Accounting and Reporting Practices of the Abu Dhabi National Energy Company - Case Study Example

Executive Summary This paper presents a brief report on the accounting and reporting practices of TAQA (The Abu Dhabi National Energy Company, PJSC). TAQA is mainly an energy company majoring on power generation, production and storage of gases as well as water desalination. The report provides an overview of the company’s financial performance as presented in its 2015 and 2014 financial reports as far as the income statement, the balance sheet and the cashflow statement are concerned. The report also identifies the accounting methods for inventory, depreciation, revenue recognition, fixed assets, intangible assets, amortization, long-term liabilities and pension accounting. Table of contents Table of Contents Executive Summary 1 Table of contents 2 Overview of TAQA 3 Financial Reporting Standards 3 Latest development of IFRS accounting principles 4 Accounting policies 4 Inventory 4 Depreciation 5 Revenue recognition 5 Fixed assets 6 Intangible assets valuation 7 Intangible assets are measured on initial recognition at cost. The cost of an intangible asset includes their fair value at the acquisition date. After recognition, they are carried at cost less accumulated amortization and accumulated impairment losses. The company does not capitalize internally generated intangible assets with exception of capitalized development cost and their related expenditure is reflected in the consolidated income statement in the year it is incurred. 7 Amortization 7 Long-term liabilities 8 Pension accounting 8 Financial Statements 8 Conclusion 9 References 10 Appendices 11 Overview of TAQA Also known as TAQA, the Abu Dhabi National Energy Company, PJSC is a UAE government controlled energy company that was founded in 2005. Since then, the company has grown to have operations in eleven countries across the world in North America, Europe, Middle East, North Africa and India. The company mainly deals with power generation, production and storage of gases as well as water desalination though it has also invested in areas such as mining and metal and in the service sector. In fact, its investments are spread in sixty countries across the world with the government owning 75.5% of shares while the UAE citizens own the remaining 24.5%. In 2015, the company’s revenue was 19.3 billion AEDs though it realized a loss of 1.8 billion AEDs. The company’s assets amounted to AED 108.8 Billion at the close of 2015. The company has a power generation capacity of 17,410 MW, Water desalination capacity of 917 million imperial gallons a day and a gas and oil production capacity of 145,000 barrels of oil equivalent a day. It is thus considered a good investment vehicle by many investors. Financial Reporting Standards The company prepares its consolidated financial statements on the basis of international financial reporting standards (IFRS) which have been issued by the International Accounting Standards Board (IASB). In preparing the accounts, the company also adheres to the applicable UAE Federal Law No. (2) Of 2015 requirements. In this regard, the company’s consolidated financial statements are prepared on a historical basis with exception of investment carried at FVOCI financial assets as well as derivative financial instruments that are measured at fair value. The 2015 annual report has adopted policies consistent with those applied in previous financial period with exception of the new and amended IFRS effective 1 January 2015. The standards include IAS 19 on defined benefit plans: Employee contributions. The section below identifies the accounting methods applied by the company in accounting for various items. Latest development of IFRS accounting principles It is worth noting that in preparing its financial reports, TAQA adheres to the latest development in IFRS principles and standards. Thus, the financial statements have adopted a number of new IFRs provisions. They include the IAS 19 on defined benefit plans including the amendments on employee contributions. The company has also adopted amendments to IFRS 3 on business combinations and IFRS8 on operating segments. There have also been amendments on IAS 16 on property, plant and equipment as well as IAS 38 on intangible assets and IAS 24 on related assets disclosures. The company also adopted IFRS 13 on fair value measurement and IAS 40 on investment property. With exception of these developments, there have not been other developments on IFRS that the company has adopted in the recent past. Accounting policies As stated above, the company prepares its financial statement on the basis of IFRS standards and on a historical cost basis with exception of investment carried at FVOCI financial assets as well as derivative financial instruments that are measured at fair value. In preparing the financial report, the