Key accounting policies
The key success factors for a company which operates in consumer discretionary sectors, such as OrotonGroup, are product differentiation through brand, product quality, and product innovation. Therefore, the important accounting policies for achieving those factors are:
Accounting Policies| OrotonGroup Policies|
Revenue recognition| OrotonGroup recognises revenue when a group entity sells a product to the customers. Revenue from license fees, franchise fees, and commissions are recognised and accrued in the period in which the fees are earned. | Inventories| Finished goods are stated at the lower of cost and net realisable value determined on the basis of moving average cost.| Impairment of intangible assets| Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment.Software is amortised on a straight line basis being their finite life of 4 years| Depreciation of property, plant, and equipment| OrotonGroup uses straight line depreciation method over their estimated useful life. The depreciation rate for plant and equipment ranging from 7.5% to 33.3% per annum and 15% per annum for motor vehicle. | Leases| OrotonGroup classified finance leases as the transfer from the lessor to the lessee substantially all the risks and benefits incidental to ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits.|
Accounting flexibility and specific strategy
Accounting Items| Flexibility| Specific Accounting Strategy| Revenue recognition| Medium to High * Management can alter the point of revenue recognition to manipulate the performance of the company especially with license fees, franchise fees, and commissions.| * No indication of specific accounting strategy for revenue recognition since the increase in revenue from 2010 to 2011 is consistent with the increase in the sales of goods and license and franchise fees.| Inventories| High * Net realisable value is subject to the estimation of selling price, cost of completion and cost of sales. * Impairment of inventories assessment requires estimation and judgment| * Provision for impairment is decreasing from 3.7% in 2010 to 3.4% of total finished inventories in 2011.| Sales and marketing expenses| Medium * The recognition of selling and marketing expenses such as advertisement expenses can be altered| * The marketing expense and selling expense increases by 30% and 18% respectively, while the operating revenue increases by 12.4%.| Impairment of intangible assets| High * The fair value of assets is subject to management judgement| * Amortisation of software is consistent overtime.| Depreciation of property, plant, and equipment| Medium to High * The depreciation method, depreciation rate, residual value and useful life are subject to management judgment.| * Increase in the depreciation by 27% is inconsistent with the decrease in the property, plant and equipment by 3.4%.| Leases| Medium to High * AASB allows Oroton Group to classify certain leases as either operating or financial leases. Classifying leases as operating lease may affect the profit and loss of Oroton Group.| * The operating lease (rent) increases by 13% from 2010 to 2011. |
Additionally, there is tendency for managers to increase profit because Oroton Group engages in short term incentive (STI) programs in which managers’ incentives are tied to their achievement of predetermined profit target. Managers may choose depreciation method, inventory valuation method and other valuation method to increase the company’s profit figure. One significant policy that Oroton Group chooses is the moving average method to calculate the inventory. Compared to its peers, such as Pacific Brands, Premier Investments and Noni B Limited,...