Identify Key Accounting Policies
The report has examined and evaluated the accounting strategy of AGL Energy Ltd, an ASX listed renowned energy company of Australia. AGL is a leading integrated renewable energy companies which is based in Australia. The company is acting responsibly by reducing the greenhouse gas emissions caused by it and is also providing safe, secure and affordable energy to its customers. AGL is meeting the energy requirements of its customers around the whole part of eastern Australia which includes gas, electricity, solar PV and other related products and services (ASX and Media Releases, 2016).
The company has a diverse product base which includes peaking and intermediate generation plants and renewable sources which comprises of hydro, wind landfill gases, solar energies and biomass (AGL Annual Report, 2016). The report here deals with strategic evaluation of the accounting choices and policies adopted by the company for meeting its goals and objectives. The accounting standards and the accounting strategies being followed by the company provide an in-depth understanding about the operations and functions of the company.
Identify Key Accounting Policies
The company is following all the regulations and norms in accordance with the Corporations Act 2001 and Accounting Standard AASB Concise Financial Reports. AGL has implemented various kinds of accounting principles and standards in their business operations. These standards were changed and amended due to change in the accounting policies on international level.
As the company is dealing in reducing its greenhouse effect it become quite essential for the firm to follow the accounting standards that has been adopted unanimously by the world, so that homogeneity can be maintained. AGL has brought the required amendments in its accounting policies and standards that are relevant to its operations and effective for the current reporting period (AGL Annual Report, 2016). The implementation of amendments in the company has not laid any bad impact on the financial statements of the company (AGL Annual Report, 2015).
AGL reporting is as same as the internal management reporting structure. The company is following the accounting standards based on the guidelines of the AASB and is also working in compliance with the normative accounting theory. This means that the accounting approach of AASB is quite new and instead of events it focuses on the framing strategies through which the company can work in accordance to the demands and desires of the customers throughout the world.
Apart from this in order to remain competitive in the crucial and dynamic market the company has also started to follow the guidelines prescribed by the IFRS (AGL Annual Report, 2016). The implementation of IFRS in the accounting standards has proved quite beneficial for the firm as the firm has become capable of presenting their data in the financial report in a quite effective manner (Horngren et al., 2012).
This has also helped the firm in becoming more transparent in their operations so that their customers and investors got to know about the firm in an effective manner. The implementation of IFRS has also aid the business organization to comply with the international standards of the accounting which has indirectly increased goodwill of the firm (Wolk, Dodd and Rozycki, 2012). In addition to this, the application of IFRS has also made the firm more competitive. All the standards and procedures adopted by the firm are based on normative accounting theory (AGL Annual Report, 2015).
Assess Accounting Flexibility
Assess Accounting Flexibility
Management of a business organization is responsible for the implementation of accounting standards in the firm. In AGL this task is also performed by the top level management and their associates. The top level management analyses a huge spectrum of information about the accounting standards that are prevailing in the international businesses (AGL Annual Report, 2016). In addition to this, it is quite important for a business organization to select an accounting standard because accounting is a major part of organization and is also crucial at the same time. Apart from this, if a business organization is busy in conducting international business then accounting become utmost significant. This is because it is important for the firm to maintain a common standard so that less difference in the amount and quantity can be maintained (Hussey and Ong, 2005).
The organization AGL has also adopted various types of accounting standards whichever is prevailing in the market in order to remain competitive in the global business market. The company is working on the guidelines of AASB and in addition to this it has also adopted the guidelines prescribed by the IFRS (AGL Annual Report, 2016). AASB has made it mandatory for organizations that are working in Australia to follow its guidelines and procedures. The company has adopted the same however; sometimes there is flexibility on the account of top level management.
The top management sometimes amends the way in which guidelines through AASB and IFRS are prescribed. However, the way through which they do the same is ethical and in compliance with the guidelines prescribed by the ASSB and IFRS (Hussey and Ong, 2017). The guidelines are followed flexibly so that they can maintain their competitive edge in the market. AGL has a wide customer base and it is important for them to take care of their needs and desires, in doing this, they sometimes become flexible (AGL Annual Report, 2015).
Evaluating the Accounting Strategy
The AGL Energy Limited has adopted proper accounting policies and procedures for developing its financial reports. The accounting strategy of the company can be evaluated on the basis of its comparison with industry peers accounting policies, changes adopted in the accounting policies, structuring of accounting transactions for achieving certain objectives and incentive criteria adopted for managers (Kenny, 2009).
The AGL Energy operates in a highly competitive energy industry of Australia as it has to develop its accounting policies that are able to provide it a competitive advantage in the market. The company is implementing the accounting policies that provide it an opportunity to take advantage of the market conditions. The accounting policies are adopted in order to improve the operational efficiency of the company so that it is able to improve its competitiveness in the market (Knight, 2004).
The financial statements are prepared on the basis of AASB standards and the Corporations Act 2001 as per the Australian accounting standards and policies. The company has prepared and reported its financial results as per the accounting policies adopted by its competitors (Origin Annual report, 2016). The company has also implemented the accounting standards for measuring carbon emissions as per the industry standards. There is strong legislation imposed by the country’s government on the energy companies for reducing the emission of carbon from its operational processes (The Australian, 2017). The company has adopted the IFRS and AASB standards for identifying and measuring the value of its financial instruments such as assets, liability and equity as per the industry standards (Marley and Pedersen, 2015).
