This assessment will cover the following questions:
- Wesfarmers Ltd. is a leading retail industry in UK. Analyze the impact of consolidated accounting on the economic entity, and the various accounting adjustments required to portray relationship.
- Evaluate complex accounting-related knowledge and practice from both historical and contemporary perspectives.
- Examine concepts and methods used to solve business and professional practice problems
Accounting plays an important role in every organization to record, summarize and present accounting information in form of financial reports. The corporate structure is governed by the set standards. The report is based on the annual and corporate structure of Wesfarmers Ltd.
Company and its Activities
Since its origin in 1914 as Western Australian farmers' cooperative, Wesfarmers had grown into one of the largest listed company of Australia. It has headquarters in Perth, Western Australia and is involved in diverse businesses (Wesfarmers, 2019). Wesfarmers is predominant in Australian and New Zealand retails, chemical, fertilizers, coal mining and the safety products. Divisions of Wesfarmers
Home Improvement and the Office Supplies
Division is made of Bunnings Warehouse, retailer of the home improvements and of outdoor living products, in servicing home and the commercial customers of Australia & New Zealand (Collison and et.al., 2016). Officeworks, supplier and retailer of the office product for home, education and business in Australia.
Few years back it announced restructure of department store busieness into single division called Department Stores, where each brand is operating independently.
It is discount department stores retailer in New Zealand and Australia and provides retail automotive repairs, services and tyres.
It is also discount retail department store in Australia with more than 305 stores. In 2014, value of the Target was written down by $680 million due to decline in profit.
Organizational restructure of 2015 clustered three businesses Energy, Chemical and Fertilizers; Resources ; and Industrial & Safety in single Industrial division.
Chemicals, Energy, and Fertilizers
Wesfarmers Chemicals, Energy, and Fertilizers produce and market chemical, fertilizers & gas products. The business include Australian Vinyls. CSBP, AGR, Evol LNG, QNP, Modwood, and Kleenheat.
Wesfarmers Resources own and operate world scale coal producing open cut resources in the Australia. In Queensland it has Curragh producing metallurgical coals for exporting & steaming coals for the domestic power generations.
Industrial and Safety
It provides industrial & safety products & services in New Zealand and Australia. Group has various subsidiaries in this division.
Company has interest of 50% in Gresham Partners investment house and Equity funds, interest of 50% in softwood sawmill and 24% in BWP Trust. Wesfamers is having 100% interests in number of subsidiaries across globe like Australia, New Caledonia, New Zealand, United Kingdom, Indonesia, Bermuda China and Singapore.
Equity Composition of Company
Equity capital of Company
Ordinary shares of company have no par value and are fully paid. The share do not bear any special terms or conditions that affects income or the capital entitlement of shareholders. Th reserved shares of company are the ordinary shares which were repurchased by companies and have been held for the future use (Annual Reports, 2019, 2019). It includes reserves shares of employees which are shares issued to the employees under shares loan plan. When share loans are repaid in full, these are converted to the ordinary shares of company and are issued to employee (Bischof, Laux and Leuz, 2019). Incremental cost that are attributable directly to issue of new shares are shown as deduction in equity net off tax from proceeds. Company did not have any shares authorised for the issue are due to be issued at the reporting date .
Equity of company comprises of only two class of shares that are ordinary shares and reserved shares. Ordinary shares are the shares of company outstanding in market. It comprised of 11,338,400,000 of ordinary shares of company having valuation of $15,809 million. Reserved shares are repurchased shares and also include employee reserved shares as loan to employees. Reserved shares contains 2709,000 number of shares and has value of $ 81 million.
The reserves of company comprised of $5549 million. Company has made various reserves under separate name. Restructure tax reserve which is used for recording recognition of taxation losses that raised from equity restructuring of group under 2001 ownership simplification plan. Capital reserve of company is used for accumulating the capital profits. Foreign currency translation reserve for recording the exchange differences on translating financial statements of the foreign subsidiaries (Penela, Estevão and Gregory, 2019). Cash flow hedge reserves for recording the gains or losses over the hedging instruments, financial asset reserve changes of fair value on the financial assets which are designated at the fair value through OCI. Other two reserves are share based payments reserves for recording the equity settled share based payments to employees and demerger reserve for recognising gains over Coles demerger.
