ACCG923 Research Report Instruction Assignment Help

In a perfect world, investors, board members, and executives would have full confidence in companies’ financial statements. They could rely on the numbers to make intelligent estimates of the magnitude, timing, and uncertainty of future cash flows and to judge whether the resulting estimate of value was fairly represented in the current stock price. And they could make wise decisions about whether to invest in or acquire a company, thus promoting the efficient allocation of capital.

Unfortunately, that’s not what happens in the real world, for several reasons. First, corporate financial statements necessarily depend on estimates and judgment calls that can be widely off the mark, even when made in good faith…..” (Sherman and Young, 2106, p.1).

The above clearly shows how crucial it is for accountants to apply their professional judgment in arriving at the most reasonable/appropriate accounting choices/estimates, which can be quite a challenging process. There is not necessarily one correct answer in most cases, and therefore, accountants need to be vigilant while dealing with accounting information.

You have recently taken an internship and joined the accounting department of an ASX listed company. To demonstrate your understanding of the application of professional judgment, you are asked to look into the company’s annual report, undertake required research on the company’s choices relating to the accounting estimates and policies on property, plant and equipment, and prepare a report for presentation to members of the accounting department and audit committee.

To complete this assignment, you will need to select a suitable company yourself that meets the following criteria:

- The company must be a constituent of the S&P/ASX 300 index (www.asx300list.com).

- The company must publish audited annual financial reports in English, fully complying with IFRS or AASB standards.

- The company has FY2019 annual report available.

Your report must address each of the following:

a) Discuss how professional judgment is applied to the accounting policies and estimates your company uses to measure Property, Plant and Equipment (PPE) for FY2019. 

b) Based on your findings in part a), critically evaluate and discuss whether the professional judgment applied in accounting estimates and policies of PPE has been reasonable/appropriate by comparing to another company in the same industry. 

c) Critically evaluate and discuss whether the disclosure made by the company regarding the accounting estimates and policies of PPE reflects the qualitative characteristics of financial information according to the Conceptual Framework. 

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Introduction

In this report, the accounting policies and estimates that Woolworths uses to find the value of its Property, Plant and Equipment (PPE) will be identified. Then those accounting policies and estimates will be evaluated by comparison with another company in the industry to assess whether accounting policies and estimates used by Woolworths is appropriate for the measurement of the Property, Plant and Equipment or not. Also, it will be assessed that the disclosures made by Woolworths about the accounting policies and estimates used to measure PPE is fulfilling all the qualitative characteristics of financial information according to the conceptual framework or not. In the end, a brief, summary of all points in the report body will be stated in the conclusion section.

Discussion on how professional judgment is applied to the accounting policies and estimates that Woolworths Group uses to measure Property, Plant and Equipment (PPE) for FY2019

Woolworths Group (2019) stated that accounting policy which is used by Woolworths to measure PPE is carrying values of these assets of the company is measured at net cost, which is cost minus accumulated depreciation, amortisation and impairment. Also, the estimation of the cost of the self-constructed assets or properties includes the different cost incurred by the company to construct assets like direct labour, different overhead costs and direct materials. Also, the estimation of the development properties which are being developed for use in the future period includes the holding cost, development cost and borrowing cost of the property which is being incurred by the business till the construction completed.

The second accounting policy of the company regarding PPE is that depreciation of these assets is done on straight-line depreciation method in which the assets are depreciated over its useful life after deduction of residual value of the assets from its cost.
The leasehold improvements are amortised over the useful life of the improvements. Another accounting policy of the company is that when different parts of one asset under PPE have different useful lives, then these parts are separately accounted as different individual assets of the business.

Woolworths also review the estimated useful life of different assets of the company under PPE category one in each financial period. If after the review, the estimated useful life of these assets changed, then the net written down value of that assets are changed from that period according to the new useful life of the asset but the reporting about those assets value done in the previous periods does not change due to the change in the useful life of that asset. The estimation of the useful life is done by the judgment of the management of the company.

Another accounting policy of the company is that gross proceeds from the sales of these assets are recognised when the title passes or unconditional contract of sales is exchanged with the buyer of the asset and the net profit or loss from the sale is recognised in the consolidated in the profit and loss statement of the group.