Evaluating the Accounting Strategy
As per the positive theory of accounting, the financial managers tend to adopt the accounting method that reflects the best financial performance of an entity. Thus, the management has discretion in change the accounting policies and transactions as per the nature of their business operations for maximizing the value of the entity (Bamberg and Spremann, 2012). As such, some flexibility in accounting frameworks is required to be adopted by the IASB so that managers can select the accounting policies and estimates on the basis of their business needs and requirements.
This refers to change in the accounting approach selected for evaluating the assets and liabilities or any modification in the deprecation method. The managers have to implement change in the accounting practices that improves the financial performance of an entity (Mirza and Ankarath, 2012). As per the financial reports of the AGL, the company has implemented some amendments in its existing accounting standards and policies for enhancing its operational effectiveness (AGL Annual Report, 2015).
However, the application of these changed accounting standards has not caused any materialistic changes in the financial reports of the company as presented by its annual disclosures. The company has restructured some of its accounting transactions for incorporating the transformational changes occurring in the energy industry of Australia. It has implemented changes in its operating financial models for achieving success in the energy industry of Australia. It has planned to downsize its non-core business operations that are not considered essential for promoting its long-term growth and value. The decision of the company has facilitated to reduce its operational cost by $60 million after tax for maximizing its operational profitability from its core business areas (AGL Annual Report, 2016).
The management of a business entity applies the accounting standards in relation to the recognition, measurement and disclosure of the financial statements. However, as per the PAT theory, the management has some discretion power in selection of the accounting policies for developing the financial statements. The managers can also distort some information relating to the performance of an entity on the basis of the incentives realized by them to manage the earnings (Mumba, 2013).
Therefore, as such it is essential that incentives provided to the managers are not linked to the business profitability. It has been analyzed from the annual report of AGL Energy that incentives provided to managers are linked with the underlying profit. The underlying profit of the company does not incorporate the materialistic information relating to the revenue or expenses realized from the material items. Also, it does not reflect any changes in the fair value of financial instruments stated in the profit and loss statements and thus removing the volatility in the financial reporting (AGL Annual Report, 2016).
Therefore, the use of underlying profit for measuring the mangers incentives ensures that executives does not take a undue advantage of their discretion power (Ordelheide, 2016). The decision for including the significant items in the underlying profit is decided by the board. The Board has also implemented an incentive policy in order to prevent the involvement of the executives from involving in any derivative pr financial product in relation to their short-term and long-term incentive plans. This is done for aligning the incentive policies developed for executives with the interests of the shareholders. Also, the company develops a service agreement that provides the guidelines regarding the remuneration and other employment terms of the executives.
The service agreement has provided all the standard guidelines regarding the participation of the short and long term incentives as per the decision of the board of directors. Thus, on the basis of evaluating the overall accounting policies and procedures adopted by the company it can be said that the company has adopted a revealing accounting strategy (Pietra, McLeay and Ronen, 2013). The accounting strategies adopted by the company have helped it in disclosing all the pertinent financial information required by the end-users for making investment decisions.
Evaluate the Quality of Disclosure
The financial statement of the firm AGL was quite adequate as it has incorporated various aspects of the firms. It has described about the share performance right holding, equity disclosures etc. the annual report of the firm has also provided information about the role of people and performance committee. This committee helps the board in fulfilling their responsibilities towards the shareholders, customers, investors, employees and the general public through making appropriate recruitment, remuneration and retention of the same (AGL Annual Report, 2016).
The annual report has also provided information about the kinds of business in which the AGL is engaged. The annual report has also covers the views and opinions of the chairman, managing director and other staff so that general public and investors get to know about the company in a well manner (Mintz, 2013). Apart from this, the operational strategies of the AGL are also discussed in the report. The annual report provides a vast base of information about the company which is quite sufficient (AGL Annual Report, 2016).
The footnotes provided information about the accounting policies that has been followed by the firm. Apart from this it also discussed about the amendments that has been made by the firm in the accounting policies, thus it was also adequate. The notes explained the policies and standard that is being followed by the firm. The company has made various amendments in the accounting policies in order to remain in consistent with the competitive world (AGL Annual Report, 2016). The notes explained the same thing in a wide and detailed manner. GAAP was a standard in accounting which was accepted by the organizations around the world unanimously. This standard has brought a positive change in the accounting practices of the organization.
The firm AGL has adopted various standards and has also carried out significant changes in the accounting standards in order to remain competitive and effective. The accounting standards prevailed in the AGL has clearly showed that they were based on the GAAP standard either directly or indirectly and it did not restrict the organization (Jensen, 2001). The segment disclosure has covered various aspects and is explained in detailed form. Management has determined the operating segment based on the manner in which the product is sold. The segment of the organsation is further classified into four interrelated segments; they are energy markets, group operations, new energy and investments. These are the four categories in which the needs of customers are catered. Apart from this, the financial results of the same are also disclosed in the annual report (AGL Annual Report, 2016).