Relationship of share price and share capital of company
The Market share price of Wesfarmers was 36.16 as on the end of the reporting date that is 30 June 2019. The share capital stated in the financial statements represents the value of shares of company. The share price of the company are derived every day in the market as per the market index. The fluctuations in the prices of shares are seen due to many reasons. Every event taking place in company has effects on its share price. Share prices represents the price a which the shares of the company are trading in the market. Events like merger, demerger, restructuring and several other influence the share prices of company.
The share capital of the company refers to the value of shares at which they were issued in the market. It is denoted by the number of shares multiplied by the share price. It represent the par value at which shares are authorised. The relationship between the capital price is with number of shares company is having at the end of the period. Share capital is represented at par value where the shares trade at market prices. There is difference between the value of equity according to the share price and the share capital at the end of the reporting date (Khumawala and Shroff, 2017). The share capital of the company is arrived after considering the movements in equity capital like translations of foreign operations, fair value changes in hedging instruments, capital distribution on demerger, acquisition of shares and dividends.
Share capital only represents the issued capital of the company at the end of the period. Any further issue of authorised shares or if share capital has been distributed back. It also covers transactions of share based payments. The share price are presented at the represents the growth and fluctuations in its prices (Aras and Crowther, 2016). The share price represents the value of company in market. Share prices have increased value as compared to the book value of the shares.
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Share price after one calendar month and its possible reasons
Share price of the company as at June 30, 2019 was 39.16 and after one month the share price of the company was 38.41 as on July 31 (Annual Reports, 2019. 2019). The has been downward movement of stock prices of company during a month. There were significant events occurred during the year that might have caused the prices to fall. The demerger of Coles, sale of Bengall, Sale of KTAS, sale of the indirect interest in Quadrant energy and acquisition of Kidman resources limited and Catch group holdings limited. One of the major and possible reason of decline can be demerger of Cole group (Weygandt, Kimmel and Kieso, 2019). The financial reports of company shows that equity of company has gone down. As major part have been demerged from company the demand of shares is influenced by such decision furthermore after the issue of financial statements.
There are several reasons that may cause the share prices to fluctuate. First and foremost reason is the demand and supply of share in market. When the shares are more than in demand of the market they tend to decline. Interest rate of banks also cause the prices to fluctuate of shares. As lower interest rates reduces the demand in market because the loans are available at lower interests and this causes speculation in securities. Fluctuations of share prices due to the underwriters. For creating demand underwriters starts buying the shares through their agents. Institutional investors also influence the share price. When the large investors show their interests towards particular shares their market demand rises. Financial position of company causes the share price to fluctuate in the market (Dauderis and Annand, 2018). It is a relevant and important factor that involves fluctuations in the share price of company. If the company pays high dividends than investors purchase the shares of company in bulk which creates demand and also sometime results in escalation in share prices. The appointment or resignation of top executives and directors influence the prices. Investors create doubt about the financial soundness on appointments and resignation. Known directors have significant contribution in position of company.
Debt structure and external financing sources of company
Interest bearing loans and borrowings. Company is having debt from banks amounting $142 million of long term debt and $ 6 million of short term debts. The bank loans are being repaid by company in instalments with interests. The bank loans are raised as they include capital benefits. Apart from banks company borrows through capital market by issuing bonds and debentures. Company is having short term debt from capital market of $350 million and long term debt of $ 2531 million. These loans have interests means that company is required to pay fixed rate of interests on these loans.
Group had continued the strategy of maintaining diversity in funding sources, upcoming maturities and maintaining the presence in the key markets. Company had repaid $500 million of domestic bonds in march 2019 from the available cash balances. Company did not issued any further bond during the year. Company renegotiated all the banking facilities and have been extended for three years (Abdul-Baki, 2019). Capital market debt of company comprises of domestic and foreign corporate bonds. All the borrowing and loans are recognised by company at the fair value.
