Holmes Institute HA2032: Comparative Analysis of Finance Sources

This report provides a detailed analysis of the sources of finance for AGL Energy Limited and Origin Energy Limited, two prominent Australian energy companies. It examines their equity and liability sections, including issued capital, reserves, retained earnings, trade payables, borrowings, and other financial instruments. The analysis covers a three-year period, highlighting the movements in each item and explaining the underlying reasons. The report compares the two companies' financial strategies, discussing the merits and demerits of using debt and equity financing. It also references the annual reports of both companies and relevant accounting literature to support its findings. The report concludes by summarizing the key findings and emphasizing the importance of understanding financial sources for assessing a company's financial position.

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SUBJECT: SOURCE OF FINANCE

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Introduction:
AGL Energy limited is an Australian listed public entity which is engaged in the
generation and retailing the electricity and gas for various residential and commercial
uses. The entity is involved in the generation of the energy from the power stations
which uses thermal power, natural gas, wind power and hydroelectricity, solar energy
and gas storage. The entity has also entered in the residential and commercial gas
market. It is the largest private owner and operator of the renewable energy in Australia.
Origin Energy is the renowned listed public energy company in the Australia
headquartered in Sydney. The core business activity of the entity includes exploration
and production of natural gas, generation of the electricity, wholesale and retail sale of
the electricity and gas and also involved in the sale of liquefied natural gas. This entity is
the largest power generation portfolio and this represent about 13% of the power
generation capacity in the national market of electricity. The entity is very active in the
renewable energy area.
PART A
i) Analysis of the owner equity section:
It is the most significant part of the balance sheet of any entity and it states the amount
invested by the owners deducted by the drawings made by them from the entity and the
net profit of the entity is added to it (Deloitte n.d). It consists of various parts such as
share capital, reserves and retained earnings. It can also be defined as the source for
the acquisition of various capital assets and also considered as the source of finance for
the entity. On the basis of the accounting principle the value of the equity is not
measured at fair market value (Conover et. all 2011).
Equity section of AGL Energy Limited
The equity sections comprises of the following line items such as:
a) Issued capital
b) Reserves
c) Retained earnings

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Equity section of Origin Energy Limited
d) Share capital
e) Reserves
f) Retained earnings
Issued capital/share capital is the amount of the shares that are sold and held by the
shareholders of the entity and thus shareholders or investors consists of retail investors
or large institutions and many other. In other words the issued capital is the amount of
the shares that the entity has actually offered to the sale to the investors.
Reserves can be stated as the part of the profit of the entity which is kept separately for
the future purpose for various uses such as to boost and maintain the financial position
of the entity. There are various purposes for which reserve can be utilized such as for
purchase of capital assets, making payment of the debt and for various funding option in
case of new investment and thus the reserves are of two types which includes general
reserve and specific reserve (Brown, R. and Whittington, M. 2007).
Retained earnings can be defined as the amount of the remaining net profit which is
adjusted for the payment of the dividend to the shareholders of the entity. Further the
amount of retained earnings is arrived after deducting the dividend paid or any amount
distributed to the shareholder of the business from the net income of the entity.
ii) Movement in the item of the equity section:
The movement of the equity of the AGL Energy can be discussed as follows:
a) Issued capital: The issued capital of the entity in the year 2017 has decreased from
previous year due to the transactions related to the on-market buy back of the shares
and in current year 2018 there is no change in the amount of the issued capital as there
is no transaction related to the equity.
b) Reserves: There is upward movement in the amount of reserve of the entity in the year
2017 as compared to previous year due to the comprehensive net income and in the

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year 2018 there is downward movement in the reserve of the entity in the year 2018 due
to loss in the hedging reserve and due to the share based payment.
c) Retained earnings: There is upward movement in the amount of the retained earnings
which is due to the transaction related to profit earned by the business during the year
and the comprehensive income of the year. Further it is decreased by payment of
dividend with the net increase in the amount. Also there is upward movement in the
amount in the year 2018.
The movement of the equity of the Origin Energy can be discussed as follows:
a) Share capital: There is no movement in the amount of the share capital over the period
of three years ( Origin Energy 2018).
b) Reserves: There is downward movement in the amount of the reserve in the year 2017
due to the comprehensive loss in the various types of reserves and there is increase in
the amount of reserves in the year 2018 due to the other comprehensive income.
c) Retained earnings: There is downward movement in the amount of the retained
earnings due to the loss suffered by the entity in the year 2017 (Origin Energy 2017).

