HI5020 Financial Data Of Woolworths And Wesfarmers: Capital Structure Management Assessmemt Answer

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Question :

Assessment Details and Submission Guidelines
Trimester
T3 2019
Unit Code
HI5020
Unit Title
Corporate Accounting
Assessment Type
Individual Assignment
Assessment Title
Raising funds for corporate operations and liabilities, provisions, contingent liabilities
and contingent assets. Measurement Basis for Assets.
Purpose of the assessment (with ULO Mapping)
This assignment aims at developing a clear understanding of students on different sources of funds used/raised by companies. They will need to identify different sources of fund used by two selected companies, discuss the evolution of the sources of fund used by the selected companies over a period of 5 years. They will have to relate the relative merits of different sources of funds used by the selected companies and shed lights on why the selected companies are using different sources of fund differently. Students will also have to summarise the key concepts under the AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets and identify use of this standard by the selected companies. Students will have to identify all different categories of assets recorded by the selected companies and examine the measurement basis used by the
company for each class of assets. (ULO 1, 2, 4, 5, 6, 7).
Weight
40 % of the total assessments (Written assignment 30 % + Presentation 10 percent)
Total Marks
Written assignment 30 marks + Presentation 10 marks
Word limit
3,000 words ± 500 words

Assignment Specifications

Purpose:

This assignment aims at developing a clear understanding of students on different sources of funds used/raised by companies. They will need to identify different sources of fund used by two selected companies, discuss the evolution of the sources of fund used by the selected companies over a period of 3 years. They will have to relate the relative merits of different sources of funds used by the selected companies and shed lights on why the selected companies are using different sources of fund differently. Students will also have to summarise the key concepts under the AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets and identify use of this standard by the selected companies. Students will have to identify all different categories of assets recorded by the selected companies and examine the measurement basis used by the company for each class of assets.

Assessment task:

Collect the latest annual reports of Two (2) ASX listed companies for the last 3 financial years. Based on your collected annual reports, do the following tasks:

  1. Identify the different sources of fund that have been used by your selected companies.
  2. Examine the evolution of the sources of fund used by the company over the last three financial years with specific focus on the changes of different sources of funds.
  3. Identify the percentage of the fund that is internally generated and the percentage of the fund that is externally generated for each selected company.
  4. Explain the relative merits and shortcomings of the different sources of fund used by your selected companies.
  5. Critically examine different types of liabilities shown in the balance sheet of your selected companies? Identify which ones of the liabilities are interest bearing and which ones are not interest is bearing.
  6. Critically examine the key provisions under the AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets.
  7. Identify if your selected companies have made any reference to this particular standard (AASB

137) in their annual reports.

  1. Identify all different categories of assets recorded by the selected companies.
  2. Critically examine the measurement basis used by the company for each class of assets recoded by the selected companies.

Assignment Structure should be as the following:

Instruction for video presentation:

Based on your written assignment you will have to make a summary video presentation at a length of 10 minutes. Your presentation should explain the assignment tasks and your key findings. You will have to upload the presentation in You Tube and submit the you tube link at Blackboard so that the marker can watch and mark your presentation. Your presentation will be marked based on the following criteria:


Presentation Style (3
marks)
Content (4 marks)
Clarity of the presentation
(3 marks)
Excellent
3-2.5
4-3
3-2.5
Very good
2.5-1.75
3-2.5
2.5-1.75
Good
1.75-1.5
2.5-2.00
1.75-1.5
Satisfactory
1.5-1.00
2.00-1.00
1.5-1.00
Unsatisfactory
1.00-0
1.00-0
1.00-0


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Answer :

Finance 

Introduction

This report reveals the key understanding on the financial data of two different companies and how well they are managing the capital structure throughout the time. The Woolworths and Wesfarmers both companies have been assessed and taken into consideration. In the starting of this report, assessment of the financial capital structure of the company and evaluation of the short term and long term sources of the funds used by the both companies have been assessed. After that, specific focus on the differences sources of the funds and assessment of these funds in the given two companies have been made. Afterward, relative merits and shortcoming of the sources of funds used by both companies have been evaluated. After that, different types of liabilities shown in the balance sheet of the company and liabilities which interest are bearing have been assessed. In the end, critical evaluating of the provisions under the AASB 137, provisions and contingent liabilities and assets have been taken into consideration. However, different types of assets recorded by the selected these two companies and the measurement followed for recording of the assets and liabilities in the books of account have been taken into consideration. 

