Estimates By German And British Accountants -Myassignmenthelp.Com

Question: Discuss About The Estimates By German And British Accountants? Answer: Introduction Wesfarmers, since its establishment during 2014 as Western Australian farmers Cooperative, the company reached to the level of topmost listed companies in Australia. The company has its headquarter in Western Australia and the diverse business of the company includes the business of home improvements, hotels, supermarkets, liquor, departmental stores, office stores and industrial divisions for fertilizers, energy, chemicals, coal and various industrial safety products. The main objective of the company is to deliver satisfactory return to the shareholders through satisfying the requirements of customers. The company also provides healthy and safe working environment to the employees and are responsible for the expectations and attitudes of communities under which it operates its activities (Wesfarmers.com.au 2018). Classification of expenses Expenses under the income statement are classified either by function or by nature. Where the expenses are classified by nature the expenses are disclosed as per the nature, for instance, transportation cost, depreciation, wages, rents expenses and salaries. The expenses are not reallocated under the different functions of the company that is the selling cost, COGS, other expenses and administration expenses (Weil, Schipper and Francis 2013). This method of disclosing the expenses are used under single step income statement and is generally used by the small businesses owing to its simplicity. However, the main limitation of this method is that under this method the gross profit of the company cannot be calculated. On the other hand, where the expenses are classified by function the expenses are disclosed as COGS, administrative expenses and selling expenses. This method enables the calculation of operating profit and gross profit under the income statement. The classification by function approach requires further disclosures of the expenses by nature either under the income statement or under the notes (Robinson et al. 2015). Looking into the Income statement and comprehensive income statement under the annual report of Wesfarmers for the year ended 30th June it is observed that the expenses under the income statements are classified by nature and not by function. This is concluded as the expenses are classified as impairment expenses, employee benefit expenses, depreciation and amortization for instance (Wesfarmers.com.au 2018). Reasons behind different methods for classifying the expenses The reasons of classifying the expenses under different methods are as follows The classification is depended upon various factors like type of the industry to which the company belongs, type of activities carried out by the company, historical factors and nature of the company. Based on these factors the most appropriate method is used. As both the methods has its own advantages and disadvantages, the managements are required to choose the most reliable, suitable and relevant method for the company (Needles, Powers and Crosson 2013). The method is also selected based on the types of cost that is mostly incurred by the company. For instance, if the company is a manufacturing company then the cost associated are material, labour and overheads. Therefore the company will classify the expenses by nature to present the income statement more clearly and more precisely Disclosures of Accounting Policies, Estimates and Errors AASB 108 deals with the Accounting Policies, Change in Accounting Estimates and Errors. As per the standard, accounting policies refers to the specific principles and conventions which the company follows in preparation of the financial statements (Abed, Al-Badainah and Serdaneh 2012). As per AASB 108, change in accounting estimates occurs when there is a new development or on the basis of some future consideration. As per paragraph 10 of Australian Accounting Standards (AASB), if any standard which does not apply to any transaction than the management judgement will be considered in applying appropriate accounting standards which are significant in economic decision making needs of the investors or stakeholders or which are reliable to the financial statements (AASB 2014). As per paragraph 13 the companies must maintain consistency in accounting policies for similar transaction unless another accounting standard provides categorization of the same in other accounting standards. As p er paragraph 19, an organization will be accountable for the change in the accounting policies of the company resulting from the application of the accounting standard relating to transitional provisions. The paragraph further states that when there is any particular change in the accounting policies then such a change in the accounting policies will apply retrospectively. However this will be not be applicable if the case is impractical to implement retrospective changes. The disclosure requirements of AASB 108 states that the company needs to disclose the standard name, the nature of change in accounting policies, the retrospective change in the accounting policies (Wang 2014). The change in accounting estimates such as change in recording of doubtful debts, obsolete inventories and fair value of financial assets and liabilities. The change in accounting estimates is recorded to the extent that such a change will have effects on the assets and liabilities of the company. As per the annual reports of the company the company needs to incorporate the accounting standards in the notes to accounts as shown in the financial statement of the company. The company has recorded some of the accounting policies, however other accounting which the company follows need to be mentioned clearly in the notes to accounts in the financial statements. Another aspect which is a bit unclear from the analysis