Santos Ltd and Origin Energy Ltd Conceptual Framework Analysis - Case Study Example

Santos Ltd & Origin Energy Ltd Conceptual Framework Analysis Student’s Name Course Date 1.0 Major Balance Sheet Estimates Origin Energy Limited According to the notes provided under the key judgments and estimates policy, the firm indicates that in the course of applying the Group’s overall accounting policies there has been a number of judgements and approximates that have been made. The judgments and estimates that are considered material to the financial statements and especially the balance sheet include; trade and other receivables, exploration, evaluation and development assets; property, plant and equipment, intangible assets, provisions, fair value of financial assets and liabilities. The trade and other receivables is an accounting item that is originally recorded at the amounts that are billed to customers. Certainly, the unbilled receivables postulate an estimate of gas and electricity services that have been supplied to the consumers in the periods after the past bills were issued. Generally, trade and other receivables depict the amount that is deemed to be collected, for which the collectability of the balances are evaluated on a continuous basis. The estimate of this item is plausible given that these approximations are provided only in the recoverability of trade receivables and in the case of unbilled revenues. Exploration, evaluation and development assets are subjected to fundamental estimation process whereby the assessment of the recoverability of capitalised exploration and evaluation expenditures would normally be a subject of specific estimates and assumptions that are to be made. These estimates are especially made in relation to whether the economic quantities of reserves have been explored. Estimation is considered to be plausible because these approximate and assumptions made could as well as be altered whenever new forms of information is availed. Property, plant and equipment estimations comes in the course of executing recoverability of carrying values so that assets are grouped together into smallest group of assets that produce largely independent cash inflows; estimation of reserves; estimation of commodity prices; estimation of useful economic lives as well as restoration provisions. The estimates are considered plausible because the process of evaluating recoverable amount, assets estimated future cash flows are subjected to intense discounting process using a pre-tax discount rate that portrays existing market assessment of time value of money as well as the risks related to the uncertainties related to the asset at hand. Santos Limited For this firm, the underlying carrying amounts related to specific liabilities and assets rely on management’s overall judgment that relates to estimates and assumptions of future events. In its balance sheet, such accounting items as exploration and evaluation reserves; oil and gas assets, as well as impairment of non-current assets have been subjected to estimations. In relation to exploration and evaluation of assets item, the assets that have been acquired are always recorded at their immediate cost of acquisition. It also involves any possible incidental costs that relate to the underlying acquisition process. Consequently, the exploration license are capitalised as intangible assets. Estimations are deemed plausible since the applicability of the policy requires that the management formulate specific estimates and assumptions about future situations and happenings. Certainly, the estimates and assumptions could be altered at any given moment on the account of new information becoming available. In regards to oil and gas assets, it is ascertained that the estimated quantities of Proven plus Probable (2P) hydrocarbon reserves that are recorded by the Group are an integral to the computation of the depletion and depreciation expenses and to the assessment of probable impairment of assets. The estimates are plausible because they are focused on interpretations of geological and geophysical models as well as assessments of a technical feasibility and commercial viability of generating the reserves. It is important to note that both the depletion and depreciation charges are calculated by adopting specific units of production method. 2.0 Conformity of Treatment of Intangibles and Goodwill Impairment with AASB 138 AASB138 According to AASB 138 an intangible assets would be measured initially at its cost. Recognition of costs related to intangible assets in the carrying amount of intangible asset is stopped in the event that the asset is positioned in a state that it is capable for operating in the manner for which it was intended by the management. In addition to this, it is stated that al internally generated goodwill cannot be recognised as an asset at all. The measurement of intangible assets can be measured using the cost or revaluation model. For the cost model, it is noted that after the initial recognition, the intangible asset should be carried at its costs less any possible accumulated amortisation and impairment losses. The revaluation model allows for measurement whereby immediately after the recognition has been done, the intangible asset would be carried at its overall revalue amounts; which are its fair value at the date of the revaluation minus any possible consequent accumulated amortisation and consequent accumulated losses. The fair value would be measured in reference to a given active market. In essence, the revaluations would be done with regularity so that at the end of the reporting period, the carrying amount of the asset would not be different in material nature to the overall fair value. In relation to the research and development expenditure, the standard requires that a company should be able to disclose the aggregate amount of research and development expenditure as an immediate expense that occurred during the period of operations. In essence, research and development expenditures would constitute those that are associated with research or development-related activities. Origin Energy Limited Goodwill is stated at its overall costs minus any possible accumulated impairment loses and it is never subjected to amortisation process. Certainly, software and other forms of intangible assets are stated at their immediate cost minus the accumulated amortisation and impairment losses. It is subsequently noted that amortisations recognised as an expense and subjected to a straight-line basis over its estimated useful lives. In harmony with AASB 138, it can be seen that Origin Energy Limited has successfully adopted the cost model for measuring its intangible