Financial Reporting Disclosures: Origin Energy Ltd & AGL Energy Limited - Case Study Example

Financial Reporting Disclosures: Origin Energy Ltd & AGL Energy Limited Student’s Name Institution Financial Reporting Disclosures: Origin Energy Ltd & AGL Energy Limited Introduction Australian based companies prepare and disclose their financial statements to the public in relation to the requirements set up to oversee the AUX listed firms. These companies engage in the presentation of the accounts while making sure to follow certain accounting concepts and Australian-based accounting standards like AASB 3 and 10 (Britton & Jorissen, 2005). This assignment examines the adherence of two companies: Origin Energy Ltd & AGL Energy Limited, as a way of finding out whether their respective reporting frameworks for such items as goodwill, revaluation of assets, impairment of goodwill and non-controlling interest adhere to the aforementioned AASB standards. Furthermore, this analysis paper will establish possible weaknesses of these companies in their reporting structures and recommend one of them as having outperformed the other in their reporting framework. Company Background Origin Energy Limited This is a leading Australian integrated energy firm that operates in three major markets, which include Australia, New Zealand and the newly established Asia Pacific region (Origin Energy Limited, 2014). Given that it is integrated, the firm has a wider base of operations that extends to energy supply chain; where gas exploration and production is involved. It also deals with generation and energy retailing sectors. In the Australian alone, the company boasts of more than 4.3 million customer base making it the largest energy retailer in the country (Origin Energy Limited, 2014). The firm enjoys a 37.5 per cent in Australia Pacific LNG and it is currently in the process of developing Australia’s largest coal seam gas to a more liquefied natural gas project. Notably, the firm has immense levels of investments in renewable energy technologies as well as 53.1 per cent stake in Contact Energy, which is New Zealand’s largest energy retailing company (Origin Energy Limited, 2014). The company has an employee base of about 6,000 people with headquarters in Sydney, New South Wales (Origin Energy Limited, 2014). AGL Energy Limited The firm is Australia’s largest integrated company dealing in development of renewable energy production and supply. The production of renewable energy offered by the company extends to hydro, wind and solar energy sources (AGL Energy Limited, 2014). The firm is listed in Australian Securities Exchange and has been in operations since 1837 (AGL Energy Limited, 2014). It conducts three main business units that include; Retail Energy Division, which sells and markets such products as natural gas, electricity and other energy related products to a customer base exceeding 3.8 million in NSW, Victoria and Queensland; AGL’s Merchant energy, which is unit that creates, operates and sustains power generation equipment as well as formulating carbon based strategies for the company; AGL’s Upstream Gas Division, which invests in areas related to gas exploration and production of gas storage facilities (AGL Energy Limited, 2014). Goodwill Methods, Testing & Impairment Process Origin Energy Limited The company reports goodwill at their respective stated costs less any possible accumulated impairment losses (Origin Energy Limited, 2014). This accounting item is never amortised by the firm rather it is tested bi-annually for any possible impairment. The bi-testing process is conducted using an operated segment ceiling test; CGUs for which goodwill was earlier allocated and later aggregated so that levels for which impairment testing is executed depicts a lowest level (Origin Energy Limited, 2014). The lowest levels further, help to identify where goodwill is monitored for all internal based reporting purposes. For impairment purposes, the company carrying amounts are reviewed at each of the reporting dates in order to establish whether or not there is any show of possible impairment. In case of existence of such indication, the underlying asset’s, which in this case is goodwill, recoverable amounts is estimated (Origin Energy Limited, 2014). The estimation involves recognizing impairment loss of the carrying amounts of an asset or its cash generating units that surpasses its recoverable amount (Origin Energy Limited, 2014). It is noted that the impairment is usually reported within the income statement falling under each reporting period. On a contrary, the company fails to expound on how goodwill or gain on bargain purchase is calculated and presented to the public. The annual reports fail to tackle this issue and this might be one of the visible weaknesses. Subsequently, the firm fails to indicate any possible revaluation of assets of the company’s subsidiaries. This also indicates that the firm fails to adhere to some of the Australian accounting standards. AGL Energy Limited This company fails to make disclosure of which goodwill method is applied, the impairment testing process used and even how goodwill or gain on bargain purchase is calculated and disclosed. Notwithstanding, there is no information provided to indicate how the firm engages in the revaluation of assets of the subsidiaries. Non-Controlling Interests Origin Energy