Materiality

Materiality
Introduction: Identify the Problem
In most occasions, the traditional financial reporting does not present all relevant information useful to the investors and other critical stakeholders. In Australia, all companies are expected to provide additional review and disclosures on the non-financial aspects that impacts on the financial performance of the company. This demands for the companies to develop integrated financial reports that incorporates non-financial evaluation performance of the company including human and intellectual capacity of the company (De Villiers, Rinaldi, & Unerman, 2014). As such, the identification of the materiality of the capitals within the integrated report for JB HiFi is vital. The concept of the materiality is important in determining whether omitting the information from the reports could influence the decisions of the users of the key financial reports and statements.
Materiality defines the entity-specific concept of relevance relating on the nature of the items that relates to certain information in a company’s financial report. An item is determined to be material if it could significantly affect the firm’s ability to create value both in the short-term and long-term (Dumay, Bernardi, Guthrie, & Demartini, 2016). The materiality of JB HiFi’s information can be evaluated on the six capitals including financial, manufactured, intellectual, human, social and relational, and natural capital. The key measures of the six capitals are the inputs and the outputs EssayBishop (JB Hi-Fi Limited, 2018). All the elements of integrated reporting are important in promoting the overall financial reporting. Therefore, the core capitals be critical in assessing the materiality of the JB HiFi capitals and their impact on the financial performance of the company.

Determine Relevant Information
The understanding of the inputs and outputs of JB HiFi is critical evaluating their impact on the performance of the company. Financial capital of JB HiFi describes the pool of financial resources available to the company for usage in the production of goods and services. The funds can be obtained through effective financing such as equity, debt, or grants. Manufactured capital is another capital element that evaluates the manufactured physical objectives available to the company for usage in the production of services and quality goods. JB HiFi’s asset base has been growing in the last three years and it is an indication of the growth of the manufactured capital. Intellectual capital describes the intangibles that offers competitive advantage such as intellectual property including copyrights, protocols, patents, and procedures (JB Hi-Fi Limited, 2018). JB HiFi has a network for its varied office locations, and digital infrastructure that expands their competitive edge.
The human capital evaluates the people’s skills and experience as well as their capacity to lead to successful innovation in the company. The people working at JB HiFi are expected to align with and promote the governance framework and the ethical values of the company. Their ability to recognize and effectively implement the company’s strategy is critical. Social and relationship capital describes the relationships between the company and institutions, community and stakeholder groups in an effort to improve individual and collective welfare. Social capital common behaviors and values and key relationships with the various stakeholders including the customers, suppliers, and partners (Dumay, Frost, & Beck, 2015). In the last three years, training the employees and developing the managers in the company has been effective in expanding their positive social capital. Natural capital refers to the inputs in the production process. The company’s production activities impacts on the natural capital. They includes water, land, and overall ecosystem health. Some of the inputs of JB HiFi is investing corporate social programs. The outcomes of the inputs making their business more sustainable.

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Fig.1:
JB HiFi’s Business Model.