of Wesfarmers ltd show that certain accounting estimates are as per the judgement of the management and it is not clear how much appropriate this can be as per AASB 108. For example, revenue which is acquired from sales of gift cards are recognized when such cards are redeemed and when customers buys goods or products using such a card. This is based on the judgement of the management and estimates which can have material impact if such estimates changes (Wehrfritz and Haller 2014). The company follows straight line method of depreciation as depicted in the notes to a ccounts of the company. Another area of concern may be the estimate regarding the deferred tax assets. The notes to account states that the eligible future capital gains are utilized as tax assets which are not that much probable (Ball, Kothari and Nikolaev 2013). Depreciation, Amortization and Impairment policies Depreciation may be defined as the reduction in the value of the assets of a company over time. These reduction in the value of the asset may be due to natural wear and tear, damage, obsolescence and other factors (Bull 2014). Depreciations is charged for fixed assets or tangible assets whereas amortization is charged for intangible assets of the company (Akintoye 2012). Impairment of assets is defined as reduction in the value of the assets of the company when the carrying amount of the assets is less than the expected amount which can be recovered from the assets (Amiraslani, Iatridis and Pope 2013). As per the financial statements of Wesfarmers ltd, the company has property, plant and equipment which consist of Freehold land, Buildings, leasehold improvements, plant, vehicles, mineral leases and equipment. The company follows the policy of measuring the carrying amount of the property, plant and machinery by measuring the cost relating to the asset less the amount of depreciation and impairment. The cost of the asset also includes part of the of costs associated with replacing parts of the assets. The depreciation policy of the company as stated in the notes to accounts is charged on a straight line basis on property, plants and equipment over the useful life of the asset. As mentioned in the notes to account the estimated useful life of the buildings is between 20 and 40 years, plant is between 3 years to 20 years. Land is not depreciated as per the policy of the company. The expenditure incurred on mining areas on which production has began is amortised over the life of the mi ne. The company only charges amortization on mines if the production on such mines has started. The depreciation amount as shown in the income statement of the company for the year 2016 is $ 1296 million. Revaluation of foreign currency is shown in the financial statements of the Wesfarmers ltd. There has been a revaluation in the spot rate of the foreign bonds which the company owns. The carrying amount of such foreign bonds as shown in the financial statements is of the amount $ 2864. The company utilizes cash flow hedges in order to mitigate the risks of variability. The impairment of asset testing is done in groups which comprises of property, plants and equipment, intangible assets and goodwill. The impairment testing is done on an annual basis for intangible assets and goodwill which have indefinite life. In other cases impairment is done when the management is certain that there are adequate signs that the asset has been impaired or where the impairment amount which was previ ously recognized has changed. The impairment calculations of the company are based on the corporate plans and business forecast as prepared by the management of the company. the discounting rate which is used for the calculations of impairment amount is based on the weighted average cost of capital or through the use of benchmarking market rates. The discount rate of the company as shown in the notes to account is 8.9% and the growth rate of the company is shown at 3% which is used in the calculation of the impairment loss which is incurred by the company. Reference AASB, C.A.S., 2014. Business Combinations.Disclosure,66, p.77. Abed, S., Al-Badainah, J. and Serdaneh, J.A., 2012. The level of conservatism in accounting policies and its effect on earnings management.International Journal of Economics and Finance,4(6), p.78. Akintoye, I.R., 2012. The Relevance of Human Resource Accounting to Effective Financial Reporting.International Journal of Business Management Economic Research,3(4). Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a test forReasons behind different methods for classifying the expenses IFRS compliance across Europe.London, UK: Centre for Financial Analysis and Reporting Research, Cass Business School. Standards, Regulations, and Financial Reporting, pp.199-223. Ball, R., Kothari, S.P. and Nikolaev, V.V., 2013. Econometrics of the Basu asymmetric timeliness coefficient and accounting conservatism.Journal of accounting research,51(5), pp.1071-1097. Bull, R.J., 2014.Accounting in business. Butterworth-Heinemann. Needles, B.E., Powers, M. and Crosson, S.V., 2013.Principles of accounting. Cengage Learning. Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015.International financial statement analysis. John Wiley Sons. Wang, C., 2014. Accounting standards harmonization and financial statement comparability: Evidence from transnational information transfer.Journal of Accounting Research,52(4), pp.955-992. Wehrfritz, M. and Haller, A., 2014. National influence on the application of IFRS: Interpretations and accounting estimates by German and British accountants.Advances in Accounting,30(1), pp.196-208. Weil, R.L., Schipper, K. and Francis, J., 2013.Financial accounting: an introduction to concepts, methods and uses. Cengage Learning. Wesfarmers.com.au., 2018. Wesfarmers.com.au. [online] Available at: https://www.wesfarmers.com.au/docs/default-source/reports/2016-annual-report.pdf?sfvrsn=4 [Accessed 6 Feb. 2018].