As India has liberalized its single brand retail industry to permit 100 percent foreign investment, we take a look at the regulatory issues and legal structures pertinent to establishing operations….
Super Retail Group Financial Report Analysis
This Report was commissioned on the request of the Board in relation to ACACIAS press release: ’12-MURMUR ACACIAS areas of focus for 30 June 2012 financial report’. A review of the relevant disclosures made In Super Retail Group Lad’s 2012 Annual Report is assessed against relevant polices that relate to element 8, estimates and accounting policy Judgments under ACACIAS press release.
Executive Summary release: ’12-MURMUR SAIS’S areas of focus for 30 June 2012 financial report’. A review of the relevant disclosures made in Super Retail Group Lad’s 2012 Annual Report is assessed against relevant policies that relate to element 8, estimates and accounting policy Judgments under Sais’s press release. The outline of SAAB standards 108 Presentation of Financial Position, CASABAS Impairment of Assets, SAAB’S 38 Intangible Assets and SAAB’S 37 Provisions, Contingent Liableness and Contingent Assets are disclosed.
Super Retail Group (SIR) Lad’s accounting practice is determined in regards to the standards examined. From this analysis, differences can be determined in the ways SIR applies the relevant standards and the requirements of the standards in relation to estimates and Judgments. From this analysis, it is determined that SIR has failed to disclose any Judgments and certain estimates and assumptions that may affect significant amounts seen In the financial statement and the entities positions. Recommendations of refining the presentation of the disclosures and the ways in which it should be structured are outlined.
ASIA has identified the need for disclosures within this area for users to assess the reported financial position, as entities did not make material disclosures of sources of estimation uncertainty and significant Judgment in applying accounting policies. An analysis of the relevant counting standard, ISOBAR in particular paragraph 17-124, Disclosure of Accounting Policies and paragraph 125-133, Sources of Estimation Uncertainty, CASABAS Impairment of Assets, CASABAS Intangible Assets and CASABAS Provisions, understand Grog’s current accounting practices reflected in the 2012 Annual Report.
A further discussion into the differences between the accounting standards used and its requirements and the application of them are examined. Through this, recommendations are then outlined into refining the gap between Grog’s current accounting practices and the requirements of the standards. Relevant Accounting Standard The relevant accounting standard related to disclosures of sources of estimation uncertainty and Judgments can be found within ISOBAR Presentation of Financial Statements.
Other key standards that are relevant to Grog’s disclosure of assumptions, estimates and Judgments are SAAB’S 36 Impairment of Assets, SAAB’S 38 Intangible Assets and CASABAS Provisions, Contingent Liabilities and Contingent Assets. 2. 1 ISOBAR This standard outlines the presentation of financial statements for general purpose financial statements, in order to ensure that there is comparability between the entities reporting periods as well as between other industries reports. The standard discusses the minimum requirement for reporting content and guidelines for the structure in which it is to be set at.
Paragraph 117-124 distinguishes the disclosure of accounting policies in relation to Judgment. Management’s Judgment made in applying accounting policies that may have effected significant amounts found in financial statements and the financial position. Seen in paragraph 125-133 ‘Sources Of Estimation Uncertainty, it is vital that entities disclose the key assumptions made grading future prospects and other uncertain estimates that are used in identifying carrying amounts of assets and liabilities.
Along side this, the nature and carrying amount must be disclosed at the reporting date. 2. 2 SAAB’S 36 Under SAAB’S 36 it is essential for assets to be tested for impairment when the carrying amount exceeds its recoverable amount. In undertaking these annual proceedings, a number of related Judgment and estimated assumptions need to be encountered. There is a need for Judgment when determining cash-generating assets (Para’s. 68). Paragraph 30-57 outlines the associated requirements for calculating value-in-use.
Paragraph 30. A specifically identifies the need for an estimate of future cash flows that the entity expects to generate from the asset. These cash flow projections are outlined in paragraph 33. A, where it is based on reasonable and supportable assumptions made by management’s estimates, re- stated further in paragraph 34, where this assumption is based on the difference between past cash flow predictions and actual cash flow amounts. These projections need to be consistent with previous projections.
