Introduction
The report examines the Property, Plant, and Equipment (PPE) disclosure for AGL Energy Ltd and Woodside Petroleum Ltd. The two organizations are energy companies in Australia. AGL Energy Limited distributes gas, electricity, solar, and renewable energy services. Meanwhile, Woodside Petroleum Ltd produces oil and gas. The report determines measures used in determining the amount of PPE in the two companies, the validity of the measures, and the interpretation of the amounts determined. In addition, the report includes factors accountants should consider when setting up accounting policy for PPE in companies, the subsequent measurement for PPE, and recommendations relevant to accounting standard setters.
Review and Evaluation of PPE Disclosure
AGL Energy Limited
Measures Utilized for PPE Determination
At AGL Energy Limited, PPE is measured through accumulated depreciation, costs related to the construction or acquisition of assets, and accumulated impairment losses. Also, costs may include the conversion of various comprehensive incomes that can cause a gain or loss on cashflows due to fluctuations in foreign currency during a purchase of PPE. Determining depreciation involves using a straight line that writes off every asset’s cost over its expected useful life to its estimated residual value. At the end of every annual report, the depreciation method, residual values, and estimated useful lives are reviewed (AGL Energy Limited, 2023). Plants and equipment have an estimated useful life of up to 50 years that can be used in depreciation calculations.
AGL assesses its impairment losses at the end of every reporting period through physical and financial indicators of an asset’s value. In case of an impairment loss in any asset, the company estimates the recoverable amount of the asset to evaluate the extent of the loss. If its not possible, the company estimates the amount recoverable using the cash generated by the asset. In addition, the company measures the right of use for equipment or plants and the right of use for assets. ROU asset is measured using a cost model less accumulated impairment loss or depreciation and adjusted for lease liability remeasurement. The estimated useful life for RUO assets, such as plants and equipment, ranges to 15 years.
Validity of Measures
According to Hladika et al. (2021), accounting standards determine the subsequent measurement, recognition criteria, and initial measurements recorded in financial statements. Using cost less accumulated impairment loss and accumulated depreciation aligns with the accounting policy for PPE. Adding PPE is considered valid in financial reporting since it provides an illustration of the company’s long-term assets and serves as an indicator of production capacity and a company’s future earnings.
Interpretations of Total PPE Amount
In 2023, AGL Energy Ltd had a net carrying amount of $ 5418 million. This was lower than the net carrying amount in 2022 determined at $6,013 million. As a result, the values indicate that the current asset book value declined at AGL. For the year ended 30 June 2023, AGL Energy Ltd had an accumulated net depreciation and impairment of $ 5,652 million (AGL Energy Limited, 2023). The impairment and depreciation were higher than in 2022, which was $4,985 million. This suggests higher wear and tear in 2023, increased impaired events, and higher depreciation. The depreciation expense 2023 was $525 million, higher than in 2022, determined at $482 million (AGL Energy Limited, 2023). From the financial statements, all changes, including reversal impairment, classified as held sale, disposals, additions, and depreciation expenses, contributed to the decline in the net carrying amount of PPE in 2023.
Woodside Petroleum Ltd
Measures Utilized for PPE Determination
Woodside Petroleum Ltd measures PPE at a costless impairment charge and accumulated depreciation. The properties for oil and gas include costs incurred in acquisition, construction, installation, capitalized borrowing costs, estimated costs for restoration and dismantling, and transferred exploration. Other measures for PPE include historical cost, net carrying amount, disposal, depreciation and amortization, impairment reversal, and completion or transfer of a project (Woodside Energy, 2022).
Oil and gas properties are depreciated based on the estimates of residual value rate and expected useful life. Evaluation and transferred exploration of equipment and plant are depreciated based on production units over proved reserves for late assets. Onshore plants and equipment are depreciated using a straight-line basis with an estimated useful life ranging between 5-50 years over their useful life. The buildings are depreciated between 24 to 50 years, land is not depreciated, and plant and equipment are depreciated between 2 to 40 years using a straight-line method (Woodside Energy, 2022). In addition, in impairment calculations, the evaluation of assets and recoverable amounts are determined through FVLCD.
