Discuss about the Financial Statements for Industry Preparation.
Every company operating in any industry prepares their financial statements in accordance with the generally accepted accounting principles and the relevant accounting standards. The main objective of this report is to study and analyzing the main business of the company, how it functions, in which industry does the company operate financial structure of the company and the financial performance of the company. Along with this, the company’s assets are analyzed with details incorporating from the carrying amount of the items under the head Property Plant and Equipment and Intangibles to the application and consistently followed its accounting policies. Thereafter comparison is made with its competitors operating in the same industry along with the appropriate recommendation and conclusion. For the purpose of the successful completion of the project, AGL Energy Limited has been chosen.
Core Business and Operating Segment – From the incorporation in the year 1837, AGL Energy Limited has been working as one of the largest company across the Globe listed in Australian Stock Exchange for serving the customers with secure and durable energy and energy devices.
The core business activities and segments are listed below:-
Renewable Energy – The company has been generating energy has been generating energy through the natural resources like wind and sunlight. Some of the major inventions are Biogas in Victoria and Solar in South Africa.
Thermal Energy – The Company generates energy through the use of coal and natural gas and has been successful in meeting the requirement of the particular area to the tune of 30% to 50% like AGL project Loy Yang which serves 30% of the total energy requirement of Victoria.
Gas Storage – The Company stores the gas in the big reservoir and provides the energy to the customers at the peak period.
Natural Gas – In this the company generates energy through the use coal seams which is the by-product of the coal (AASB,2015).
The company’s main focus is on the customers satisfaction in each aspect including safe and reliable energy. (Cited in Official Website)
Operating Industry and Competitors – The Company operates in Energy Utilities and Natural Gas distribution Industry. As per the latest industry report of 2015, the industry in which the company is operating is in a Growth stage. It is because of the fact that there is a decline in the energy consumption by the customers either residential or commercial and has shifted to renewable energy and solar energy. There are three main competitors namely Duke Energy Corporation, International Power Limited and Origin Energy Limited. Duke Energy Corporation is incorporated in USA and is the largest company having the electric power and supplying and distributing the same. Second competitor is International Power which has been since 1996 the leading company in power sector serving South Australia, Victoria and Queensland. Third major competitor has been the leading integrated energy company in Australia which is engaged in exploring, producing, generating and supplying of electric power to various customers across New Zealand and the Pacific. Major implication is that all the three competitors have created an edge over the business of AGL Limited by reaching to the customers not in Australia only but also in New Zealand and USA.
Financial Structure of the Company – The Company’s capital structure consists of the Equity and the Borrowings under the head Current and Non Current Liabilities. Equity includes Share capital issued and paid up, Reserves and the amount of net profit earned during the year which has been ploughed back into the business. As per the schedule of changes in equity, the company has issued ordinary equity shares of $1275 m and retained net profit amounting to $2175 m. Borrowings from banks and financial institutions have increased during the year due to the funding for the part amount of debt related to the acquisition. In respect of the financial ratios, the debt equity ratios have been improved from 0.52 in 2014 to 0.46 in 2015. Thus, the company is funded majorly from external sources.
Financial Performance of the Company – The financial performance of the company has been majorly affected with positive impact due to the acquisition of Macquarie Generation assets. The effect is that the Operating Earnings before Interest and Tax has been increased by 12.2% and thereby having increase net profit by 12.1 %. This increase has led the company to declare the dividend amounting to Rs. 64 per share which has enjoyed the 1.6% increase in relation to previous year. The operating cash flows of the company have been increased by $378 m whereas the operating earnings before interest and tax of the whole group including all the segments have been declined by 54% approximately. The reason for such decline has been disclosed in director’s report that the company has faced high operating costs and less revenue from acquisition of Macquarie business. The profit and earnings so declared in the annual report comply with the provisions of Corporations Act 2001 and Australian Accounting Standards in convergence with the International Reporting Framework Standards.
Effects of Events After Balance Sheet Date – As per the Note 8 of the Directors Report for the year ending 30-06-2015, no event or circumstances has arisen after the end of the reporting period the effect of which is significant and is required to be disclosed as per AASB 110 – Events after the reporting period.
Disclosure relating to the Final dividend declared on 12th of August 2015 has been made. This is the event which has been occurred after the reporting period but the liability for the same has not been made in the books of accounts. It is because as per AASB 110 if any entity declares dividend after the reporting period then there is no need to create any liability at the end of the reporting period. But the same fact of declaration of dividend, its payment and its exercise details shall be disclosed in the Notes to Accounts as per the AASB 101 on the Presentation of Financial Statements.
Effect of Changes in Accounting Policies – There are changes in the accounting policies. As per Note number 1 (d) The Company has changed the method of recognition under Energy Market Segment of distribution use of system costs in the area of South Australia and Queensland. Due to this change the company’s revenue and expenses are shown at grossing up figure in the Statement of Profit and Loss and similarly the receivables and payables are shown in the statement of financial position at grossing up figure.
Second change is that the company has change the structure of segment reporting so as to disclose the business operations in accordance with the structure of the organization. To comply with such change the operating segments have been changed from Retail energy, Merchant Energy, Upstream gas and Investments to Energy Markets, Group Operations, New Energy and Investments respectively.
Carrying Amount of Items under PPE – As per the annual report of the company, the net carrying amount of following three classes as on 30th of June 2015 are as follows:
Classes of Property Plant and Equipment Net Carrying Amount as on 30-06-2015.
