ACCM 4300 Assignment PDF

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MEMORANDUM To:

The Board of Directors

From:

Sadikshya Humagain, Student

Date:

21 September 2020

Subject: AGL: consolidation and relevant notes

This memo presents the information about the consolidation and the financial statements that are prepared by the parent entity AGL energy limited which is listed on ASX 200 and has subsidiary companies such as ActewAGL, Perth Energy and Southern Phone. A parent company are legally required to prepare consolidated financial statements using uniform accounting policies for the transactions and other events as per IFRS 10/AASB 10. To elaborate, the main rationale of this standard is to explain principles for the presentation and preparation of consolidated financial statements when an entity controls one or more entities. Therefore, to comply with the standard set by Accounting Standard AASB 10 Consolidated Financial Statements under the Corporations Act, all the parent entity including AGL are required to prepare consolidated financial statements that depict all their assets, income, liabilities as those of a single economic entity. AGL Ltd separately publishes their corporate governance and sustainability report that illustrates their company structure, how they are applying a sustainable approach to protect the environment and also clearly discloses the independent auditor reports in the annual report after the financial reports. The structure also ensures accountability in each of their activities where they are required to provide a report on the plans that are updated, strategies, policies and implementation. Furthermore, these issues are addressed in the annual report as it discloses how they are creating sustainable value for the shareholders and other stakeholders over time and attract the investors and shareholders in the future (Loftus et al. 2018, p.300). In the financial year 2020, AGL has more than 1 billion dollars in cash and also bought some shares from shareholders through buyback program which were mostly offset by strong operating cash flow (AGL Annual report 2020). In the year 2020, where most of the business is going through losses citing the reason of pandemic, AGL is still able to make a profit of $816 M as in the year ended on June 30, 2020, which shows their cash flow management ability. Thus, disclosing such details of the company structure, debt ratio, information about independent auditors as well their approach on sustainable development by maintaining transparency in every aspect has helped AGL to sustain for more than 150 years of the establishment.

In consolidation, if the parent entity’s cost of the investment exceeds the subsidiary’s net asset value, then it will result in goodwill (Yang & Aquilino 2017). In contrast, if the net asset value is higher than purchase consideration it will result in the gain on bargain purchase. In the financial statement, the goodwill is found in the notes of the consolidated statement of intangible assets. Goodwill on acquisition usually means that when an entity pays a higher purchase price than the combination of the Fair value of identifiable assets, which is usually paid for either the copyrights, reputation or brand. To illustrate, AGL in the year 2019/2020, AGL energy limited acquired Perth Energy Holdings Pty Ltd based on an enterprise value of $93 million, therefore, in the year 2020, we can see in the notes to intangible asset the company goodwill increases from $2866 Million to $2879 Million, which implies that AGL paid around $13 M of goodwill while acquiring Perth Energy Holdings Pty Ltd (AGL Annual report 2020, p.121). The measurement of Intangible asset is amortized and checked over their projected useful life for Impairment as per AASB 136 Impairment of asset (Loftus et al. 2018, p.221). This standard ensures that entities assets are carried at no more than their recoverable amount. For AGL, the estimated useful lives are used in the calculation of amortisation for intangible assets with finite lives are for their Software it is usually 3 to 7 years and on their licences, it's calculated by subtracting the licence term and asset useful life (AGL Annual Report 2020, p.122) At the end of each reporting period, AGL reviews the carrying amounts of its assets to find whether there is any indication of an impairment loss for the assets that are existing in the company. While reviewing, if there is any suggestion of the impairment then the recoverable amount of the asset is predicted to find out the extent of the impairment loss (AGL Annual report 2020, p.124). Similarly, if it is impossible to estimate the recoverable amount of any such asset, then AGL usually projects the recoverable amount of their cash-generating unit to which the asset is categorized and determine the impaired amount respectively. While analysing the used value, the projected future cash flows are discounted to their present value by a discount rate that reflects the current market scenario asset (Loftus et al. 2018, p.222). Similarly, if the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, an impairment loss is recognised as profit or loss in the statement asset (Loftus et al. 2018, p.222). For example, AGL has incurred an amortization expense of $179 M for the software on 30 June 2020, which is determined based on the $503 fair value of software (AGL Annual report 2020, p.121). In relation to the financial statement, it is observed that AGL needs to make changes to mainly two aspects. Firstly, AGL is a party to various legal actions and claims which have arisen in the ordinary course of business. It has given various warranties and indemnities to certain third parties concerning the performance of contracts by various wholly-owned subsidiaries (AGL Annual report 2020, p.166). However, the reliable amount is not measured

and mentioned in the contingent liability section. So, AGL should consider calculating the reliable amount with this event and mention it in the note section and declare the amount which will in return add clarity to the related stakeholders and will give a true and fair representation of the financial statements in case they had to pay such amount to another party . Besides, AGL is due to adopt Amendments to References to the Conceptual Framework in IFRS Standards and other AASB 2018-6 Amendments to Australian Accounting Standards: Definition of a Business (AASB 3), therefore, it will be more appropriate if they could incorporate these amendments which will enhance the reliability of the financial statement and the annual report and would generate much reliable statement. Also, this will ensure the support of the stakeholders and offers the additional investor to the entity. The proper administration of the mentioned relevant changes will ensure proper disclosure and would help others in understanding the entity better. Please let me know your thoughts about the suggestion. If you wish, I can explore this suggestion further and generate the estimated amount for the contingent liability.

REFERENCES AGL 2020 Annual Report, retrieved from, https://www.agl.com.au AGL 2020 Annual Sustainability Report, retrieved from, https://www.agl.com.au AGL 2020 Annual Corporate Governance Report, retrieved from, https://www.agl.com.au Australian Accounting Standards Board (AASB) 2018, Standard 10: Consolidated financial statements, retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB10_0715_COMPdec15_01-18.pdf Deloitte 2011, “IFRS-10 Consolidated Financial Statements”, IFRS 10 Consolidated financial Statements, retrieved September 19, from . Loftus, J, Leo K, Daniliuc, S, Boys, N &et al.2018, Financial Reporting,2nd edn, Karyn Brynes Publisher: John Wiley, Australia. Thornton, G 2015, IFRS 10 consolidated financial statements, CPA Australia, retrieved from https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professionalresources/ifrs-factsheets/factsheet-ifrs10-consolidated-financial-statements.pdf Yang, J and Aquilino, F (2017) ‘Measuring goodwill and noncontrolling interest under the new consolidation accounting standards’, Journal of Financial Reporting and Accounting, pp.198–207....