Accounting Standards at JB Hi-Fi

2675 words (11 pages) Business Assignment

16th Jun 2020 Business Assignment Reference this

Tags: Business AssignmentsAccounting

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Executive summary

In the increasingly complicated world of accounting, the need for a reliable set of accounting policies and professional judgement becomes ever more prevalent. The AASB 108 and AASB 116 combine to set out the guidelines in the selection and modification of accounting policies and estimates. Its main objective is to improve the quality of the financial information disclosed, namely its relevance and reliability. By proxy, the accounting policies set by entities that follow this standard will inherit these traits, allowing such entities to produce annual financial reports of higher quality.

On the other hand, the managers professional judgement is an equally important aspect of the preparation of annual financial reports. Not only does professional judgement from an experienced individual reduce the risk of error, studies have shown that it improves the reliability of the produced information and increases its level of comparability.

Being one of the largest global retailers in electronics, JB Hi-Fi Limited (“the Company” or “JB Hi-Fi”) demonstrates a solid adherence to standard through its annual financial report. While the company expresses a seasoned sense of professional judgement, there are some areas in the financial report that seem to lack this.

It can be concluded that JB Hi-Fi implements a strong sense of professional judgement in the auditing and creation of its PPE accounting policies. The treatment of depreciation and disposal held a high correspondence with the Australian and international financial reporting standards. However, some differences arise when accounting for impairment and useful lives. This offsets the appropriateness, but conclusions as to why certain judgements were made regarding policies were still able to be drawn, deeming them reasonable.

1 Introduction

In conjunction with accounting standards, professional judgement is arguably the most fundamental aspect in selecting and changing an entity’s accounting policies. In this report, JB Hi-Fi’s policies regarding PPE will be isolated and evaluated, exploring any further strengths, weaknesses and consequences will arise as a result of professional judgement.

1.1 JB Hi-Fi: at a glance

Founded in 1974, JB Hi-Fi is a Melbourne based electronics retailer who has expanded both across Australia and New Zealand in the last 45 years. It specialises in both home appliances and personal electronics and as of August 2018, was ranked the 7th largest retailer in those categories globally (Bencic 2018). Large companies must employ strong senses of professional judgement. As a testament to the company’s growth, the following table is provided to highlight the growth in key financial figures over the 2019 financial year

Figure 1: JB Hi-Fi financial performance – highlights

This report will assess the selection and maintenance of PPE related accounting policies and explore the impacts of professional judgement.

2 Selecting and changing policies as per AAS108

2.1 Selecting policies

When creating or changing existing accounting policies, the AASB108 outlines clear guidelines the entity must consider. If specified, an entity is expected to follow the AASB108 guidelines unless the standard has no effect, in which entities may choose to overlook the respective requirement. However, AASB108 (8) disallows using this exclusion as a method for entities to obtain a certain representation of their financial statements.

Should a specific standard not apply to a scenario, management has the freedom to choose the method of treatment. When doing so, management must consider similar internal cases and cases between other standard-setting boards. It is also encouraged to consider the recognition and measurement criteria of relevant accounts as per the conceptual framework. Information produced by set policies are also expected to uphold a certain criterion.[1]

2.2 Supplementary information on selecting policies

All standards indicate the level of guidance it should give. In some cases, standards are labelled as integral, in which it is usage mandatory wherever applicable. In addition, paragraph 13 states that an entity must apply accounting policies consistently across similar transactions, events and conditions. Exceptions are made only when specified in the AASB108.

2.3 Changing existing accounting policies

The only circumstance an entity may change existing accounting policies is when the Australian Accounting Standard instructs so. This may occur when the change results in the improvement of relevance and reliability of the representation of an entities financial positioning, performance or cash flows.

2.4 Professional judgement and its impact on accounting policies

An individual’s professional judgement provides the evaluations necessary to develop accounting policies. Due to the application of the individual’s expertise on specific events, professional judgement is arguably one of the most important factors in the policy creation process.