Enumerate Options
JB HiFi’s business model reflects on the core capitals that are material to their operations includes financial capital, human capital, and manufactured capital. Financial, human, and manufactured are most material as the company relies on them to produce their products and services. JB Hifi business involves two retail brands including JB HiFi that places emphasizes on technology and consumer electronic products, and The Good Guys that offers home appliances and consumer electronics products to the consumers (JB Hi-Fi Limited, 2018). The value strategy for each brand ranges from low prices to excellent customer service within its 311 store physical network and through online sales channels.
Capitalizing on the manufactured capital, JB HiFi’s retail approach helps them to maintain its competitive position through its scale, low cost operating approach, quality store locations, strong supplier partnerships, and the multichannel capabilities. However, to maintain its competitive edge, the company needs to the success of financial capital, human capital, and manufactured capital. The financial capital is significant providing the relevant funding for the company to retain its retail network. Both equity and debt financing are critical in sustaining the operations of JB HiFi and thus, they are material in the financial reporting process.
In the last three years, the total liabilities and equity of the company increased from $998.52million in 2016 to $2.59billion in 2018. The increase in the financing is attributable to the increase in the level of debt financing. During the same period, the total liabilities of JB HiFi increases from $593.82 million in 2016 to $1.64billion (JB Hi-Fi Limited, 2018). The disclosure of the debt levels and financing is critical as it shows the long-term sustainability and financial position of the company. The company will be able to finance its operations and sustain its dual retail business model. Therefore, the contribution of the financial, human, and manufactured capital is critical and material to the financial reporting and performance of JB HiFi.
Assessment and Make Preliminary Decisions
Financial, human, and manufactured capitals are the most three essential capitals due to their ability to improve the value of the corporation. The financial capital is able to transform the inputs to outputs through value-addition activities (Lai, Melloni, & Stacchezzini, 2017).. The inputs of the financial perspective includes the access to debt loans, sales revenues from the stores, and the receipts from products and services.
The financial inputs will be critical in improving the financial discipline as well as the management of the financial resources effectively. After the inputs, the company will be able to obtain independent financial advice accessible to all the employees in the company. The financial capital of JB HiFi increases when the value of equity increases and when there is an effective financial management structure and program (JB Hi-Fi Limited, 2018). An efficient financial management program is relevant in improving the capital performance of JB HiFi.
Compared to its rivals, JB Hifi has a strong financial capital position. David Jones and Myer are unable to match the financial capacity and potential of JB Hifi. The increase in the financial capital will be able to expand the value of the corporation (Serafeim, 2015). Additional financial capacity expands the value of the operations of JB HiFi to provide quality products and services through their retail stores. Based on the free cash flow in table 1, JB HiFi has been able to generate significant free cash flow over the last three years. The strength of the financial capital of JB HiFi is that the cash flow of the company increased from $133 million in 2016 to $238 million in 2018. However, there is a weakness in the rising costs of operations and production. The management should make efforts to reduce the costs involved in the operations of JB HiFi.
Table 1:
Free Cash Flow from 2016 to 2018.
2016 2017 2018
Free Cash Flow $133 million $142 million $238 million
Source: (JB Hi-Fi Limited, 2018).
Human capital is another essential element of the operations of JB HiFi. Human capital evaluates the people’s skills and experience as well as their capacity to lead to successful innovation in the company. The people working at JB HiFi are expected to align with and promote the governance framework and the ethical values of the company The inputs of the human capital comprises of members, employees, and management (Stubbs, & Higgins, 2014). From the inputs, the expected outputs from the human capital includes having a strong service culture, capable and motivated workforce. A key strengths of the human capital is that JB HiFi has passionate and committed workforce that will help in delivering quality outcomes and results for the company. JB HiFi operates numerous stores that requires the strong input of the employees. However, the weaknesses is the weak financial ability to handle high cost of managing the human resources in the company due to the competitive for the talented employees in the industry.
Compared to its rivals, David Jones has better human capital position than JB HiFi. However, JB Hifi has better human capital capacity than Myer who lacks experienced professionals. Being able to motivate the employees is critical in expanding their inputs and contribution to the business success (Camilleri, 2018). The increase in human capital has a positive influence on value of the company. It is because having good employees will increase productivity through being committed to grow the revenues of the company.
Manufactured capital has a significant impact on increasing the overall value of the company. The manufactured capital of JB HiFi comprises of the physical objects and such as equipment, infrastructure, buildings, and equipment. The ability for JB HiFi to increase its manufactured capital will grow the overall valuation. The network of stores of JB HiFi also forms a critical element of the manufactured capital that grows the capacity of the company to earn more revenues (Simnett, & Huggins, 2015). The outputs that will be obtained includes an increase in the physical stores and the online sales.
The manufactured capital is essential in increasing the assets available for the company to generate more wealth and revenues. However, a decrease in the manufactured capital is detrimental to the ability of the company to grow its valuation. JB HiFi’s manufactured capital has grew over the last three years as the company has increased its product portfolio (JB Hi-Fi Limited, 2018). The products offered by JB HiFi incorporates electronic, telecommunication and the audiovisual products.
Most importantly, the capacity has a significant capacity to offer relevant professional services to the corporate and government markets including hospitality and education sectors. The homemaker centres of JB HiFi offers consumer electronics, cooking appliances, and air conditioning among others (Adams, 2017). One of the key strengths of manufactured capital of JB HiFi is that the total assets of the company increased from $992 million in 2016 to $2,492 million in 2018 (JB Hi-Fi Limited, 2018). The manufactured capital increases the asset base that helps in expanding the value of the company.
JB HiFi has better manufactured capital position than its rivals, David Jones and Myer. The online presence and stores network of JB HiFi is a competitive advantage over its rival. The growth of asset base is positive compared to Myer and David Jones who have been experiencing stunted asset growth (Eccles, & Krzus, 2014). The framework of integrated reporting evaluates the impacts of the various capitals on the value of the company as well as the long-term sustainability that is important in financial reporting.
Conclusion: List Reasons Explicitly
In conclusion, the financial capital is the most important capital that would help JB HiFi in creating significant value. This implies that the financial capital is the most material capitals of the integrated financial reporting. The financial strategy of JB HiFi is structured to develop capacity in the long-term and maintain financial stability of the company. To achieve the value targets, JB HiFi relies on investing on the long-term growth projections while taking into account short-term uncertainties in the markets.
The financial capital is the most critical material capital as it impacts on the positive financial performance. The business model keen on increasing the sales through store networks will rely on the financial capacity and input to improve positive financial performance and reporting. The financial capital is able to create value for the company through the creation of significant amount of financial returns and the economic value for larger stakeholder base. JB HiFi relies on the understanding of the financial capital to structure its pricing strategy. The company relies on improving efficiency in all operations that enhances infrastructure capacity and reliability on the production services. The increase in capital investments increased the financial resources available for JB HiFi to implement their business model.
Self-Correct
The study was subjected to various limitations including the challenge of extracting information and data from the integrated financial reports of JB HiFi operations. The scale of the integrated report is huge and thus, it is often a challenge to identify the data relating to the non-financial performance of the company including the sustainability inputs and outcomes. The conclusion could be biased as it only focuses on the financial impact of the financial capital that is material. However, the financial capital could not be the most material through using other criteria such as leadership and quality of management in the company. Therefore, the case study should also consider the non-quantitative impact of the capitals on the company to determine their materiality on financial reporting.

