Accounting Concepts and Measurement Issues in Advanced Financial Accounting

This report discusses the accounting concepts used by AGL Energy Limited and the measurement issues involved in the conceptual framework. It also explores the fundamental qualitative characteristics of financial information.

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced financial accounting
Name of the student
Name of the university
Student ID
Author note

1ADVANCED FINANCIAL ACCOUNTING
Table of Contents
Introduction............................................................................................................................2
1. Accounting concepts.......................................................................................................2
2. Measurement issues involved with conceptual framework.............................................3
3. Fundamental qualitative characteristics..........................................................................5
Conclusion.............................................................................................................................6
Reference...............................................................................................................................7

2ADVANCED FINANCIAL ACCOUNTING
Introduction
Purpose of this report is to study the annual report of AGL Energy Limited to deliver
examples and identify the accounting concepts used by the entity. The report will focus on
the measurement in accounting in accordance with the conceptual framework and the
measurement techniques used by AGL Energy Limited. In the next segment the report will
state the understanding regarding the fundamental qualitative characteristics associated
with relevance and faithfulness regarding the information presented in the financial
statements. AGL Energy Limited amongst the leading entities in Australia those are
engaged in integrated energy related products and services. it is engaged in merchant and
retail energy related business, upstream gas portfolio and power generation of assets
(Agl.com.au 2019).
1. Accounting concepts
It refers to basic principles, rules and assumption those are used as the basis for
recording business transactions and for preparing the accounts. Accounting concepts
presumes that for the purpose of accounting business organisations and he owners are
the 2 separate independent organisations. Recording for each financial transaction is
crucial to the business and for the creditors and investors. Accounting uses the regulated
and formalised system that follows the standardised procedures and principles. The
primary objective of accounting concepts is maintaining consistency and uniformity for
accounting records (Bebbington and Larrinaga 2014). These concepts are considered as
the basis for accounting. All the concepts are developed over decades from the
experience and hence they are accepted universally. Below are different accounting
concepts those are generally used while preparing the financial statements by the entities
–
 Accounting period concept – all accounting transactions recorded under the books
of the accounts are on assumption that the profits associated to these transactions
shall be ascertained for particular period. It is known as the accounting period
concept. It requires the profit and loss statement and balance sheet shall be
prepared at the regular intervals. This is important for various purposes like
ascertainment of financial position, profit computation and computation of tax.
 Going concern concept – this concept tells that business organisation will continue
carrying on the activities for the indefinite time period. To be more specific, it states
that each business organisation has the continuity for life. Hence, it is not expected
to be dissolved in the near future. This concept is considered as a crucial concept
as it delivers basis for revealing the asset’s value under the balance sheet (Francis,
Hasan and Wu 2013)
 Accrual concept – accrual concept states that something like an amount is yet to be
received or paid at the closing of the accounting period. It states that the revenues
are recognised while it becomes receivable. It makes a difference among accrual
receipt of cash and right to receive the cash is considered as revenue and as the
actual obligation and payment of cash is considered as expenses
 Matching concept – it states that revenue and the expenses made to earn the
revenue shall belong to same period for accounting. Hence, once revenue is
realised in the next step the associated expenses are accounted for. This is done
through using the actual concept.
 Accounting cost concept – it states that all assets reported in books of accounts at
the purchase price that includes acquisition cost, transportation and installation cost
and not at the market price. In other words, fixed assets like machinery, building,

