Accounting Policies and Estimates for PPE: Origin Energy Analysis

This report provides a comprehensive analysis of Origin Energy's accounting policies and estimates related to Plant, Property, and Equipment (PPE). It examines the company's application of accounting standards, including AASB 108, and its choices regarding depreciation methods, impairment assessments, and the estimation of asset useful lives. The report highlights the importance of professional judgment in selecting and applying these policies, emphasizing the need for reasonable and logical decision-making. It also evaluates the appropriateness of the professional judgments made by Origin Energy, comparing them to industry practices and competitor approaches. Furthermore, the report offers recommendations for improving the company's accounting policies, particularly regarding the use of technical analysis in calculating recoverable amounts and future cash flows for impairment analysis. The report concludes that Origin Energy has generally followed accounting standards, but suggests enhancements to ensure accurate PPE valuation.

ACCOUNTING POLICY AND ESTIMATES: PPE
FROM:
STUDENT ID:
DATE: 05/10/2019
SUBJECT: ACCOUNTING POLICY AND ESTIMATES: PPE
UNIVERSITY:

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Executive Summary:
This report has been prepared to explain the accounting policies and estimates related to PPE adopted
by Origin Energy and prescribed by the accounting standard. This report explains in detail regarding
policies and estimates adopted by Origin Energy. This report also explains that the professional
judgement plays an important role in selection and adoption of accounting polices and estimates and
the professional judgement should be reasonable and logical.

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Table of Contents
1. Company chosen 4
2. Brief Introduction 4
3. PPE: accounting policy and estimates detailed analysis 4
a. Accounting policy and estimates: criteria for selection 4
b. Accounting policies and estimates adopted by Origin Energy………………………...5
c. Appropriateness of professional judgement used by entity accounting policy and
estimates…………………………....…………………………....……………………….6
d. Recommendation regarding improvement in accounting policies and estimates……….…7
4. Conclusion 7
5. References 8
6. Appendix 10

ACCOUNTING POLICIES AND ESTIMATES: PPE 4
1. Company chosen:
We have performed detailed analysis on Plant, Property and equipment (PPE) of Origin Energy
Limited which is listed on Australian Stock Exchange. We have also performed detailed analysis on
accounting policies and estimates made by the company for recording and accounting of PPE.
2. Brief introduction:
The Origin Energy is an Australian public company which is listed on Australian Stock Exchange.
The company is headquartered at Sydney, Australia. The company was founded in year 2000 and the
main business of the company is natural gas exploration and production in various part of Australia
and around the world. The company is one of largest retailer in energy sector in Australia and having
4.2 million customer bases.
Plant, property and equipment is one of the major items of the financial statements and the accounting
policies and estimates related to PPE should be selected very carefully. The accounting estimates are
the estimation made by the company regarding useful life of assets etc. The accounting policies
related to PPE are the selection of method of depreciation, policy for revaluation and impairment of
assets etc. Both the components related to PPE should be applied and selected after due consideration.
3. PPE: accounting policy and estimates detailed analysis:
a. Accounting policies and estimates: criteria for selection:
In AASB 108: Accounting policies, changes in accounting estimates and errors, the accounting
policies related to specific items should be governed as per accounting policies provided in specific
accounting standard. If there is no specific accounting standard, then AASB 108 should be followed
for selection and application of accounting policy. As per accounting standard, the accounting policy
should not be applied to the items of financial statements is immaterial (Ram, R. and Newberry, S.
2013).
The management of the company should its professional judgement for selection and application of
accounting policy. The policy selected in such a manner that information derived from the accounting

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policy should be reliable and relevant to decision- making and it should serve the purpose of the users
of financial statements. The accounting policy should be free from biasness, prudent, having
economic substance of transaction and should be complete in all aspects. While applying the
professional judgement, the management should use the references provided by accounting standard
and literature, legal decisions, pronouncement and other reliable resources. The other resources
should be used to that extent that it should not contradict with the provisions of accounting standard
108.
The accounting policies once selected, should be followed consistently over a period of time and the
same policy should be applied to each category of items. The entity should change the accounting
policies only if there is requirement as per AASB or it can be resulted in providing more reliable and
authentic information (AASB 2013).
The professional judgement can impact the accounting policies and estimates in great manner because
if anything wrong judgement is used then it can represent the distorted picture of financial statements.
b. Accounting estimates and policies adopted by Origin Energy:
The Origin Energy Limited is having exposure towards PPE as on June 30, 2019 is $3,597 million.
The company has recorded the PPE at acquisition cost less depletion, accumulated depreciation and
impairment losses (Origin Energy 2019). The entity has also included the future cost of rehabilitation
and closure as part of cost of PPE. The company review the carrying value of assets at end of each
reporting year to check any indication of impairment in value of assets. If any kind of repairment
indication exist, then the company calculate the recoverable amount and accordingly recognize the
impairment losses in income statement (AASB 108 2015). The company follows the straight- line
method to calculate the depreciation on the assets and the cost is amortized over the useful life of
asset. The leasehold improvements of the assets of the entity are amortized over the shorter of useful
life of asset or lease period. CWIP and land is not amortized by the entity. The company has
estimated the useful life of building for 10 to 50 years and plant and equipment life 3 to 30 years. The
company has also made technical assessment of operating life of the assets and accordingly has taken
the useful life of asset. The entity has made estimates towards future prices to calculate the value in
use of CGU so that impairment losses can be calculated correctly (Agndal, H. and Nilsson, U. 2010).
c. Appropriateness of professional judgement used by entity in accounting policies and estimates:

