HI5020_(1)_(1)[1]

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Trident University International *

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Nov 24, 2024

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Abstract The main requirement to start a company or to keep any organisation running is funds. There are many sources from which funds can be acquired by the company like from equity, loan, debt instruments and more. Each method of acquiring funds have its own merits and demerits. This report will explain us through a practical approach as to what sources of fund have been selected by ASX listed companies. We will also learn about AASB 137 treatment of 'Provisions, Contingent Liabilities and Contingent Assets'. Also, we will understand categories of asset recorded by the company and their measurement basis. For the purpose of the report, companies that have been selected are Wesfarmer, Woolworth and Myer. All three companies are competitors and have several departmental stores across Australia.

Contents Abstract ................................................................................................................................................ 1 Introduction .......................................................................................................................................... 3 About the company .......................................................................................................................... 3 Sources of fund of selected company ................................................................................................... 5 Wesfarmer ........................................................................................................................................ 5 Woolworth ........................................................................................................................................ 5 Myers ................................................................................................................................................ 5 Evolution of sources of fund in past two year .................................................................................. 6 Wesfarmer ........................................................................................................................................ 6 Woolworth ........................................................................................................................................ 6 Myers ................................................................................................................................................ 6 Internal and external fund comparison ................................................................................................. 7 Wesfarmer ........................................................................................................................................ 7 Woolworth ........................................................................................................................................ 7 Myers ................................................................................................................................................ 8 Merits and demerits of different sources .............................................................................................. 8 Borrowings ....................................................................................................................................... 8 Equity ............................................................................................................................................... 8 Reserves ............................................................................................................................................ 8 Types of liability reported .................................................................................................................... 9 Wesfarmer ........................................................................................................................................ 9 Woolworth ........................................................................................................................................ 9 Myers .............................................................................................................................................. 10 Key provisions AASB 137 ................................................................................................................. 11 Provision ......................................................................................................................................... 11 Contingent liabilities ...................................................................................................................... 11

Contingent asset ............................................................................................................................. 11 Reference of AASB 137 in selected companies annual report .......................................................... 12 Wesfarmer ...................................................................................................................................... 12 Woolworths .................................................................................................................................... 12 Myer ............................................................................................................................................... 12 Categories of asset recorded by selected companies .......................................................................... 13 Wesfarmer ...................................................................................................................................... 13 Woolworths .................................................................................................................................... 13 Myers .............................................................................................................................................. 13 Measurement basis of asset recorded ................................................................................................. 13 Wesfarmer ...................................................................................................................................... 13 Woolworths .................................................................................................................................... 14 Myers .............................................................................................................................................. 14 Conclusion .......................................................................................................................................... 15

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Introduction Funds are the fundamentals of any organisation in order to begin its operation and continue it. A company might fail in long run even though if it is profitable if they do not manage the funds properly. For any activity be it investment, day to day operation and growth strategy fund is the basis requirement. There are many sources from which fund can be acquired by an organisation. Sources like equity, preference share, debt instruments, bank loan can be used to acquire funds to fulfil companies’ requirement. Each source of funds has its own merit and demerits attached to it. While raising funds using equity dilutes the ownership, using debt sources brings fixed interest obligations in the organisation making it riskier (Cooper and Sherer, 1984). Selecting the source to acquire fund is an important budgeting task. Selecting which source to use also depends upon the nature of requirement whether it is short term or long term and the amount required as well. Generally, organisation prefer using equity or retained earnings to fund long term requirements than using debt sources. In order to understand the different sources of funds used by organisations, we will be following a practical approach in this assignment. Rather than just talking about different sources of funds and its merits and demerits, we will select three ASX listed company and see using their annual reports, the sources of funds used by them. For the purpose of this assignment, the companies that have been selected are Wesfarmers, Woolworths group and Myer. In this report, we will begin with analysing the different sources of fund that are used by the three companies selected, we will also discuss about the merits and demerits of these sources and the changes that has happened in the past two years that is financial year 2022 and 2021. Further we will also discuss about the categories of asset of each company and the measurement basis used by them (Grant and Visconti, 2006). Further, we will also discuss about the provision of AASB 137 and whether this standard has been referenced by the companies selected in their annual report. About the company The first company that have been selected is Wesfarmers. Wesfarmers is one of the biggest listed companies in Australia and has a chain of departmental stores. Wesfarmers diverse business covers home improvement, outdoor living and building materials; general merchandise and apparel; office and technology products; health, beauty and wellbeing products; wholesale pharmacy distribution and many more.