Freehold Land and Building $ 104 m
Leasehold Land and Building $ 5 m
Plant and Equipment $6849 m
As per the AASB 116 on Property Plant and Equipment, Net Carrying amount as on date of reporting period is the amount at which any assets is recognized in the books of accounts after reducing therein the amount of accumulated depreciation till reporting date and the amount of impairment loss during the year if any.
Accounting Policies adopted for PPE – Property Plant and Equipment has been valued cost of an asset less the amount of accumulated depreciation and accumulated impairment loss if any. Cost incurred after the reporting period is also capitalized if it is probable that the economic benefits will flow in future and is easily measurable.
Apart from the cost of property plant and equipment, depreciation is charged to an asset and expensed in Profit and Loss account. Depreciation has been calculated on the basis of Straight line method or on the basis of use of units. Company estimates, the useful life of all assets, their residual value and the method of depreciation for all assets excluding Land, at the end of each reporting period. The estimated useful lives for freehold building its fifty years, for leasehold buildings its least of period of lease or twenty years and for plant and equipment three to thirty five years or the number of units used.
Intangible Assets of the Company – As per the Note number 17 of the Annual Report of the company, the company has shown the bifurcation of intangible assets amounting to 3266 m $. It consists of four classes namely Goodwill, Licenses, Customer Relationships and Contracts and Others.
Goodwill is directly related to the synergies, higher revenues with savings in cost which is expected to be achieved in due course of time. Second one is Licenses which helps the company to operate the business effectively and efficiently. Through customer relationships and contracts the company will be able to capture the market.
Accounting Policies Adopted for Intangible Assets – Intangible assets are generally recognized on acquisition or business combination or are acquired as general asset. These assets are amortized over its useful life or are not depreciated in case it has indefinite lives. The useful life and the recognition criteria are reviewed by the company at the end of each reporting period. These intangible assets are derecognized when it is probable that there will be no economic benefits from the utilization of these intangible assets.
First intangible goodwill is recognized at cost less accumulated impairment loss. Similarly licenses and customer relationship contracts are valued at cost less accumulated amortization and accumulated impairment loss.
Impairment of Assets – As per the annual report of the company items of Intangible assets have been impaired during the year and accordingly impairment loss has been accounted for in the books of accounts. No impairment has been charged for items under the head Property Plant and Equipment. In case of Intangibles, Customer relationships and Contracts have been impaired during the year by 40 $ m and accordingly reported in the notes to accounts. The loss has been booked in accordance with the provisions of Australian Accounting Standard Board (AASB) 136.
In order to compare the aforesaid analysis with other company, Origin Energy Limited has been chosen out of the three competitors cited above. As per the Annual report, Origin Energy Limited has three main business activities which includes exploring and producing the natural gas, generating the electricity and selling the electricity and gas so generated or produced in wholesale or retail market. Company has three operating segments Energy Market, Exploration and Production and the Contact Energy. Though the company has derived 20% increase in EBITDA but there has been a statutory loss of 449 $ m. (Cited in Annual Report).Due to this Earning per share is also in negative terms. The company is majorly financed through Interest bearing liabilities. In respect of Capital structure of the company, debt equity ratio has not been improved as from 0.67 in 2014 to 0.93 in 2015. Two significant events have happened subsequent to the balance sheet date. First is the sale of entire interest of 53.09% in Contact Energy Limited and the second is declaration of final dividend of 25 cents per share on 28th September 2015. The companies follow the same policies for Property Plant and Equipment having net carrying amount of $6505 m and Intangibles having net carrying of $5281m and are impaired accordingly.
Conclusion
AGL Energy Limited being the largest company in Australia has been servicing millions of customers through the goodwill that has gained by the company from the date of its incorporation. Company has followed all the relevant accounting standards for the purpose of accounting and reporting thereon and has reflected true picture of the status of the company. Company’s financial structure is adequate according to the nature of business and investment in the assets including property plant and equipment and intangibles is appropriate. Their selected competitors for analysis though has reported underlying loss but have resulted in higher EBITDA. In order to conclude, the above study has given the details of AGL Energy Limited and has provided the comparison with the leading competitor in the Industry.
From this report, it is analyzed that AGL Energy Limited is efficient and capable of making its position in the market in spite of having the leading competitors like Origin Energy and Duke Corporation. When compared with Origin Energy Limited, it is implied that the company still have goodwill, earning profits in such a recession period of energy industry, declaring and paying higher dividends to shareholders, have adequate capital structure and is complying with the provisions of all relevant statutes and regulations. Thus, our recommendation for the investor to invest in AGL Energy Limited out of the companies operating in Energy Sector and for the customer to opt for products of AGL Energy Limited and for the financial institutions and other stakeholders to have AGL Energy Limited at the top.
References:
AGL Energy Limited, 2015 “Annual Report” Official Website available on https://www.agl.com.au accessed on 01/09/2016.
Australian Government, 2016, “Australian Industry Report” available on https://www.industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/AIR2015.pdf accessed on 01/09/2016.
Australian Government, 2011, “Events after the Reporting Period”, available on https://www.aasb.gov.au/admin/file/content105/c9/AASB110_07-04_COMPdec09_01-11.pdf accessed on 02/09/2016.
Australian Government, 2010, “Impairment of Assets” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf accessed on 02/09/2016.
Origin Energy Limited, 2015, “Annual Report” official website available on https://www.originenergy.com.au/content/dam/origin/about/investors-media/senate-submission-carbon-risk-disclosure-160331/annual-report-2015.pdf accessed on 02/09/2016
Australian Government, 2015, “Operating Segments” available on https://www.aasb.gov.au/admin/file/content105/c9/AASB8_08-15_COMPnov15_01-16.pdf accessed on 02/09/2016.
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