3ADVANCED FINANCIAL ACCOUNTING
furniture, are recorded at the price at which they are acquired (Frias‐Aceituno,
Rodriguez‐Ariza and Garcia‐Sanchez 2013)
 Business entity concept – this concept presumes that for the purpose of
accounting, business enterprises and the owners are separate and independent
entities. Hence, the personal transactions of the owner and business transactions
shall be maintained separately.
Accounting concepts applied by AGL Energy Limited
Consolidated financial statement of AGL Energy Limited is the general purpose
financial statements that are prepared by the for-profit organisation as per the requirement
of Corporations Act 2001, AASBs and are complied with the IFRS. Various accounting
concepts used by the entity are as follows –
 Going concern concept – consolidated financial statements of the entity are
prepared in accordance with going concern concept. The director is responsible for
assessing whether the consolidated entity is able to continue as the going concern
and use of the going concern basis is appropriate.
 Accounting period concept – AGL Energy Limited records all the accounting
transactions on the assumption that the profits associated to these transactions are
ascertained for particular period. The period covered by the entity for recording its
accounting transaction is for 1st July to 30th June. Further the entity prepares the
profit and loss statement and balance sheet shall at the regular intervals covering
the said period. This helps the users in ascertainment of financial position, profit
position of the entity (Cheng et al. 2014).
 Accrual concept – the company prepares its account based on the accrual concept
that is an amount that is yet to be received or paid at the closing of the accounting
period. Further, the entity records the revenues while it becomes receivable.
 Matching concept – company records the expenses in the same period in which the
associated revenues are earned. Further, once revenue is realised by the entity, in
the next step it accounts for the associated expenses. This is done through using
the actual concept.
 Accounting cost concept – the company reports all assets in books of accounts at
the purchase price that includes acquisition cost, transportation and installation cost
and not at the market price. In other words, fixed assets like machinery, building,
furniture, are recorded at the price at which they are acquired.
 Business entity concept – this entity records only the business related transaction in
the name of the company. Hence, the personal transactions of the owner and
business transactions are maintained separately (Deegan 2013)
Hence, from the above it can be stated that the entity follows accounting concepts
like going concern concept, matching concept, accounting cost concept, accrual concepts,
accounting period concept and business entity concepts while preparing the financial
statements of the company. It will enable the users of financial statement to make
informed and better decisions regarding investment or credit lending (Agl.com.au 2019).
2. Measurement issues involved with conceptual framework
Revised conceptual framework for the purpose of financial reporting was issued by
IASB (International accounting standard board) in 2018 March. Owing to this, for
complying with the strategies of AASB and the directive of financial reporting council the
framework is required to be applied all over Australia. As stated in the conceptual
framework the procedure of determining monetary value of the element at which the same
is to be recognised in the income statement and balance sheet. It involves selecting

4ADVANCED FINANCIAL ACCOUNTING
appropriate measurement basis. Various measurement bases are applied by the entities to
variety of extent and that too in different combination under the financial statement. These
includes –
 Present value – the assets in the balance sheet of the entity are carried at present
value discounted at applicable discount rate for the net cash flows in future period
that is expected from the assets in the normal business course. On the other hand
the liabilities are recognised at present value discounted at applicable discount rate
for the net cash outflows expected to be required for settlement of the obligation in
the normal business course (Griffith, Hammersley and Kadous 2015).
 Current cost – assets are recognised at cash amount or at the amount which is
equivalent to cash that are required to be expensed if the equivalent or the same
asset is acquired from the market. On the other hand, the liabilities are recognised
at the value of settlement. The settlement value is the non-discounted value of cash
or the cash equivalent estimates to be paid in normal business course.
 Historical cost – assets are reported at the amount which is expensed to acquire the
asset including the transportation and installation cost. On the other hand, liabilities
are reported at the value of proceeds that is received in exchange of obligation or at
the amount of cash or cash equivalent that is required to be paid at the normal
business course (Ifrs.org 2019)
 Realisable or settlement value or exit price - assets are reported at the amount of
cash or cash equivalent that can be received by the entity if the assets is sold in the
market under normal business course. On the other hand the liabilities are reported
at the settlement price that is non-discounted value of cash or the cash equivalent
that is expected to be made for satisfying liabilities in normal business course.
Factors those shall be taken into consideration to select the measurement bases
are listed below –
 Enhancement of qualitative characteristics – enhancement of qualitative
characteristics involves the implication of verifiability, comparability and
understandability. It states that the value shall be measured in such way that it can
be verified, compared with previous records or with other entities and shall be
understood by the users. However, timeliness has no impact on measurement.
 Reliability – the value shall be reliable for the purpose of measurement. Reasonable
estimates shall be made while preparing the financial statement as it is integral part.
If the estimates cannot be made reasonably the item shall not be reported in the
financial report as it cannot be measured (Li 2013)
 Faithful representation – information those are reported in the financial report are
required to be without any error. However, this does not imply that the information
shall be accurate perfectly. Inconsistency in measurement may take place if
different estimate are used for assessing the value of assets as well as liabilities. If
inconsistencies take place in measurement it may result into unfaithful presentation
of annual statement as well as the entity’s financial performance. On the contrary,
for some instances the use of same basis of measurement for the assets and the
associated liabilities
 Relevance – for reporting items under financial statement of the entity selecting
appropriate basis for the purpose of measurement is crucial as it has huge impact
on the performance and financial position of the entity. Further, the contribution of
assets and liabilities to the cash flow of the entity shall also be taken into
consideration. However, the same is highly dependent upon the business nature,
type of activities it is engaged into, nature of the industry and the economic
condition of the country (Mca.gov.in 2019).