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The entity has used reasonable professional judgement in applying and selection of accounting
policies and estimates related to PPE. The entity has followed all the compliances and guidelines
provided in Australian Accounting Standards and has followed the same procedures for selection of
policies and estimates (Hamidi-Ravari A., 2014). As per accounting standard, the entity should
disclose the PPE net of accumulated depreciation and amortization and the entity has followed the
same process. As per power industry standard, most of the companies in power sector has followed
the straight-line method of depreciation to depreciate the value of assets and the same method has
been adopted by Origin Energy. Further, in case of Origin Energy, the company has taken the useful
life of assets for plant and machinery from 3 to 30 years whereas the other competitor company AGL
Energy has adopted the plant life upto 50 years. It shows that the Origin Energy has adopted lesser
life which is more reliable and authentic as per conservatism concept defined by accounting
standards. Further the company has followed the accounting standard regarding the capitalization of
borrowing cost to PPE (Contact Energy. 2015). The company has capitalized the borrowing cost on
qualifying assets only as per provisions of accounting standards. The company has also made
technical analysis of useful life of assets which is more reliable in comparison to other practice
followed by the companies in the industry (ASX 2010a). The competitor company AGL Energy has
not made any technical analysis of useful life of assets whereas Origin Energy has made the technical
analysis which shows that the company has used reasonable professional judgement for selection of
accounting policies and estimates.
d. Recommendation regarding improvement in accounting policies and estimates:
After performing detailed analysis on PPE of the Origin Energy, we recommend that the company
should consider the technical analysis regarding the calculation of value in use and future cash flows
to calculate the recoverable amount (FRC 2012). The entity has taken its own assumptions to
calculate and predict future cash flows for impairment analysis but there should be technical analysis
by an industry expert so that recoverable amount can be calculated correctly and the carrying values
of PPE should show their true value on the reporting date. Further, the company should have policy
for revaluation of assets, and it should disclose the revaluation policy in financial statements (Devi, S.
and Samujh, R. 2015).

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4. Conclusion:
After performing detailed analysis on PPE, we can conclude that the entity has followed the
guidelines of accounting standard regarding adoption and selection of accounting estimates and
policies related to PPE and the professional judgement used in reasonable and accurate. The entity
should adopt the technical analysis for forecast of future cash flows for more accurate value of
impairment losses so that the value of PPE can be recorded correctly.

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5. References:
Origin Energy. 2019. Origin Energy: Annual Report. Available at
https://www.originenergy.com.au/content/dam/origin/about/investors-media/documents/fy19-origin-
annual-report-online-oct.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
"Origin Energy sale of Contact completed" (PDF) (Press release). Contact Energy. 2015. Accessed
from the original (PDF) on 05 October 2019.
ASX (2010a), Corporate Governance, Australian Stock Exchange, available at: www.asx.com.au/
about/corporate_governance/index.htm (accessed 30 August).
Agndal, H. and Nilsson, U. (2010), “Different open book accounting practices for different
purchasing strategies”, Management Accounting Research, 21(3): pp. 147-166
Financial Reporting Council (FRC) 2012, ‘Managing Complexity in Financial Reporting: Findings
from the Consultation Process’. Available at: http://www.frc.gov.au/files/2014/
07/Findings_from_the_managing_complexity_consultation_ process.pdf, accessed 12 February 2015.
Devi, S. and Samujh, R. 2015, ‘The Political Economy of Convergence: The Case of IFRS for
SMEs’, Australian Accounting Review, 25 (2): 124–38.

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Hamidi-Ravari A., 2014, ‘AASB Essay 2014-1 The Critical Role of the Reporting Entity Concept in
Australian Financial Reporting’, in AASB Research Centre (Ed.), AASB Essay Series. Available at:
http://www.aasb.gov.au/admin/file/content102/ c3/AASB_Essay_2014-1_The_Critical_Role_of_the_
Reporting_Entity_Concept_in_Australian_Financial_ Reporting.pdf, accessed 16 August 2016.
Ram, R. and Newberry, S. 2013, ‘IFRS for SMEs: The IASB’s Due Process’, Australian Accounting
Review, 23 (1): 3–17.
Australian Accounting Standards Board (AASB) 2013, ‘Amendments to the Australian Conceptual
Framework’. Available at: http://www.aasb.gov.au/admin/file/content105/c9/AASB_ CF_2013-1_12-
13.pdf, accessed 12 January 2014.

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6. Appendix:
Accounting policy and estimated related to PPE of Origin Energy:

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