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Further in the year 2018 there is upward movement in the retained earnings due to the
profit earned by the entity.
iii) Items covered in the liability section:
The liability section of the AGL Energy Company covers the following items:
a) Trade and other payables
b) Borrowings
c) Current tax liabilities
d) Other financial liabilities
e) Provisions
The liability section of the Origin Energy Company covers the following items:
a) Trade and other payables
b) Interest bearing liabilities
c) Provision for income tax

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d) Other financial liabilities
e) Provisions
f) Derivatives
g) Employee benefit
Trade and other payables is the amount which is payable by the company for the
purchase of goods and services. It consists of accounts payables, creditors and other
payables (Hopkins, P. n.d).
Interest bearing liabilities is the amount of debt in which payment of interest is
required despite it is planned by the entity to pay the debt in a month.
Income tax liabilities is the amount of the income tax which is payable by the entity
within one year.
Provision is an account which records the present liability of the entity.
Derivatives are generally used by the company to hedge its position by having
speculation in the movement of the underlying assets.
Employee benefit liability is recorded when the employee has rendered service in
exchange for the benefit to be paid in future.
iv) Movement in each item of the liability section:
The movement in the liability of the AGL Energy is as follows:
a) Trade and other payables: There is upward movement in the amount during the
period of three years as the payable amount has increased in these three years.
b) Borrowings: There is decrease in the amount of the borrowings during the period
as the entity has repaid its bank loan.

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c) Current tax liabilities: There is increase in the current tax liabilities over the period.
d) Other financial liabilities: There is downward movement in the current portion whereas
there is upward movement in the non-current portion of the financial liabilities.
e) Provisions: There is upward movement in the current provisions but there is downward
movement in the non-current portion of the provisions.

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The movement in the liability of the AGL Energy is as follows:
a) Trade and other payables: There is downward movement in the payables in the
year 2017(AGL Energy 2017) but the amount has increased in the year 2018 as
the payment obligation has increased in current year.
b) Interest bearing liabilities: There is downward movement in the amount of the
liabilities in the period of three years.

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c) Provision for income tax: There is upward movement in the provision for income tax as
the payable amount of the liability has increased (AGL Energy 2018).
d) Other financial liabilities:
e) Provisions:

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f) Derivatives
g) Employee benefit: There is downward movement in the liability for employee during the
period of three years.
v) Merits and demerits of the source of fund for the entity:
The entity mentioned uses both debt and equity as their source of financing the
business activities. The share capital is having advantage over using the debt as source

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of capital as in this there is no obligation for the payment of interest or for making the
repayment of the investment made by the shareholder and on the other hand in debt
periodic payment is required to be made. In equity there is low risk as compared to debt
(Feroz,et.all 2013). Further, in case of insolvency debt holder are required to be paid
first whereas there is no obligation for equity holders. But on the other hand due to
dilution in the shares the proportion of the ownership also gets diluted which does not
happen in case of debt. Further equity has higher overall cost and consumes more time
as compared to debt (Georgia M and Darren P.2018).
Conclusion:
It is concluded from the detailed analysis that the company has utilized various sources
for financing purpose such as short term and long term debt and also involves equity.
The movement in the equity and the liability section has also discussed and the reasons
for the movement are also interpreted and it determines the financial position of the
entity.

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References:
AGL Energy Limited (2018). AGL Energy limited annual report 2018. Available at
https://www.2018annualreport.agl.com.au/xmlpages/resources/TXP/agl_energy/finrep/
pdf/AGL_Energy_Annual_Report_2018.pdf
AGL Energy Limited (2017). AGL Energy limited annual report 2017. Available at
https://www.agl.com.au/-/media/agl/about-agl/documents/media-center/asx-and-media-
releases/2017/170825-agl-207-annual-report-asx.pdf?
la=en&hash=5ED3160547B1054044D524FC89664E52
Origin Energy (2018). Origin Energy Limited annual report 2018. Available at
https://www.originenergy.com.au/content/dam/origin/about/investors-media/
documents/Origin_2018_Annual_Report.pdf
Origin Energy (2017). Origin Energy Limited annual report 2017. Available at
https://www.originenergy.com.au/content/dam/origin/about/investors-media/
presentations/Appendix%204E%20and%20Full%20Financial%20Statemetns
%202017.pdf
Deloitte (n.d). Australian financial reporting guide. Available at
https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-
australian-financial-reporting-guide-december-2017-160181.pdf
Conover, CM, Miller, RE & Szakmary, A 2011, ‘The Timeliness of Accounting
Disclosures in International Security Markets’, International Review of Financial
Analysis, vol.17, pp849-869
Feroz, E., Kim, S., & Raab, R. (2013). Financial Statement Analysis: A Data
Envelopment Analysis Approach. The Journal of the Operational Research
Society, 54(1), 48-58. Retrieved from http://www.jstor.org/stable/822748