Company Accounting - Technical Aspects of Consolidation - Assignment Example

• Question 1

Wesfarmers Limited is a conglomerate which is based out of Australia and headquartered in Perth, Western Australia. The business has various business dimensions which predominantly deals with retail but is also interested in manufacturing as well as distribution of chemicals and fertilizers. Coal mining is another contributor of wealth to the company along with industrial and safety product. It is a great achievement for it to become the largest company in Australia by its revenue. It is also considered as the Australia’s largest private employer.

• Composition of Groups

As of July 2015, Wesfarmers will provide a technical aspect of the consolidations made with the subsidiaries as well as other partners. After the establishment as well as commencement of the business, it had acquired and merged with a few companies and reflects a consolidated financial statement. The company has recorded an increase of 8.3% in their profit which currently stands to $2440 million in 2015. This is not only the profit made by the company itself but its subsidiary has also contributed a huge amount to the same. Some of the subsidiaries of the organizations are Coles, which it acquired for $22 billion and is also said to be one of the Australia’s successful takeover. Coles Group being a retail business provided the company with a better option to distribute their products. This has also been considered as the ideal acquisition as where dimension of business are into retail. It has many retail outlets which include national supermarket along with outlets of liquor, convenience as well as fuel retail. At the time of acquisition, the company had multiple numbers of full-service supermarkets, hotels, liquor shop and fuel and convenience store. Coles also had a multiple number of businesses which also included financial service as well as Coles online. It has also been complemented for its sustainable performance and better growth opportunities (Coles, 2014).

The company also acquired Bunnings which helped the company to enhance its distribution system of Home Improvement and Office Supplies. This portion of the group is trying to boost its customer value by reaching up to the customer, both digitally and physically. Bunnings was the retailer of home as well as outdoor living products. This company has improved the network of its stores through investing in existing outlets. This company has witnessed an increase of 11.1% in its earnings along with the sales growth 11.4% (Wesfarmers, 2015).

Kmart is again a subsidiary of this group which is a discount department store which also deals in the retail automotive services and also provides tire throughout the country. This store was first ever discounting department store in Australia. KTAS is one of the departments of Kmart which deals with automotive products.

Another subsidiary of this group is Target. It is a store retailer which deals in fashion products and also has a vision to make them affordable to various sets of peoples. This department or the part of the business deals in the apparel products as well as cosmetics.

WesCEF is again a subsidiary of Wesfarmers which deals in chemical, energy as well as fertilizers. There are mainly three business units in the same including chemicals, kleenheat and CSBP fertilizers. The chemical unit is one of the most important as CSBP supply country’s most of the demand for ammonia, ammonium nitrate as well as other industrial chemicals. The coal fields of Bowen Basin being a player in resource sector receives ammonium nitrate from Queensland Nitrates which is a joint venture of CSBP and Dyno Nobel Asia Pacific. CSBP also has a joint venture with the Coogee Chemicals to form Australian Gold Reagents which supplies sodium cyanide to the Australian gold mining sector. Australian Vinyls is supplier of polyvinyl chloride (PVC) is the parent company of ModWood, which manufactures wood-plastic for the purpose of composite screening as well as decking the products (Wesfarmers, 2015). The Wesfarmers resources are again a unit of the group which deals with mining of coal and produces metallurgical and steaming coal. The two coal mines are Curragh and Bengalla mines. The Bengalla mine is one where the business has interest of 40%. On the other hand, it also has an industrial and safety business deals with supplying of industrial work wear products (Wesfarmers, 2015). Therefore, such a vast dimension of businesses shows that the company is dealing within several industries and is earning from all of its business. Other than this, the company also invests in the BWP Trust, Gresham Partners and Wespine Industries.

• Question 2

The separate legal entity is the concept where the company has a separate identity from its owner. It is also same in case of the parent as well as the subsidiary companies (Burlington, 2015). In this case, the operations of the entire subsidiary are individually taken care of. The cost and profits associated with them are also monitored individually. Only during the final preparation of the statements all the costs and revenues are brought together and a consolidated financial statement is created (Wesfarmers, 2015).

