Accounting Theory Organization and the Mechanisms

Question: Discuss about the Accounting Theory for Organization and the Mechanisms. Answer: Introduction The present study presents a detailed analysis of the factors that drive the culture of the organization and the mechanisms, processes that can control and direct the operations of the organization with special orientation to the operations of Woolworths Limited. Woolworths Limited is publicly traded Australian corporation that has extensive retail operations across different parts of Australia as well as New Zealand. Woolworth Limited is the second largest business firm in Australia in terms of revenue and the second largest in New Zealand as well. The company operates primarily in the retailing industry across Australia, New Zealand and India in different divisions that include the Super markets, petrol, liquor, general merchandise, home improvement, hotels and gambling (Woolworthslimited.com.au. 2016). In addition to this, the current study also analyses the governance structures that includes evaluation of the adherence to the rules and guidelines, analysis of the General Purpose Financial Reports for users of financial statements of Woolworths Limited. Furthermore, the current study also deals with the issues associated to remuneration structure, internal and external controls. Moreover, the present study also discusses the principles prudence and adherence to the conceptual framework of the financial reporting. Factors that drive the culture of Woolworths Limited Corporate Governance: Corporate governance refers to the specific approach of the board towards augmentation of the value of the shareholders and at the same time fortification of the funds of the shareholders. The management of the company Woolworths Limited intends to make it certain that the policies as well as practices in different critical zones of financial declarations, remunerations reports and corporate governance meet different requirements of high levels of disclosures and compliance (Deegan 2012). Woolworths Limited is publicly listed in the Australian Securities Exchange (ASX) and is required to apply different recommendations stated in the ASX Corporate Governance Councils principles and recommendations (AXS CGC). The corporation has assessed the present corporate governance procedures as well as practices that are essentially against the ASX Recommendations. The analysis of the corporate governance framework of Woolworths Limited reveals the fact that the company is entirely governed and c ontrolled by the board of directors who are selected by the shareholders (Healy and Palepu 2012). The company has established three different committees that include the Nomination Committee, Audit, Risk Management and Compliance Committee and People Policy Committee. A Board Charter presents the responsibilities of the board to aptly represent and at the same time serve the interests of all the shareholders of the corporation by way of overseeing and evaluating the stratagem, policy and performance of Woolworths Limited (Woolworthslimited.com.au. 2016). Issues with the remuneration rate The board of the company Woolworths Limited established the remuneration committee People Policy Committee in order to make it certain that the level as well as composition of the Group Remuneration is appropriate and feasible and its association to the performance is understandable. The People Policy Committee complies with the requirements of the ASX Recommendations. The auditors report on the remuneration reveals the fact that the board of directors prepares and presents the remuneration report as per the section 30 A of the Corporation Act 2001 and the audit is primarily based on the Australian Auditing Standards (AAS). The remuneration report published during the year 2015 replicates the disappointing performance of the company and the subsequent results on the executive as well as employee remuneration. The performance of the company against the important metrics underpins the entire structure of the remuneration. The remuneration report shows a 0.1% growth in net profit after tax (NOPAT) associated to the previous year. The remuneration report also reflects the 0.7% decline in the earnings per share as compared to the previous year (Woolworthslimited.com.au. 2016). The management of Woolworths Limited intends to link the pay structure of the firm with the performance. However, the company has no provision for short-term incentives. Again, there are certain awards associated to the historical financial presentation and historical retention rights (Horngren et al. 2012). The remuneration framework makes it certain that the structure and the governance of remuneration of the Woolworths Limited persists on supporting the overall attainment of particular business results that in turn can deliver value of the shareholder. The assessment of the remuneration structure offer strong foundation to work with sufficient flexibility to replicate alterations in strategy and to attract and at the same time retain the talents (Botzem 2012). In addition to this, the board as well as the senior executive group have a long-term association with the shareholders through different requirements of the shareholders. The analysis of the remuneration report also reveals the fact that the company failed to meet the short term incentive plan that happened to be the performance gateway of 4% growth of net profit after tax as compared to the year ago period. Analysis of the General Purpose Financial Reports for users to make financial reports Conceptual Framework As rightly put forward by Edwards (2013), the conceptual framework refers to the aim and objective of the financial reporting, qualitative nature and characteristics of different useful information. In addition to this, the conceptual structure also deals with the definition, recognition and measurement of different elements of the financial declarations, notions of capital and maintenance of capital. The primary aim of the general purpose financial reporting is to offer financial information regarding the reporting business entity (Miller and Power 2013). The financial information provided in the GPFR can help the potential financiers, lenders as well as other creditors in arriving at decisions concerning purchasing, selling and holding equity, debt instruments, offering loans as well as other forms of credit. However, these reports of Woolworths Limited do not offer all the important information that existent as well as potential investors, financiers and creditors require (Aasb.go v.au. 2016). The statements of Woolworths Limited also follow the requirements of the conceptual framework. The balance sheet reveals important information regarding the inventory, net investment in inventory, assets, intangible assets, net repayable debt, financial liabilities, and shareholders equity. The financial declarations declare the fact that the board have allowed final dividend of 72 c per share out of the total dividend of 139 c during the 2015. The dividend declarations prove to be important information for the shareholders of the company. The aim of the financial reporting is also to get a favourable credit rating. For example, both the SP