ACCG224: Financial Accounting and Reporting - PPE Policies

This report examines the accounting policies and estimates related to Property, Plant, and Equipment (PPE), focusing on the application of professional judgment in financial accounting. The report analyzes the practices of AGL Energy, adhering to the AAS 108 guidelines for recognizing, measurin...Read More

Running head: ACCOUNTING POLICIES AND ESTIMATES ON PPE
Accounting Policies and Estimates on PPE
Name
Institution

ACCOUNTING POLICIES AND ESTIMATES ON PPE 2
PART C
Professional judgment in accounting is defined as the application of gained expertise
and experienced through practicing accounting and auditing to make accurate, reliable, and
trusted decisions (Foundation, 2014). In Australia, Listed companies are guided by the AAS
108 when choosing accounting policies to use in making professional judgments to estimate
the cost and value of Property, Plant, and Equipment (PPE) assets. This section examines
different account policies used by the AGL to estimate its PPE based on AAS 108 guidelines.
Paragraph 8 of the AAS 108 establishes that accounting policies help entities to include
only reliable and relevant information in their financial elements. Likewise, paragraph 13
states that entities should maintain consistency in applying selected accounting policies.
Paragraph 14 hold that policies can be changed under two circumstances. First, the Australian
Accounting Standard may require a policy to be changed. And, second, where the proposed
changes provide more reliable and relevant information compared to the previous policy
(Australian Accounting Standards Board, 2015).
AGL Energy uses the following policies to estimate the value of its PPE assets. First,
AGL uses the cost model to measure its PPEs. Besides the initial costs of the assets, other
cost elements recognised by the company include; a) costs associated with the construction or
acquisition of the asset, b) finance costs related to the construction or acquisitions processes,
and c) gain or loss associated with the acquisition or transfer of the asset (AGL Energy Ltd.,
2019).

ACCOUNTING POLICIES AND ESTIMATES ON PPE 3
Source: AGL Energy Ltd., 2019, p 110
AAS 116 recognises three methods, (the straight-line method, the units of production
method, and the diminishing balance method), to be used on calculate depreciation of an
asset. AASB maintains that a chosen depreciation method should be used consistently unless
there is an expected change in the future consumption pattern (Australian Accounting
Standards Board, 2015). AGL Limited uses the straight-line depreciation method to calculate
the depreciation of its assets. The company reviews the depreciation method, residual value,
and useful lives of its PPE at the end financial period. The three items of depreciation are
adjusted if necessary (AGL Energy Ltd., 2019).
Source: AGL Energy Ltd., 2019, p 110

ACCOUNTING POLICIES AND ESTIMATES ON PPE 4
AASB requires Australian listed companies to test its assets for impairment at the end
of a financial year. AGL limited reviews the carrying amount of its assets for indications of
impairment. The company evaluates the extent of impairment loss where evidence of
impairment loss exists. An impairment loss is established when the recoverable amount of an
asset is lower than its carrying value (AASB, 2015). AGL incurred an impairment loss of $
768 million at the end of the 2019 financial years ended 30 June 2019 (AGL Energy Ltd.,
2019).
Source: AGL Energy Ltd., 2019, p 110
In conclusion, AGL adhered to the AAS 108 guidelines in estimating the value of its PPE in
2019 annual report. Therefore, there is adequate evidence back AGL’s adherence to
professional judgment in recognising, measuring and estimating the cost and values of its
PPE assets. AGL Energy is consistent in applying accounting policies as required by AAS
108.

ACCOUNTING POLICIES AND ESTIMATES ON PPE 5
PART D
AAS 108 demonstrates that it is crucial for accountants to apply professional judgment
to achieve the most appropriate accounting estimates and choices. AASB 108 intended to
promote reliability and relevance of financial statements. AASB 108 also enhance the
comparability of financial statements over a given period as well as with other entities. Based
on the information provided by the AGL on recognition and measurement of its PPE s, the
company has demonstrated consistency in applying account policies which is the genesis of
obtaining professional judgments. AGL should continue adhering to guideline of AASB 108
and make a change of policy when need be. A change is policy should be supported by
material facts.

ACCOUNTING POLICIES AND ESTIMATES ON PPE 6
References
AASB. (2015). Accounting Policies, Changes in Accounting Estimates, and Errors. Sydney:
AASB. Retrieved 09 17, 2017, from
http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01
-10.pdf
AGL Energy Ltd. (2019). AGL Energy Limited Annual Report 2019. Sydney: AGL.
Retrieved from
https://www.agl.com.au/-/media/aglmedia/documents/about-agl/investors/annual-
reports/agl_annual_report_090819.pdf?
la=en&hash=2890C67A39531E9197467BBC1F87B463
Australian Accounting Standards Board. (2015). AASB 116: Property, Plant and Equipment.
Sydney: Australian Accounting Standards Board. Retrieved from
https://www.aasb.gov.au/admin/file/content105/c9/AASB116_08-
15_COMPoct15_01-18.pdf
Foundation, I. (2014). IFRS 9: Financial instruments. International Accounting Standards
Board.