JB Hi-Fi - Current Financial Reporting Practices for Disclosures and Uncertainty - Case Study Example

JB Hi-Fi, Ltd Name Institution Date Executive Summary The amendments contained in the AASB 101Financial Reporting standards are expected to affect the financial reporting policies for corporations with regard to revenues recognition and comprehensive incomes, asset and financial instrument valuation. The AASB 101 requirements taking effect from Jan 1, 2013 focus on the standards relating to disclosures of the sources for estimation and uncertainty accounting in financial reporting for 30 June 2013. In compliance with these new and revised regulations, JB Hi-Fi Ltd is conducting a review of its financial reporting policies for fixed, financial and intangible assets valuation, risk and judgment policies disclosures for the company and its subsidiaries. This report outlines the various amendments and new regulations as affecting the company’s upcoming financial reporting for 30 Jun, 2013 and puts forward recommendations for adopting the standards for the company’s board of directors. Introduction The Amendment to Australian Accounting Standards Board (AASB) is the national agency tasked with developing and maintaining financial reporting standards governing both public and private sector organizations. These amendments are expected to change the financial reporting policies used by companies for reporting assets and liabilities, for reporting the activities of their subsidiaries in the financial reports and for disclosure of various risks estimated for financial instruments held with the companies. JB Hi-Fi is an Australian retailer for home consumer electronics, accessories and audio-visual entertainment material. Being Australian-based, the company stands to be affected by the new amendments taking effect for corporate financial reporting. The company should review its accounting policies to comply with the AASB 101 requirements for financial reporting in its June 2013 report. JB Hi-Fi, Ltd JB Hi-Fi operates a chain of retail store outlets for CD, DVD. Blu-Ray, video games and consumer electronics. The company is headquartered in Melbourne, Australia and currently operates 168 retail stores, with 155 being in the country and 13 in New Zealand. JB Hi-Fi was established in 1974 by John Barbuto and was later sold to Richard Bouris and David Rodd in 1983. The company was later purchased by private equity bankers and its senior management in 2000, and was registered on the Australian Stock Exchange in 2003. The company is also listed on the Standard and Poor’s Stock Index. The company recorded $3.13 billion in sales revenue for 2012 financial year with $104.6 million in after-tax profit (JB Hi-Fi Board of Directors, 2012, p.5). The company’s business strategy builds on the founder’s philosophy to provide specialist Hi-Fi electronic equipment and music recording at the cheapest prices. The retail chain stocks a wide range of home entertainment electronics, music, movies and videogames at highly competitive prices. AASB Standards and ASIC Requirements The AASB 101 compiled standards came into application beginning July 1, 2012 and came into full operation on Jan 1, 2013. The amendments are part of the financial reporting restructuring efforts aimed at improving the recognition and measurement criteria that may determine effectiveness of collective performance in corporations as an early signal for macroeconomic conditions. Recognition for this need comes about largely following the Global Financial Crisis in 2007-2010, which has been blamed partly on poor financial reporting for net worth of companies and financial instruments especially in the financial and real estate sectors in Western countries The changes in financial reporting for the country through the AASB 101 amendments is part of the efforts to bring reporting standards to par with new international accounting standards contained in the IAS 1 Presentation of Financial Statements issued by the International Accounting Standards Board (IASB). The AASB 101 amendments are also part of the Trans-Tasman convergence project that seeks to bridge the difference that existed between accounting reporting standards in Australia and New Zealand. The accounting changes in AASB 101 outline the new and amended requirements for financial reporting for related party disclosures, transaction and significant event disclosures in interim reports, additional disclosures for financial assets’ transfer, clarification of disclosures related to credit risk on financial instruments, and clarification of award-credits modalities for customer loyalty programs. The amendments precede other amendments to come into effect in 2012 – 2015 that apply new standards for major corporate accounting areas including consolidation, financial instruments, joint arrangements, revenue and leases. These further regulations will bring about extensive requirements for financial disclosures in companies. The changes taking effect in 2013 bring about relief from some disclosure requirements for non-public reporting companies because of the convergence of accounting reporting standards in the Trans-Tasman project. The new and revised requirements with 30th June 2013 applicability include the AASB 9 Financial Instruments, AASB 10 Consolidated financial Statements, AASB 12 Disclosures of interest in Other Entities, and AASB 13 Fair Value Measurement. Certain areas of focus for companies for the 30 June, 2012 financial reports have been identified affecting the financial reporting requirements relating to disclosures of the sources for estimation and uncertainty accounting. These are revenue recognition and deferral policies for expenses, asset values and related disclosures of assumptions, off-balance sheet arrangements and going concern arrangements. For revenue recognition, the accounting policies in companies are to be reviewed to ensure compliance to relevant financial reporting standards and adoption of policies aimed at accurate recognition of revenues put in place. For transactions where payment has been received upfront, documentation should indicate why the cash was received, and how and which type of asset the definition of the revenue fits. Accounting standards perceive revenue recognition as having an inherent risk for which an understanding of controls at the client’s should be obtained. Expenses incurred by the corporation should be recognized immediately in the comprehensive income statement unless its associated to an asset, while deferred expenses and other intangible assets reviewed to ensure they satisfy their definitions as such. In recording profit for the period, companies should ensure they appropriately allocate income and expenses items to profit and comprehensive incomes. The carrying amount of assets held by corporations in terms of goodwill, intangible assets, and property, plant and equipment needs to be reviewed. Particular standards under AASB136 Impairment of Assets require that impairment calculations consider the impact of newly introduced carbon tax and mineral rent tax on asset value with respect to the outflows related to the assets. The impairment indicators at the end of the financial