The second company that has been selected is Woolworth group. Woolworth is in same business line as Wesfarmers and has a chain of departmental stores in Australia. Woolworth is more focused on B2C food, and has less diverse portfolio as compared to Wesfarmers but it is second in this segment in Australia in terms of market. The third company that has been selected is Myer. Myer is also a competitor of Wesfarmer and Woolworths. Myer has 58 departmental stores across Australia. Their product range includes womenswear, menswear, childrenswear, beauty, homewares, electrical goods, toys and general merchandise.

Sources of fund of selected company Wesfarmer The major sources of funding for Wesfarmer are equity including reserves and loan. Lease is source of funding for asset financing however, there will be no inflow of funds therefore it has not been shown as a source of funds. Particular 2022 ($m) 2021 ($m) Category interest-bearing loans and borrowings 988 950 Current interest-bearing loans and borrowings 3970 2072 Non- current Equity 7981 9715 Non- current Total 20062 19842 Woolworth Similar to Wesfarmer, Woolworth also has two sources of fund that is borrowings and equity. Particular 2022 ($m) 2021 ($m) Category Borrowings 354 119 Current Borrowings 3938 2753 Non- current Equity 6104 1739 Non- current Total 22867 16627 Myers Myers has just one difference as compared to the other two companies. There are no current loan or borrowings for Myers. Also the company has taken low amount of borrowings and raised funds more from equity source (Schaltegger, Etxeberria and Ortas, 2017). Particular 2022 ($m) 2021 ($m) Category Borrowings 59 66.8 Non- current Equity 267.4 226.9 Non- current Total 2025.6 2029.2

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Evolution of sources of fund in past two year Wesfarmer In the below table we can see that Wesfarmer has increased its long-term borrowings by approximately 92% which has resulted in increase of debt equity ratio as well. Wesfarmer has also reduced its equity as a result of negative capital return however the same has been offset to an extend by good profits in the year 2022. Particular 2022 ($m) 2021 ($m) Change from 2021 to 2022 Percentag e change interest-bearing loans and borrowings 988 950 38 4.0% interest-bearing loans and borrowings 3970 2072 1898 91.6% Equity 7981 9715 -1734 -17.8% Total 12939 12737 Debt equity ratio 0.62 0.31 Woolworth Both borrowing current (~198%) and equity (251%) has increased significantly as compared to last year. This shows that company is investing highly in its business. The major source of increase of equity is retained earning which has increased due to increase in profitability of the company (Brealey, Myers, Marcus, Mitra, Maynes and Lim, 2007). The debt equity ratio of the company has also improved from last year. Particular 2022 ($m) 2021 ($m) Change from 2021 to 2022 Percentag e change Borrowings current 354 119 235 197.5% Borrowings non-current 3938 2753 1185 43.0% Equity 6104 1739 4365 251.0% Total 10396 4611 Debt equity ratio 0.70 1.65 Myers Myer’s borrowing has reduced by a little and their equity has increased by a little. There is not much significant changes in debt equity ratio as well. Particular 2022 ($m) 2021 ($m) Change from 2021 to Percentag e change