Validity of the Measures
Accounting principles validate adding items to PPE. Recognizing costs associated with properties on oil and gas like acquisition, construction, installation, completion of production, and the infrastructure facility are relevant in standard accounting practices together with costs like capitalized borrowing costs. In addition, subsequent maintenance and impairment reversal costs are valid for determining future economic benefits connected to items flow in an organization, and their cost can be reliably measured.
Interpretation of the Total PPE Amount
In 2022, the historical cost was $64,513 million. After deducting accumulated impairment and depreciation, the net carry amount was determined to be $39,919 million (Woodside Energy, 2022). The historical cost indicates the initial cost of acquiring and developing an asset. The net carrying amount reflects the current book value of the assets. 2022 the accumulated impairment and depreciation were determined as $24,594 million. The value reflects reductions over a particular period and impairment reversal.
In 2022, accumulated impairment and depreciation was estimated at $24,594 million. The value was higher than 2021, estimated at $22,664 million. The net carrying amount and historical cost in 2021 were $18,649 million and $41,313, respectively (Woodside Energy, 2022). The values were lower than the 2022 values. A rise in acquisitions or impairment reversals could have contributed to the rise in cost. Also, this indicates that Wood side Petroleum Ltd has invested and improved its gas and oil properties in the 2022 reporting period.
Comparison of PPE measurement Methods
The PPE measurement methods for AGL Energy Ltd and Woodside Petroleum Ltd have various similarities. In measuring depreciation, the two companies use straight-line and reducing balance. The assessment of impairment for PPE for the two companies considers physical and financial indicators. Also, the two companies have disclosed the climate risks associated with the PPE holdings based on TCFD recommendations. Lastly, the measurement of PPE is based on historical cost and fair value for certain assets.
Despite the similarities, AGL Energy Ltd and Woodside Petroleum Ltd have illustrated some inconsistencies in measuring similar items. AGL has used a revaluation model in certain assets, while Woodside Petroleum has not. For instance, the power plant AGL has revalued the plant at a fair value while Woodside Petroleum Ltd still needs to despite the equipment’s original price and estimated useful life. Although in depreciation methods, the two companies utilized straight-line and reducing balance. Woodside Petroleum Ltd mainly uses straight-line and reducing balance for only certain assets. However, AGL Energy Ltd uses the two measurement methods, including production units.
Factors Accountants Should Consider When Setting Up Company Accounting Policy Relating to PPE
When setting up a company’s accounting policy relating to PPE, accountants must consider various factors to ensure accuracy and transparency in financial reporting. The factors should align with the company’s financial position and operations. The key factors include:
Initial Recognition Cost
First, accountants should formulate a guideline that recognizes the initial cost of PPE assets. The guidelines should illustrate the criteria for determining assets that qualify for recognition and the measurement process utilized. According to Deloitte (n.d), for a PPE to be recognized as an asset, it is probable that the asset’s cost can be measured reliably and future economic benefits are associated with the asset. There should be no unit of measure for recognition, and only parts regularly replaced for PPE should be recognized. Based on Deloitte’s (n.d) study, a PPE item should be recorded initially at cost. The cost should include expenses incurred during transportation for the asset until its working condition. Besides the purchasing price, accountants should include installation, delivery, and handling charges.
For subsequent measurements, accountants can select methods like the fair value, cost, or revaluation models to measure PPE assets after initial recognition (Deloitte, n.d). The cost model is carried on assets with less impairment and accumulated costs. According to Deloitte ( n.d), companies should conduct revaluations regularly to ensure the carrying amount or an asset does not differ from the fair value documented in a balance sheet.
Depreciation Method
Accountants should select a depreciation method that determines the estimated useful life of an asset. Depreciation methods used by several companies include straight-line, units of production, and reducing balance (Madray, 2022). A company can select any method depending on its operations.
Impairment Assessment
Assessing the impairment of assets is crucial for balance sheets to ensure the figures are balanced. Therefore, accountants should develop regular impairment tests that assess if the carrying value of PPE goes above the recoverable amount to record the impairment loss.
