Carbon Risk Disclosure in Australian Energy

This assignment delves into the topic of carbon risk disclosure within the Australian energy sector, specifically focusing on two major players: AGL and Origin Energy. Students are tasked with analyzing the carbon risk disclosures presented in the annual reports of both companies. The analysis should draw upon relevant accounting frameworks like IFRS (International Financial Reporting Standards), incorporate concepts from agency theory to understand the motivations behind disclosure practices, and consider the impact of regulatory risks on corporate reporting.

Accounting Theory and Issues

Executive Summary
The present report has been prepared for demonstrating the importance of accounting strategy and
policies adopted affirm in meeting its corporate goals and objectives. This is an investigative report based
on the manager’s accounting strategy and the reporting strategy choices adopted by an ASX listed firm in
Australia. In this context, the report addresses the key accounting policies, accounting flexibility, quality
of accounting disclosure, accounting strategy evaluation and the potential red flags in the public financial
disclosure of AGL Energy Ltd., an energy company in Australia. The compliance of the financial reports
of the company as per the conceptual accounting framework is also discussed in the report.

Introduction
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.
Section 1: 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).
Section 2: 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).
Section 3: 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).
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.
Section 4: 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
Section5: 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).
Section 6: 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.

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