CORPORATE ACCOUNTING OF AGL ENERGY

QUESTION

1. AGL Energy Limited

• All accounting standards are available on online database or these standards can also be accessed on AASB web site (www.aasb.gov.au).

1. 2.     Draft a report incorporating the following points in relation to your selected company (upto 800- 1,000 words).

 Assets – PPE and Intangibles

•  What is the carrying amount of each class of Property, Plant, and Equipment, at reporting date, of your company?
• Describe the accounting policies relating to Property, Plant, and Equipment adopted by your company. (at cost or at fair value?) Critically analyse.
• Identify the intangible assets reported by the company. Discuss their composition and relevance to the company’s business.
•   Describe the accounting policies relating to Intangible Assets adopted by your company.
• Are any items of Property, Plant, and Equipment, and/or Intangible Assets of your company impaired?  If so, identify which assets are impaired, and the amount of accumulated impairment losses.

SOLUTION

AGL Energy Limited

AGL Energy Limited is the largest gas and electricity retailer in Australia. It basically owns, operates and develops renewable energy generation assets (http://www.agl.com.au/about/companyoverview/Pages/default.aspx).

Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses (AGL Annual report, 2010:58). Cost includes all expenditure directly attributable to acquisition and development of asset. Any subsequent costs are added to the asset’s carrying amount if there is a probability that, its future economic benefits will go to the entity and cost of this item can me measured correctly. Repairs and maintenance are charged to the profit and loss account. The gain or loss on sale of property, plant and equipment is recognized as difference in sale proceeds and carrying amount of that asset and it is taken to P&L. Depreciation is provided on property, plant and equipment, excluding land, on straight line method. Cost of each asset less its residual value is written off over its expected useful life.

Accounting policy adopted by AGL energy for treatment of property, plant and equipment seems to be in accordance with AASB116.  Cost Model in AASB116 (http://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun09_07-09.pdf) states that an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.  Other aspects of the standard pertaining to depreciation, disposal of assets and recognition of impairment have also been complied with in the accounting policies of the company.

Since, AGL Energy limited is a generator and retailer of renewable energy sources like landfill gas and electricity; therefore it makes expenditure on exploration and development of new gas and oil assets. Accounting for these assets is not covered by AASB116. Exploration and evaluation expenditure is recognized as an exploration and evaluation asset in the year in which such expense is incurred and is measured at cost. When an oil or gas field is approved by the government for development, the accumulated exploration and evaluation expenditure is transferred to oil and gas assets.

The carrying amounts of different class of fixed assets of AGL Energy limited are as follows:

Property, Plant and equipment                  Net carrying amount as at 30 June 2010 ($m)

Freehold land and buildings                           24.7

Leasehold improvements                              18.1

Plant and equipment                        2013.4

Total                                                          2056.2

Exploration and evaluation assets                  607.5

Oil and Gas assets                                        333.4

Company has reported following Intangible assets on 30 June 2010 at following values:

Intangible Assets                                        Net carrying amount on 30 June 2010($m)

Goodwill                                                     2624.8

Licences                                                     301.2

Customer relationships and contracts 183.6

Wind farm development rights                      37.3

Other                                                          2.1

Total                                                          3149                

All these intangible assets are of great significance to the company and have been therefore recognized in the books of accounts. As, AGL Energy Limited is a company dealing in developing and selling of renewable energy sources, It requires various approvals and licences from government departments for legally carrying out explorations and developments of alternate sources of energy like oil and gas fields etc. Hence, Licences are booked as intangible assets by the company which will continue to give economic benefits in future. Similarly, Company has forayed into wind and hydro electricity generation; therefore, Wind farm development rights are intangible assets of great value to it. Now, a vast and reliable customer base is the biggest asset any business can boast of, as sound customer relationships earn revenue after all and since company has actually paid for acquiring these contracts, so they have been recorded as intangible assets in the financial statements.                         

Company measures Intangible assets acquired separately at cost, where in cost refers to its fair value as at the date of acquisition. After that, intangible assets are carried at cost less any accumulated amortization and impairment losses. Intangible assets with finite lives are amortized over their expected useful life and tested for impairment whenever there is an indication that the asset might be impaired. AGL Energy Limited has recognized three types of intangible assets namely; Goodwill, Licences and Customer relationships and contracts.

Goodwill is recognized as an asset by the company, at the date that control is acquired. It is measured as the excess of sum of purchase consideration paid, amount of minority interest and fair value of company’s previously held equity share over the net of assets acquired and liabilities assumed. Goodwill is not amortized however it is tested for impairment annually.

Licences are carried at cost less any accumulated impairment losses. It is assumed that licences have indefinite useful lives as they will be renewed periodically and the cost of renewal is insignificant. Licences are also tested for impairment atleast annually.

Customer relationships and contracts acquired by the business are carried at cost less accumulated amortization and impairment losses. Such assets are amortized on a straight line basis over the period during which financial benefits are expected to be earned.

Accounting for Intangible assets is covered by AASB138 Intangible Assets. AGL’s policies for intangible assets comply with the provisions of this accounting standard.

On a thorough study of company’s fixed assets and their valuations over the years, it has been asserted that out of all the classes of property, plant and equipment, only Plant and equipment pertaining to certain information technology assets and landfill gas extraction site in merchant energy, have suffered impairment losses. There were impairment losses on plant and equipment in previous years also. Apart from plant and equipment, Exploration and evaluation assets have been impaired in the current year. None of the intangible assets of the company have been impaired till now.

Non Current Asset                                     Accumulated impairment loss as on 30 June 2010($m)

Plant and equipment                                    45.6

Exploration and evaluation assets                  13.9

Reference List

• AGL energy limited’s company website (n.d.) Available from: http://www.agl.com.au/about/companyoverview/Pages/default.aspx (Accessed 10 April 2010).
• AGL energy limited’s annual report (2010) Available from: http://www.agl.com.au/about/companyoverview/Pages/default.aspx (Accessed 10 April 2010).
• Property, plant and equipment, Australian Accounting Standards Board (n.d.) Available from: http://www.aasb.gov.au/admin/file/content105/c9/AASB116_07-04_COMPjun09_07-09.pdf (Accessed 10 April 2010).

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