assets. It has also made efforts to distinguish between how goodwill and intangible assets are recognised and measured just as required by the standard. Santos Limited Santos Limited identifies exploration and evaluation activities that involve the search for hydrocarbon resources, the establishment of technical feasibility and the assessment of commercial viably of a given notable resource. The expenditure for each of the areas related to this process is accounted for using the successful efforts of accounting. To be specific, these successful methods require all activities that relate to exploration and evaluation expenditures that are expensed in the period for which it is incurred with the exception of costs acquiring new exploration and evaluation of assets. The overall costs of finding successful wells and other appraisal related costs that is incurred in the determination of development feasibility process is capitalised as an intangible exploration and evaluation assets. This is in harmony with the requirements of AASB 138 on research & development, which notes that research and development expenditure should be recognised as an immediate expense that occurred during the period of operations and that these expenditures would constitute those that are associated with research or development-related activities. 3.0 Elements of a Conceptual Framework For both of these two companies, the most implemented element of conceptual framework is the provision of the four elements of the financial statements. These firms have made sure to provide information on how each and every accounting item present within the cash flows, income statement as well as balance sheet is recognised, measured, presented and disclosed as a whole. For instance, Origin Energy Ltd annual report indicate that the financial statements have been prepared in accordance with the requirements set forth in the Corporations Act 2001, Australian Accounting Standards as well as other notable pronouncements of the AASB. It is also indicates that the preparation of these statements has been solely on a historical cost basis in exception of derivative financial instruments, surrender obligations while available-for-sale financial assets, assets and liabilities have all been classified as being held for sale are carried at their immediate fair value. Moving forward, these statements have all been presented in Australian dollars. For Santos Ltd, an analysis on the financial annual report indicates that the notes are organised into fundamental sections that avail an enhanced comprehension of the Group’s overall performances. Significant and other accounting policies have been developed to measure bases and deemed to be relevant to the comprehension of the underlying financial statements, which are availed throughout the notes of the financial statements. The firm’s has successfully presented the financial report in a logical and understandable manner such that there are different sections, which provide different set of information that relates to the basis for preparation; financial performances, group structure among others. This is a clear reflection of the management’s efforts provide the use of these reports with a clear and concise disclosure and presentation that is well-availed. The least implemented element of conceptual framework rests with provision of information related to constraints. The management has not made enough efforts to establish a cost-benefit-analysis as well as providing information related to the materiality concept of different accounting items. Defining the materiality of such accounting items as equity, liabilities and assets helps the user to ascertain the exact extend for which these items are of value to operations. 4.0 Application of Fair Value Accounting It is indeed true that both of these firms have adopted fair value accounting to disclose their assets and liabilities. Origin has extended its application of fair value to the disclose trade and others receivables, which are basically recognised at their fair value and thereafter, measured at an amortised cost minus possible accumulated impairment losses. According to Hitz (2007), the adoption of fair value is focused on a particular current vale. The measurement process adheres to a committed three-tier-process with a leaning towards marking as opposed to marking model. It is argued that the key properties of fair value are focused on a highly idealised market condition, which is preferred and the fundamental aspect related to market-based measures. It is important to understand that one of the well-known intrinsic concepts of any given economic is indeed the lack of verifiability for which fair value accounting concept makes effort to overlook with its emphasis on objective and verifiable market valuation (Hitz, 2007). In essence, the reliability of fair value estimates is set to decline with each degree of the hierarchy and most notably so when it shifts away from the market-to market model. Most of the standard-setting bodies focus on establishing extensively on the conceptual supremacy of fair value measurement especially in regards to the underlying theoretical economic reasoning that is integrated in two key pragmatic constraints (Power, 2010). In fact, following the normative functionality of this conceptual framework, the concept of fair value measurement is considered to be an overhaul substitute for any future standard-setting initiative. From an information perspective, the decision usefulness of fair value accounting reporting is considered to be irrelevant (Power, 2010). This is especially in regards to the aspects related to recognition visa-vie disclosure matters. However, it is noted to be useful in relation to the measurement perspective. For instance, it is noted that the shift from a historical cost accounting stand-point towards adoption of fair value accounting has continued to emphasize on the overall economic approach to the overall accounting measurement for where the economic values are considered for reporting on the statement of financial position. References Hitz, J. M. (2007). The decision usefulness of fair value accounting–a theoretical perspective. European Accounting Review, 16(2), 323-362. Origin Energy Ltd. 2016 Annual Report. Accessed from https://www.originenergy.com.au/content/dam/origin/about/investors-media/senate-submission-carbon-risk-disclosure-160331/Origin_Annual_Report_2016.pdf Power, M. (2010). Fair value accounting, financial economics and the transformation of reliability. Accounting and Business Research, 40(3), 197-210. Santos Ltd. 2016 Annual Report. Accessed from https://www.santos.com/media/3524/final-2016-annual-report.pdf Read More