Executive times during the year as per their

Executive Summary

Woolworths
is one of the top retailers in Australia with huge diversification in its
product range and large market capitalisation in terms of their 35.7% market
share, as per the report at Roy Morgan, Aldi hits new high in supermarket
wars, (Roy Morgan, 2017). This report has investigated into the accounting
policies, estimates and practices adopted by Woolworths and the extent to which
the disclosures provide a true and fair view of the financial statements.

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The
methodology employed throughout the investigation has highlighted the
significant accounting policies used as part of the general framework for
preparing financial statements. Also, it has identified the critical estimates
made by the company at various times during the year as per their own market
requirements and circumstances.

The
results showed that the disclosures made by Woolworths in the form of the notes
to the financial statements and the general layout adopted to present the
overall performance of the company and its subsidiaries is magnificent and
provides a true and fair view. None of the changes in the accounting estimates
had any material impact on the financial statements. Along with an unmodified
opinion by the auditor, the statements provide enough evidence to justify the
assertions made by the management.

 

2.         Introduction

Woolworths
Limited is one of the major retailers in Australia providing access to more
than 3,500 products. Its main operations include supermarkets (under
the Woolworths brand in Australia and the Countdown brand in
New Zealand), liquor retailing (as BWS in Australia), hotels and pubs
under the Australian Leisure and Hospitality Group (ALH Group) umbrella, and
discount department stores under the Big W name in Australia.

The financial
highlights in annual reports of Woolworths 2016, (woolworthsgroup.com.au, 2017), show drop-in sales by 1.2% which
has subsequently led to drop-in profits and earnings per share as compared to
the last year. However, in 2017, the sales have increased by 3.7% but earnings
per share have still fallen by 5.1% as compared to 2016 as per Woolworths 2017 annual report, (woolworthsgroup.com.au, 2017). The
changes in the financials reflect the changes in the management’s strategies in
terms both operational and key strategic decision making.

The
company uses Corporations Act 2001, Australian Accounting Standards and
Interpretations, International Financial Reporting Standards (IFRS), for
preparing its consolidated financial statements. The consolidated statements
include all subsidiaries of Woolworths i.e. all entities over which Woolworths
has rights to return, ability to affect those returns and has the power to
direct the activities of the entity.

3.         Methodology

3.1.      Significant Accounting Policies

The significant
accounting policies used by Woolworths are as follows:

1)                 
Financial statements are consolidated as at 26 June 2016 that includes
assets, liabilities and the financial statements of all subsidiaries. Any
unrealised gains and losses arising as a result of intra-group balances are not
included while non-controlling interests in the equity are shown separately.

2)                 
Revenue is accounted for based on the rational value of the
consideration received or receivable as per the criteria for recognition as
follows:

a.      
Revenue is acknowledged and recorded in the books when the perils and
rewards of ownership have been transferred and it is expected that the revenue
will be received and amount can be measured with reliability.

b.     
Revenue for services is based on the contract completion stage. Cash
and cash equivalents Cash and cash equivalents comprise cash balances and call
deposits with an original maturity of three months or less.

3)                 
Cash and cash equivalents involve all cash balances and call deposits
with three months or less original maturity.

4)                 
Foreign currency transactions are based on the Australian dollar
exchange rate based on the same dates when the transaction takes place.

a.      
Differences from foreign exchange rate recognised in Other comprehensive
income

b.     
Differences from a monetary item are not planned. These items and other
hedges are considered as a category of the net investment in a foreign
operation.

5)                 
All assets and expenses are accounted for without GST except for cases
when the GST cannot be recovered by the relevant authorities.In such case, GST
will be included in expenses.

6)                 
Inventories are recorded in Income Statement and Balance Sheet at lower
of 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 accumulated
depreciation and any accumulated losses.

8)                 
Straight line method is used for the depreciation as part internal
policy with useful lives being rechecked every period and assets with different
lives are treated separately.

9)                 
Goodwill that is acquired as a result of business combination is valued
at fair value of the net assets less cost paid to purchase those assets.

10)             
Cost less accumulated depreciation/ less amortisation/ or any impairment
losses. In a business combination, cost should represent the fair value for
when the asset was acquired. Depreciation of intangible assets is recorded
based on the straight line method.

11)             
There are two types of leases; operating and finance leases. Operating
leased assets are not recorded in the books as only rent is paid and the risks
and rewards are not being transferred whereas finance leased assets are shown
in the Non-current or current assets of the company. Based on certain
conditions, 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 way
as the non-leased assets.

 

12)             
Borrowing costs directly related to construction or production of an
asset that qualifies the recognition criteria of an Asset, form part of the
capitalisation cost of that asset.

13)             
Listed Equity Securities are valued at their fair value through other
comprehensive income. The initial recognition is based on fair value minus all
transaction costs. At disposal, any gains or losses in OCI are transferred to
Profit and Loss Statement.