2022 Borrowings non-current 59 66.8 -7.8 -11.7% Equity 267.4 226.9 40.5 17.8% Total 326.4 293.7 Debt equity ratio 0.22 0.29 Internal and external fund comparison Wesfarmer Wesfarmer does not have investment internally as their sum of reserves and retained earnings are negative. Particular 2022 ($m) 2021 ($m) interest-bearing loans and borrowings 988 950 interest-bearing loans and borrowings 3970 2072 Issue capital 13574 15826 Reserved share -102 -102 External fund 18430 18746 Retained earning 485 60 Reserves -5976 -6069 Internal fund -5491 -6009 Total 12939 12737 Percentage externally generated 142% 147% Percentage internally generated -42% -47% Woolworth In case of Woolworth, the company has &5 generation of fund internally and rest externally in year 2022. Particular 2022 ($m) 2021 ($m) Borrowings current 354 119 Borrowings non-current 3938 2753 Contributed equity 5207 5253 Non-controlling interest 124 360 External fund 9623 8485 Reserves -7400 -6989 Retained earnings 8173 3115 Internal fund 773 -3874 Total 10396 4611 Percentage externally generated 93% 184% Percentage internally generated 7% -84%

Myers Myers is not only getting fund externally but they are also covering the losses through external funds. Particular 2022 ($m) 2021 ($m) Borrowings non-current 59 66.8 Contributed equity 737.1 737.7 External fund 796.1 804.5 Accumulated losses -477.3 -514 Reserves 7.6 3.2 Internal fund -469.7 -510.8 Total 326.4 293.7 Percentage externally generated 244% 274% Percentage internally generated -144% -174% Merits and demerits of different sources Borrowings Borrowings is a cheap source of finance as there is a fixed obligation that is the interest that has to be paid and nothing over and above that. However, borrowings bring in high risk with itself. There is fixed interest that must be paid irrespective of the whether there is profit and loss. Borrowings is not suited for long term financing and huge funds are also not available. Equity Equity is less risky as it depends upon the company whether they want to pay dividend or not even when there is profit. However, equity dilutes the ownership and owners expects a lot in return which makes this costlier. Equity funding is suited for long term financing and when huge funds are required (Brealey, Myers, Allen and Krishnan, 2006). Reserves Reserves are internal funding source. Nothing in return is required as this is internal source. There is no risk attached as well and best source of funding. However, the availability of internal funding is limited.

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Types of liability reported Wesfarmer Wesfarmers has reported the liabilities mentioned in below table. Trade payable are related to vendor payments, then there is short term and long term borrowing, then there is short term and long term lease liability, income tax payable is related to tax liability payable to government, short term provisions are mainly related to employee benefits and self-insured risk, derivative are related to hedging contracts and long term provisions are related to employee benefits, self-insured risk and restructuring & make good. Particular 2022 ($m) 2021 ($m) Trade and other payables 5362 4234 Interest-bearing loans and borrowings 988 950 Lease liabilities 1100 969 Income tax payable 0 349 Provisions 1154 1152 Derivatives 2 43 Other 287 218 Total current Liability 8893 7915 Interest-bearing loans and borrowings 3970 2072 Lease liabilities 6023 6136 Provisions 374 374 Derivatives 30 2 Total non-current Liability 10397 8584 Total liabilities 19290 16499 Out of the above, short term and long-term loans and borrowings are interest bearing. Lease payment includes the interest amount in it. Woolworth Woolworth has reported the liabilities mentioned in below table. Trade payables are related to vendor payments, then there is short term and long-term borrowing, then there is short term and long-term lease liability, current tax payable is related to tax liability payable to government, other financial liability includes derivatives and put options over non-controlling interest, provisions include employee benefits, self-insured risk and Restructuring, onerous contracts, store exit costs, and other (Hassan and Marston, 2019).

