Comprehensive Analysis Of AGL Energy’s Contingencies, Provisions, And Leases

Introduction to AGL Energy and its operations

Discuss About The Global Financial Crisis And Accounting Rules.

AGL Energy Ltd is an Australian public company which is primarily involved in the production and distribution of electricity and gas for both residential, domestic as well as for commercial use. It generates energy from power stations which basically use thermal management, wind power, hydroelectricity and coal gas sources. In this essay a comprehensive analysis of the various kinds of the various contingencies, provisions of the company have been discussed along with adequate focus on leases of the company.

The company, like any other public limited company has a certain set of contingencies and provisions. Generally, the company do has various kinds of contingent assets and liabilities, which are due to materialise in the due course of time, later in the future. Certain entities at AGL, serve as parties to various kinds of legal actions and claims, which have or will arise in the normal day to day course of the business. Any claim, which might occur, from such legal actions are generally not expected to have any kind of dangerous or adverse effects in terms of materials on the company. In such cases, generally provisions are not required as it is not probable, that a future sacrifice of future benefits might occur later in the future. In the case of the contingent liabilities, the parent company has provided various kinds of warranties and indemnities to a certain number of third parties, in the context of fulfilment and performance of contracts by different fully owned subsidiaries. Similarly, like the contingent assets, the directors are of the view, that provisions are not required in case of such matters. As per the reports of the company, the provisions along the years have maintained an average of around $50 million.

AGL always strives to maintain its high ethical standards and follows all the necessary rules and regulations of the regulatory bodies. In the same way, AGL, addresses the recognition, measurement, and presentation of all its provisions, contingencies and other arduous contracts in accordance with the rules laid down as per AASB 137 and IAS 37. Accordingly, the provisions of the company are also recognised by following the same standards mentioned above. The provisions are actually recognised and measured when there arises a present obligation because of some past events or a set of events, or when a probable outflow of resources is about to take place and when the amount of the obligations is correctly estimated (Risaliti, Cestari and Pierotti., 2013). There are no letters of credit as part of the contingencies of the company, otherwise it would have been measured as per the standards set in IAS 39.

Contingencies and provisions of AGL Energy

The Energy Company, like most other companies has included certain number of items as a part of its contingencies. Al tough the company has not been able to maintain any such company in the recent years, such as 2017 or 2016, although the company had maintained certain amount of deferred and contingent consideration liabilities in the year 2014. The company has been maintaining at least $242 million worth of contingent liability.

The importance of deferred liabilities and contingent consideration liabilities cannot be undermined by any means, as it is an integral form of the company’s overall financial well-being. When the company has to pay a liability in the current accounting period and the amount of tax has not been assessed, then the deferred tax liability comes into the context. The biggest plus point of this issue is that the company’s incomes becomes unaffected by these taxes and the growth of these incomes increases subsequently with no interference in the shape of taxes (Ljubi?, Mrša and Stankovi?, 2013). On the flip side, the postponement of any kind of liability is takes a toll on the financial as well as the reputation of the company. It brings a bad name to the company in the circles of the creditors and investors, when they see a company which fails to honour its liabilities.

The lease items of the company ranges from various types from non-current finance lease receivables, operating leases to different finance lease liabilities which forms the part of the lease commitments.  AGL has acted either as lessor or a lessee in many cases. In the case of the amounts which are due to be received as part of the finance leases are recognised as part of AGL’s net investment in leases (Deloitte Nigeria, 2018). As a lessee, the assets which are held under finance lease are initially recognised as assets of AGL, at their fair value, the corresponding liability to the lessor is included in the consolidated financial statements of the company. The details of all these leases have been pictorially presented below

In the case of classification of leases, both the lessee and the lessors are required to classify the lease arrangements in accordance with the provisions of the AASB117 or the IAS17. They are classified into two categories mainly, the operating lease and finance lease. Each and every accounting treatment and disclosures for each type of lease are differs to a significant extent. The classification of the finance lease is a lease which transfers substantially all risks and rewards in connection to ownership,  title to the assets may or may not be eventually be transferred to lessee. Operating lease is classified not in the manners of the finance lease.

Leases of AGL Energy

The classification and the presentation of the different kinds of leases have been comprehensively explained subsequently. The assets held under finance leases are depreciated over their expected useful lives on a similar basis as owned assets. Operating lease payments are identified and recognised as an expense on a straight line basis over the lease term. Similarly, different kinds of contingent rentals arising under operating leases are recognised as an expense in the period in which they are actually incurred.

