Sale of the Home Timberand Hardware Group · Liquidation of Mastersinventory · Closure of all Mastersstores and settlement of trading and employee liabilities· Accounting for propertycosts, including re-measurement of onerous leases and exit costs to be settledby the Group· The Lowe’s put option· Accounting for the HomeConsortium transaction· Taxation implicationsrelating to the Home Improvement exit.
Theaccounting for these interrelated components is complex and there aresignificant judgements and estimates required in determining the carrying valueof the remaining assets and liabilities held at the balance date, particularlyin relation to: · Assets and liabilitiesbeing disposed of in the Home Consortium transaction · Assets and liabilities,including onerous lease provisions and other residual liabilities beingretained by the Group · Accounting treatment ofthe Lowe’s put option. Giventhese complexities we have considered the accounting for the Home Improvementexit to be a key audit matter.5. CriticalAnalysisLowerearnings per share even with higher sales in 2017 is justified by the fact thatthe company is currently closing one of its segments and is trying to absorbthe losses from within the company’s earned income each year.
That is why hugeamounts of losses from the other comprehensive and profit and loss account canbe seen as transfers onto the current year’s profits. Moreover,the company provides the following information as a means of full disclosuresand transparency in dealings of the company for the users of financialstatements:Thekey non?IFRS measures forbusiness performance include:· Earnings beforeinterest, tax, depreciation and amortisation (EBITDA) · Cost of doing business · Fixed charges coverratio · Return on fundsemployed and lease adjusted return on funds employed · Earnings beforeinterest, tax, depreciation, amortisation and rent (EBITDAR) · Comparable sales · Significant itemsNon?IFRS measures used in describing the Balance sheet and Cashflow statement include:· Funds employed· Net assets employed · Cash flow fromoperating activities before interest and tax · Free cash flow · Fixed assets andinvestments · Net repayable debt · Cash realisation ratio · Net investment ininventory · Free cash flow afterequity related financing activities · Net assets held forsale · Net tax balances· Other financial assetsand liabilitiesThematerial business risks for Woolworths are divided into the following fourcategories: i. Strategic:The retail trading environment will continue to be competitive, driven by newentrants, technology disruption, as well as be affected by changing customerneeds and expectations and other external and internal risk drivers. Failure tosuccessfully respond to these factors, our competitors and the changingmarketplace may adversely impact on market share and business performance. Mitigation:Woolworths Group has a board approved strategy driving a Customer 1st cultureand investment in growth enablers, including our store network, technology anddigital channels.
ii. Financial:The availability of funding and management of capital and liquidity areimportant to fund the Group’s business operations and growth. In addition, afailure to turnaround our general merchandise business or materially adverseinterest rates and foreign exchange rate fluctuations could impact on thebusiness’ profitability.Mitigation:Woolworths Group has board approved treasury policies to govern the managementof the Group’s financial risks, including liquidity, interest rate and foreigncurrency risks. iii.
Operational:The Woolworths Group is subject to operational risk and could be exposed toevents, including but not limited to, failures to meet people or product safetystandards, information technology, security, asset, data breaches and businessdisruptions as a result of cyber-attacks, natural disasters, weatherconditions, industrial disputes, technology failures or supply chaininterruptions.Mitigation:Woolworths Group has established policies, standards and training regardingbusiness operations, including people safety, health and wellbeing, food andproduct safety. iv. Compliance:The Woolworths Group is subject to applicable laws, regulations and contractualarrangements and is exposed to adverse regulatory or legislative changes.Breaches or adverse changes could result in negative impacts on the Group’sreputation and profitability, significant fines or other adverse consequences.Mitigation: WoolworthsGroup has a Compliance Framework in place and a variety of policies have beenestablished to facilitate legal, regulatory compliance and internal protocols.6.
ConclusionWoolworthsLimited is a very well-established business. With over 90 years of providingexcellent retail services to its customers and enhancing the quality of life byproviding good quality products at reasonable prices, the company is committedto continuously improving its current operations. Itis in its expansion phase whereby the company is making new strategies in orderto improve long term gains for its shareholders. Thecompany is following 2001 Act and the International Financial ReportingStandards (IFRS). It also makes additional disclosure which ae non-statutoryrequirements but are provided by the management to present a true and fairview.Anychanges in the accounting standards in 2016 and 2017 are not very significantand do not have a material effect on the financial statements except for thediscontinued operations which must be emphasized as they are reducing theprofits of the company and are also mentioned by the auditor in theirindependent report.