company uses AEDs as the functional currency. The section below presents the different accounting policies adopted for different items in preparing the report. Inventory The company’s inventories include fuel for the purpose of powering electricity generation facilities. These inventories are valued at the lower of cost, determined on the basis of weighted average cost and net realizable value. Costs in this case are the expenses that the company incurs in bringing the inventories to their present condition and location. On the other hand, the net realizable value refers to the estimated selling price in the company’s ordinary course of business after subtracting estimated cost of completion and the estimated necessary costs of making the sale. The company’s other inventories include those of oil and oil products and are part of the production from the group’s oil and gas facilities and tanked at storage facilities for the purpose of sale. These inventories are valued at market value. Depreciation The company’s depreciation policy differs depending on the kind of item being depreciated. Depreciation is calculated on a straight line basis of the assets estimated useful lives. For buildings, equipment, plant and machinery, depreciation is calculated on a straight line basis over a 20 to 40 years period with residual values, useful lives and depreciation methods being reviewed and adjusted where necessary at each reporting date. Spare parts are also depreciated on a straight line basis over their estimated operating life. Oil and gas properties are depreciated on a unit of production basis over the proved and probable reserves of the field concerned with the depreciation only starting after the commencement of production from the property. Revenue recognition The company recognizes revenue to the extent that it is probable that economic benefits will flow to the group and the revenue can reliably be measured regardless of when payment is received. The company measures revenue at the fair value of the consideration receivable or received after taking into account contractually defined payment terms while excluding sales taxes, royalties and similar applicable levies. Revenue from oil and gas is recognized when the significant risks and rewards of ownership have been transferred and the title has passed to the customer. It is when the product is physically transferred into a delivery mode such as pipeline or vessel. Revenue from gas storage is recognized after the service is provided and accepted by customer. Revenue from power and water and fuel is recognized on the basis of the following criteria; i) Once the group has determined that the PPA/PWPA meets financial asset model requirements for service concession arrangements, consideration receivable is allocated with reference to the relative fair values of service delivered. Construction revenue is recognized as construction completes when the contract outcome can reliably be estimated depending on stage of completion. Operating revenue is recognized as the service is provided while finance revenue is recognized using the effective interest rate method on the financial asset. ii) Where the PPA/PWPA is an operating lease, capacity payments are recognized as operating lease rental revenue to the extent the capacity has been availed to the off taker. Non capacity revenue such as fuel revenue is recognized as revenue depending on the contractual terms. iii) Water and energy revenue is recognized when the contracted water and power is delivered to the off taker. iv) Fuel revenue is recognized as and when fuel is consumed in the production of water and power. Fixed assets Property, plant and equipments are recognized at cost less accumulated depreciation and impairment losses if any. Any subsequent replacement of significant parts of such assets is recognized as individual assets with specific useful lives and depreciation. Oil and gas properties in the development and production phase and related assets are recognized at cost less accumulated depreciation and accumulated impairment losses. The cost is their purchase price or construction cost, and costs attributable to bringing the asset to its operation and the initial estimate of the decommissioning obligation. Intangible assets valuation Intangible assets are measured on initial recognition at cost. The cost of an intangible asset includes their fair value at the acquisition date. After recognition, they are carried at cost less accumulated amortization and accumulated impairment losses. The company does not capitalize internally generated intangible assets with exception of capitalized development cost and their related expenditure is reflected in the consolidated income statement in the year it is incurred. Amortization Amortization for intangible assets with finite lives is calculated on a straight line basis as follows; Tolling