Determining the subsequent expenditures and Assets Disposals
Accountants must indicate the criteria for identifying subsequent expenditures like maintenance and repairs on PPE. The subsequent costs should include expenses that contribute to the growth and attainment of assets. The subsequent charges should be included in the carrying amount of PPE if it has future benefits on the asset. Also, accounts need to document disposal methods for an asset, such as sales or retirement, and illustrate a gain or loss on the disposal (IPSAS, 2021).
Government subsidies provided for the PPE
All government grants offered to a PPE should be disclosed in financial statements either as income or used to lower the cost of an asset.
Subsequent Measurement for PPE
In PPE, subsequent measurements are important in accounting for fixed assets. It evaluates the carrying amount of PPE after the initial recognition. Models used for subsequent evaluation include the revaluation model, fair value, and cost model. When using the cost model, the subsequent costs of assets associated are determined using historical cost less impairment losses and accumulated depreciation (Hladika et al., 2021). The method provides a consistent value for assets related to historical cost principles.
The revaluation method assesses assets using fair value, less impairment losses, and accumulated depreciation (Hladika et al., 2021). The fair value refers to the amount an organization can incur when purchasing or selling a similar asset. The method provides regular asset value updates besides introducing volatility in financial statements.
Recommendations to Accounting Standard Setters
In enhancing subsequent measurement for PPE, accounting standard setters should consider the following recommendations. The setters should optimize disclosure related to PPE assets by providing various estimates and assumptions relevant to subsequent measurement. Also, the setters should provide clear guidelines for determining fair value for different types of assets and how to recognize or identify impairment losses. By providing the guidelines, an organization can address disposal considerations, formulate a procedure for assessing impairment, and determine the threshold for impairment triggers (Ali & Ahmed, 2017). To promote compatibility, the setters should ensure that standards associated with PPE assets are consistent with jurisdiction and different companies. Lastly, the setters should illustrate situations where the revaluation of PPE is relevant. The strategy can help in identifying factors that are crucial during revaluation.
Conclusion
AGL Energy Ltd and Woodside Petroleum Ltd have similar PPE measurements with slight inconsistencies. The two companies use the historical cost, evaluated amounts, and fair value in measuring PPE. Also, there are some similarities in their impairment procedures and depreciation methods. In PPE, setting up standards ensures transparency, consistency, and accuracy in financial reporting. By documenting clear guidelines, accountants can measure subsequent expenditures considering fair value and historical cost. Therefore, standard setters are crucial in updating accounting standards that incorporate the evolving nature of financial reporting and businesses.
References
AGL Energy Limited. (2023). Annual Report 2023. https://www.agl.com.au/content/dam/digital/agl/documents/about-agl/investors/2023/230810-agl-energy-limited-annual-report-2023-4-4-asx.pdf
Ali, M. J., & Ahmed, K. (2017). Determinants of accounting policy choices under international accounting standards: South Asian evidence. Accounting Research Journal, 30(4), 430-446.
Deloitte (n.d). IAS16 for Property, Plant, and Equipment. IAS Plus.https://www.iasplus.com/en/standards/ias/ias16
Hladika, M., Gulin, D., & Bernat, I. (2021). Revaluation as a model of subsequent measurement of property, plant, and equipment–case of Croatia. Croatian Economic Survey, 23(1), 63-95.
IPSAS. (2021). Proposed International Public Sector Accounting Standard for Property, Plant, and Equipment. https://www.ifac.org/_flysystem/azure-private/publications/files/ED-78-Property-Plant-Equipment.pdf
Madray, R. (2022). Property, Plant, and Equipment Disclosure Requirements. AICPA’s National A&A Resource Center. https://assets.ctfassets.net/rb9cdnjh59cm/AHvSJD8ByWFEDV7r8vNGW/444c8459b7031dc36f902838de19abf0/cpea-may-2022-report-property-plant-equipment-disclosure-requirements.pdf
Woodside Energy. (2022). Annual Report 2022. https://www.woodside.com/docs/default-source/investor-documents/major-reports-(static-pdfs)/2022-annual-report/annual-report-2022.pdf
write