Wesfarmers Limited has recorded the profit of $2440 million but it has been so after deducting the contribution of all the other subsidiaries of the company. Every business unit is operated individually and a managing director is appointed for the same. As in the case of Coles, it has recorded increases in its earnings by 6.6% and its standalone earning is $1783 million. It is a worthy competitor in the Australian food and grocery sector and even tops the list. This unit of business also makes its own strategies to remain the dominant players and increases its earning as well as revenues (Wesfarmers, 2015).

The home improvement and office supplies witnessed an increase of 11.1% growth in earnings and the sales grew by 11.4%. This is again considered as the figures that have been earned by this unit alone. Therefore, Bunnings actually strategizes its sales increase by valuing the customers and enhancing their experiences as well as improving their innovation. Kmart again recorded an increase in the earnings by 18% which stands to $432 million. Unlike others, Target witnessed a decrease in its revenue in the current year. The WesCEF also contributed a lot to the business as it individually recorded an increase in the operating revenue by $1.8 billion. The resource unit of the organization also witnessed an increase its revenues which currently stands at $1.4 billion and $50 million in profit making. The Industrial and Safety unit of business alone recorded revenue of $1.8 billion (Wesfarmers, 2015).

As the companies as well as its subsidiaries are separate legal entity, all the financial statements are brought together and are consolidated. In this case, the minority interest is separated and is provided to the subsidiary.

• Question 3

The financial year 2015 was marked as an achievement for the company as the group has delivered an excellent performance. However, the company is a public limited company and its shares trade on the Australian Stock Exchange. The companies being a giant one also have required a huge amount of funds to back its operations (Wesfarmers, 2015).

The debt levels of the firm witnessed an increase in the year if compared to the capital management of 2015. The acquisition of Pacific Brands Limited’s Workwear Group, the company took a debt. The acquisition 50% of the Coles credit card joint venture was also funded by debt from the credit book along with its interest in Quadrant Energy (Wesfarmers, 2015).

The company also tried to diversify its source of dept in order to maintain its presence in the debt market. Therefore, the Group issued seven-year bond to raise a further capital of $864 million. This was in 2014 but in 2015, the company further issued five and a half year floating and fixed bonds in the domestic market to raise another $500 million (Wesfarmers, 2015).

However, during its settlement the group repaid the A$500 million from the cash that was with the company. In year 2015, the company reduced its syndicate debt which was $750 million. It also repaid the A$756 million. Finance cost also decreased by 13.2% to $315 million. This was the result of low debt balance of the company. The returns to the shareholders are satisfactory and maintaining the efficiency of the capital structure is one of the main objectives of the organization. The company has maintained a proper capital structure policy. The capital which the company raised of about $2.6 billion was fully comprised of dividend investment plans as well as the share plans available for the employees. However, the company returned $1148 million to the shareholders through capital distribution of about $1 per share. They also distributed dividends to the shareholders (Wesfarmers, 2015).

• Question 4

Corporate governance refers to any kind of process as well as mechanism which is related to controlling and directing the corporation (Tricker, 2015). On the other hand, sustainability refers to the maximum utilization of resources and reducing the waste (Mekonnen et al., 2015.). The company has provided its subsidiaries with the equal policies of corporate governance, sustainability as well as audit committee. This has been seen in each and every subsidiary such as in Coles, it received many feedbacks regarding its sustainable performance. Coles put a huge effort in its product quality and safety which is the main subject of concern in most of the organization. It has also received green star rating in Australia for building the first environment friendly supermarket. The risk of the same is also tried to mitigate so that the business operations should run smoothly. On the other hand, Bunnings is also working towards achieving the title of socially responsible unit which is environmentally aware as well as economically viable. It also pursues its aim to preserve the environment by using environmental friendly products and reducing wastes. Both of these subsidiaries also calculate their costs and earnings in an independent ways following the rules of accounting. Kmart also focuses on sustainability where they cover the ethics, community as well as the environmental situation to enhance the safety of the team members. It also uses LED lights to reduce its costs and saves the energy. Similarly, Target also focuses on the improvement of the condition for the employees. Various strategies are taken into consideration audit, control management and the subject of saving electricity has also been provided importance. WesCEF is the most important part where the sustainability is mostly needed and it maintains the same. This unit of the company focused on the regulatory compliance and the environmental conditions are also kept in concern. Therefore, it reduced its green house gas emission to a huge extend. The resources units also focused a lot towards the sustainability as employee safety is their main concern and are also supporting the local communities during any kind of natural disaster (Wesfarmers, 2015).

