ACCY801: Accounting and Financial Management - Woolworths Limited

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Question:Accounting and Financial Management

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Accounting and Financial Management Assignment

Assignment Task

Business report Woolworths Limited

Reports must be typed, double spaced, in 12-point font.
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You must attach a completed and signed assignment coversheet. A downloadable coy is available on the Moodle site for this subject.
Do not plagiarise your work. Plagiarism is the unacknowledged work of another person. Plagiarism can result in zero marks or possible expulsion from the university.
Referencing style must follow the Harvard style. Style guides are available on the UOW library website.
Whenever the Annual Report is cited you must provide a page reference to the Annual Report so that your work can be easily verified.

Detailed Information Recently Woolworths Limited has made news headlines due to poor financial results and hence it would be interesting to analyse the prior year financial information. Therefore using data in the 2015 Annual Report and Corporate Governance Report for Woolworths Limited (Woolworths) address the following:

Provide a brief summary of the company. Include details such asindustry sector, primary activities, recent performance (300 wordsmaximum).
Prepare a table that outlines details of the Board of Directors.Include items such as name, gender, age, education, career history,remuneration, and any other details you think are important orinteresting. Provide a brief summary of the characteristics of theBoard (1,000 words maximum).
Woolworths follows the corporate governance recommendations of the Australian Stock Exchange (ASX) Corporate Governance Council(CGC) and has several policies in place to support its corporateconduct. The external audit function is discussed throughout theserecommendations.
Outline the key recommendations of the ASX CGC in tableformat.
Who is Woolworth’s auditor?
What amount of remuneration did the auditors receive fromWoolworths during the year?
Briefly discuss the role of the external audit function and howthis may/may not be achieved (400 words maximum).
Provide a financial statement analysis of Woolworths for 2015 in tableformat. Include the following ratios (show all workings):

current ratio,
Quick ratio
inventory turnover,
Accounts receivable turnover
asset turnover,
debt to equity,
gross profit margin,
profit margin,
return on assets,
return on equity.

Based on your results, make a brief comment on the liquidity,efficiency, solvency, and profitability of Woolworths for 2015 (600 wordsmaximum). Analyse the distribution of Woolworth’s shareholding and identify and major shareholders. If there are major shareholders, list who they are and discuss the significance of their ownership stake in Woolworths? (300 words maximum). If there are no major shareholders in Woolworths, you should just discuss, in general terms, the impact/significance of major shareholder

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Solution:

Executive SummaryAn attempt has been made in the report to analyse the performance of Woolworths as instructed in the Assignment to drill down on the reasons of its poor financial performance presently. Woolworths belongs to the ‘Food and Staples Retailing ‘Sector and is listed on the ASX with the ASX code ‘WOW’. The Company is a Supermarket chain based in Australia, New Zealand and Tasmania. Presently, it covers 80% of the Retail market in Australia. The recent performance of the group has been below expectations with a reported sale of $ 60.7 billion less by 0.2 % over last year and Earnings per share of 195.2 cents, 0.7 % less than last year. The group reported net profits of $ 2453.3 million, more than 0.1 % over last year. The reasons of Woolworths poor financial performance may be attributed to the poor Operational Management as indicated by the Ratio analysis despite the fact that the Company complies with CGR rules relating to the Board of Directors, Audit and other recommendations mentioned therein. There are no Substantial shareholders of Woolworth. Overall, the Liquidity, Efficiency and Solvency are below expectations while the Profitability position is acceptable. The Company complies with the key recommendations of the ASX CGC. The External Auditor is DELOITTE TOUCHE TOHMATSU who received $ 4,101,000 as remuneration during the year. 1 Introduction - Brief summary of Woolworth Woolworths belongs to the ‘Food and Staples Retailing ‘Sector and is listed on the ASX with the ASX code ‘WOW’. The Company is a Supermarket chain based in Australia, New Zealand and Tasmania. Presently, it covers 80% of the Retail market in Australia. Woolworths specializes in groceries, electronics, consumables and stationery items and operates about 3729 Outlets in Australia and New Zealand. The Company also deals in Hotels, Home improvement, General merchandise and has Online operation too. The group is Socially, Ethically and Environmentally aware and has engaged in endeavours like sponsoring of Olympic and Paralympic teams. (Woolworthslimited.com.au, 2016, pg 1,31) The recent performance of the group has been below expectations with a reported sale of $ 60.7 billion less by 0.2 % over last year and Earnings per share of 195.2 cents, 0.7 % less than last year. The group reported net profits of $ 2453.3 million, more than 0.1 % over last year. An attempt has been made in the report to analyse the performance of the Company as instructed in the Assignment to drill down on the reasons of its poor financial performance presently. 2 Details of the Board of Directors and a brief of the characteristics of the Board