Paragraph 38 continues to detail the significance for management to use the appropriate assumption that would best fleet management’s estimates of economic conditions that will continue throughout the assets useful life. When calculating the value-in-use, there is a need to determine a discount rate and under paragraph 55 the rate is a pre-tax rate. Paragraph 126-137 states that entities should be encouraged to disclose the assumptions and various estimates taken in order to determine the CHUG recoverable amount during the period.
Paragraph 134 requires that a disclosure of the group’s key assumptions, description of managements approach to identifying these assumptions, the period future cash flow as well as the discount rate applied. . 3 SAAB’S 38 SAAB’S 38 details the accounting procedures applied for intangible assets that are not specified otherwise in other standards. This standard deals with a number of assumptions and estimates that are required when applying it.
Paragraph 22 examines the need for entities to assess the prospect of anticipated future economic benefits using reasonable and supportive assumptions that will exist over the useful life of the asset. Paragraphs 33-41 identify the requirements regarding acquisitions as part of a business combination, these intangible assets must be recognized separately from goodwill. Paragraph 41 examines the principle of entities being allowed to use techniques that have been developed for estimating fair values. The standard requires certain disclosures outlined in paragraphs 118-128.
These disclosures provided basis for understand of assumptions and estimates involved in determining: Finite or indefinite useful lives, amortization rates and the reasons for identifying an intangible asset having indefinite useful life Amortization methods used for definite lives The gross carrying amount for any accumulated amortization Reconciliation of the carrying amount at start and end of period Information grading any restrictions on the face of intangible assets or any assured as security for liabilities 2. CASABAS SAAB 137 outlines the accounting procedures for provisions, contingent liabilities and contingent assets. Under paragraph 36 the best estimate required to settle the present obligation at the end of the financial period is the amount recognized as a provision. This estimate discussed in paragraph 38 is determined by the Judgment of management and takes into account risk and uncertainties, the discounting of present value (discounting at a pre-tax rate) and future events that may affect present obligations.
Further Judgment needed by management is necessary when dealing with risks and uncertainties in order to avoid overstating or understating accounting elements. When disclosing the application of this standard paragraph 84-92, in relation to Judgments and assumptions, an entity shall detail the major assumptions made relating to future events further addressed in paragraph 48 that is the description of future events that may affect the amount of the provisions likeliness to occur. In summary an entity shall disclose the reconciliation of the movements of each class of provision and detailed information regarding the nature f the obligation.
Under note 3 found in SIR Ltd 2012 Annual Report, three significant factors have been disclosed that may result in an alteration of future material adjustments due to estimates and assumptions (Refer to Appendix 1): I. Estimated impairment of goodwill I’. Estimated value of intangible assets relating to acquisitions iii. Estimated make good provisions The associated SAAB standard, previously discussed are SAAB’S 36 Impairment of Assets in relation to point I, SAAB’S 38 Intangible Assets corresponding to ii, and iii, is the reflection of CASABAS Provisions, Contingent Liabilities and Contingent Assets.
Specific paragraphs have been discussed earlier in order to understand the Grog’s accounting practices. 3. 1 Critical Accounting Estimates and Assumptions SIR Ltd applies SAAB’S 36, CASABAS and SAAB’S 38 regarding estimates and Judgment disclosures under ISOBAR paragraph 125-133 as discussed previously. Estimated impairment of goodwill deals with the application of SAAB’S 36 disclosed under note 1. 0. In applying SAAB’S 36. 68, SIR has classified the recoverable amounts for CHUG, which are determined based on the calculated value-in-use.
The assumptions require the application of paragraph 134, outlining the assumptions under note 14. (Refer to Appendix 2). The growth rate and discount rate for each subsidiary and the period of which these assumptions are based on, that is a five-year period approved by the Board has been outlined. The assumptions disclosed regarding value-in-use is that budgeted gross margins are determined by past and expected future performance. There is consistency between the use of weighted average growth rates and forecasts included in industry reports.
