Accounting for Corporate Accountability: Non-current assets by Woolworths Limited

Woolworths Limited is an Australian based company that operates through a variety of companies including New Zealand Supermarkets, Australian Food and Petrol, BIGW, Hotels Segments and Endeavor Drinks Group. These organizations are engaged in specific activities that differ from each other. For example, New Zealand Supermarkets trades food and spirits, while Australian Food and Petrol offers food and petroleum products (Woolworths Limited 2017, n.p.). This corporation therefore has a large number of supermarkets and stores from which each segment operates. Woolworths Limited is now his second best performing company in Australia after Wesfarmers. The corporation started its operations in 1924 with a nominal capital of £185,000 but has today grown to manage over $800,000,000 in equity. Just like any other corporate organization, the company has its resources in the form of assets that it has to account for and report by the US GAAP. This essay identifies the non-current assets of the organization and discusses the challenges in measuring the fair values of such property and the methods used (Woolworths Limited 2017, n.p). Additionally, there is the discussion of whether the IASB’s approach to measuring fair values of fixed assets is practical for the enterprises that are not actively traded.

Property, Plant, and Equipment

The property plant and equipment comprise the tangible resources that are considered as capital assets and are used in the daily operations. This category contains the land, buildings, machinery, motor vehicles, furniture, and other equipment. On the other hand, the intangible assets are the goodwill, liquor and gaming licenses, and the brand name (Woolworths Limited 2016, p.70).

Woolworths Limited obtains the fair value of its property, plant, and equipment after deducting the accumulated depreciation and impairment losses (Woolworths Limited 2016, p.72). For the self-constructed property such as buildings, the organization often includes the costs that are incurred such as the expenditure of raw materials, labor, and the apportioned overheads (Biondi, 2011, 8).

Some of the accounting methods used during the measurements include the straight-line approach for depreciation (Woolworths Limited 2016, p.72). For the impairment of the non-financial assets, the company assesses them when there is an indication that the property might be impaired or if it is possible that the previously impaired asset has changed (Herrmann, Saudagaran, and Thomas, 2006, p.46). Therefore, the management estimates the recoverable amount of the assets to establish the extent of impairment. Another significant accounting process is the estimation of the useful lives of property using management judgment and experience at least on an annual basis.

Comment on Measurement Methods

The use of straight line method for the depreciation of the assets of the organization is practical because it allows for the reduction of the value of such properties over time. In fact, an asset cannot have the same value throughout its useful life. Besides, the approach is one of the recommended on by the IASB (Zyla, 2013, p.87). Additionally, the costing process of the self-constructed assets makes sense because it takes into account all the expenses incurred when developing the resource. Moreover, the firm then establishes a useful life based on the computed cost from where it will conduct subsequent depreciations to arrive at fair values (Hitz, 2007, p.327).

Problems on Measuring Property, Plant, and Equipment

The management of Woolworths Limited is likely to encounter problems when estimating the useful lives of the assets. Notably, the establishment of the period of effectiveness is based on the manufacturers’ recommendation and the administration’s experience. However, there is no guarantee that the two might give an accurate time (McDonough and Shakespeare 2015, p.97. Moreover, the usage of property further determines the likely period that a resource can stay. For instance, careless use might see a machine getting faulty before its estimated useful life comes to an end while a careful use or under usage use might prolong their lives (Goh, Li, Ng, and Yong 2015, p.136). As such, the measurement of fair value that is based on the useful life will be prone to errors that might either report a lower or higher amount than the exact value.

Additionally, the firm is likely to miss the exact cost of the self-constructed assets due to the difficulty in apportioning the overhead costs and poor recording of all financial transactions. Notably, the apportionment of the total expenses incurred is prone to errors of misallocation, thus, leading to either overvalued or undervalued the cost of the property (Hodder, Hopkins, and Schipper 2014, p.171).

Apart from the problem of allocation, the firm might end up having an overvalued or undervalued property if at the point of construction the cost of materials were either inflated or deflated. In such a case, the value of the complete property will differ from the ones of other companies within the industry (Magnan, Menini, and Parbonetti 2015, p.573). Therefore, a firm would meet challenges when trying to dispose of the assets especially when they were overvalued because the potential buyers will opt to purchase from the rest of the sellers who offer at relatively lower prices.