Name	Gender	Education and Career History	Annual Remuneration and shares owned	Other Details
GM Cairns	Male	MA (Hons).; Previous Chairman of David Jones, Westpac and Rebel, previous CEO of Lion Nathan, Current Director of Macquarie, Origin among others.	Not mentioned	Joined on 01/09/2015; 1 year served, Independent, Non?executive, Serving as Chairman presently.
Carla (Jayne) HRDLicka	Female	BA, MBA, Currently CEO of Jetstar Group, formerly worked with Qantas Group and as Senior Partner with Bain & Company; Recognised leader on customer led growth and transformation.	$262,561; 2081 shares	Appointed in 2010.
JR Broadbent	Female	BA (Maths & Economics), Currently chair of Swiss Re life and Health Australia and Clean Energy Finance and Chancellor of Woolongong University; Previous director, Coca Cola Amatil and Qantas among others.	$262,561; 65,138 shares	Joined on 28/01/2011, 5.7 years served, Independent, Non?executive, appointed as director in 2011.
Allan Douglas (David) MacKay	Male	BBA, Former CEO and president of Kellogg; Former director of Sara lee bakery, Australia food Council among others.	$ 283,207; 7,000 shares	Director since 2012.
Christine Cross	Female	B.Ed. and MSc in Food Science and a Diploma in Management, Former director of Next, and Fairmount and a Member of Advisory Board of PwC, Currently retail advisor to Apex and director of Kathmandu and Brambles among others.	$ 305,597; 8,500 shares	Director since 2012.
SR Perkins	Male	B.Com., LLB (Hons), presently Non-Executive Director of Brambles and Museum of Contemporary Art in Sydney among others, formerDirector of Meridian Energy.	$239,236, 7,000 shares	Joined on 01/09/ 2014, served 2 years, Independent, Non?executive.
Grant O’Brien	Male	Director of Consumer Goods Forum and Member of Business Council of Australia.	$ 2,160,493, 85,003 shares	25 years in Woolworth, Managing Director; Current Chief Executive Officer since 2011.
MJ Ullmer	Male	BSc (Maths) (Hons), FCA, SF Fin; Former CFO of Commonwealth Bank of Australia, and Partner of KPMG, Coopers among others.	$ 294,691, 9,000 shares	Joined on 30/01/2012, served 4.7 years, Independent, Non?executive.

Former Directors have been excluded from the list
(Woolworthslimited.com.au, 2016; Pg. 48, 51, 26,27,28, CG report pg. 5)

Brief Summary of the characteristics of the Board The details of the board functioning are found in the Corporate governance framework as detailed in the Corporate Governance Statement of Woolworth. Each member of the board except the MD and (CEO), is approved by the Stakeholders and is directly accountable to them for appropriate Strategic initiatives and value?creation. The Board Delegates Strategy implementation to Woolworths Group Management and is responsible for ensuring compliance with Corporate Governance guidelines. The Board functions through four committees for effective discharge of its responsibilities; Nomination; Audit, Risk Management and Compliance; People Policy Committee; and Sustainability Committee. Each committee has a charters defining its role and responsibilities. The Chairman is chosen within the non?executive directors. Each Non?executive director is appointed at least to one Committee and compulsory totheNomination Committee. The Board’s main function is the representation and serving of Shareholders’ interests through Oversight and appraisal of the Company’s strategies and performance so as to maintain and enhance Shareholder value and ensure proper Management. The Board Charter defines clearly and concisely the powers and responsibilities of the Board and regulates its Composition and the Meeting rules, as well as the Definition of the relationship between the Board and Management. The Board composition included majority of Independent non?executive directors with requisite skill set and experience. The Nomination Committee functions to review possible candidates to the Board and also reviews the eligibility of retiring directors for re?election, based on attributes like skills, experience, diversity, commitment and probable conflicts of interest. The Board also recommends to shareholders in this relation in the notice of the (AGM), material information relevant to their decision. (Woolworthslimited.com.au, 2016; pg. 2 to 6; CG Statement) 3 Details of the External Audit function a. Key recommendations of the ASX CGC