Limited The firm indicates that the acquisition of all non-controlling interests are accounted for as being transactions with all equity holders in their immediate status as being sole equity holders and thus, no level of goodwill is recognised (Origin Energy Limited, 2014). It is disclosed that any possible adjustments related to non-controlling interests are focused on a balanced amount of the net assets of the immediate controlled equity of a given subsidiary. The company however; fails to present a clear and concise way used to calculate the non-controlling interests. AGL Energy Limited AGL Energy Limited 2014 annual reports does not indicate the manner for which non-controlling interests is calculated and disclosed within its financial statements. Furthermore, this firm fails to indicate whether in any case, non-controlling interests shares any immediate goodwill or not under goodwill methods. Adoption AASB 10 and 3 Adoption AASB 10 AGL indicates that it has applied all requirements of AASB 10 in the preparation of its consolidated financial statements. The disclosure indicates that the application of AASB 10 has been conducted to replace some parts of AASB 127, which provides prerequisites in the consolidated and separate financial statements. In fact, it is established that the firm engaged in the review and assessment of classification of its immediate investments in its underlying controlled entities following the stipulations laid out within AASB 10. The reviews made by the company indicate that there were no new requirements that were necessary in changing the existing control assessments as well as there were any additional entities that were required for purposes of consolidation. Following this line of indication, the firm notes that the immediate adoption of AASB 10 had little or no effect on the immediate financial position or performances of its overall operations. It is important to note that AASB 10requires all entities to prepare and disclose all accounting items especially in the preparation of consolidated financial statements in cases where it has control over more than a single subsidiary (AASB10, 2015). On the other hand, Origin Energy Limited takes into account this requirement and ensures that all significant accountings items are showcased in regards to how they are calculated and disclosed. Even though the company fails to provide relevant information on how revaluation of assets in its immediate subsidiaries is executed, it makes pertinent efforts to showcase how most of the accounting items like goodwill are applied and calculated even in cases where non-controlling interests are involved. Recommendation in relation to AASB 10 Unlike Origin Energy Limited, it can be seen that AGL Energy Limited has failed miserably to breakdown the specific accounting concepts adopted in calculating and disclosing goodwill, NCI and revaluation of assets. Thus, it is recommended that the firm provide a detailed notes section indicating methods used in the preparation and calculation of the accounting items mentioned above. In addition to this, Origin Energy Limited should make sure to also disclose how its revaluates assets of its subsidiaries in order to equip public users with effective and informed data for efficient decision making process. AASB 3 The standard requires that all public listed companies like Origin and AGL Limited should ensure they report on their immediate business combination processess so that concepts of relevance and comparability are followed to the latter (AASB3, 2015). It requires that companies establish and report on all assets, liabilities and non-controlling interests incurred (AASB3, 2015). It also requires that all companies establish whether they have engaged in the recognition and measurement of goodwill that resulted in business combinations or gain on bargain purchases. Following this requirement, it can be seen that Origin Energy Limited is the strongest company of the two because it has clearly showed how goodwill is calculated and disclosed. It has also indicated the method used for disclosing and testing impairment. Gains on bargin purchase have also been successfully executed by this firm. On the other hand, AGL Energy Limited has failed miserably in providing detailed information on how these items are calculated and disclosed for that matter. It is the weaker of the two companies in terms of disclosures. Recommendation The only recommendation is that AGL Energy Limited should provide detailed information on how accounting concepts have been used in calculating and presenting goodwill and NCI in the course of business combinations. References AASB3. (2015). Accessed on March 24, 2015 from http://www.aasb.gov.au/admin/file/content105/c9/AASB3_03-08_COMPjun14_07-14.pdf AASB10. (2015). Accessed on March 24, 2015 from http://www.aasb.gov.au/admin/file/content105/c9/AASB10_08-11.pdf AGL Energy Limited. (2014). Annual report. Accessed on March 24, 2015 from http://www.agl.com.au/~/media/AGL/About%20AGL/Documents/Media%20Center/ASX%20and%20Media%20Releases/2014/140917_annualReport1364569.pdf Britton, AD & Jorissen, A. (2005). International financial reporting and analysis. 2nd Ed. Cengage Learning Publishers. Origin Energy Limited. (2014). Annual report. Accessed on March 24, 2015 from http://www.originenergy.com.au/files/Origin-annual-report-2014-WEB.pdf Read More