Particular 2022 ($m) 2021 ($m) Trade and other payables 7002 6467 Lease liabilities 1572 1495 Borrowings 354 119 Current tax payable 12 252 Other financial liability 109 165 Provisions 1680 1518 Other current liabilities 0 7870 Liabilities associated with assets held for sale or distribution 21 5231 Total current Liability 10750 23117 Lease liabilities 10899 10521 Borrowings 3938 2753 Other financial liability 690 251 Provisions 846 804 Other non-current liabilities 46 51 Total non-current Liability 16419 14380 Total liabilities 27169 37497 Out of the above, short term and long-term borrowings are interest bearing. Lease payment includes the interest amount in it. Myers Myers has reported the liabilities mentioned in below table. Trade payables are related to vendor payments, then there is long term borrowing, then there is short term and long term lease liability, Current tax liability is related to tax liability payable to government, short term provisions are mainly related to employee benefits and self-insured risk, derivative are related to hedging contracts. Particular 2022 ($m) 2021 ($m) Trade and other payables 429.3 353.3 Lease liabilities 144.2 156.2 Provisions 67.7 63.1 Derivative financial instrument 0.6 1.1 Current tax liability 23.8 16.4 Other liabilities 0.1 0.2 Total current Liability 665.7 590.3 Borrowings 58 66.8

Lease liabilities 1555 1579.3 Provisions 4.4 4.8 Derivative financial instrument 0.1 0 Total non-current Liability 1617.5 1650.9 Total liabilities 2283.2 2241.2 Out of the above, long-term borrowings are interest bearing. Lease payment includes the interest amount in it. Key provisions AASB 137 AASB 137 deals with the recognition criteria of provisions, contingent asset and contingent liability. Provision As per AASB 137, a provision must be recognised when a present obligation arises due to some past event, and it is probable that outflow of resources will be required to settle the obligation. Provision should be recognised only when reliable estimate can be made. Contingent liabilities An entity should not recognise contingent liability however, such contingent liability should be disclosed unless possibility of outflow of resources is remote. Where an entity is jointly and severally liable for an obligation, the part of the obligation that is expected to be met by other parties is treated as a contingent liability (Kane, 2004). Contingent liabilities are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. Contingent asset An entity should not recognise contingent asset. Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the entity. A contingent asset is disclosed if inflow of economic benefit is probable. Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial report.

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Reference of AASB 137 in selected companies annual report Wesfarmer The company has given a note that they have applied the amendment to the accounting standard AASB 137 which is effective from 1 st January 2022 and will be adopted by them. Contingent liability – Wesfarmer has given a note that certain companies within their Group are party to various legal actions that have arisen in the normal course of business. It is expected that any liabilities arising from such legal action would not have a material effect on the Group. Contingent asset – no note is given Provision – the company has reported certain provisions like employee benefits, Self- insured risk, restructuring and make good and certain other provisions. These provisions are classified as both short term and long term. Woolworths Contingent liability – Woolworth has given a note on contingent liability. They have disclosed that the group has entered into a guarantee but the probability of making a payment against those guarantees is remote. Guarantees in normal course of business relating to conditions set out in development applications and for the sale of properties; and guarantees against workers’ compensation self-insurance liabilities as required by State work cover authorities (White, 2009). Contingent asset – no note is given Provision - the company has reported certain provisions like employee benefits, Self- insured risk, restructuring, onerous contract, store exit cost and others. These provisions are classified as both short term and long term. Myer Contingent liability – Mayer reported that the parent company did not have any contingent liability. However, the group had contingent liability in relation to guarantee. The group has issued bank guarantee of 32.3 million $. However, there is significant uncertainty about future payments. Contingent asset – no note is given Provision - the company has reported certain provisions like employee benefits, restructuring, workers compensation and other provisions. These provisions are classified as both short term and long term.