The use of straight-line method for depreciation might further lead to value estimation problems because an asset cannot undergo an exact extent of the tear and wear every year. Therefore, the deduction of a particular value at the end of the year would mean that the firm will accept to report marginally inaccurate values for the property. Another problem of using this method is the fact that the values of deduction are already predetermined though the company might end up having the property damaged beyond effectiveness before the year ends (Müller, 2014, p.546). In such a case, the company will have the asset removed from the list of its resources, and its remaining value expensed from the income statement, thereby, reducing the potential net profit.

Intangible Assets: Goodwill, Liquor and Gaming Licenses, and the Brand Name

The company measures goodwill at cost less any identified accumulated impairment losses at the initial recognition. The rest of the intangible assets that include brand names, Victorian gaming entitlements, and liquor and gaming licenses are measured by deducting amortization and any impairment from the cost (Woolworths Limited 2016, p.74). In the case that such assets are acquired during a business combination, then the cost is represented by the fair value at the date of acquisition. The management amortizes those assets with finite lives on a straight-line basis. However, the useful lives are reviewed and adjusted accordingly during each period.

Comment on Measurement Methods

The test for impairment and adjustment on fair value is significant because the intangible assets also lose or increase in value at some point. The recording of the goodwill at the point of acquisition and then testing it for impairment is practical because the value of the asset is prone to change. For instance, goodwill often reduces when the aspects that led to its rise are no longer equivalently useful (Hodder, Hopkins, and Schipper 2014, p.174). Some of the qualities that result in rising might include a high number of customers, highly skilled employees, and proximity to a busy industrial area.

Problems of Measuring Intangible Assets

The firm usually recognizes goodwill at the acquisition of another organization and includes it as part of the non-current assets. However, the fact that the value of goodwill is often an estimation makes it possible to either have it overvalued or undervalued, thus, increasing the chances of reporting the wrong amount in the statement of financial position (Hodder, Hopkins, and Schipper 2014, p.177). Once the company records a faulty figure, the subsequent test for impairment and reporting of fair values will be wrong because they will be based on wrong initial data.

Furthermore, it is not easy to perform an accurate estimation of goodwill and its impairment thereof. Typically, one would analyse the factors that contribute towards the assigned goodwill such as the proximity of the business premises to the potential buyers, a high number of the customer, and so on. However, it is not easy to quantify such quantities and primarily to determine the exact amount of impairment value. The persons concerned will only employ their experience and what seems reasonable to them in the course of valuation (Beyersdorf, 2013, p.21). Nevertheless, it is not possible to trust one’s judgment because they can be subjective on particular factors.

Apart from goodwill, the firm also meets estimation challenges with the rest of the intangible assets that include brand names, Victorian gaming entitlements, and liquor and gaming licenses. The firm will often encounter difficulties in estimating the useful lives and the fair values of the brand names and gaming benefits because there are no particular financial criteria of measurement rather than experience. Therefore, the subsequent reports on the fair values of the test for impairment and amortization might give inaccurate amounts, thereby, ending up overvaluing or undervaluing the net worth of the company.

Deferred Taxes

Comment on Measurement Methods

The firm’s approach to measuring deferred tax asset is practical because there are times that an organization might overpay tax and wait for a refund from the tax authorities (Hull and White 2014, p.52). As a result, it is proper to recognize the amount receivable as an asset because the organization will receive the refund by deducting the amount from the future tax remittances.