Making decisions under different circumstances will likely result in multiple answers. The greatest benefit to professional judgement is the decision making that maximizes comparability between these changing conditions. Ivan (2016, p. 9) conducted a 2016 study that concluded professional judgement proved most useful when transactions and events accompany unclear situations and incomplete standards.

3 JB Hi-Fi: a summary of its accounting policies

JB Hi-Fi’s directors and auditors indicated in its annual financial report that it coheres to the Australian accounting standards, IFRS and the Corporations Act 2001. Furthermore, the report states that it depicts a fair and true representation of the entities financial position as at 30 June 2019. JB Hi-Fi’s financial figures regarding plant and equipment may be found in the table below.

Figure 2: total plant and equipment as at EOFY 2017, 2018 and 2019

3.1 Calculating values

Per AASB116 (15), the cost of PPE is any expenditure directly attributable to the acquisition of the asset. By complying with the AASB116 (30) cost model, items of PPE are valued at its cost less any accumulated depreciation and impairment loss.

3.2 Treating depreciation

Depreciation expenses are calculated on a straight-line basis using an estimated useful life of 1.5 to 15 years. At every EOFY, the estimated useful lives, residual values and method of depreciation are analyzed, and necessary changes are made according to AASB116 (51), AASB116 (60), and AASB108. Should the group decide to make any changes, its effects are applied to all future reports.

3.3 Treating impairment

Impairment tests are conducted when the carrying amount of PPE items is deemed unrecoverable. Losses from impairment are calculated by the difference in the assets carrying amount and its recoverable amount. Assets a grouped at the lowest levels of cost for the purposes of impairment, as cash flows are independent and identifiable from other cash-generating asset groups.

3.4 Treating derecognition

Derecognition occurs upon disposal, or when future economic benefits of an asset reach zero. The difference between the sale proceeds and the carrying value of PPE determines the gain or loss on disposal, which is recognized under other expenses in the profit and loss statement, under AASB116 paragraph 67 and 68.

4 An evaluation of JB HI-FI and its accounting policies and estimates

4.1 Depreciation

By employing the straight-line method, depreciation becomes predictable and thus easily estimated. However, this method ignores that the actual usage of an asset will likely consume more value near the beginning of an asset’s useful life. It is reasonable to assume that the benefits of consistency and convenience outweigh the drawback of inaccuracy.

4.2 Estimated Useful Life

The report discloses 1.5 to 15 years estimated useful life, however, the IRS 35 (6) (10) recommends between 2 and 10 years for equipment. increasing useful lives results in lower depreciation periodically, adding temporary value to your assets and presenting a more appealing image to investors. Additionally, differences in the type of PPE held between businesses may explain this disparity. Thus, the decision to increase the useful lives of assets may be deemed both reasonable and appropriate on the basis that it was to improve the financial statement.

4.3 Impairment

JB Hi-Fi’s policy states that testing occurs “whenever events […] indicate that the carrying amount may not be recoverable” (JB Hi-Fi, 2019), a reactive approach instead of a proactive one. This opposes AASB136 (9) which instructs entities to assess for any indication of impairment at the end of each period, which JB Hi-Fi does not indicate. This is contrasted against the financial report of its competitor, Harvey Norman, who’s 2018 EOFY report disclosed that valuation checks are performed “with sufficient regularity” (Harvey Norman Limited, 2018).

JB Hi-Fi also mentions that assets are grouped at the lowest classes, likely to aggregate the low-cost expenses, which increases reporting efficiency and thus would be deemed reasonable. It can be concluded that while JB Hi-Fi’s approach is reasonable, its disregard of the guidelines classifies it as inappropriate.

4.4 Disposal

JB Hi-Fi’s current derecognition criteria for PPE allows the company to maximize the usage of the asset. Keeping PPE for longer also increases the reported level of assets, providing a positive reflection on the financial statement. As the disposal policy is both logical and complies with AASB standards it can be concluded that it is both reasonable and appropriate.