References
Adams, C. (2017). Understanding integrated reporting: the concise guide to integrated thinking and the future of corporate reporting. London, UK: Routledge.
Camilleri, M. A. (2018). Theoretical insights on integrated reporting: The inclusion of non-financial capitals in corporate disclosures. Corporate Communications: An International Journal, 23(4), 567-581.
De Villiers, C., Rinaldi, L., & Unerman, J. (2014). Integrated Reporting: Insights, gaps and an agenda for future research. Accounting, Auditing & Accountability Journal, 27(7), 1042-1067.
Dumay, J., Bernardi, C., Guthrie, J., & Demartini, P. (2016, September). Integrated reporting: a structured literature review. In Accounting Forum (Vol. 40, No. 3, pp. 166-185). New York, NY: Elsevier.
Dumay, J., Frost, G., & Beck, C. (2015). Material legitimacy: blending organisational and stakeholder concerns through non-financial information disclosures. Journal of Accounting & Organizational Change, 11(1), 2-23.
Eccles, R. G., & Krzus, M. P. (2014). The integrated reporting movement: Meaning, momentum, motives, and materiality. John Wiley & Sons.
Lai, A., Melloni, G., & Stacchezzini, R. (2017). What does materiality mean to integrated reporting preparers? An empirical exploration. Meditari Accountancy Research, 25(4), 533-552.
Serafeim, G. (2015). Integrated reporting and investor clientele. Journal of Applied Corporate Finance, 27(2), 34-51.
JB Hi-Fi Limited. (2018). Annual Integrated Report 2018.

Simnett, R., & Huggins, A. L. (2015). Integrated reporting and assurance: where can research add value?. Sustainability Accounting, Management and Policy Journal, 6(1), 29-53.
Stubbs, W., & Higgins, C. (2014). Integrated reporting and internal mechanisms of change. Accounting, Auditing & Accountability Journal, 27(7), 1068-1089.

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