Corporate Accounting Plan: Evolution, Merits and Demerits of Fund Sources
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Corporate accounting aims to communicate about a firm’s assets and liabilities to the stakeholders. It helps in offering a full suite of services for accounting and finance functions on the higher-end offerings, which drives maximum value across enterprises. This report aims to discuss different fund sources and its evolution, merits, and demerits of various fund sources used by Caltex Australia Limited and Woolworths Group. Further, a discussion will be on AASB 137, its reference to the company, categories of assets recorded, and the measurement basis used by both the companies. This report concludes that both companies have opted for equity and debt as their fund sources. They have not made any reference to AASB 137, however, fulfilled most of the conditions of this accounting standard.
Corporate accounting is a special branch of accounting, which is dedicated to the preparation of the company’s final accounts, their interpretation, and analysis as well as accounting for special events such as preparation of consolidated balance sheets. The activity of corporate accounting is performed normally for ascertaining the operational and financial status of the company. Corporate accounting makes sure the company’s financial activities comply with regulations and laws stipulated by the oversight bodies. It helps in confirming that activities of the business are in tune with the policies of the organization (Avdjiev, Chui and Shin 2014).
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This report aims to identify various sources of the fund generated by two companies, Caltex Australia Limited and Woolworths Group and provide an insight into the evolution of these funds. Further, a discussion will be made on the percentage of internally and externally generated fund sources, merits and shortcomings of each fund source and the different types of liabilities shown in selected companies. Moreover, an examination of key provisions under AASB 137 and its reference to the select companies will be made. Lastly, identification and examination of different asset categories and the measurement basis used by the companies for each asset class will be discussed in detail.
Background of Entity
Caltex Australia Limited
Caltex Australia Limited is the Australian convenience retailer and transport fuel supplier company. It is engaged in purchasing, refining, marketing and distributing petroleum products in the Australian market. The products consist of motor oil, petroleum, diesel fuel, lubricants, and jet fuel. The company also operates service stations, fast food stores, and convenience stores. Caltex Australia Limited is a locally-owned publicly listed entity that derives revenue from wholesale, refinement and petroleum retail. It employs approx. 6,600 employees that operate in Singapore, Australia, and New Zealand and are administered from Sydney head office (Caltex. 2020).
Woolworths Group Limited
Woolworths Group is one of the biggest listed companies in Australia which is majorly based upon retail operations. The company engages in operating general merchandise supermarkets and consumer goods as well as the procurement of liquor and food items. It also has its footprint in the hotel industry consisting of pubs, gaming operations and accommodations. Woolworths Group serves its customers in the countries of Australia and New Zealand (Woolworthsgroup.com.au. 2020).
The sources of fund (based on time) can be short term, medium term and long term with the help of which an entity raises its working capital, shares and bond capital, and long-term capital respectively. The entity can select any fund sources depending upon requirement and gestation period of project that must be financed. Business organization often require capital funding or external funding in order to expand their business into the new locations and markets as well as investing in the research & development for fending off competition (Muritala 2018).
The company raises funds either by using debt or by the equity. Equity is the cash paid into business, either own cash of owner or the cash contributed by one or more than one investor. The investments of equity are certified by issuing the shares in entity. The issuing of shares is in direct proportional to investment amount. Further, fund obtained by incurring debt is second major funding source. This is borrowed from lender at the fixed interest rate and with the predetermined date of maturity. The principal amount is required to be paid back in full by fixed stipulated date, however, periodic repayments of the principal can be part of loan arrangement (Mahdaleta 2016).
In case of Caltex Australia Limited, the fund sources used by company from year 2016-2018 includes equity and debt.
Also, in case of Woolworths Group, the fund sources used by the company from the year 2017-2019 includes equity and debt source of financing.
The debt and equity financing can be seen in the balance sheet of the companies under the ‘Non-current liabilities’ section and the ‘Total equity’ section respectively. The actual amount of debt and equity financing is discussed in the following headings ‘Evolution of the Fund Sources’.
