Ac7101 : Financial Reporting Disclosure Assessment Answers
Question:
b. Provide a detailed explanation of the PPE disclosures made by your company in the year ended 30 June 2017. Your explanation should include a discussion of the asset(s) and amounts, the valuation model used (cost or revaluation) an analysis of depreciation, revaluations and asset purchases/sales.
c. Critically analyse to what extent the latest annual report of your company meets the disclosure requirements of accounting for PPE as per AASB 116.
d. Based on your findings in part c, critically discuss to what extent the disclosures of PPE align with the objective of general purpose financial reporting and, as a conclusion, recommend actions for improvement.
Answer:
Introduction:
It is considered as one of the major responsibilities of the companies to provide all the required disclosure of financial aspects and information of their business in the financial statements so that the potential investors and other users can judge the financial performance and financial standings of those companies (Leuz and Wysocki 2016). One of such aspects is the disclosures of information related to the Property, Plant and Equipment (PPE). The main aim of this report is to investigate different dimensions of PPE accounting and disclosures in Origin Energy, an Australian energy company.
Complexities and Key Issues in the Accounting of PPE
The involvement of certain issues as well as complexities can be seen in PPE accounting that the companies are needed to consider. The first complexity is related to the initial recognition of PPE. AASB 116 puts the obligation on the companies to do the initial recognition of PPE at cost; and companies have the option to select between historical costing and fair value costing as the basis of recognition (ey.com 2018). However, in case companies select the historical cost model, users will face the issue of not getting the actual market price of PPE while the adoption of fair value accounting eliminates this complexity. The next major complexity in PPE accounting can be seen in the impairment of PPE. According to AASB 116, it is needed for the companies to test their PPE for impairment. However, companies face issues at the time to determine the recoverable value as the companies are needed to compare the carrying value with the recoverable amount. Apart from the above, the companies face difficulties while determining the appropriate rate of discount for the current market assessment and appropriate risks (pwc.com 2018). These are the major complexities as well as issue that the companies face in the accounting of PPE.
PPE Disclosure in Origin Energy
It can be seen from the annual report for the year ended 30 June 2017 of Origin Energy that there are five components of PPE in the company; they are Generation PPE, Other Land and Building, Other Plant and Equipment, Producing Areas of Interest, and Capital Work-in-Progress. As per the annual report, the balance of PPE in the year 2017 and 2016 are $3,714million and $5,685 million respectively (originenergy.com.au 2018).
The annual report states that the company has recorded their PPE at cost value after the deduction of depreciation, depletion, charges of impairment and amortization. In this case, the components of costs are estimated future costs of rehabilitation and required closures. It can also be seen from the annual report that the company has reviewed the carrying amount of PPE for the determination of impairment, if any. In case there is an signal of impairment, the requirement of the company is the determination of the recoverable value of the assets and then, it is needed to record the impairment in the income statement (originenergy.com.au 2018).
As per the 2017 annual report, Origin Energy has used different depreciation methodologies for different components of PPE. The company did the amortization of PPE related to areas of interest on units of manufacture basis. Under this technique, the company has applied an average unit depletion cost to the production of the current period. The company has not charged any depreciation on land and capital work-in-progress. Apart from these, all the other assets have been depreciated on the straight-line basis based on their useful lives (originenergy.com.au 2018).
It can be seen from the Statement of Cash Flows for the year ended 30 June that the company has acquired PPE worth $354 million and $460 million in 2017 and 2016 respectively. The same source says that the company has received proceeds from the sale of non-current assets worth $887 million in 2017 and $118 million in 2016 (originenergy.com.au 2018).
Adherence to the Disclosure Requirements of PPE Accounting as per AASB 116
AASB 116: Property, Plant and Equipment provide certain disclosure requirements for PPE for the companies related to PPE. According to AASB 116, the companies are needed to disclose information related to the measurement base for the determination of the gross carrying value of PPE; method of deprecation for PPE along with the useful lives and rate of depreciation; the gross carrying value along with the accumulated depreciation both at the commencement and end of the year; and the reconciliation of the PPE carrying value such as any additions, revaluation, impairment losses and depreciation (aasb.gov.au 2018). It also demands the disclosure related to the net exchange difference of PPE arising from different currency. The companies are also needed to disclose information related to any restriction on PPE, amount of contractual commitment and others (Yao, Percy and Hu 2015).
It can be seen from the 2017 annual report of Origin Energy that that the company has disclosed information about the measurement base of PPE that is the cost basis.
(Source: originenergy.com.au 2018)
After that, the company has disclosed information about the depreciation method applied for each of the components of PPE along a separate table showing the rate of depreciation and it can be seen in below:
It is also evident in the 2017 annual report of Origin Energy that the company has disclosed information about the gross carrying amount and accumulates depreciation about their PPE for the years 2017 and 2016; and it can be seen in below:
(Source: originenergy.com.au 2018)
The company has also disclosed the fact that the companies did not have any significant business combination in 2017 related to PPE. Origin Energy has disclosed information about the assets held for sale in their annual report. The company has also classified PPE worth $459 million in 2017 for the disposal group classified. The company has recognized impairment losses worth $753 million related to PPE and it can be seen in below:
It can be said on the basis of the above discussion that the company has disclosed the required information related to the accounting of PPE in their 2017 annual report after complying with the standards of AASB 116.
Extend of the Alignment of PPE Disclosure with the GPFR Objectives
The major aim of general purpose financial reporting is to provide the exiting as well as potential investors, lenders and creditors with the financial information so that they can make decisions related to the resources of the companies (ey.com 2018). This objective can be related to the situation of Origin Energy. It can be seen from the above discussion that Origin Energy has provided the required information about PPE in the related financial statements (Henderson et al. 2015). For this reason, the existing and potential investors can make effective decisions from the provide information. It implies that the disclosure of Origin Energy about PPE is fully aligned with the objectives of general purpose financial reporting.
Conclusion:
One can observe that Origin Energy fully complies with AASB 116 for disclosing the information related to PPE. Full compliance of the company with the objectives of general purpose financial reporting can be seen in the PPE accounting. Based on the above discussion, some recommendations are provided below:
References:
Aasb.gov.au. (2018). Property, Plant and Equipment [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-15_COMPoct15_01-18.pdf [Accessed 1 Oct. 2018].
Ey.com. (2018). Conceptual Framework: Objectives and Qualitative Characteristics. [online] Available at: https://www.ey.com/publication/vwluassets/supplement_86_gl_ifrs/$file/supplement_86_gl_ifrs.pdf [Accessed 1 Oct. 2018].
Ey.com. (2018). Impairment accounting – the basics of IAS 36 Impairment of Assets. [online] Available at: https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf [Accessed 1 Oct. 2018].
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Leuz, C. and Wysocki, P.D., 2016. The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54(2), pp.525-622.
Originenergy.com.au. (2018). Annual Report 2017 [online] Available at: https://www.originenergy.com.au/content/dam/origin/about/investors-media/annual%20review%202017/AnnualReport_FY2017.pdf [Accessed 1 Oct. 2018].
Pwc.com. (2018). A practical guide to accounting for property under the cost model. [online] Available at: https://www.pwc.com/jp/en/assurance/research-insights-report/assets/pdf/imre_22en.pdf [Accessed 1 Oct. 2018].
Yao, D.F.T., Percy, M. and Hu, F., 2015. Fair value accounting for non-current assets and audit fees: Evidence from Australian companies. Journal of Contemporary Accounting & Economics, 11(1), pp.31-45.
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