Categories of asset recorded by selected companies Wesfarmer Wesfarmer has classified asset into two groups that is current and non-current. Current assets are further classified into cash and cash equivalent, trade receivable, inventories, income tax receivable, derivatives and others. Non-current asset is further classified into investment in associate and joint venture, other financial asset, deferred tax asset, property plant and equipment, goodwill and intangible asset, mine properties, right of use asset, derivatives and others (Orlitzky, Schmidt and Rynes, 2003). Woolworths Woolworths has classified asset into two groups that is current and non-current. Current assets are further classified into cash and cash equivalent, trade and other receivable, inventories, other financial asset and other current asset. Non-current asset is further classified into trade and other receivable, other financial asset, lease asset, property plant and equipment, intangible asset, investment accounted for using the equity method and other non-current asset. Myers Myers has classified asset into two groups that is current and non-current. Current assets are further classified into cash and cash equivalent, trade and other receivable and prepayment, inventories, and derivative financial instruments. Non-current asset is further classified into property plant and equipment, right of use asset, intangible asset, deferred tax asset, derivative financial instrument and other non-current asset. Measurement basis of asset recorded Wesfarmer Particular Measurement basis Cash and bank deposit Amortised cost Receivable Amortised cost

Inventories Lower of cost and net realisable value Other financial asset Fair value through other comprehensive income Property plant and equipment Cost of asset less accumulated depreciation Goodwill and intangible asset initial recorded at cost and then at cost less accumulated impairment Mine properties Development expenditure is capitalised and carrying value is measured at cost Woolworths Particular Measurement basis inventories Lower of cost and net realisable value Trade receivable initially recorded at fair value and subsequently at amortised cost Non-current asset Lower of carrying amount and fair value less cost of sell Derivatives Fair value through other comprehensive income Myers Particular Measurement basis Trade receivable initially recorded at fair value and subsequently at amortised cost inventories Lower of cost and net realisable value Property plant and equipment Cost of asset less accumulated depreciation Goodwill and intangible asset initial recorded at cost and then at cost less accumulated impairment

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Conclusion From the above it is clear that there are multiple ways in which funds can be acquired. Each method has its own benefits and disadvantages. However, selecting which method to use to acquire the funds depends upon the risk that the company is willing to take, period for which fund is required, availability from different sources and amount of fund required. In the above analysis we can see how the three selected companies that are Wesfarmer, Woolworths and Myers has acquired their funds, what is their debt equity ratio and how it has changed over two years. Further in the above report, we have also analysed the balance sheet of the selected companies starting from liabilities and then moving on to the asset. In liabilities, more focus has been placed on provisions and contingent liabilities as these two are easily confused therefore it was necessary to properly explain the difference in definition and reporting of these two.

References Cooper, D.J. and Sherer, M.J., 1984. The value of corporate accounting reports: arguments for a political economy of accounting. Accounting, Organizations and Society, 9(3-4), pp.207-232. Grant, R.M. and Visconti, M., 2006. The strategic background to corporate accounting scandals. Long range planning, 39(4), pp.361-383. Schaltegger, S., Etxeberria, I.Á. and Ortas, E., 2017. Innovating corporate accounting and reporting for sustainability–attributes and challenges. Sustainable Development, 25(2), pp.113-122. Brealey, R.A., Myers, S.C., Marcus, A.J., Mitra, D., Maynes, E.M. and Lim, W., 2007. Fundamentals of corporate finance. Brealey, R.A., Myers, S.C., Allen, F. and Krishnan, V.S., 2006. Corporate finance (Vol. 8). Boston et al.: McGraw-Hill/Irwin. Hassan, O.A. and Marston, C., 2019. Corporate financial disclosure measurement in the empirical accounting literature: A review article. The International Journal of Accounting, 54(02), p.1950006. Kane, E.J., 2004. Continuing dangers of disinformation in corporate accounting reports. Review of Financial economics, 13(1-2), pp.149-164. White, L., 2009. Resource consumption accounting: Manager‐focused management accounting. Journal of Corporate Accounting & Finance, 20(4), pp.63-77. Orlitzky, M., Schmidt, F.L. and Rynes, S.L., 2003. Corporate social and financial performance: A meta-analysis. Organization studies, 24(3), pp.403-441.

HI5020_(1)_(1)[1]

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