Woolworths also obtained the recoverable amount of the properties using comparable valuation method in which the current market rental value with regards to the recent sales of the comparable sites. The impairment loss is recognised in the consolidated profit and loss statement of the group by the amount by which the carrying value is above the recoverable value of the assets. All these above stated are the accounting policies and estimates of Woolworths, which it uses to estimate PPE.

Based on the findings in part a), critical evaluation and discussion whether the professional judgment applied in accounting estimates and policies of PPE has been reasonable by comparing to Coles Group accounting policies and estimates

The accounting policies and estimates of Woolworths which it uses to measure PPE will be evaluated against the accounting policies and estimates of Coles Group which is its biggest competitor in the main business line of the group which is Grocery Supermarket chain business. The analysis of the Coles Group accounting policies and estimates, it has been evaluated that the Woolworths accounting policies and estimates are more than adequate as it has been observed that Woolworths and Coles accounting policies are same about different aspects which will be discussed in this section.

The first accounting policy which has found be same in the two companies is the method of estimating the carrying value of PPE, which is cost minus accumulated depreciation, amortisation and impairment. This show that Woolworths is following the industry norm in its carrying value estimation and also by this method, the chances of overvaluation of PPE risk is mitigated. Also, AASB 116 allow cost model which has been used in this case. Therefore, these accounting policies and estimate has been found appropriate.

The second aspect which has been found to be similar is that both companies take into account all cost which has been incurred by the business to develop or construct assets under PPE category. Therefore, it can be stated that companies decided to capitalise all the cost related these assets creation is also an industry norm and also according to the asset valuation method, which is cost basis valuation. This makes this estimation process also reasonable.

The third aspect which has been found to be same between two companies is the use of straight-line depreciation method, and this also verifies the fact the company is not overcharging its profit or loss statement. AASB, (2015) also stated AASB 116 tells to the depreciable amount of PPE should be calculated by deducting the residual value from the cost amount. Then that depreciable value should be divided by the estimated useful life. Coles Group (2019) and Woolworths Group (2019) stated exactly the same process for depreciation calculation. These facts make this policy of Woolworths appropriate for the measurement of PPE.

The fourth aspect which is the use of judgment of management for estimation of useful life is found in the two companies and this show that Woolworths is not the only company using its management experience and skill for estimation. Although these policies increase transparency in the accounting method, it is found to be a reasonable policy as it is used by its competitor, and there is no other better method applied in this industry. Therefore, the accounting policies and estimates of Woolworths are found to be reasonable.

Critical evaluation and discussion whether the disclosure made by Woolworths regarding the accounting estimates and policies of PPE reflects the qualitative characteristics of financial information according to the Conceptual Framework

After assessing the different disclosures made by Woolworths, it can be stated that the company's most of the accounting policies and estimates have fulfilled different qualitative characteristics of financial information, but there is one aspect in which fulfilment of the qualitative characteristic is doubtful which is disclosure that estimated useful life of assets are reviewed and decided by the management judgment.

Nobes and Stadler, (2015) stated that the first characteristic, which is relevance, tells that the financial information stated that information should be able to help the user make accurate decisions. All the disclosures made by Woolworths helped the users asses how it measures its PPE as the disclosures of the company is given in a detailed way, but the use of management judgment in the estimation of useful life does not indicate how assessment process of the useful life is done. Therefore, this is one aspect which does not fulfil the relevance characteristic.

The second characteristic is the faithful representation, and this characteristic has three requirements which are completeness, neutrality and free from error. All the disclosures made by Woolworths are stated relevant details about the accounting policies and estimation process of the company regarding PPE which increases transparency and also more details have been given in the disclosure for the user compared to its competitor who is Coles Group. Although, again, the management judgment disclosure increases the chances of biasness or error in the financial information as the accuracy of information depends on different aspects of company management like intention, skill or experience. Therefore, this aspect is stopping the overall disclosures of the company fulfilling the two fundamental qualitative characteristics of financial information.

Conclusion

In this report, the different accounting policies and estimation method used by Woolworths had been analysed and identified. Some of the accounting policies which had been identified are cost basis valuation method for PPE, straight-line method of depreciation used for PPE and use of management judgment for estimating useful life of the company. It had also been found that Woolworths accounting policies and estimates are reasonable as they are followed by its competitor which is Coles Group and also recommended by AASB 116. The different disclosures of Woolworths Group are fulfilling two fundamental qualitative characteristics which are relevance, and faithful representation expects for one which management judgment use for estimating useful life.

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