An Evaluation of the Financial Reporting by the Warehouse Group Limited: A Focus on the Conceptual Framework and NZ IAS 19 (Employee Benefits) and NZ IFRS 16 (Leases)

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Introduction

One of the most important functions of the management of an organization is to deliver shareholder objectives. Usually, these shareholder expectations are founded on profit realization and growth in terms of the company financials. In this report, the focus will be on identifying the role of the conceptual framework in financial reporting in New Zealand as well as the standard setting process and the role of accounting standards in financial reporting in New Zealand. The report will also provide a critique on issues relating to the application of the conceptual framework and NZ IAS 19 (Employee Benefits) and NZ IFRS 16 (Leases) and lastly give an evaluation of the disclosure by WHS of information relating to NZ IAS 19 (Employee Benefits) and NZ IFRS 16 (Leases).

The Role of the Conceptual Framework in Financial Reporting in New Zealand

The conceptual framework also known as the concepts statements is a set of objectives, and fundamentals that is utilized by companies to identify the goals and purposes of financial reporting. An important point to note is that, it provides the relevant stakeholders such as the members of a board in their selection of transactions, and events that need to be accounted for in an annual report (Kabir & Rahman, 2018). It also provides the right guidelines on how these events and transactions should be assessed, and measured, and ultimately on how they should be summarized and reported in annual report.

To put it into perspective the conceptual framework is used to assist the members of Board of New Zealand companies to be able to:

Assist them to answer the right questions in relation to the financial performance of the company.

Ensure that a company is aware of the level of financial discretion that they should provide to the public and its relevant stakeholders such as investors, and creditors.

Provide the right terminology in relation to what should be included in the annual reports of a company.

The Standard Setting Process and the Role of Accounting Standards in Financial Reporting in New Zealand

There are different accounting standards that are used based on the types of companies. For instance, the International Financial Reporting Standards (IFRS) are normally used as a guide by the for-profit companies in relation to how they are able to prepare their financial statements in order to comply with the standards that are provided by the External Reporting Board (XRB). On the other hand, for the public benefit entities (PBEs), they will utilize the International Public Sector Accounting Standards (IPSAS) during the preparation of their financial statements so that they comply with the standards that have been provided by the XRB. An important point to note is that, the main role of the accounting standards is to ensure companies apply the same rules and standards in the preparation of their accounting standards, which will make sure that their financial statements are comparable (Kabir & Rahman, 2018). In addition to that, they assist in the improvement of the transparency level in relation to financial reporting in New Zealand. Furthermore, they are able to specify when, and how the different economic events will be recognized, assessed and displayed in the financial statements. Also, through the utilization of the accounting standards, they will be able to set boundaries in relation to the financial reporting measures.

The standard setting process is a multifaceted and complex process in New Zealand. The XRB provides an accounting standards framework requiring the New Zealand Accounting Standards Board (NZASB) to set standards for various industries, sectors, and entities of different sizes. The standards are based on multi-standards and multi-tier strategy. Separate sets of standards, therefore, exist for various sectors such as for-profit entities, public benefit entities, and for the non-profit sector. The NZASB provides for-profit sector with accounting standards linked to pronouncements issued by the IASB and authoritative notices as well as the financial reporting standards (FRS). The FRS are developed locally in New Zealand and are specific to the country.

Processes Pronouncement Type

First Process- For-Profit accounting standards on the basis of IASB pronouncements Relevant authoritative notices

NZIFRS

NZIAS

NZSIC

Amendments to authoritative and standards notices

Second Process -Process for PBE Accounting standards on the basis of IPSASB pronouncements Amendments to authoritative and standards notices

PBE IPSAS

Relevant authoritative notices

Third Process- PBE Accounting Standards on the basis of IASB pronouncements Amendments to authoritative and standards notices

PBE IFRS

PBE IPSAS

Relevant authoritative notices

Fourth Process – Domestic standards for inclusion in For-profit Accounting Standards or in PBE Accounting Standards Relevant authoritative notices

FRSs

PBE FRSs

SFR Standards

Amendments to standards and authoritative notices

Critique on issues relating to the application of the Conceptual Framework and NZ IAS 19 (Employee Benefits) and NZ IFRS 16 (Leases)

In terms of the analysis of the Warehouse Group Limited annual report, the first area that will be analysed in the income statement of the company. Table one below provides a comparison of the 2019 and 2020 income statement reports to have a better understanding of the company’s performance.

Table 1: Income Statement Report

2020 2019

Total Revenue 3.17B 3.07B

Gross Profit 1.03B 1.03B

Operating Income 94.38M 113.81M

Income Before Tax 57.97M 94.06M

Net Income 44.47M 65.38M

In assessing the company’s income statement over the past two years, it was determined that there was a slight increase in the total revenue that the company got in 2020, in comparison to 2019 by NZD$101.47 million, which was a 3% increase. However, it was determined that the operating income in 2020 declined by NZD$-19.43 million, or -17%. It is also important to point out that the net income of the company was 44.47 million, and this was a decline by NZD$20.91 million, or 32% in comparison to what was reported in 2019.