Evolution of the Fund Sources
The evolution of the sources of the fund is done by the entity for their need to raise external sources of funds, investment in the research and development, capital funding for the expansion or fending off the competition. The entities require to raise funds at a certain point in time for the development of products as well as expansion in the new markets.
In the case of Caltex Australia Limited, the uses of long-term debt have been increased over the years. The long-term debt was $990,063 in 2016(reference: consolidated Balance Sheet 2016, Total non-current liabilities), which reduced to $888,650 in 2017 and again it increased to $1,144,365 in 2018. Moreover, the equity of the company has been increased over the years. The total equity of company was $2,810,215 in 2016 that increased to $3,107,901 in 2017 and again it increased to $3,389,064.
In the case of Woolworths Group, the long-term debt has decreased then increased across the three years period. The long-term debt of the company was $4,215m in 2017 that reduced to $3,513m in 2018 and then it increased to $4,202m in 2019. Further, the equity of the company has been increased then decreased across three years. The total equity of the company was $9,876m in 2017 that increased to $10,849m in 2018 and lastly it reduced to $10,669 in 2019.
Percentage of Internally and Externally Generated Funds
The funds of the company can be generated either internally or externally. The funds generated internally are realized by the company’s efforts or by operations. These are the funds that are not borrowed or realized by other external means. Equity financing is one of the most popular financing models because capital is generated internally by the business. Moreover, entities try to obtain external financing sources when they are not able to finance the expenditure with money generated from operations (Vătavu 2015).
The percentage of internally generated funds of Caltex Australia Limited is 64% in 2016, 71% in 2017 and 66% in 2018. Further, the percentage of externally generated funds of Caltex Australia Limited is 36% in 2016, 29% in 2017 and 34% in 2018 (Caltex. 2020). In addition, the percentage of internally generated funds of the Woolworths Group is 57% in 2017, 68% in 2018 and 61% in 2019. Moreover, the percentage of externally generated funds of Woolworths Group is 43% in 2017, 32% in 2018 and 39% in 2019 (Woolworthsgroup.com.au. 2020).
Merits and Shortcomings of Fund Sources
Equity Fund Source
Money raised from the equity fund sources has various advantages. Following are some of the major benefits:
Merits of Equity Source of Fund
- The source of financing through equity is committed to intended projects of the business.
- The equity source of finance is a permanent solution for the entity’s financial requirements.
- The financing through equity helps to provide leverage to management to focus on a continuous basis for fulfilling core objectives.
Shortcomings of Equity Source Fund
- Financing through equity sources is a time-consuming and costly affair. The equity share investment is believed to be a highly risky investment.
- The dividend distribution to the shareholders is not a tax-deductible expense. On the other hand, interest expenses are the eligible expenses for a tax benefit (Akeem et al. 2014).
- Financing through equity is the most difficult way of getting funds. This does not require different statutory compliance. However, it consists of various other costs, such as brokerage expenses.
- It consists of various legal as well as regulatory issues for the purpose of compliance. Hence, this is a sophisticated process to start with.
- The funds raised through equity dilutes the control of existing shareholders (Rouf 2015).
Debt Fund Source
Merits of Debt Fund Source
- One of the major benefits of financing through debt is maintaining complete ownership by the entity. The benefit of maintaining ownership relates to having complete control over the decisions made on behalf of the company (Enekwe, Agu and Nnagbogu 2014).
- The next benefit of financing through debt is receiving deductions by the entity for interest paid on debt.
- The use of debt source of financing by the company raises capital in a flexible manner in comparison to financing through equity.
- This financing source is less complicated and equally less expensive (Einiö 2014).
Shortcomings of Debt Fund Source
- The major shortcoming of debt financing is that the entity is obligated to pay back the borrowed principal along with interest (de Almeida and Eid Jr 2014).
- Financing through debt affects the business credit rating. The business organization is risky if it has a greater amount of debt in comparison to equity amount.
- The business that seeks debt source of finance is required to meet the lender’s requirement of cash. This means they are required to have a good balance of cash reserve (Dopson 2018).