5 suggestions and improvements

While most of the accounting policies utilized by JB Hi-Fi adhere to both AASB and IFRS standards, differences between the two documents can still be drawn. This manifests mainly in the treatment of impairment. JB Hi-Fi may wish to consider changing impairment testing to be conducted periodically. The company also appears to lack detail in its disclosure, which can be remedied by disclosing more information through methods such as the total plant and equipment table or disclosing how estimated useful lives are calculated.

6 Conclusion

Through the evaluation of JB Hi-Fi’s treatment of PPE, it can be concluded that an effective professional judgement is necessary when producing reasonable and appropriate accounting policies.

References

  • Emily Bencic 2018, how JB Hi-Fi moves up global retail ladder, Appliance Retailer, viewed 18 August 2019, < https://www.applianceretailer.com.au/2018/08/how-jb-hi-fi-moves-up-global-retail-ladder/>
  • Michael Janda & Stephen Letts 2016, JB Hi-Fi announces Good Guys takeover worth $870m, ABC, NSW, viewed 18 August 2019, < https://www.abc.net.au/news/2016-09-13/jb-hi-fi-announces-870m-good-guys-takeover/7837922>
  • JB Hi-Fi 2002, JB Hi-Fi, VIC, viewed 18 August 2019, < https://www.jbhifi.com.au/pages/about-us>
  • Australian Accounting Standards Board [AASB] 2015, AASB 108 accounting policies, changes in accounting estimates and errors, Camberra, viewed 19 August 2019, <https://www.aasb.gov.au/admin/file/content105/c9/AASB108_08-15.pdf>
  • JB Hi-Fi Limited, annual report for the financial year ended 30 June 2019, Victoria, viewed august 19 2019 <https://investors.jbhifi.com.au/wp-content/uploads/2019/08/4E_FY19.pdf>
  • Ivan I. 2016, ‘The importance of professional judgement applied in the context of the International Financial Reporting Standards’, Audit Financiar, vol. 14, no. 10(142), pp. 1127-1135, viewed 20 August 2019, DOAJ Directory of Open Access Journals
  • Oana A. & Maria A. 2014, ‘professional judgement. the key to a successful audit’, SEA: Practical Application of Science, Vol. 2, Issue 3(5), pp.217-222, viewed 20 August 2019, DOAJ Directory of Open Access Journals
  • International Financial Accounting Standards [IFRS] 2017, part 1. organization, finance, and management, Chapter 35. Financial Accounting, Section 6. Property and Equipment Accounting, International Financial Accounting Standards, viewed 22 August 2019, <https://www.irs.gov/irm/part1/irm_01-035-006>
  • Australian Accounting Standards Board [AASB] 2009, AASB 136 Impairment of Assets, Camberra, viewed 22 August 2019, <https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf>
  • Australian Accounting Standards Board [AASB] 2015, AASB 116 Property, Plant and Equipment, Camberra, viewed 22 August 2019, <https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-15_COMPoct15_01-18.pdf>
  • Harvey Norman Holdings Limited 2018, 2018 annual report, Harvey Norman holdings limited, Sydney, viewed 22 August 2019, <https://static1.squarespace.com/static/54803162e4b08e1b8a472201/t/5bad8412f4e1fcd2edb86026/1538098250289/2018-Annual-Report.pdf>
  • Bragg S. 2019, how depreciation affects cash flow, AccountingTools, viewed 19 August 2019, <https://www.accountingtools.com/articles/how-does-depreciation-affect-cash-flow.html>
  • The Sydney Morning Herald 2006, JB Hi-Fi buys NZ chain for $15m, The Sydney Morning Herald, Sydney, viewed 18 August 2019, < https://www.smh.com.au/business/jb-hi-fi-buys-nz-chain-for-15m-20061212-gdp18i.html>

Appendix

Reasonable To have sound or logical judgement that’s justifiable through explanation
Appropriate To be suitable to for use in its respective situation or circumstance

Acronyms

AASB Australian accounting standards board
EOFY End of financial year
IFRS International financial reporting standards
PPE Plant, property and equipment
PNL Profit and loss

[1] Criterion include relevant, faithfully represented, bias-free, prudent, materially complete, and reflective of the economic substance of the transaction, event or condition.

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