reporting period should be disclosed and documented for relevant assets. Off-balance sheet arrangements where the company is the majority beneficiary for special purpose entities that are not to be consolidated in the financial statements should be reviewed and the rationale and details of any such arrangement adequately disclosed. For current and non-current liabilities classification, unless a corporation can defer settlement of a liability for at least 12 months after the financial reporting period, the liability must be shown as current. This includes bank loans due within 12 months after the reporting period, bank loans where one of the contractual terms has been breached and loans reviewed annually, and accommodation bonds due for immediate payment under circumstance beyond the corporation’s control. Corporate entities should include disclosures on estimates and accounting policy judgments along with their financial statement reports. These should contain relevant information enabling users of the statements to discern items that containing significant uncertainty in the analysis of financial position and performance of the corporation. Under AASB 7, companies are required to provide disclosures relating to risks from financial instruments that they hold. In particular, disclosures for ageing analysis used for financial assets that are past due but not impaired, impaired financial assets and significant assumptions and methods use in the valuation of financial assets where no observable market data is available. JB Hi-Fi’s Current Financial Reporting Practices for Disclosures and Uncertainty The adoption of the AASB 101 financial standards on the company’s financial reporting has potential effect on fair value determination policies for tangible, intangible and financial assets as well as provisions and contingencies for its financial statements. The principal accounting policies adopted by JB Hi-Fi in their financial reporting are based on the AASB and IASB pronouncements, and the Corporations Act of 2001 (JB Hi-Fi Board of Directors, 2012, p.57). The company used a historical convection for valuing financial and other assets and liabilities, while fair value through profit and loss from its financial assets including derivative instruments. Areas where assumptions and estimates were used have been indicated in the notes accompanying the financial statements for the company. Consolidated financial statements for the company include the assets and liabilities for all its subsidiaries. These encompass all entities, including special entities, over which the company holds control over the financial and operating policies stemming from ownership of more than half the controlling interests in the entities. These are fully consolidated from the date of transfer of control to the parent company with the acquisition method being used for accounting for the business combinations and investment in these subsidiaries being accounted for at cost in the various financial statements for JB Hi-Fi Ltd. The inter-company transactions, balances and unrealized gains between the entities and the parent company have thus been eliminated except for where evidence of the impairment of an asset being transferred is provided. Borrowings in the past have been recorded at fair value net of transactional costs, but are currently measured at their amortized cost. These have been classified as current liabilities. Derivative financial assets are recorded at fair value of the dates of entering the contracts and during disposal of the same. The company holds hedges for particular risk of certain cash flows of recognized assets and for net investment in foreign operations. The company documents the relationship between the hedge items and the hedging instruments used as well as the risk management objectives and strategy used in the transactions. Provisions are made for any amounts of dividends declared but still held with the company after the end of the financial reporting period. Goodwill and other intangible assets with an unlimited useful lifetime and thus not subject to amortization are tested for impairments either at the end of the financial year or when events or changes in circumstances suggest that they might be impaired. Investments and other financial assets including loans and receivables are carried in the financial statements at their amortized cost calculated using the effective interest method, with investments in subsidiary entities being measured at cost in the parent company’s financial statements. Investments in associates are measured using the equity method and the cost method in the consolidated financial statements and company financial statements respectively. Revenue recognition is made at fair value of the consideration receivable, recognized as revenue only when they can be reliably measured, when future financial benefits are assured and specific recognition criteria has been met for some items. These are based on historical values depending on the transaction type and arrangements in the transaction. Potential differences between JB Hi-Fi’s current practice and the accounting standard requirements In reviewing its financial reporting policies to comply with AASB 101 standards for financial reporting in June 2013, the company’s directors and internal auditors should look into the policies used in reporting of inter-company transactions and assets and liabilities held with its subsidiaries. The company should also review it reporting for risks in financial assets held in relation to the requirements for more disclosure details. Potential differences also exist in the reporting policies for current liabilities. Recommended actions to satisfy ASIC requirements In the financial reports for June 2012, the company should include more information describing the accounting modalities used in reporting risk for financial assets and hedges held by the company. These should indicate more detail describing the particular financial instruments being held by the company. For the financial reporting of the net assets and liabilities for its subsidiaries, the company should include more details indicative of the amount of risk inherent from these subsidiaries. The company should also rectify their financial reporting policies for classifying current liabilities for those liabilities identified as being due within one year from the end of the June 2013 financial reporting period. Conclusion In comparing the new and amended standards in the AASB 101 areas of focus for 30 Jun, 2013 financial reporting with the accounting policies currently in use by the firm, certain gaps emerge that need to be addressed. The company should review its reporting practices for its subsidiaries in its consolidated financial reports and for classification of current liabilities. The company’s board of directors should also focus on the area of risk disclosure for financial asset instruments held by the company. References Australian Accounting Standards Board (2010), AASB 101 Presentation of financial statements, Canberra, viewed 14 July 2011, JB Hi-Fi Board of Directors (2012), JB Hi-Fi Annual Report for 2012, Melbourne, Australia: JB Hi-Fi Ltd. Read More