and the Moodys modified the rating to a lower level as compared to the previous years figure (Woolworthslimited.com.au. 2016). The users of the financial information can make use of the reports for arriving at decisions. The users can also assess the items as follows: Analysis of the inventory The closing inventory of the company Woolworths Limited increased 3.8% owing to the opening of new stores. The net investment in inventory declined $272.6 million due to the variances in the timing of payments of creditors. The inability to manage the inventory in the retail business of the Woolworths Limited might perhaps impair the competitive position of the company. Figure: Inventory (Source: Woolworthslimited.com.au. 2016) Analysis of the accounts receivable, provision for bad debt and doubtful debt The company Woolworths presents the accounts receivables in the financial statements by including the amount of GST. The trade receivables were registered to be 1001.9 during 2015 and 965.2 in the year 2014. The trade receivables are primarily identified at fair value, enumerated at amortised cost by interest method after deduction of the allowance for impairment. The users of the financial information can analyse the data presented in the financial reports and assess the items to frame financial decisions. However, the financing cost of the company Woolworths Limited declined 2% in 2015 as compared to the year 2014 primarily due to the savings in the interest out of repayment of the debts, offset by lower capitalized interest (Woolworthslimited.com.au. 2016). The net repayable debt declined to $3067.3 million made possible owing to the proceeds from the sale of property and investment. Analysis of the plant, property and equipment The plant, property and equipment of the company is essentially enumerated at cost after deduction of the accumulated depreciation and amortisation and accumulated loss of impairment (DRURY 2013). The management of the company Woolworths Limited made investments amounting to $1535.3 for the plant, property and equipments as the company opened many new stores and the refurbished many existing retail stores, purchased many new merchandising systems and different supply chain initiative. Figure 1: Balance Sheet (Source: Woolworthslimited.com.au. 2016) Analysis of depreciation methods The depreciation method that the management of the company Woolworths Limited is currently for the assets is the straight-line method over an economic time. The annual report published by the company Woolworths Limited reveals the fact that the useful lives of the plant, property and equipment is 2.5 years to 10 years (Woolworthslimited.com.au. 2016). Analysis of the liabilities The analysis of the consolidated financial reports of the company Woolworths Limited reveals the fact that the company has the total liabilities of $1236.3 million. The liabilities that are not anticipated to be settled within 12 months are essentially enumerated at the normal value by utilizing the remuneration rate that is again anticipated to be implemented during the time of settlement. The liabilities that are not anticipated to be settled within 12 months can be enumerated at the present value of the assessed future cash outflows in respect of different services provided by different members of the staff of the organization (Woolworthslimited.com.au. 2016). Treatment of leases The financial reports of the company Woolworths Limited reveals the fact that the leases can be classified as finance leases where the contracts specified in the lease helps in transferring the risks as well as rewards associated to ownerships to the particular lessee (Kang and Gray 2013). Analysis of the process of reporting revenue in the financial reports of Woolworths Limited: The operating revenue of the Woolworths Limited is registered to be $60868 million. However, the revenue of the company is measured at fair value based on different consideration that can be received based on meeting the criteria for recognition. The revenue is identified net of returns as well as discounts (Woolworthslimited.com.au. 2016). Prudence The above concept is also known as conservatism principle and is one of the accounting principles that requires particular accountant in recording of liabilities as well as expenses for realization purpose (Alexander 2013). This particular concept requires accountants in remaining cautious in adopting policies as well as estimations in income assets and overstatement of entity expenses. Conceptual Framework Preparation of financial statements contends with uncertainties and surrounding facts regarding events as well as circumstances like collectability of doubtful receivables, useful life of fixed assets such as Plant and Equipment. These uncertainties recognizes by corporate disclosures in exercising prudence for conceptual framework (Brigham and Ehrhardt 2013). Prudence is the concept inclusive of degree of caution for exercising over the judgements for level of uncertainty (Rahman 2013). Process for updating the conceptual framework Updating or developing conceptual framework, IASB removes reference from the basic concept of Prudence. This mainly explains prudence exclusion important aspects for faithful representation such as reference to Prudence (Henderson et al. 2015). Advantages and disadvantages of on financial reporting Advantages include reference to prudence in conceptual framework that brings consistency of information and neutrality of actions (Chalmers et al. 2012). Even after prohibitions in and against deliberative misstatement, it appears in the 2010 conceptual framework. One of the disadvantages involves biasness affecting financial performance in later periods. Conclusion The investors can analyse different items presented in the financial reports of the corporation Woolworths Limited. The disclosure policy of the Woolworths Limited essentially complies with the Corporation Act 2001 and ASX Listing Rules. The continuous disclosure policy of the company can thereby promote the confidence of the investors towards both the integrity as well as the securities. The inventory of the company has also increased due to the increase in the establishment of new stores. Therefore, the investors can analyse the efficiency of the company in converting the inventory of the company into sales before arriving at decisions. Again, the investors are also aware of the investments of the company towards the plant, property and equipment of the corporation. The investments in the plant, property and equipment has initially caused outflow of cash but can help the company to generate profit in the future period (Glaum et al. 2013). This can boost the sentiments of the invest ors positively. References Aasb.gov.au. (2016).Australian Accounting Standards Board (AASB) - Home. [online] Available at: https://www.aasb.gov.au [Accessed 23 Aug. 2016]. Alexander, D., 2013.Financial reporting: the theoretical and regulatory framework. Springer. Botzem, S., 2012.The politics of accounting regulation: Organizing transnational standard setting in financial reporting. Edward Elgar Publishing. Brigham, E.F. and Ehrhardt, M.C., 2013.Financial management: Theory practice. 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