Principle	Main Recommendation	Additional Recommendation
Laying solid foundations for Management and Oversight	Disclosure of roles and responsibilities of the board and proper review before appointment duly informing stakeholders of material information. A written agreement with each director and Accountability of Company Secretary;	Appropriate diversity policy and periodical evaluation of the Board and Senior executives duly disclosed in the Annual report.
Structure of the board for Value addition	Existence of a Nomination committee with at least three independent directors with a charter. Disclosure of the Board skill matrix existing as well as proposed, disclosure of the names, tenure and independence status in case of directors with specified relationships and associations.	Chairman to be independent and different from the CEO. Ensuring Proper induction and professional development of directors.
Ethical and Responsible acts	Proper and defined code of conduct for Directors, Senior Executives and Employees and its disclosure.
Safeguarding Integrity	Existence of an Internal Audit Committee and other rules similar to Nomination Committee described above.	Disclosure of the qualifications and experience of members, number of meeting and attendance of each member. Where the committee does not exist, the equivalent procedures employed to be disclosed. Appointment, removal and rotation of external auditor and Declaration of opinion from CEO and CFO recommended. .
Timely and balanced disclosure	Written policy of Compliance with Listing rules and its disclosure.
Respect of Stakeholder’s rights	Information on company and governance on Website, Planning and implementation of an effective Investor relations program.	Disclosure of policies to facilitate Investor participation and an option of two-way communication electronically.
Recognition and management of risk	Risk Committee and other rules same as for Nomination Committee.	Existence, Structure and role of audit committee and procedure employed in case of nonexistence to be disclosed with material exposure to risk and its management.
Fair Remuneration	Rules on the same ground as Nomination Committee.