Source: https://www.agl.com.au/-/media/DLS/About-AGL/Documents/Investor-Centre/160828_AR_1587084.pdf?la=en
Identifying Potential Red Flags
The potential red flags of a business entity depicts the issues of concern that are identified in its annual report that requires more disclosure and are not sufficiently explained in the annual disclosures. The potential red flags identified in the annual report of AGL Energy Limited are as follows. The company has adopted some amended accounting standards for maximizing its operational efficiency but has nor disclosed adequate information regarding the specific amended standard adopted. The company has restructured its accounting transactions regarding the measurement of its operational cost for improving its operational profitability.
The company has downsized its non-core business areas without providing detailed information regarding the decision for their downsizing. The company needs to provide more information about the transformations adopted in the measurement of its operational costs. The company for improving the performance of its operating segments has also adopted significant changes in accounting methods for measuring the fair value of its financial instruments. The company has removed the disclosure of some significant items from its operating EBIT in order to enhance its operational profitability (AGL Annual Report, 2016).
Source: https://www.agl.com.au/-/media/DLS/About-AGL/Documents/Investor-Centre/160828_AR_1587084.pdf?la=en
Also, the large asset impairment of the company also presents a major use of concern. The company ahs reported about $6 million decrease in its inventory value due to impairment. The main reason as stated by the annual report of the company for large-asset impairment is due to the decline in the global oil process that has degraded the value of its natural gas assets. The company has also reported a statuary loss after tax of about $408 million to its shareholders due to inclusion of significant items in its operating profit realized after tax deductions.
This represents a large gap between the net income and taxable income which is mainly due to the removal of some significant items from the underlying profit of the company. The company has reported its underlying profit to be about $701million and this is due to removal of significant items from its taxable income. The company needs to provide more information in relation to the increasing gap between its net income and taxable income.
The company is also incorporating eth sue of strategic partnerships for meeting its capital requirements. It has been depicted din its annual report that AGL has currently sold 50 % of its share to H.R.L. Morrison and Co and realized sale of $7 million before tax gain. It has also acquired the assets of Macquarie Generation for improving its capital allocation (AGL Annual Report, 2016).
Source: https://www.agl.com.au/-/media/DLS/About-AGL/Documents/Investor-Centre/160828_AR_1587084.pdf?la=en
Source: https://www.agl.com.au/-/media/DLS/About-AGL/Documents/Investor-Centre/160828_AR_1587084.pdf?la=en
It has also been seen in the annual report that AGL Energy is involved in the selling of big assets in year 2016 and it can be clearly seen in cash flow statement. After reviewing the cash flow statement and its related notes to accounts it has been noted that there is unexpected write off of assets for $673 Australian dollars. These assets are the sale of cash generated units that are the substantial assets of the AGL Company. The fourth quarter means end period of the financial accounting cycle and in this accounting many adjustments are done to give effect to the change of one accounting period to another. As seen in the subsequent events section of the annual report of the AGL Energy there is only major change that has been taken in end of fourth quarter has been reported (AGL Annual Report, 2016).
As per this note to account, AGL Energy announced that on behalf of QIC or those invested in QIC that they are partner in the $2-3 billion project of Powering Australian Renewables Fund (PARF). The independent Auditors of the AGL Energy are Deloitte and they have successfully evaluated the entity financial statements and other requirements in financial reporting (Langendijk, Swagerman and Verhoog, 2003). As per the opinion of the independent auditors of the company unmodified opinion has been given on the consolidation financial statements of the company. Related party transactions means those transactions that are outstanding on the balance sheet date (Gray and Manson, 2007). These transactions refer to those transactions that are done with the related parties. As seen in the annual report of AGL Energy there is no such related party transactions that are due on the balance sheet date (AGL Annual Report, 2016).
Compliant with the Conceptual Framework
The conceptual framework is a normative theory, which seeks to identify the general purpose of financial reporting. It also deals with providing accounting guidance which is in compliance with the current trends. The normative theory is the one which is mostly followed in organization at present because this theory deals with optimal accounting approaches (AGL Annual Report, 2016).
This theory seeks to aid in selecting accounting procedures that are most appropriate. The annual report has remained in compliance with the conceptual framework as the company AGL has followed various approaches in relation to the accounting standards. The firm has made various amendments in accounting procedures so as to remain competitive in the market. The company is following the guidelines set out by the AASB and the IFRS which is in trend in the present market conditions. In the dynamic business environment, where every business firm is catering customers from across the world, in such a dynamic and crucial environment IFRS has provided stability in the accounting procedures of the firm (Wolk, Dodd and Rozycki, 2012).
Conclusion
The report has inferred that accounting strategies plays a vital role in the long-term growth and success realized by a business entity. It is quite important to evaluate accounting methods and policies implemented by an entity before making investment decisions. AGL is a company which is engaged in renewable energy and is providing its customers safe and secured energy to its customers in Australia. The company has adopted the guidelines of AASB and IFRS in order to remain in compliance with the international accounting standards and procedures. The report has addressed various aspects of accounting and its impact on the efficiency of the performance of the business organsation.
References
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