agreement 14 years Connection rights 30-40 years Computer software 3 years The company reviews the amortization method and period for intangible assets with finite useful lives at each financial year end. The company does not amortize assets with indefinite useful lives but are tested for impairment annually. Long-term liabilities The company measures its long-term liabilities at amortized cost using the effective interest method at the end of the subsequent accounting periods. Pension accounting The cost of defined benefit pension plans and other employment medical benefits and the present value of the pension obligations are determined by actuarial calculations. The costs of provision of benefits under defined benefit plan are determined on the basis of projected unit credit method. Financial Statements This report has analyzed the financial reports of TAQA for the years 2014 and 2015. The reports were obtained from the company’s website with the company’s income statement, the balance sheet and the cashflow statement being attached in the appendix below for the sake of reference. The company’s balance sheet reveals that it has total assets amounting to 108,767 million AEDs in 2015 in comparison to 115,038 million AED in 2014. Thus, the company’s total assets have declined over the two years. The decline may be attributed to the company disposing some of its assets in a bid to finance some of its operations given that it has been operating at losses. Contrally to the decline in the company’s total assets, the company’s total liabilities have greatly increased over the two years. The company had total liabilities amounting to 9,704 million AEDs in 2014 which have increased to 12,102 AEDs in 2015. The increase in the company’s liabilities could be attributed to the big increase in the company’s current interest bearing loans and borrowings indicating that the company is finding it hard to meet its financial obligations given that it has been accumulating losses. The company’s income statement indicates that the company suffered a 1,114 million AEDs loss in 2015 which was a decline to the 2,289 million AEDs loss suffered in 2014. The accumulation of losses could explain the decline in the company’s shareholders equity from 8,784 AEDs in 2014 to 7,331 AEDs in 2015. However, the decline in losses in 2015 has seen the company’s EPS improve from 0.50 AED in 2014 to 0.30 AED in 2015. The decline in the annual loss could be attributed to the company undertaking effective loss cutting strategies in a bid to return the company to profitability. The company’s cashflow statement shows a slight decline in the company’s cash and cash equivalents from 3,530 AEDs in 2014 to 3,437 AED in 2015. This could be attributed to the company’s difficult economic situation given its loss making trend. In conclusion, the company’s financial statements for the two years do not indicate a stable but weak financial position of TAQA. However, it is hoped that with change of strategy, the company can recover from the loss making trend as has been evidenced by the great decline in the loss made in 2015 compared to that of 2014. Conclusion The above analysis has revealed that TAQA has successfully adopted IFRS in its accounting and reporting practices. This has been evidenced in its application of IFRS in its accounting for inventory, revenue recognition, depreciation, amortization, fixed assets, and valuation of intangible assets, long-term liabilities and pensions. The analysis of its financial statement however does indicate the need for a recovery strategy given that the company has accumulated losses over the two years. References Taqaglobal.com, 2016, TAQA at a glance, Retrieved on 5th May 2016, from; https://www.taqaglobal.com/about-us/taqa-glance Taqaglobal.com, 2016, Annual report 2015, Retrieved on 5th May 2016, from; https://www.taqaglobal.com/sites/default/files/TAQA%20Annual%20Report%20English%20Fina l.pdf Appendices TAQA FY 2015 FY 2014 BALANCE SHEET (in AED’000) 31-12-2015 31-12-2014 ASSETS Non-Current Assets Property, plant and equipment 74, 850 79,824 Operating financial assets 9,758 10,147 Intangible assets 9,956 10,532 Investment in associates 421 726 Investment in joint venture - 151 Advance and loans to associates 702 398 Deferred tax assets 1,183 547 Other assets 167 238 97,037 102,563 Current Assets Inventories 2,835 2,963 Operating financial assets 256 228 Advance and loans to associates 2 475 Accounts receivable and prepayments 4,489 5,157 Cash and short-term deposits 3,568 3,652 11,150 12,475 Assets classified as held for sale 580 - 11,730 12475 TOTAL ASSETS 108,767 115,038 EQUITY & LIABILITIES Equity attributable to equity holders of the parent Issued Capital 6,066 6,066 Contributed capital 25 25 Other reserves 3,546 3,485 Accumulated losses (2,382) (530) Foreign currency translation reserve (1,812) (1,448) Cumulative changes in fair