• Question 5

Non-controlling interest, also known as minority interest is the portion of the ownership or shareholding of the subsidiary in its parent company. It is the amount over which the parent company does not have any interest as it is the share of the subsidiary (Memili, Misra and Chrisman, 2012). Generally, the minority interest is recorded in the shareholders portion of the balance sheet of the parent company. It is so because, it is the part of profit which belongs to the subsidiary and the parent company have no claim over it (Cotter, 2012).

Consolidated financial statement refers to a statement of accounts where the transactions of the parent company as well as the subsidiaries are recorded together. Therefore, when the profit is calculated after deducting the expenses from sales then that profit also consists of the share of the subsidiary (Robinson et at., 2015). However, when the standalone statement of the subsidiary is maintained then the profit is divided into two portions as per the agreement. When the subsidiary has the ownership portion of less than 50% then the amount which the particular company can claim is the minority interest and the parent company is bound to pay the same as per the agreed percentage (Leo et al., 2015). However, in the case of this company, the non-controllable interest is held by Wespine Ltd, BWP Trust and Gresham Group (Wesfarmers, 2015).

• Question 6

Goodwill is the value as well as the reputation of the firm in the market. In terms of accounting it is the value which the acquirer pays for a company beyond its actual market value (Hogan and Matuszewski, 2015; Baboukardos and Rimmel, 2014). There has been some of the acquisition where the company had to pay some percentage of amounts above its market value. In case of Coles and Bunnings, the company had to pay goodwill of 29.7% and 45.8% of the fair cost of those companies. Kmart is the one with the maximum goodwill as a result of its growing networks and higher returns on capital employed as the company paid 78.1% more than its value. However impairment is the reduction of the value of goodwill which has been witnessed by Target, This unit of the organization recorded an impairment of $667 million of goodwill. Goodwill is the item which is generally found on the asset side of the balance sheet of the organization (Wesfarmers, 2015).

• Question 7

Foreign exchange is one of the main concerns of any company as this can affect their business by a huge margin (Allayannis, Lel and Miller, 2012). If the business imports or exports its product then any foreign exchange fluctuation will impact the same (Towbin and Weber, 2013). In case of this company, the risk of fluctuation is mainly with the Kmart. This unit of company requires the product that needs to be imported and any negative fluctuation could highly impact the trade margins of the unit. In case of the WesCEF, its cost also depends on the exchange rate of the country and so it is monitored closely. Therefore, to mitigate the same, foreign exchange hedges are also put into action. In the resources unit most of the coals are exported to the Asian countries and any kind of fluctuation could affect the same. Besides hedging, the company also maintains a foreign currency translation reserve to cover any kind of uncertainty (Wesfarmers, 2015).

• Question 8

The memorandum presents almost all the aspect of the business and its subsidiaries. However, I being a responsible employee would like to provide some advice to the Directors of each subsidiary. The main subject of concern for the company is maintaining such performance by each of the units but on the same time, the returns to the shareholders should also increase. The company has aggressively acquired various companies and at the same time acquired their goodwill. Therefore, the company should put more effort on increasing its goodwill in the market and increasing its value. Target is the only unit which is recording low profit than that of previous year, therefore the reasons for the same should be identified and rectified. Sustainability and environment friendly process are also taken into concern and efforts are also clear which is appreciated. The company’s capital structure is also improved as per the reports and it is requested to maintain the same.