Different sources of fund that have been used by Woolworths and Wesfarmers

Equity capital- These are the common stocks which are used by the organization to raise the capital from the market. Both companies, Wesfarmers and Woolworths have raised the capital by issue of the equity in the market.  The equity capital is fund paid into the business by the investors for the common stocks. In this case, company issues equity capital to the investors in exchange of the common stocks (Woolworths Company 2019).

Debt funding- It is the main method of raising funds from the market. Ideally, debt capital is preferred by the organization with a view to raise the more capital at the cheaper cost of capital. In addition to this, both companies have kept the debt funding to reduce the cost of capital. But at the same time, it also increases the financial leverage associated of company (Wesfarmers Company 2019).   

Borrowing from the banks and financial institution- This is another source of fund option which is used by organization to raise the funds from the banks and financial institutions. The borrowing and funds are raised by organization from the banks to keep the cost of capital low. However, there is no requirement to keep any secured assets to raise funds. Both companies have used this method to raise funds from the market but most of the loans and borrowing have been used by organization as unsecured debts for its business (Wesfarmers Company 2019).   

Evaluation of different sources of fund that have been used by company 

The Wesfarmers and Woolworths both used sources to raise funds by using the equity, debt and other loans and debt funding in the business process of the organization.  The stakeholders of the equity. The Woolworths Company has raised its funds by issue of the more equity capital of $ 440,000000 in the given year which has strengthen the equity capital part of the organization. In addition to this, the retained earnings of the company has decreased which was further used by Woolworths Company for its sources of the funds. The accumulated income of the company has increased by average 283% since last three years which reflects that company has increased its profitability and resulted to the higher total equity capital. The increased equity capital by average 40% since last three year has shown that company has increased its equity capital and used the retained earnings as one source of the capital for its business (Woolworths Company 2019). The long term debts of the company has also increased by average 15% since last three years which reflects that company has raised its capital by raising loans and borrowing from the banks and financial institutions (Wesfarmers Company 2019).   

Sources of Funds of Woolworths
 (All numbers in thousands)
Particular
2019
2018
2017
2016
Stocks
5,828,000
6,055,000
5,615,000
5,252,200
Retained profit or earning 
3,968,000
4,073,000
3,797,200
3,124,500
Comprehensive income
490,000
353,000
113,800
93,900
TOTAL EQUITY
10,286,000
10,481,000
9,526,000
8,470,600
Total liabilities 
23,491,000
23,558,000
22,915,800
23,502,200
Total debts
2,855,000
2,199,000
2,774,700
3,868,000
Deferred liabilities 
-
-
-
-
Deferred revenue
-
-
-
-
Long term liabilities
282,000
311,000
311,900
325,400
Total non-current liabilities
4,202,000
3,513,000
4,215,500
5,727,600

The debt and capital are the most imperative factor which are used by the organization to raise the funds from the market. However, with the increasing complexities and deployment of the funds, company has faced higher loss in its business (Woolworths Company 2019). Nonetheless, due to the non-availability of the option for the deployment of the funds, company has not used any sources to raise the funds. In context with the Wesfarmers Company, the common stock of the company has decreased by 28% since last three year with the decrease or redemption of the shareholding payment to the shareholders. Nonetheless, the retained earnings of the company has went in negative which reflects the negative impact on the business growth of the organization (Wesfarmers Company 2019).  Therefore, company has not used equity capital for its sources of funds. Nonetheless, the debt capital of the company has also not been used by the organization to raise the capital. The Wesfarmers of the company has not used any capital for its business or has not raised any finance capital from the market (Arkan, 2016).