The debt structure of company comprises of short and long term domestic and foreign bonds and the short tern deposits. Every company is required to have an adequate debt structure comprising of debt from capital markets and the external sources. External sources of company only comprises of bank borrowing. There should be balance between the different sources of borrowings and the maturity ranges. High debt involves high risks company along with also has to ensure that the debt financing does not become riskier factor of the company. This funding source involves fixed amount of interest payments decreasing the profits of company.
Key element in Fixed assets categories
The fixed assets of company comprises of property and buildings, plant and equipments of the company. The property of company comprised of $819 million in year 2019. Plant and equipment of company valued $3059 million and the intangible fixed assets of company had value of $986 million.
Property of company comprises of land and buildings including under construction. Buildings had depreciation and impairment of $148 million. The plant and equipment of company comprised of leasehold improvements with depreciation and impairment of $351 million and plant, vehicles and equipments with depreciation and impairment of $4088 million. Company has made new addition to the Property , plant and equipments of company. Total additions during the year are of $1207 million (Annual Reports, 2019, 2019). During the year it had also disposed off unproductive assets worth $5030 million. Depreciation and amortisation on the movements in assets was of $714 million.
Carrying value of fixed assets are represented at cost of asset less the accumulated depreciation and impairment. Cost of assets also include replacement parts eligible for capitalisation. Items are depreciated over useful life on straight line basis. Expenditure over the mining areas have been amortised at the rate of depletion of recoverable reserves (Pratt, 2016). Leasehold improvements are amortised over lease period or useful life of improvements whichever is less. Assets are de-recognised when they are disposed off or sold and no economic benefits could be generated out of it. Gains or losses on de-recognition are represented in income statements. The treatment of the fixed assets is dependent on the type of fixed assets. Company is available with deduction over the depreciation charged over the fixed assets of company. Fixed assets represented on the balance sheet of company are inclusive of its subsidiaries and acquired companies. Company conducts periodic impairment test of the fixed assets of the company this helps in keeping the values of assets close to the fair value (Schroeder, Clark and Cathey, 2019). It is conducted when the assets are not generating independent cash flows and value in use also not close to its fair value. Impairment is there when carrying value exceeds the recoverable amount.
Intangible assets and impairment policy followed
Intangible of company comprised of goodwill and intangible asset. The total value of goodwill of company is $3090 million. The total goodwill includes goodwill of Bunnings, Kmart Group, Wes CEF, WIS, Office-works and Coles. Other intangible assets comprises of allocation of intangible assets to the groups of cash generating units. Carrying amount of intangibles is $832 which was $3806 in 2018. Coles had major intangibles of $ 2963 (Annual Reports, 2019, 2019). The demerger of Coles from the group has significantly brought down the other intangibles of company. Coles alone had goodwill comprising of $10377 in year 2018.
Fixed assets of company are depreciated as their values is depreciated is due to use. Intangible assets are the assets that cannot be touched. These include patents, trademarks, copyrights and intellectual rights. As per the reporting frameworks corporations are required to impair their intangible assets on fair value (Gupta, 2016). Company conducts impairment tests for intangibles also at-least annually for the indefinite life intangibles and goodwill, where there are indications that assets may be impaired. Recoverable amount of the assets or CGU is determined as higher of fair value less cost of disposal and value in use. Cash flow projections are based over the corporate plans and the business forecasts of company prepared by the management and approved by board.
Financial operations of Company during the financial year
Financial performance of the company was adequate and sound. Company had maintained its return even after the demerger of Coles. Retained earnings of company comprised of remeasurement loss on defined benefit plan of $ 1 million but it din not attracted any tax effects. The retained earnings of company also contained $208 million.
Dividend distributions amounted to $ 18194 million. Company considers franking credits, current earnings and future requirements of cash flows in its dividend policy. Group operates a dividend investment plan allowing eligible shareholders for electing the investments of dividends in ordinary shares.
Capital of the company was $22754 million in 2018 which after the demerger of Coles went down to $15809 million. Other significant change was seen in reserves that is also due to the demerger.
The above research shows that financial statements of the company provide all the relevant information that is required for analysing the financial health and position of company. It is essential for the analysts and experts to have the ability to understand and identify h reasons behind change in financial figures. The events and transaction have impact over both the financial statements and share prices of company.
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