The NZ IAS 19 (Employee Benefits) in designed as prescription for accounting and disclosures for New Zealand employee benefits. Tier 1 for-profit players in compliance with NZ IAS 19 are also in compliance with the IAS 19 Employee Benefits. The key takeaways from the income statement report that was provided by WHS in relation to their financial performance in 2020 posited that, although the company had to close from 26th March to 13th May 2020, the company’s fourth quarter sales increased by approximately 26%. This could be an indication as to why the company’s total revenue in 2020 was higher than was the case in 2019 (Warehouse Group, 2021). Such results are encouraging to the main stakeholders of the company such as the investors, and the employees because the company was able to increase its total revenues in a year when it closed its shops, or stores for a period of seven weeks as a measure to reduce the spread of COVID-19 in New Zealand. In addition to that, the online sales of the company grew by 55.2% in 2020. The online sales are currently representing the 11.4% sales of the company (Warehouse Group, 2021).

An Evaluation of the Disclosure by WHS Of Information Relating to NZ IAS 19 (Employee Benefits) and NZ IFRS 16 (Leases)

An improvement of the online sales is considered to be good news for the company in a variety of sectors. First, it provided the indication that the company is highly adaptive, and flexible to the changes that may occur in the market (Shaker-Sultan, 2014). The reason for this is that, while other companies may have experienced a drop in sales because of having to close down their physical stores, WHS looked for an alternative and began using the online stores to conduct sales for the company (A.A. AL-Qudah, 2019). It is an indication that the company has adopted an agile way of working whereby it is able to involve the cross-functional teams which are empowered to make decisions at a faster rate, and respond to the market changes (Warehouse Group, 2021). This has also contributed to the company becoming more customer centric, improving its overall performance, and making WHS’ working environment to be great for the employees despite the challenges that they have to face in-line with the COVID-19 pandemic. In addition to that, it provided the indications of the high employee engagement of the employees at WHS (Warehouse Group, 2021). They demonstrated a sense of resilience, and hard work as they coped with the unpredictable circumstances that were brought about by the COVID-19 pandemic. They also were able to meet an increase in the surge of online demand for the company’s products, and therefore fulfilled their role in ensuring that the company was able to increase its total revenue during the pandemic year (Pivac et al., 2017). It is also an indication of the company’s customer behaviour changing from purchasing products through the company’s physical stores to preferring to make their purchases from the online stores of the company.

The second aspect of the annual report that was analysed was the balance sheet. As was the case with the income statement analysis, the researcher assessed the 2019 and 2020 statements for comparison purposes. Table two contains information of the 2019 and 2020 annual report of the WHS.

2020 2019

Cash 168.07M 49.3M

Total Assets 1.85B 1.05B

Long Term Debt – 7.05M

Total Liabilities 1.48B 568.79M

Total Shareholder Equity 377.13M 481.31M

Net Tangible Assets 241.57M 355.8M

Comparing the two financial years, it can be noted that the company increased its cash on the balance sheet by $118.77 million, which is also a 241% increase. Another key statistic on the balance sheet was the net tangible assets, which was $241.57 million, a decrease from 2020, which was $355.8 million. This is an indication of a reduction of $114.23 million, or a depreciation of 32% in comparison to their previous annual report. In addition to that, the total shareholder equity of the company in 2020 decreased by $104.18 million from the previous reported figure in 2019 (Warehouse Group, 2021).

The key takeaways from assessing the balance sheet is that the value of the assets in WHS increased significantly in 2020, especially in terms of cash and total assets in comparison to the 2019 period (Warehouse Group, 2021). An important point to note is that the shareholder’s equity in 2020 was expected to decline in comparison to the previous year because, even as the company made its adjustment in relation to the COVID-10 pandemic. However, an important point to note is that, the company still paid some form of dividend, which is an indication of the positive financial health for the WHS in the 2019-2020 financial year.

The final aspect of the annual report that was assessed in this study is the cash flow statement report, and it is illustrated in table three below.

Table 3: Cash Flow Statement (2020/2019)

2020 2019

Net Income 44.47M 65.38M

Capital Expenditures -64.51M -61.33M

Dividends Paid -27.75M -52.03M

Total Cash From the Investing Activities -52.51M -59.04M

Total Cash From Financing Activities -236.73M -116.11M

A look at the 2020 annual cash flow statement of the WHS provided the indication that the net income of the company decreased by approximately $21m in 2020 as compared to 2019, which was a 32% decline in comparison to the previous year. In addition to that, the company’s capital expenditure experienced a decline of $3.19 million, as was the case in the total cash from investing, which experienced a decline of $6.53 million and also there was a decline of the total cash from the financing activities (Warehouse Group, 2021).

The cash inflows and outflows of the company provided the indication that the company was not performing well from a liquidity point of view. In particular there was a significant decline of approximately $21 million in relation to the available cash that can be used in relation to the company’s operating activities. The company does not have enough cash to meet its regular operating activities, and this is the reason why the short-term liabilities of the company were significantly higher in 2020 than was the case in 2019 (Warehouse Group, 2021). However, in comparison with the total revenue and assets of the company, the figures that were provided in the cash flow statement are not that bad. WHS has enough assets, and even cash to pay its current expenses, or liabilities.

Conclusion

This discussion sought to identify the role of the conceptual framework in financial reporting in New Zealand as well as the standard setting process and the role of accounting standards in financial reporting in New Zealand. It has provided a critique on issues relating to the application of the conceptual framework and NZ IAS 19 (Employee Benefits) and NZ IFRS 16 (Leases) and given an evaluation of the disclosure by WHS of information relating to NZ IAS 19 (Employee Benefits) and NZ IFRS 16 (Leases).

References

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Srinivasan, P., & R., S. (2015). Narrative analysis of annual reports – A study of communication efficiency. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2611890Warehouse Group. (2021). View the warehouse group 2020 annual report. The Warehouse Group :. https://www.thewarehousegroup.co.nz/investor-centre/2020-annual-report