value of derivatives in cashflow hedges 2,604 (2,984) 2,839 4,614 Non-controlling interests 4,035 3,581 Loans from non-controlling interest shareholders in subsidiaries 457 589 4,492 4,170 Total Equity 7,331 8,784 Noncurrent liabilities Interest bearing loans and borrowings 66,734 72,380 Islamic loans 1,639 1,918 Deferred tax liabilities 2,570 3,643 Asset retirement obligations 13,396 13,143 Advances and loans from related parties 280 285 Loans from non-controlling interest shareholders in subsidiaries 301 260 Other liabilities 4,414 4,921 89,334 96,550 Current Liabilities Accounts payable, accruals and other liabilities 5,129 6,425 Interest bearing loans and borrowings 5,772 2,059 Islamic loans 156 148 Amounts due to ADEWA and other related parties 153 97 Income tax payable 761 853 Bank overdrafts 8583052 6461788 Other financial liabilities 131 122 12,102 9,704 Total Liabilities 101,436 106,254 Total Equity & Liabilities 108,767 115,038 TAQA FY 2015 FY 2015 INCOME STATEMENT (in AED’000) 31-12-2015 31-12-2015 Revenues Revenue from oil and gas 6,291 12,066 Revenue from electricity and water 9,685 10,435 Fuel revenue 2,269 2,726 Gas storage revenue 261 312 Other operating revenue 838 1,786 19,344 27,325 Cost of sales Operating expenses (9,120) (11,905) Depreciation, depletion and amortization (6,541) (6,942) Dry hole expenses (17) (640) Provisions for impairment (835) (3,837) (16,513) (23,324) Gross profit 2,831 4,001 Administrative and other expenses (713) (1,098) Finance costs (4,635) (4,849) Changes in fair value of derivatives and fair value hedges (138) (243) Net foreign exchange gains 64 142 Share of results of associates 104 123 Share of result of a joint venture 23 31 Gain on sale of land and oil and gas assets 21 167 Interest income 27 17 Other gains 3 22 Loss before tax (2,413) (1,687) Income tax credit (expenses) 1,299 (602) Loss for the year (1,114) (2,289) Attributable to: Equity holders of the parent (1,800) (3,010) Non-controlling interests 686 721 Loss of the year (1,114) (2,289) Basic and diluted EPS attributable to equity holders of the parent (AED) (0.30) (0.50) TAQA FY 2015 FY 2014 STATEMENT OF CASH FLOW(in AED’000) 31-12-2015 31-12-2014 Operating activities Loss before tax (2,413) (1,687) Adjustments for: Depreciation, depletion and amortization 6,541 6,942 Amortization of deffered expenditure 57 68 Release of onerous contracts provision (87) (84) Employee benefit obligations, net (9) (16) Gain on exchange-loans and borrowings and operating financial assets (268) (81) Provision for impairment 835 3,837 Dry hole expenses 17 640 Exploration and evaluation costs derecognized during the year 3,940 4,167 Gain on sale of land oil and gas assets 695 682 Interest expense and national interest (104) (123) Accretion expense (23) (31) Share of results of associates 162 154 Unrealized losses on fair valuation of derivatives and fair value hedges (27) (17) Interest income (27) (17) Other non-cash adjustments - 10 Construction costs 130 404 Revenue from operating financial assets (1,634) (1,954) Working capital changes: Inventories 127 (258) Account receivables and repayments and other assets 623 198 Amount due to ADEWA and other liabilities 56 (53) Accounts payables, accruals and other liabilities (1,086) (1,493) Income tax paid (439) (693) Asset retirement obligation payments (156) (132) Cash received from service concession agreements 1,635 1,491 Net cash from operating activities 8,593 11,888 Investing activities Proceeds from sale of non-core assets 34 298 Proceeds from insurance claims - 58 Purchase of property, plant and equipment (2,840) (5,333) Construction costs paid (130) (404) Dividends received from investment carried at FVOCI - 4 Proceeds from disposal of investment carried at FVOCI - 493 Proceeds from disposal of an associate - 13 Return of capital/additions of investment carried at FVOCI - 9 Dividend received from associates 9 16 Dividend received from joint ventures 28 25 Loan repayment by associates 169 108 Purchase of intangible assets (77) (597) Interest received 27 17 Acquisition of other assets (9) (58) Net cash used in investing activities (2,789) (5,351) Financing activities Interest bearing loans and borrowings received 6,961 4,897 Repayment of Islamic loans (147) (145) Repayment of interest bearing loans and borrowings (8,247) (6,930) Interest paid (3,894) (4,290) Dividend paid to non-controlling interest shareholders (519) (613) Loans received from non-controlling interest shareholders in subsidiaries 41 75 Repayment of loans from non-controlling interest shareholders (136) (71) Receipt of loans from ADEWA - 195 Repayment of loans from ADEWA (5) - Net cash used in financing activities (5,946) (6,882) Net decrease in cash and cash equivalents (142) (345) Net foreign exchange difference 49 (71) Cash and cash equivalents at 1 January 3,530 3,946 Cash or equivalents at 31 December 3,437 3,530 Read More