5ADVANCED FINANCIAL ACCOUNTING
Analysing the scope and business scenario of AGL Energy Limited following issues
were found those are involved with the measurement principles of the entity –
 Historical cost method – primary issue involved with historical cost approach is it
does not consider the changes in the market prices and changes in the value of
money. Hence it does not provide the true picture of the entity’s financial position.
Further, the fixed cost reported as per the historical cost approach does not reflect
its true value (Agl.com.au 2019).
 Current cost approach – main issue with this approach is that consideration of
current cost is significantly subjective and is only applicable for short term period
only. However, for long term period current cost is considered to have no existence
and hence, is not useful (Miller and Power 2013)
 Realisable value – it is relevant only for the assets expected to be sold and if 2nd
hand market for the same exists. Hence, in absence of 2nd hand market it is difficult
to value the realisable value for the same assets. Further, the exit price is less
relevant for the asset which is intended to be discarded. Disclosures of cash value
are less likely to be relevant to the other users those are interested in the
profitability of the entity (Agl.com.au 2019).
 Present value – as the present value is sensitive to the discount rate, if the discount
rate is not taken on appropriate basis the present value will be misstated. Hence,
present value is not relevant in case the discount rate application method is not
justified (Ryan et al. 2014)
Analysing the annual statement of AGL Energy Limited it is found that the entity
prepares the financial statement based on the historical cost excluding the assets like
financial instrument, derivative instrument as these assets are valued at using the fair
value approach.
3. Fundamental qualitative characteristics
Qualitative characteristics in context of useful information requires that the if the
financial information is to be used for the purposes of taking various crucial decisions the
information shall be represented faithfully and the same shall be relevant to the intended
purpose. The usefulness of the information can be enhanced if the same is
understandable, timely, verifiable and comparable. In other words, It states that the value
shall be measured in such way that it can be verified, compared with previous records or
with other entities and shall be understood by the users and the information shall
purported to specific period (Aasb.gov.au 2019).
Relevance –
If the financial information is relevant it can create difference in decision made by
the users of financial statement. Further the information is capable to make difference
even if any user does not opt for taking advantage of the same in case the user is aware of
the same from any other source. Further the financial information can make difference in
context of the decisions if the same has confirmatory value or has predictive value or has
both the value. Confirmatory value is the value that provides confirmation regarding the
previous analyses. On the other hand predictive value is the value that can be used as the
input to the processes employed by the users for predicting the future outcomes
(Aasb.gov.au 2019). Going through the annual statement of AGL Energy Limited it is found
that the information provided by the entity can be verified with the supporting details
disclosed through notes, compared with previous records or with other entities and shall
be understood by the users clearly. Hence, the financial information provided by the entity
is considered as relevant (Agl.com.au 2019).