Wesfarmers
2019
2018
2017
2016
Stocks
 
 
 
 
Retained profit or earning 
15,728,000
22,234,000
22,242,000
21,909,000
Comprehensive income
-208,000
176,000
1,509,000
874,000
TOTAL EQUITY
-5,549,000
344,000
190,000
166,000
Total liabilities 
9,971,000
22,754,000
23,941,000
22,949,000
Total debts
18,333,000
36,933,000
40,115,000
40,783,000
Deferred liabilities 
2,673,000
2,965,000
4,066,000
5,671,000
Deferred revenue
-
-
-
-
Long term liabilities
-
-
-
-
Total non-current liabilities
91,000
156,000
156,000
104,000
Stocks
3,146,000
4,154,000
5,757,000
7,410,000
Retained profit or earning 
8,362,000
14,179,000
16,174,000
17,834,000

Percentage of the funds internally generated and externally generated in the business 

It is analysed that both companies have increased the equity capital of the business. It has been observed that the internally generated funds of the organization have been used by both companies to increase the equity capital (Robinson, 2020). The retained earnings of the Woolworths has increased the share capital of the company by the average 22% since last three years (Wesfarmers Company 2019).   

Sources of Funds of Wesfarmers
 (All numbers in thousands)
Particular
2019
2018
2017
Total stockholders' equity
23,491,000
23,558,000
22,915,800
Total non-current liabilities
4,202,000
3,513,000
4,215,500
Total
76042038
127457036
137069834
% of  internal sources of funds
30.9%
18.5%
16.7%
% of External sources of funds
5.5%
2.8%
3.1%

It is analysed that % of the internal sources of the funds in the Wesfarmers company has increased to 30.09% since last three years. However, the increment in the internal sources of the funds has found due to the increased in the retained earnings and increased redemption of the internal funds (Clare, et al. 2017). Furthermore, % of the external sources of the funds have increased to 5.5% of the total capital which reflects that company has increased its debt funding and borrowing with the given percentage. Nonetheless, in case of the low profitability, company may face higher charges on its profit earning capacity (Zeller, Kostolansky, & Bozoudis, 2016).

In case of Woolworths Company, the total % of the internal sources of the funds has been stable as company has kept the stable internal sources of the funds. In addition to this, external sources of the funds of the company has been decreased to 5.6% which has gone down due to the decrease in the financial external sources of funding in the business (Saleem, & Rehman, 2011).

Sources of Funds of Woolworths
 (All numbers in thousands)
Particular
2019
2018
2017
2016
Total stockholders' equity
23,491,000
23,558,000
22,915,800
23,502,200
Total non-current liabilities
4,202,000
3,513,000
4,215,500
5,727,600
Total
74895019
74103018
72187717
73868616
% of  internal sources of funds
31.4%
31.8%
31.7%
31.8%
% of External sources of funds
5.6%
4.7%
5.8%
7.8%

Therefore, it could be inferred that both companies have kept higher % of the internal sources of funding in the business with a view to lower down the financial leverage (Gombola, & Ketz, 2013).