Liabilities shown in the Balance-Sheet
In the case of Caltex Australia Limited, the total liabilities of the company are classified into two parts, which include “current liabilities” and “non-current liabilities”. Further, this is classified into “interest-bearing liabilities” and “non-interest-bearing liabilities”. The “interest-bearing liabilities” include short-term and long-term “interest-bearing liabilities”. Moreover, the “non-interest-bearing liabilities” include “current tax liabilities” and short-term and long-term ‘payables”, “employee benefits” and “provisions” (Caltex. 2020).
In the case of Woolworths Group, the total liabilities are divided into two categories, which include “current liabilities” and “non-current liabilities”. The “interest-bearing liabilities” include short-term and long-term “borrowings”. Further, the “non-interest-bearing liabilities” includes short-term “trade and other payables”, “current tax payable”, short-term and long-term “other financial liabilities”, short-term and long-term “provisions” and “other non-current liabilities” (Woolworthsgroup.com.au. 2020).
Key Provisions under AASB 137
The accounting standard provision of AASB 137 ensures suitable recognition criteria and measurement bases that are applied to contingent assets, provisions and contingent liabilities as well as adequate information level is disclosed in notes to enable the users to understand nature, amount and timing to these classifications. Companies are required to apply this standard in accounting for contingent assets, provisions, and contingent liabilities, except for those, which results from executory contracts, onerous contracts and those covered by other standards. Moreover, recognition of the provision is required to be done when the entity has a present obligation which is the result of past events (Florina and Iulia 2015). It is evident that the outflow of resources embodying economic benefits will be needed to settle down the obligations. Moreover, reliable estimates are required to be done with the number of obligations. In case, if these conditions are not met then provision recognition will not be done. At the end of each reporting period, revision of provision is required to be done and the adjustment of this should reflect the current best estimate. Further, in case of no probability of requirement of the resource outflow embodying the economic benefits for settling obligations, there should be a reversal of provisions (Aasb.gov.au. 2020).
AASB 137 Reference in Company’s Annual Report
Both companies, Caltex Australia Limited and Woolworths Group has not made any reference to the accounting standard AASB 137, but both have fulfilled certain conditions of the accounting standard. In the case of Caltex Australia Limited, provision for the impairment loss is raised based on risk matrix for the expected losses of credit across categories of customers. The recognition of provision is when there is a present constructive or legal obligation as a result of a certain specific past event, which can be reliably measured and, it is probable that future sacrifice of the economic benefits will be required for settling down these obligations (Muritala 2018).
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Further, the company discusses certain items that are either not certain that it is required to make future payments or simply put, it might not be possible to measure amounts of future payments such as legal and other claims, bank guarantees and deed of the cross guarantee and the class order relief. Moreover, in the case of Woolworths Group, they define probability as a recorded liability which includes uncertainty over amount or timing, which will be required to be paid but the expected amount of settlement can be estimated reliably by the Group. The major provisions held by the company include self-insured risks, employee benefits, onerous contracts, and store exist costs. Moreover, the company defines contingent liabilities as potential future payments of cash but where payment likelihood is not considered to be probable or cannot be reliably measured (Woolworthsgroup.com.au. 2020).
Recorded Assets Categories
The assets categories of Caltex Australia Limited is divided into two parts, the first one is “current assets” and the second one is “non-current assets”. The “current assets” includes “cash and cash equivalents”, “receivables”, “inventories” and “others”. Further, “non-current assets” includes “receivables”, “investment accounted for using equity method”, “intangibles”, “plant, property and equipment”, “deferred tax assets”, “employee benefits” and “others” (Caltex. 2020).
The assets categories of Woolworths Group are classified into two parts, which are “current assets” and “non-current assets”. The “current assets” is consists of “cash and cash equivalents”, “trade and other receivables”, “inventories” and “other financial assets”. Further, “non-current assets” is consists of “trade and other receivables”, “other financial assets”, “plant, property and equipment”, “intangible assets” and “deferred tax assets” (Woolworthsgroup.com.au. 2020).