6ADVANCED FINANCIAL ACCOUNTING
Faithful representation –
Though the financial information are provided in context of economic phenomena
that is with the numbers and word, for using the information for decision making purpose it
shall not only be presented with economic phenomena, it must be represented faithfully.
For presenting the financial statement faithfully the information shall be without any
involvement of error, neutral and complete in all aspects. However, it does not mean that
the information shall in all aspect be accurate and without any involvement of error means
omission or error is not involved while amount is reported (Aasb.gov.au 2019). Going
through the annual statement of AGL Energy Limited it is found that the information
provided by the entity can be are without any involvement of error, neutral and complete in
all aspects. Hence, the financial information provided by the entity is considered to be
represented faithfully (Agl.com.au 2019).
Conclusion
From the above discussion it can be concluded that AGL Energy Limited follows
accounting concepts like going concern concept, matching concept, accounting cost
concept, accrual concepts, accounting period concept and business entity concepts while
preparing the financial statements of the company. Further, the information provided by
the entity can be verified with the supporting details disclosed through notes, compared
with previous records or with other entities and shall be understood by the users clearly.
Moreover, information provided by the entity can be are without any involvement of error,
neutral and complete in all aspects. Hence, the financial information provided by the entity
is considered as relevant and represented in faithful manner.

7ADVANCED FINANCIAL ACCOUNTING
Reference
Aasb.gov.au. 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/ACCED264_06-15.pdf [Accessed 30
May. 2019].
Agl.com.au. 2019. [online] Available at:
https://www.2018annualreport.agl.com.au/xmlpages/resources/TXP/agl_energy/finrep/
pdf/AGL_Energy_Annual_Report_2018.pdf [Accessed 31 May 2019].
Bebbington, J. and Larrinaga, C., 2014. Accounting and sustainable development: An
exploration. Accounting, Organizations and Society, 39(6), pp.395-413.
Cheng, M., Green, W., Conradie, P., Konishi, N. and Romi, A., 2014. The international
integrated reporting framework: key issues and future research opportunities. Journal of
International Financial Management & Accounting, 25(1), pp.90-119.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Francis, B., Hasan, I. and Wu, Q., 2013. The benefits of conservative accounting to
shareholders: Evidence from the financial crisis. Accounting Horizons, 27(2), pp.319-346.
Frias‐Aceituno, J.V., Rodriguez‐Ariza, L. and Garcia‐Sanchez, I.M., 2013. The role of the
board in the dissemination of integrated corporate social reporting. Corporate Social
Responsibility and Environmental Management, 20(4), pp.219-233.
Griffith, E.E., Hammersley, J.S. and Kadous, K., 2015. Audits of complex estimates as
verification of management numbers: How institutional pressures shape
practice. Contemporary Accounting Research, 32(3), pp.833-863.
Ifrs.org. 2019. IFRS . [online] Available at: https://www.ifrs.org/issued-standards/list-of-
standards/conceptual-framework/ [Accessed 30 May 2019].
Li, J., 2013. Accounting conservatism and debt contracts: Efficient liquidation and
covenant renegotiation. Contemporary Accounting Research, 30(3), pp.1082-1098.
Mca.gov.in. 2019. [online] Available at:
http://www.mca.gov.in/XBRL/pdf/framework_fin_statements.pdf [Accessed 30 May. 2019].
Miller, P. and Power, M., 2013. Accounting, organizing, and economizing: Connecting
accounting research and organization theory. Academy of Management Annals, 7(1),
pp.557-605.
Ryan, C., Mack, J., Tooley, S. and Irvine, H., 2014. Do not‐for‐profits need their own
conceptual framework?. Financial Accountability & Management, 30(4), pp.383-402.