Merits and demerits of the different sources of the funds used in both companies

Sources of the funds
Merits 
Demerits
Equity capital
The equity capital is useful for both companies to keep the capital for its business for the uncertain period of time (Chen, & Shimerda, 2011)
The equity capital is not required to be paid by the Woolworths and Wesfarmers company in the certain period of time (Wesfarmers Company 2019).
The shareholders are the owner of the company who take imperative decision in the general meeting of company for the better and effective deployment of the capital.
The equity capital is used by company and there is no fixed payment is made by Woolworths and Wesfarmers company to any of the investors (Woolworths Company 2019).
It does not increase the company’s burden to pay off and fixed costing is made by the Woolworths and Wesfarmers company to the investors. 
The main demerit of keeping the equity capital in the business is that it increase the cost of the capital in the Woolworths and Wesfarmers company. In addition to this, it has been observed that company would also has to face high cost of equity in the business which may negatively impact the return on capital employed of both companies.
The equity capital would be burden to the value growth of the Woolworths and Wesfarmers company if no adequate dividend is offered to the investors. It is analysed that the process to issue of the share capital in market is also way too long which may also be complicated for the Woolworths and Wesfarmers company (Woolworths Company 2019).
Debt financing 
It is analysed that the debt financing helps company to reduce its overall cost of capital. 
It is easily available to the company and there is no need to keep any security for raising funds for the Woolworths and Wesfarmers company(Podile, et al. 2019).
The debt financing is accompanied with the fixed interest bearing costing which impacts the financial leverage of the Woolworths and Wesfarmers company
The higher debt funding may result to the winding up or liquidation of the company if the debt funding is not paid within the given time manner (Kim, & Ayoun, 2015).
Borrowing and loans 
These are the easily available funding for the Woolworths and Wesfarmers company and at the same time it is accompanied with the lower cost of capital than equity capital but higher than debt funding (Woolworths Company 2019).
Company with the good credit rating could easily raise the funds through this process (Woolworths Company 2019).

In the given case, the borrowing if not paid by the organization may be negative indicator for Woolworths and Wesfarmers company and its credibility in the market (Wesfarmers Company 2019).    

Different types of liabilities shown in the balance sheet

The liabilities are kept in the liabilities side of the balance sheet of the company. Both companies have kept good amount of liabilities (Woolworths Company 2019).

Wesfarmers company
2019
2018
2017
Long Term Debt
2,673,000
2,965,000
4,066,000
Deferred taxes liabilities
-
-
-
Deferred revenues
-
-
-
Other long-term liabilities
91,000
156,000
156,000
Total non-current liabilities
3,146,000
4,154,000
5,757,000
Total Liabilities
8,362,000
14,179,000
16,174,000
Woolworths company
23,491,000
23,558,000
22,915,800
Long Term Debt
2,855,000
2,199,000
2,774,700
Deferred taxes liabilities
-
-
-
Deferred revenues
-
-
-
Other long-term liabilities
282,000
311,000
311,900
Total non-current liabilities
4,202,000
3,513,000
4,215,500

 

The long term debts of the Wesfarmers Company has been $ 267300. These are the debts which are used by Wesfarmers Company for the long term period. In addition to this, the long term debts of the Woolworths Company has been $ 2,855,000. These are the debts which are used by Wesfarmers Company for the long term period. However, these increased debts in both capital increases the financial leverage in long run.  The deferred tax liabilities and deferred revenue of the company have been zero since last three years. Both companies have kept zero deferred tax liabilities in the books of accounts (Kajananthan, & Velnampy, 2018). The other long-term liabilities includes the debts which needs to be paid by the company arise from the different business activities (Woolworths Company 2019).  The non-current liabilities are those liabilities which are kept by company for the long term and raised from the banks and financial institution. The non-current liabilities of the Wesfarmers have been to $ 3146000000 in 019 which has decreased by average 17% since last three years (Wesfarmers Company 2019). 

The long terms debts of the Woolworths are the interest bearing liabilities and company is paying 6.4% interest on these liabilities. In addition to this, long terms debts of the Wesfarmers are also interest bearing liabilities which are issued in the market at the interest rate of 5.3% in market (Tamulevičienė, 2016). 

Key provisions under the AASB 137 provision for the contingent liabilities. 

 This AASB 137 ‘provision for the contingent liabilities contains in detail about the disclosure requirements of provision, contingent asset, contingent liabilities, onerous contracts and restructuring  that are require to be followed by the companies while preparing their annual report which would provide relevant information to its stakeholders.  A provision is considered as obligation which needs to be maintained to strengthen the disclosure. For example-provisions for bad debts, and provision for the contingent liabilities (Myšková, & Hájek, 2017).

contingent liability is a possible obligation that may arise in future due to some past events depending on the happening or non-happening of some future events. For example-losing a law suit pending for a long time (Woolworths Company 2019).

contingent asset is an asset that may arise in future due to some past events depending on the happening or non-happening of some future events. For example-winning of a law suit pending for a long time (Woolworths Company 2019).

