PPE Analysis of AGL Energy - Desklib

This report explains the accounting policies and estimates related to Plant, Property and Equipment of AGL Energy Limited. It includes a detailed analysis of accounting policies and estimates, evaluation of professional judgement in application of accounting policy and estimates, improvement in accounting policies and estimates, and conclusion. The report also provides subject, course code, course name, and college/university details.

PPE ANALYSIS OF AGL ENERGY
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DATE: 29/09/2019
SUBJECT: PPE ANALYSIS OF AGL ENERGY
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Executive Summary:
This report has been prepared with an objective to explain the accounting policies and estimates
related to Plant, Property and Equipment. We have made detailed analysis of accounting policies and
estimates of AGL Energy Limited which is listed on Australian Stock Exchange. We have also
suggested the recommendations for improvement in estimates related to PPE. We have also
performed competition analysis of accounting policies and estimates of AGL Energy Limited with
industry standard and competitors and accordingly has made detailed analysis of PPE and its
estimates.

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Table of Contents
1. Company selected 4
2. Introduction 4
3. Detailed analysis of PPE 4
a. Criteria for selecting and changing accounting policies related to PPE 4
b. Accounting estimates and policies used by AGL Energy Limited………………………...5
c. Evaluation of professional judgement in application of accounting policy and
estimates…………………………....…………………………....……………………….6
d. Improvement in accounting policies and estimates…………………………....………7
4. Conclusion 7
5. References 8
6. Appendix 9

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1. Company selected:
We have selected AGL Energy Limited for analysis of accounting policies and estimates related to
Plant, Property and Equipment (PPE).
2. Introduction:
AGL Energy Limited is an ASX listed entity which is into generation and retailing of gas and
electricity for domestic and industrial use. The company is also in S & P/ ASX 300 index. The
company is having more than 3.6 million customers in Queensland, Victoria and New South Wales.
The company was founded in 2006 and is based at North Sydney New South Wales Australia. The
company prepare its financial statement at end of 30th June every year.
Plant, property, equipment (PPE) is an important part of financial statements and the accounting
policies and estimates related to PPE should be chosen very carefully. Accounting policies are the
rules which ensures that the transactions are recorded correctly, and these are disclosed in notes to
financial statements. Accounting estimates are the amount or estimates which are used to determine
the approximate amount to be debited or credited to the items of financial statements.
3. Detailed analysis of PPE:
a. Criteria for selecting and changing accounting policies related to PPE:
AASB 108: Accounting policies, changes in accounting estimates and errors, provides the criteria for
any entity to select and change accounting policies and estimates. The para 7 to 14 provides detailed
description about accounting policies and its application, consistency and change in policies. As per
para 7-14, if the application of any accounting policy is immaterial then that policy should not be
applied. All the entities should follow the accounting policies for an item specifically which are
defined in specific Australian Accounting standard (AASB 2015).
The management of the entity should use his judgement in developing and applying the accounting
policy that should be resulted in information which is reliable, neutral free from any biasness,

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prudent, represented faithfully and there is economic substance of transaction. The information
should be also relevant to decision-making and should be complete in all aspects. The entity/
management should also comply with Australian Accounting Standard and conceptual framework
requirement while framing and applying accounting policies. The management should also consider
best industry practices, recent pronouncements, other accounting literatures to that extent which
doesn’t conflict with the accounting standard and conceptual framework requirements while framing
and applying accounting policies.
The accounting policies selected and implemented should be consistently applied on similar items
year on year basis unless any accounting standard specifically permits. The entity should change the
accounting policy only if there is requirement as per Australian Accounting Standards or change will
be resulted in more reliable and relevant information about the effect of transactions on financial
statements and cash flows. The company can change the accounting estimates based on circumstances
and more reliable sources of information and estimates changes should be based on prospective basis.
b. Accounting estimates and policies used by AGL Energy Limited:
In case of AGL Energy Limited, the company has accounting policy and accounting estimates related
to PPE is as below:
The entity has measured the PPE at cost less impairment and accumulated depreciation as 30th June
2019. The cost of the assets has included all the expenditures which are directly related to
construction or purchase of asset. Finance cost is capitalized for qualifying assets only. The cash flow
hedge on foreign currency translation has also adjusted to cost of assets based on accounting
principles. Subsequent costs have been capitalized only if there are probable economic future benefits
exist. The gain or loss on sale of asset has been recorded in income statement by the entity (AGL
Energy 2019).
The company has used straight line depreciation method to write down the value of assets. The assets
are written down over their expected useful life and to the extent of residual value of asset. The