Problems in Measuring Deferred Taxes

Concerning deferred taxes, it is possible for the company to report a higher or lower value than the actual one because of errors in the accounting process. In as much as the enterprise uses its computed profits against the tax authorities amounts, the management meets the challenge of not reporting correct accounting profits from where they calculate the amount of payable tax. An accounting process often involves, and the accountants are likely to make mistakes in recording or even reporting some of the revenue and expenditures. In the case that they report more revenues than the actual one, then the firm is likely to report the inflated amount of taxes, thus, reducing the amount for the deferred tax assets (Herrmann, Saudagaran, and Thomas, 2006, p.64). On the other hand, a wrongful increase in the value of the expenses might see the firm report a higher amount of deferred tax assets than the expected figure. Once the company has recorded wrong information for the deferred tax, there is a leading possibility that all the subsequent values for the same asset will be faulty. That will be the case since the accountants in charge of the assets will often use the already recorded amounts to adjust the future figures after the periodical operations.

General Challenges

Apart from the particular challenges noted per the asset categories, there are common problems that the management is likely to encounter. First, there are always possibilities of a change in accounting rules and regulations, especially the ones that guide the rates of taxation (Perry 2002, p.61).

Computation errors also present a significant challenge in the process of coming up with a fair value (Perry 2002, p.59). Even though the accountants of an organization might be fully aware of the methods for determining the fair values, it is possible for them to make some substantial errors in the process. For example, one could use a wrong percentage in trying to calculate the value for depreciation, thereby, ending up decreasing or increasing the fair value of the asset under computation (Mackenzie, Coetsee, and Njikizana et. al, 121). Also, the person in charge could forget to use the carrying value and instead use the historical cost to deduct the current amount of depreciation.

Practicability of IASB’s Approach to Fair Value Measurement

IASB sets the guidelines for the IFRS, which recognizes the analysis and reporting of non-current assets at fair values (Hull and White 2014, p.50). IFRS 13 defines fair value as the price that one would receive when they sell an asset or transfer a liability in any orderly transaction to another party at the date of measurement (Mackenzie 2012, p.127). The standard recommends three valuation techniques that include income, cost, and market approach. However, Woolworths Limited uses the cost method where it arrives at an amount that one requires to replace the asset, thus, being the fair value.

At least, it is important that an organization reports its assets at the latest fair to give a reflection of the net worth of the business or the accurate valuation of a particular asset (Libman and Feldman, 2013 p.97). The application of fair value further makes it difficult to manipulate a firm’s net income because all the expenses that arise as a result of depreciation and amortization are accurately computed (Barker and Schulte 2017, p.58).

Even though the measurement of fair value aims at obtaining the rightful valuation of a company’s assets, it is not practical for the enterprises whose non-current assets are not actively traded (Leggett, Wilkins, and Clark 2015, p.160). Such organizations would only require those who invest in them and the reporting using fair value can only lead to the dissatisfaction of both the existing and potential investors, especially during economic turbulent times (Christensen and Nicolaev 2011, p.740). It is likely that the reported values might be lower than what they are in the market using this approach. As a result, it will only lower the demand for the particular companies stocks given that the potential shareholders will see the great reduction in net worth. Therefore, it is not a reasonable technique for the organizations that might not be engaged in dangerous trading.

Overall, Woolworths Limited’s principal non-current assets include Property Plant and Equipment, intangible assets, and deferred taxes. These assets apart from deferred taxes are further into distinct categories such as buildings and motor vehicles for the case of Property Plant and Equipment. On the other hand, the intangible assets comprise goodwill, liquor and gaming licenses, and the brand name. Regarding the measurement of fair value, the company uses several acceptable methods to arrive at the values before reporting in the financial statements. Some of the approaches include depreciation and impairment for the tangible and intangible assets. Meanwhile, the management uses the balance sheet method to find the exact amount for reporting. Despite using acceptable techniques, the firm might meet several challenges from such approaches. For instance, there could be calculation errors, misinterpretation of the accounting rules, and lack of proper judgment of the useful lives to attach to the fixed assets. The applications of the measurement of fair value follow the financial regulations as established by IASB. The concept behind the reporting of fair values is of relevance as it shows the practical cost of the respective assets as well as leading to the computation of a reasonable net worth of the firm. However, the measurement of fair values is not sensible with the businesses that are not actively traded in the market. For instance, the computed fair values might at times become lower than the market values, thereby, making the organizations less attractive to the potential shareholders. In the case of the actively traded firms, the potential investors will consider other factors such as profitability and the growth in shares.

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