3.2.      Critical Accounting Policies and Judgements

All the
assumptions and estimations are made keeping in mind the past experience,
previous and current trends that are adjusted for existing market conditions
and other factors taken under reasonable circumstances. These factors are
reviewed on a regular basis.

However, there might be a discrepancy between actual results and
estimates. Some of these estimates might involve a greater level of complexity
that 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 and
associated tax balances.

Any change in the accounting estimate is
significant to that period only when the revision takes place. However, changes
might be made to both the current and future periods to allow accurate
comparisons and help in the decision making.

3.3.      Individual Significant Items from Continuing
Operations

As per the wider review of all the company’s
assets and liabilities, the consolidated statement of Profit or Loss includes
significant expenses before tax. These amounted to $958.6mn which was not part
of the ordinary course of business.

In
particular, 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 total
income tax benefit recognised from the

 

significant
expenses was $193.1 million, resulting in a $765.5 million impact on profit for
the period 1. 

Note 5.1 represents individual items that are
significantly related to the impairment of Home Improvement Assets and store
exit costs. The home Improvement Assets have been classified as discontinued
operations. $754.7mn is attributable to the equity holders of parent entity
while $10.8 is allocated to non-controlling interests.

3.4.      Accounting Flexibility

The
accounting estimates and practices adopted by the company are only subject to
changes with respect to any new amendments in the accounting standards followed
or new policies adopted for disclosures. The new policies for disclosures are
in accordance with the basic accounting principle i.e. to show a true and fair
view of the company.

The
management of the company has only flexibility to change the adopted accounting
policies so as to show a true and fair picture of the company’s performance to
its shareholders. Otherwise, no other change adopted can be seen as an abuse to
the management’s power at Woolworths.

3.5.      Comparisons with the Industry Peer

Comparisons
with Wesfarmer, a leading competitor, shows similar adoption of accounting
policies as mentioned in the beginning, (wesfarmers.com.au,
2017). Except for the fact that Woolworths has more elaborative financial
Statements which is better because it shows that:

·        
The company is more
confident in terms of the accounting policies they have adopted

·        
They have nothing to
hide which clears many suspicions

·        
The company is honest
to its shareholders

·        
The assertions made by
the management are all true and provides a fair view.

While
Woolworths’ financial statements have an easy to understand layout with less
overall headings and less horizontal division, Wesfarmer has more headings with
a longer horizontal division. Hence, additionally Wesfarmer provides the
following set of headings

·        
Risks

·        
Capital

·        
Group Structure

 

·        
Unrecognised items.

3.6.      Others

The
remuneration of the management has remained stable from 2016 to 2017 without
any significant changes with respect to the allowances made and any bonuses
given. Retention share rights had been given to each of the key personnel
including CEO, CLO and CFO. As
part of the business transformation, share rights were awarded which can be
continued based on the individual performance and continued employment.

Critical
Accounting assumptions related to policies such as employee benefits, Discount
rates, and actuarial assumptions were made but none of them has a material
impact on the financial statements.         

Any
changes in fair values such as restructuring of onerous loans or any other
asset/ liability, the effect will be either taken to the profit and loss account
or other comprehensive income. For example, changes as result of the
discontinued operations were taken to profit and loss account in 2016.

4.         Literature
Review

Woolworth’s
group has several different entities running within their umbrella. Therefore,
disclosures are required for each and every segment of their business to
provide a clear picture and reasoning for the adopting certain changes to the
accounting estimates or why was one of their operations discontinued.

The
financial statements of Woolworths first provide a segment wise performance
analysis and then they are divided as per the accounting policies so that the
disclosures for all the segments are made together for each accounting policy
in clusters. Each of these clusters provide all the required information as
required by the standards. For example, in 2017, Woolworth provides a separate
box to explain the impairment of their Big W segment and as a result a
turnaround plan for Bid W was formally approved.

The
disclosures made in the financial statements are sufficient enough to help the
shareholders understand the reasoning behind the on-going activities of the
company. The reasoning is further backed by the fact that the director’s report
supports the evidence

 

 

provided
as notes to the financial statements. Also, Deloitte being the auditor of
Woolworths has given a clean, unmodified opinion with respect to the compliance
with the code of Governance and compliance to the International Financial
Reporting Standards.

4.1.      Potential Red Flags

Big
W is not expected to be recovered in the near future because of the significant
transformation being carried out in terms of its structure and growth plans.
While there is an expectation to see a positive customer response to lower
prices, better product solutions and a better customer shopping experience, it
is still too soon to tell when this will translate into sales momentum and
improved profitability.

It
is duly mentioned in 2017 financial statements that the next year is likely to
be the year of Investments, hence the profits will be low.