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company has not written down the value of land. Leasehold improvements are amortized shorter of
useful life of economic benefits or lease term of asset. The company review at the end of each
financial year the useful life of assets, residual value and depreciation method. The life for freehold
building and plant and machinery has been considered upto 50 years. Right- of- use- assets have been
recorded at initial measurement of lease liability less any lease payment released before lease start
date. ROU asset is also depreciated shorter of useful life of asset or expiry of lease terms. The entity
also reviews the carrying value of assets for impairment loss checking and impairment loss is
recognized if carrying value of CGU exceeds recoverable amount and impairment loss is charged to
income statement.
c. Evaluation of professional judgement in application of accounting policy and estimates:
The professional judgement has been applied correctly in accounting policies and estimates of PPE
and the professional judgements are appropriate and reasonable. As per Australian Accounting
Standards, the PPE cost should include all the costs which are necessary to bring the assets into ready
to use and the entity has adopted the same accounting policy. In one more case, the interest cost
should be capitalized on qualifying assets and the same accounting policy has been adopted by AGL
Energy Limited (AGL Energy 2019). In Power and Gas sectors, all the entities are using the straight-
line method for depreciating the assets and in case of AGL Energy and other competitors such as
Origin Energy, Energy Australia, Alinta Energy, Simple Energy have used SLM method only.
The entity has used professional judgement while estimating the useful life of assets. In case of other
competitors such as Origin Energy has used same accounting estimates for useful life of assets such
as Origin Energy has taken 10 to 50 years as useful life for Building including leasehold
improvements whereas AGL Energy has taken upto 50 years as useful life for leasehold
improvements and building.
AGL Energy has also used correct professional judgement in determination of recoverability of
carrying values of PPE. The entity groups the assets into smallest group of individual assets that
generates cash generating units. The recoverable amount requires assumptions to be taken on lot of
information such as market demand and supply, foreign exchange fluctuation and discount rates etc.
and the same assumptions has been taken by Origin Energy Limited which shows that the company

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has taken prudent assumptions for determination of accounting assumptions and estimates (Origin
Energy 2019).
Thus, after analyzing the above facts, we can conclude that the assumptions taken by the company are
reasonable and accurate and as per industry standard.
d. Improvement in accounting policies and estimates:
After analyzing in detail, we can say that the entity has used correct accounting policies and
estimates. We advise to the company that the entity should conduct a technical analysis regarding
useful life of assets and should also derive the useful life of assets based on technical analysis by
technical staff or consultants. If the estimated technical useful life is lesser than current estimated
useful life, then entity should use technical life as estimated useful life. If the technical estimated
useful life is higher than current estimated life, then the entity should continue with existing estimated
life considering prudent and conservative concept.
4. Conclusion:
After performing detailed analysis on accounting policies and estimates, we can conclude that
accounting policies and estimates should be determined very carefully and should be followed on
consistent basis. In case of AGL Energy Limited, the company has followed the requirement of
AASB 108 and used reasonable professional judgement for accounting estimates and policies related
to PPE. The company should also do technical analysis of useful life of assets and accordingly should
take the decision.

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5. References:
AGL Energy Limited. 2019. AGL Energy Annual Report. Available at
https://www.agl.com.au/-/media/aglmedia/documents/about-agl/investors/annual-reports/
agl_annual_report_090819.pdf?la=en&hash=2890C67A39531E9197467BBC1F87B463
Origin Energy. 2019. Origin Energy Annual Report. Available at
https://www.originenergy.com.au/content/dam/origin/about/investors-media/documents/origin-2019-
annual-report_online.pdf
Australian Accounting Standard Board. 2015. AASB 108: Accounting policies, changes in accounting
estimates and errors. Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB108_08-
15.pdf

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6. Appendix:
Accounting policy of PPE of AGL Energy Limited:

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