There are certain conditions which compels the reclassification of the leases into finance and operating lease. In this regard, some of these situations are like for example, the lessor transfers the ownership of the lease assets at the end of the lease period, or when the nature of the leased assets enables the lessor to utilize them without including any kind of major changes.

A hypothetical example has been provided below. AGL enters into a lease agreement on April 1, 2018, that is about to last for eight years. The asset’s total economic life is estimated at 7.5 years. The fair value of the entire asset is estimated to be $5 million, and lease payments of $450,000 are payable each and every six months which is beginning from January 1, 2019. The current value of the minimum lease payments is estimated to be around $4.6 million. The lease payments were initially due to originate from July 1, 2018, but the lessor of the lease property, has agreed to postpone the first payment until January 1, 2019 (Huian, 2013). The asset was received by the entity on July 1, 2016. In this regard, some adjustments for the reclassification needs to be done, in order to reclassify them. In this case, the lease liability must be recognised when the asset is received by the entity and the lease agreement commences, which is scheduled to happen on 1^st July, 2018. The lease would be considered and classified as a finance lease because it is substantially for the asset’s entire economic life and the present value of the minimum less payments is at least 92% of the fair value of the asset.

For this portion, plant and machinery has been selected as the non-current asset of the company. The total plant and machinery for the year 2017 was 46447 and for the year 2016 was $6482. A very small decrease could be seen between the two figures, signifying the less purchase or disposal of plants and machinery. One of the most popular method for valuing the plant and machinery is the comprehensive comparison method. In this method, the historical costs of the plants are compared with the current market prices. This helps in evaluating the true worth of these leased assets.

The alternative method for the valuation of the receivables is the valuation method which is used for valuation purposes. It is also known as the Depreciation Replacement Cost (DRC). The method is used by estimating its age, economic life and residual value in order to estimate the current value. Moreover the technique is internationally recognised and accepted in the case of valuing the leased properties and is especially suited for non-current assets plants and property..

Conclusion:

The essay tends to delve deep into the intricacies of the contingencies, provisions and the leases of one of the largest energy companies of Australia, which is the ALG Company. After the competition of this essay, some positive aspect regarding the performance of the company has been found out. This is seen in the efficient handling of the different contingencies, provisions and lease of properties. It can be seen that adequate planning is put behind the handling these intricate items. More importantly, it was observed that the company has strictly adhered all the standards set by the accounting bodies.

References:

Agl.com.au. (2018). [online] Available at: https://www.agl.com.au/-/media/agl/about-agl/documents/media-center/asx-and-media-releases/2014/august/1354841.pdf?la=en&hash=3634B6C0D4BA7D5A524689B2828ECE71BE959556 [Accessed 21 May 2018].

Agl.com.au. (2018). Management Energy an Electricity Provider & Gas Supplier | AGL. [online] Available at: https://www.agl.com.au/ [Accessed 21 May 2018].

Anon, (2018). UK&GERMANY. [online] Available at: https://www.iasplus.com/en/binary/dttpubs/uk_ger.pdf [Accessed 18 May 2018].

B?nu??, M., 2016. THE VALUATION AND ACCOUNTING OF TRADE RECEIVABLES. Lucr?ri ?tiin?ifice Management Agricol, 18(2), p.125.

Deloitte Nigeria. (2018). Audit readiness (6) : Impairment of trade receivables. [online] Available at: https://www2.deloitte.com/ng/en/pages/audit/articles/financial-reporting/audit-readiness-6.html# [Accessed 21 May 2018].

Huian, M., 2013. Stakeholder’s participation in the development of the new accounting rules regarding the impairment of financial assets. Business Management Dynamics, 2(9), pp.23-35.

Ljubi?, D., Mrša, J. and Stankovi?, S., 2013. Interaction of Net Present Value, Cash Flow and Financial Statements.

Risaliti, G., Cestari, G. and Pierotti, M., 2013. Global Financial Crisis and Accounting Rules: The Implications of the New Exposure Draft (ED)” Financial Instruments: Expected Credit Losses” on the Evaluation of Banking Company Loans. Journal of Modern Accounting and Auditing, 9(9).