Also,
as per the auditor’s independent report, the Home Improvement exit has a number
of interrelated components, each of which required consideration, including:

·        
Sale of the Home Timber
and Hardware Group

·        
Liquidation of Masters
inventory

·        
Closure of all Masters
stores and settlement of trading and employee liabilities

·        
Accounting for property
costs, including re-measurement of onerous leases and exit costs to be settled
by the Group

·        
The Lowe’s put option

·        
Accounting for the Home
Consortium transaction

·        
Taxation implications
relating to the Home Improvement exit.

The
accounting for these interrelated components is complex and there are
significant judgements and estimates required in determining the carrying value
of the remaining assets and liabilities held at the balance date, particularly
in relation to:

·        
Assets and liabilities
being disposed of in the Home Consortium transaction

·        
Assets and liabilities,
including onerous lease provisions and other residual liabilities being
retained by the Group

·        
Accounting treatment of
the Lowe’s put option.

 

 

Given
these complexities we have considered the accounting for the Home Improvement
exit to be a key audit matter.

5.         Critical
Analysis

Lower
earnings per share even with higher sales in 2017 is justified by the fact that
the company is currently closing one of its segments and is trying to absorb
the losses from within the company’s earned income each year. That is why huge
amounts of losses from the other comprehensive and profit and loss account can
be seen as transfers onto the current year’s profits.

Moreover,
the company provides the following information as a means of full disclosures
and transparency in dealings of the company for the users of financial
statements:

The
key non?IFRS measures for
business performance include:

·        
Earnings before
interest, tax, depreciation and amortisation (EBITDA)

·        
Cost of doing business

·        
Fixed charges cover
ratio

·        
Return on funds
employed and lease adjusted return on funds employed

·        
Earnings before
interest, tax, depreciation, amortisation and rent (EBITDAR)

·        
Comparable sales

·        
Significant items

Non?IFRS measures used in describing the Balance sheet and Cash
flow statement include:

·        
Funds employed

·        
Net assets employed

·        
Cash flow from
operating activities before interest and tax

·        
Free cash flow

·        
Fixed assets and
investments

·        
Net repayable debt

·        
Cash realisation ratio

·        
Net investment in
inventory

·        
Free cash flow after
equity related financing activities

·        
Net assets held for
sale

 

·        
Net tax balances

·        
Other financial assets
and liabilities

The
material business risks for Woolworths are divided into the following four
categories:

       
i.           
Strategic:
The retail trading environment will continue to be competitive, driven by new
entrants, technology disruption, as well as be affected by changing customer
needs and expectations and other external and internal risk drivers. Failure to
successfully respond to these factors, our competitors and the changing
marketplace may adversely impact on market share and business performance.

Mitigation:
Woolworths Group has a board approved strategy driving a Customer 1st culture
and investment in growth enablers, including our store network, technology and
digital channels.

     
ii.           
Financial:
The availability of funding and management of capital and liquidity are
important to fund the Group’s business operations and growth. In addition, a
failure to turnaround our general merchandise business or materially adverse
interest rates and foreign exchange rate fluctuations could impact on the
business’ profitability.

Mitigation:
Woolworths Group has board approved treasury policies to govern the management
of the Group’s financial risks, including liquidity, interest rate and foreign
currency risks.

   
iii.           
Operational:
The Woolworths Group is subject to operational risk and could be exposed to
events, including but not limited to, failures to meet people or product safety
standards, information technology, security, asset, data breaches and business
disruptions as a result of cyber-attacks, natural disasters, weather
conditions, industrial disputes, technology failures or supply chain
interruptions.

Mitigation:
Woolworths Group has established policies, standards and training regarding
business operations, including people safety, health and wellbeing, food and
product safety.

   
iv.           
Compliance:
The Woolworths Group is subject to applicable laws, regulations and contractual
arrangements and is exposed to adverse regulatory or legislative changes.
Breaches or adverse changes could result in negative impacts on the Group’s
reputation and profitability, significant fines or other adverse consequences.

Mitigation: Woolworths
Group has a Compliance Framework in place and a variety of policies have been
established to facilitate legal, regulatory compliance and internal protocols.

6.         Conclusion

Woolworths
Limited is a very well-established business. With over 90 years of providing
excellent retail services to its customers and enhancing the quality of life by
providing good quality products at reasonable prices, the company is committed
to continuously improving its current operations.

It
is in its expansion phase whereby the company is making new strategies in order
to improve long term gains for its shareholders.

The
company is following 2001 Act and the International Financial Reporting
Standards (IFRS). It also makes additional disclosure which ae non-statutory
requirements but are provided by the management to present a true and fair
view.

Any
changes in the accounting standards in 2016 and 2017 are not very significant
and do not have a material effect on the financial statements except for the
discontinued operations which must be emphasized as they are reducing the
profits of the company and are also mentioned by the auditor in their
independent report.