Disclosures of management’s explanation as to why certain subsidiaries were not calculated using value-in-use is present. SIR Ltd has identified the intangible assets that undertook assumptions and estimates as brand names and supplier agreements, as well as put options. The use of paragraph 41 has been performed by SIR Ltd in valuing brand names using the relief from royalty method and multi-period excess earnings method in valuing supplier agreements. In determining these calculations, assumptions are made by management.
The value of put options has undertaken estimations. These three intangible assets were acquired as a business combination. SIR disclosures of the assumptions and estimates reflecting the application of SAAB’S 38. 18-128 are found under note 1 . Q. Iv-v (Refer to Appendix 3). Brand names are determined as indefinite, supplier agreements have a useful life of 20 years, and amortization is calculated in regards to the timing of projected cash flows over the estimated useful life. Reasons for specific brand names being classified as indefinite is outlined under note 14. . The key factors that management has taken in depicting brands useful life is also estimates in accounting for provisions for make good on the removal of leasehold improvements or return leasehold premises to the original state. The make good provision is recognized when SIR has a present obligation from the occurrence of past events. Leasehold improvement costs are capitalist and amortized over the useful life or the shorter of the period of the lease disclosed in note 18. C (Refer to Appendix 5). Note 1 . States that the amounts for provisions have been reliably estimated, and are not recognized for future operating losses (Refer to Appendix 6). Further disclosed under note 1 . Z, is Grog’s application of make good costs. They are recognized as a provision at the beginning of the agreement and these estimated true payments are discounted using appropriate market yield at reporting date. (Refer to Appendix 7). 3. 3 Significant Judgment Significant Judgment is essential for SIR to disclose when applying the listed standards. There have been no Judgments disclosed under note 3.
Accounting Standard Requirements The one significant gap found between ISOBAR and the current practices of SIR Ltd is the failure of disclosing significant Judgment. ISOBAR . 122 details an entity should disclose a summary of the significant accounting policies of management Judgment’s (apart from those of estimations) dad in applying the entity’s accounting policies, which has affected significant amounts recognized in financial statements. SIR Ltd has failed to disclose a summary of Judgments made that may affect significant amounts on financial statements.
However SIR has disclosed estimates and assumptions however certain areas are not successfully outlined. Assumptions are clearly outlined in the notes, however a detailed description and reasoning of managements approach to identifying these is not present. Management estimates relating to put options have not been clearly stated within the notes. The assumptions regarding the valuation ethos of brand names and supplier agreements have not been outlined (royalty method and multi-period excess earnings). ISOBAR . 125 has not been effectively applied in Grog’s disclosure of assumptions.
There is no information regarding the assumptions of future events. Assumptions and estimates overall have been disclosed, however briefly without detail, as required by ASIA. In order for SIR Ltd to comply with the standard of disclosures of estimates and judgments by which ASIA requires, certain adjustments for future disclosures are needed. The need for ease of locating information requires the implementation of fined structure essential. Under note 3, Critical accounting estimates and judgments, a clear distinction between estimates and Judgments is integral.
A distinct need can be seen within note 3. A. I to ‘refer to note 14 for details’; and should be outlined in ii and iii. It is difficult to locate the relevant information regarding estimates value of intangible assets relating to acquisitions and estimated value of makes good provisions, however assumptions are still outlined throughout the notes despite a lack of clarity regarding referral to note 3. Any related estimates and judgments made by management need to be discussed under note 3, regarding the nature of the element relating to estimates or Judgment.
The differences mentioned previously need to be refined; assumptions relating to the future events, estimates relating to put options and methods used to value brand names and supplier agreements need to be outlined. It is important for SIR to disclose all related information that may assist users in making economic decisions. Therefore it is essential for SIR to outline all assumptions, estimates and Judgments made that affect significant amounts within the financial statement and financial position.