concise Analysis of Business Report Letter of Advice Research Proposal

Pages: 4 (1406 words)  ·  Bibliography Sources: 4  ·  Level: Master's  ·  Topic: Business

SAMPLE EXCERPT:

[. . .] More importantly, it minimises the possibility of creative accounting (distorting financial information for selfish gains) (Bhattacharyya, 2011). Nonetheless, this method makes comparisons over time difficult. In addition, financial information users are often interested in present values as opposed to historical values.

The revaluation model on the other hand provides a more accurate representation of an organisation's asset position on a continuous basis depending on the prevailing market conditions (Zakaria et al., 2014). In addition, the model may result in a higher asset value, which would imply a stronger balance sheet. Nevertheless, the possibility of creative accounting cannot be ignored (Bhattacharyya, 2011). Overall, in spite of the likelihood of information distortion, the revaluation model provides a more reliable representation of property, plant, and equipment compared to the cost model since it reflects their current market prices, which most users of financial information are often interested in.

Intangible Assets

It is common for the value of brands reported in the annual report to differ from that reported by articles in business websites such as Business Insider. This discrepancy often emanates from the fact that not all intangible assets are captured in the balance sheet - "what is recorded is at historic cost using inconsistent policies and not revalued" (Intangible Business Ltd., n.d.). In other words, organisations tend to underreport brand values in their annual reports.

More importantly, it should be noted that accounting requirements for internally generated intangible assets such as goodwill and brand value tend to be extremely stringent. Unlike acquired intangible assets whose accounting is often comparatively straightforward, internally generated intangible assets are usually subject to additional recognition criteria (IFRS, 2014). Generally, these assets are not acknowledged as intangible assets (Chartered Accountants Australia and New Zealand, 2016). This is specifically because it is often difficult to reliably substantiate the costs and future benefits associated with them (Austin, 2007). In addition, internally generated intangible assets tend to be more uncertain compared to acquired intangible assets (Austin, 2007). On account of these two reasons, recognising internally generated as intangible assets would be inconsistent with the core attributes of financial information, particularly with respect to relevance, faith representation, and verifiability (Mindermann & Brosel, 2009).

There are practical examples wherein intangible assets have presented difficulties in valuing companies. An ideal example in this case is Standard Chartered's acquisition of Korea First Bank for £4 billion in 2005 (Intangible Business Ltd., n.d.). Out of this amount, goodwill was valued at £738 million. There were problems as there was no proper justification of how that amount had been arrived at.

Recommendation

Overall, it is highly likely that the information provided in Woolworths's 2015 annual report has been depicted in accordance with the six qualitative characteristics as described in the conceptual framework. Given its status and reputation, the organisation clearly understands the implications of providing financial information that does not exhibit those characteristics. Therefore, it is sensible for an investor to rely on the information provided in the organisation's annual report for their investment decision.

Yours faithfully,

Prime Accountants

Appendix: References

Austin, L. (2007). Accounting for intangible assets. University of Auckland Business Review, 9(1), 63-72.

Australian Accounting Standards Board (AASB) (2015). Conceptual framework for financial reporting. AASB Exposure Draft ED/2015/3.

Bhattacharyya, A. (2011). Essentials of financial accounting. 3rd edition. New Delhi: PHI Learning.

Chartered Accountants Australia and New Zealand (2016). AASB 138 intangible assets. Retrieved from: http://www.charteredaccountants.com.au/Industry-Topics/Reporting/Australian-accounting-standards/Analysis-of-AASB-standards/AASB-138-Intangible-assets?standard=

Ernst & Young (2015). Conceptual framework: objectives and qualitative characteristics. Retrieved from: http://www.ey.com/Publication/vwLUAssets/Supplement_86_GL_IFRS/$FILE/Supplement_86_GL_IFRS.pdf

Intangible Business Ltd. (n.d.). The FTSE 100's reporting of acquired intangible assets. Retrieved from: http://www.intangiblebusiness.com/uploads/2013/02/11/162-IFRS_3_The_First_Year.pdf

International Accounting Standards (IAS), n.d. IAS 16 -- Property, plant and equipment. Retrieved from: http://www.iasplus.com/en/standards/ias/ias16

International Financial Reporting Standards (IFRS) (2014). IAS 38 intangible assets. Retrieved from: http://www.ifrs.org/IFRSs/Documents/Technical-summaries-2014/IAS%2038.pdf

Mindermann, T., & Brosel, G. (2009). Does the capitalisation of internally generated intangible assets according to IAS 38 really provide useful information? Ekonomia Menedzerska, 6, 7-16.

Zakaria, A., Edwards, D., Holt, G., & Ramachandran, V. (2014). A review of property, plant and equipment asset revaluation decision-making in Indonesia: development of a conceptual model. Mindanao Journal of Science and Technology, 12, 109-128. [END OF PREVIEW]

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