Question

The Managing Director of Premier Ovens Pty Ltd, Mr. Scott Rose, has always admired the manner in which Wesfarmers Limited has been operated as a Public Listed Company and very impressed by the comprehensive Annual Report which they distribute to their diverse group of Shareholders. He has asked you to refer to the 2019 Wesfarmers Limited Annual Report (especially pages 111 -158) and write a report to him which addresses the following matter.

(i) The management of Wesfarmers Limited is in the process of constructing the financial statements of the Company Group, applied several Accounting policies that involve material judgements and estimates. In what areas have these judgements and estimates been implemented in the accounts? Using examples, explain the concept of Materiality.

Answer 1

Report to

Managing Director

Premier Ovens Pty Ltd.

As per your advice I have seen through the annual report of West farmers Limited

Below are the some of the areas which will have judgements and estimates that will be implemented in the accounts.

· Fixed asset depreciation , Natural resources depletion and Intangibles amortization

· Construction expenses treatment

· Conversion or translation of foreign currency items

· Valuation of Inventories For example: FIFO, LIFO etc

· Accounting and treatment of goodwill

· Investments and its valuation method

· Treatment of Retirement benefits of employees

· Recognition of profit on long-term contracts

· Valuation of Fixed assets

· Treatment and disclosure of Contingent liabilities

Thanking you,

Concept of Materiality:

Materiality concept is accounting and disclosure of information which affects the end user decisions.

For example: A company has incurred $100 in purchasing tools required for maintenance , this does not require to be capitalised since the amount is immaterial and will not affect the end user understanding and taking decision based on accounting it as expense in the period in which it is incurred.

A company has changed the depreciation method from straight-line to units of production method which has increased its profits. This accounting is material which company should disclose in financial statements as change in accounting policy and its material impact on the profits reported for the period. Change in accounting depreciation method and its impact on profit can impact an end user decision making and hence the same is material.