An onerous contract is a contract that incur more unavoidable cost than expected economic benefits. For example- a lessee is obligated to make payments under the terms of a lease, and is no longer using the asset (Woolworths Company 2019).

A restructuring is a program done by management which changes the scope of business or the way in which business is conducted for the betterment of business. For example-demerger, divestment strategy (Bayrakdaroglu, Mirgen, & Kuyu, 2017).

Applicability and Non Applicability:

This standard shall apply to all listed companies who have been complying with the listing agreements and rules (Woolworths Company 2019). The standard shall not apply to companies that are not having contingent liabilities (Wesfarmers Company 2019).   

Disclosure requirements:

The AASB provides in detail about the manner in which companies are required to disclose the provisions, contingent liabilities etc. in the annual report. Few major disclosure requirements mentioned in the section are as follows (Azwin, Sadalia, & Irawati, 2019):

An entity is require to disclose

  1. Provisions carried forward from the end of the relevant financial year; 
  2. all the existing and new provisions made for the relevant period

(b) Amount utilized and not utilized during the period; 

(c) The increase/decrease in the amount of provision due to the recorded passage of the time.  

All the companies that are listed on ASX need to follow all the provisions of AASB and do the disclosure as per the requirements mention in the standards strictly. If not followed the requirements correctly, it would lead to wrong presentation of financial statements to the stakeholders and would not present the true and fair picture of the company which would affect the goodwill and may attract penalties in certain cases (Simlai, & Guha, 2019).

Identify the applicability of particular standard (AASB 137) in the companies 

Both companies are indulged in the retail business sectors and after going through the annual report of Wesfarmers and Woolworths company, it has been observed that these companies does not have any contingent liabilities nor any of the contingent expenses needs to be paid by the organization to its debt holders. Therefore, it is inferred that both companies has not made any provisions and there are no contingent liabilities held by the company and thus there is no implication of AASB 137 over the company and it need not to disclose anything regarding the same in their annual report (Sari, Saputra, & Siahaan, 2018).

All different categories of assets recorded 

Wesfarmers ltd. has continued investments in both current assets and non-current assets for the last three financial years.

Categories of current assets which can liquidate in 1 year and are held by the company are majority net receivables, inventory, short terms assets and inventories. 

Categories of Noncurrent assets held by the company are Property, machinery, plants and equipment’s are put in this categories to determine

Company also holds intangible assets and goodwill.

Woolworth ltd. hold both current and non-current assets recorded in the three financial years. 

Categories of current assets 

  • net receivables, 
  • inventory, 
  • other current assets, 
  • short term investments and
  • Cash and cash equivalents.

Categories of Non-current assets 

  • Property, machinery, plants and equipment’s are put in this categories to determine (Yahoo finance. 2019).

Measurement basis used by the company for each class of assets

Current Assets

These are assets are held by organization which could be converted into the liquid assets in the given time manner. 

  • Cash and cash equivalents: Amortized cost or fair value equal to three months.
  • Marketable securities:  at the value which could be obtained from the market.
  • Trade receivables or accounts receivable:  recorded at net realizable value or at fair value estimated.
  • Inventories:  at the value lower of cost or ne releasable value.
  • Other current assets: recognized at the value of its recorded value.

Non-current Assets- at the value or market price assessed. 

  • Property, plant, and equipment (PPE):  recorded by using the cost model (historical cost lower down with the depreciation.
  • Investment property
    • Recorded by using the cost model (historical cost lower down with the impairment loss. 

Intangible assets:  at the amount computed after implementing the impairment test

  • Goodwill:- at the amount computed after implementing the impairment

Financial assets: recorded at net realizable value or at fair value estimated.

Conclusion

After assessing all the details, it could be inferred that critical evaluating of the provisions under the AASB 137, and other provisions and contingent liabilities and assets are used to assess the true value of the recorded in the books of accounts. Now in the end, it could be inferred that proper fair value is followed to strengthen the overall financial recording of the financial records in the books of accounts.