Basis of Measurement for Recorded Assets Class
In the case of Caltex Australia Limited, receivables are recognized at fair value and it is subsequently measured at the amortized cost less the losses of impairment. The measurement of the inventories is at a lower cost and the net realizable value. The cost is based on the principle of first in first out and consists of direct labor, direct material and an appropriate proportion of the fixed and variable overhead expenditure incurred in the inventories acquisition and carrying them into existing condition and location. ‘Goodwill arises on subsidiaries acquisition’ is stated at the cost less any accumulated loss of impairment. The acquisition of other intangible assets done by the Group is stated at the cost less accumulated amortization and the losses of impairment (Maas, Schaltegger and Crutzen 2016). The amortization is charged up with a consolidated income statement on the straight-line method over estimated useful lives of the intangible assets. Further, the measurement of plant, property, and equipment are at cost fewer impairment losses and the accumulated depreciation. The cost consists of expenditure, which is directly attributable to the asset’s acquisition. The self-constructed asset’s costs include direct labor, material costs, and appropriate production overheads proportion. The recognition of deferred tax is by using the method of balance sheet liability, the amount used for the purposes of taxation and assets and liabilities carrying amounts for the purposes of financial reporting (Watson 2015). The provided deferred tax amount is based on the expected manner of the settlement or realization of assets and liabilities carrying amount by using enacted tax rates or substantively enacted at the date of the balance sheet. Lastly, the unrealized gains that arise from the transactions with the associates and the joint ventures are being eliminated to the extent of the interest of Group. The unrealized losses arising from the transactions with the joint ventures and associates are eliminated in the same way as the unrealized gains, however, only to extent that there includes no impairment evidence (Caltex. 2020).
In Woolworths Group, the recognition of trade and other receivables are initially at the fair value and the measurement of it is at amortized cost by using effective interest method less the loss allowance. Generally, they have the terms of thirty days. The investment of Group in the listed equity securities are designated as the financial assets and at the fair value by other comprehensive income. Initially, the measurement of investment is at fair value with any recognized changes in the other comprehensive income (Al Ani and Al Amri 2015). Further, the initial recognition of the investment in associates are at the cost consisting of costs of transaction and it is accounted with the help of using the equity method and including profit or loss share of Group and the other associate's comprehensive income in investment’s carrying amount until the date on which the key influence ceases. The measurement of plant, property, and equipment of Group is done at the cost of fewer impairment losses, amortization, and depreciation. The self-constructed asset’s cost consists of materials costs, overheads proportion and direct labor. The development properties cost consists of holding, borrowing, and costs of development until the asset is complete (Woolworthsgroup.com.au. 2020). The depreciation of assets is based on a straight-line basis over their useful lives to the residual values. When parts of the plant, property and equipment’s item have different useful life then they account for separate assets. The goodwill of the company represents the excess of acquisition cost over the fair value of the share of acquired net identifiable assets (Watson 2015). Its measurement is done at cost less any accumulated losses of impairment. Further, the measurement of other intangible assets is at cost fewer impairment losses and amortization.
It can be stated from the analysis that both entities are using debit and equity as their funding sources. Moreover, the long-term debt and equity of Caltex Australia Limited has increased over the years. In the case of Woolworths Group, the long-term debt of the company has reduced initially, however, it has increased in the later years. The equity of the company has increased initially but then reduced in the later years.
Further, the percentage of internally generated funds is 64%, 71% and 66% from 2016-2018 and the percentage of externally generated funds is 36%, 29% and 34% from 2016-2018. In addition, the percentage of internally generated funds is 57%, 68% and 61% from 2017-2019 and the percentage of externally generated funds is 43%, 32% and 39% from 2017-2019. Further, it has been discussed that both the debt and equity fund sources have their own merits and shortcomings. In addition, different assets and liabilities categories, as well as AASB 137 provisions, have been discussed. Both companies have not referred to this accounting standard, but they have fulfilled certain conditions of the standard. The assets class of both companies includes short and long-term assets. Lastly, a rigorous discussion has been made regarding the measurement basis for each of the assets class used by both the companies.
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