b. Details of Woolworth’s auditor DELOITTE TOUCHE TOHMATSU c. Remuneration received by the Auditors during the year$ 4,101,000 was received during 2015 d. Role of the External Audit function Attendance of External Auditor in the AGM is deemed compulsory to answer questions from Stakeholders. Issue of an Independent Audit report of Opinion on prescribed matters. This may be achieved through following the Professional code of conduct and discharging the duties independently on the audit of the financials and supplements. Independence here implies lack of financial or management interest. The Auditor should try to obtain sufficient and appropriate audit evidence after thoroughly understanding the company and its environment. (Smallbusiness.chron.com, 2016) 4 Financial Statement Analysis for 2015 Liquidity The Liquidity analysis of Woolworth will help to assess its capability to satisfy short-term obligations. Inventory is deducted from Current assets for Quick ratio as it is less liquid compared to other assets. The thumb rule of 2:1 and 1:1 respectively for Current as well as Quick ratio is used as a benchmark. Woolworth liquidity is below satisfactory and undermines its ability to meet short term liabilities in the ordinary course of business as calculated in Appendicle 1. The Current ratio of 0.84 implies that Woolworth current liabilities are covered only 0.84 times its current assets while the quick liabilities are covered only 0.30 times. The liquidity position is poor. Profitability The profitability analysis (Appendicle 1) of Woolworth shows 2.39 Return on assets and 5.45 Return on equity. The ROA implies that the assets are earning profits of $ 2.39 for each dollar invested in asset while equity is earning $ 5.45 for each dollar invested. The Gross margin and profit margin each indicates a profit of 27% and 4 % respectively implying that the profitability position is satisfactory if not excellent. This is so because the profit margin is extremely low compared to the gross margin profit implying that the management has failed to control the cost structure of the firm and needs to pep up efforts towards increasing the operational efficiency of the company. A profit margin of 4 % is very low and risks the future growth and survival of the Company if steps are not taken to correct it. Efficiency The efficiency of Woolworth (Appendicle 1) as reflected by the Inventory turnover of 9.27 appears satisfactory. Receivables turnover of 69.66 appear majorly unfavourable given the nature of business of Woolworth. Turnovers have been computed with averages of denominators in each case. The turnover is indicating that while the conversion of inventory is reasonable, the conversion of receivables needs major improvement. The Asset turnover of 2.45 is also satisfactory. The efficiency analysis is below expectation. Solvency The long term solvency of Woolworth (Appendicle 1) will give an idea of the % of its assets sponsored by Debtors. Investors prefer companies with minimum debt signifying minimum risk and financial cost with restrictions so that benefits from the investment exceed costs. The Debt-to-Equity Ratio of 1.28 clearly signifies that Woolworth in majorly dependent on debtors. A D/E greater than 1 implies that Debt exceeds Equity and puts the company in the high risk profile which does not find favour with Investors. The solvency of Woolworth needs improvement so as to ensure growth in the future and prospective investments for the company. Overall, the Liquidity, Efficiency and Solvency are below expectations while the Profitability position is satisfactory. 5 Shareholding analysis Though there are no Substantial Shareholders, the top 5 Shareholders of the Company include HSBC Custody Nominees (Australia) Limited with 16.37 % shareholding; JP Morgan Nominees Australia Limited with 10.18 %, National Nominees Limited with 9.79%, Citicorp Nominees Pty Limited with 3.44 % and BNP Paribas Norms Pty Ltd with 2.79%. (Woolworthslimited.com.au, 2015; Pg. 123) The impact or significance of the Major Shareholders of the Company needs to be understood from the perspective of Controllership and Share of profits. Major shareholders in liaison (normally 50% or above) have the power to influence the policies and the appointment of Board of Directors of the Company thereby exerting an indirect influence on the operations of the Company. This also implies greater part of the profits being distributed to these Shareholders. The Strategic direction of the Company may be steered as per their whims and fancies and the wishes of the minority tend to be ignored. These shareholders may also dilute their position to competitors for a good price on their stake. The major shareholders may not be able to authorize a buyout due to corporate restrictions favouring minority shareholders. (Investopedia, 2003) Conclusion The reasons of Woolworths poor financial performance may be attributed to the poor Operational Management as indicated by the Ratio analysis despite the fact that the Company complies with CGR rules relating to the Board of Directors, Audit and other recommendations mentioned therein. There are no Substantial shareholders of Woolworth. Overall, the Liquidity, Efficiency and Solvency are below expectations while the Profitability position is satisfactory. The Company complies with the key recommendations of the ASX CGC. The External Auditor is DELOITTE TOUCHE TOHMATSU who received $ 4,101,000 as remuneration during the year.

Financial Statement Analysis 2015
(Amount in m$)
Serial	Ratio	Formula	Analysis	Working	Ratio 2015
a	Current ratio	Current Assets/Current Liabilities	Liquidity	7660.9/9168.6	0.84
b	Quick ratio	Quick Assets /Current Liabilities	Liquidity	7660.9-4872.2/9168.6	0.30
c	Inventory turnover	Cost of goods sold/ Average Inventory	Efficiency	44344.8/4872.2+4693.2/2	9.27
d	Accounts Receivable turnover	Net sales/ Average Receivables	Efficiency	60679.1 /885.2+857/2	69.66
e	Asset turnover	Revenue/ Average assets	Efficiency	60679.1/25336.8+24136.5/2	2.45
f	Debt to equity	Debt/Shareholders equity	Solvency	14204.8/11132	1.28
g	Gross margin	Gross profit/Revenue	Profitability	16523.6/60679.1	0.27
h	Profit margin	Net profit/Revenue	Profitability	2137.4/60679.1	0.04
i	Return on assets	Revenue/Assets	Profitability	60679.1/25336.8	2.39
j	Return on equity	Revenue/Equity	Profitability	60679.1/11132	5.45

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