Introductory Financial AccountingAspiring Accountaholic

ACCT11081School of Business and Law

CQUniversity Australia

Kate Edwards 12022314

Due Date: 26th September 2017

Step 7: InventoryTable 1: AGL Energy’s Total Inventories in Consolidated Statement of Financial PositionInventories 2013 ($m) 2014 ($m) 2015 ($m) 2016 ($m)Current Assets 133 191 396 414Non-current Assets

29 28 32 30

Total assets 162 219 428 444

When I initially started this step of finding out information about my company’s inventories, I must say that I was quite nervous to do this. Anxiety tells me ‘Kate, I have a very bad feeling about this!’ but yet on the other hand, Motivation tells me ‘You can do this, Kate! Just work with your magical accounting tricks and you’ll hopefully pull it off!’ One of the first things that I noticed was that in all of the annual reports, there were no footnotes about my company’s inventories, or a policy that talks about how my company handles inventories. I found it to be quite bizarre for me, as I specifically remember finding plenty of information about inventories with my last company AMA Group Ltd. However, after using my fantastic detective skills, it turns out that my company actually stores all of their footnotes and their policies in their FINANCIAL reports, not their ANNUAL reports. The financial reports still have all of my company’s consolidated statements in it, it just has a lot more footnotes and information that I could look at, rather than referring to my company’s annual reports! So, as I was looking through my company’s consolidated statements, it’s immediately revealed that AGL Energy’s inventories were located in their Consolidated Statement of Financial Position, or the basic term would be known as the Balance Sheet. As you can see in Table 1 above, AGL Energy has inventories split into current and non-current assets. The total amount of inventories that AGL Energy has managed over the last 4 years are set in $m. So, you can imagine that my company has quite a lot of inventories! Initially, I must say that I found it a bit unusual that AGL Energy had inventories under non-current assets. I always thought and assumed that inventories were only current assets, as it was quite common for inventories to be current assets, and also, I’ve noticed other people’s companies where their inventories only lie in current assets. However, I remembered that inventories were defined by IAS 2/AASB 102 as ‘Assets held for sale in the ordinary course of business, and include goods purchased by a retailer’. My accounting knowledge tells me that this definition means that inventories can be both current and non-current assets.

AGL Energy’s inventories under non-current assets has basically been slightly up and down. However, it was particularly note-worthy to see the movements in inventories under their current assets. I noticed that there was a massive increase in inventories between 2014 and 2015. It’s a coincidence that the inventories that are classified as non-current assets also had the largest increase between 2014 and 2015. From my understanding, if inventories increase, particularly if it’s huge in certain years, then that would tell me the company has bought more goods than it has sold. As you can see in Table 2 below, it has the totals of the raw materials and finished goods for each financial year. From analysing these figures, AGL Energy seemed to have sold a lot of goods in 2013 and 2014. For a company who have made millions, these figures are rather small, which I would understand that it’s a good thing, since they had sold a lot of goods to their customers over those two years. However, it’s concerning that AGL Energy has quite a lot of finished goods and raw materials within the last two years. Whenever I see a company that has quite a lot of finished goods, particularly if it’s almost less than the raw materials, this tells me that they have purchased more materials and goods than what they have been selling. From my understanding, this isn’t a great thing for AGL Energy, as they aren’t selling enough of their inventories. Looking at the 2016 figures, I believe that the problem of keeping too much inventories on stock, and not selling them to their customers could’ve had a massive impact on their loss of over $400 million. Table 2: AGL Energy’s Current AssetsCurrent 2013 201

42015

2016

Raw materials and stores – at cost

45 48 167 198

Finished goods – at cost 88 143 229 216Total current assets 133 19

1396

414

Table 3: AGL Energy’s Non-Current AssetsNon-current 2013 201

42015

2016

Raw materials and stores – at cost

29 28 32 Nil

Finished goods – at cost Nil Nil Nil 30Total non-current assets 29 28 32 30

Moving onto the footnotes! When I looked at my company’s footnote for inventories, I noticed that for both the current assets and the non-current assets, it has its inventories split up into two categories – into ‘Raw materials and stores – at cost’ and ‘Finished goods – at cost’. From my previous experience with ACCT11059, I understand that raw materials and stores are like certain components, of which are used to make products but haven’t been used yet. Unfortunately, I’ve had…you guessed it…ZERO experience in working with inventories and/or with accounting firms. However, there’s something that I’ve had a little bit of experience in, and that’s cooking! You’re probably thinking ‘Kate, we’re not in a cooking assignment – we’re in an accounting class!’ So anyway, to give you an example of raw materials and finished goods, it’s like when I cook my grandma’s pasta recipe sometimes *drools*. Yes, I have the pasta, the sausage, parsley, garlic, onion, and other ingredients in store, but of course, I haven’t started to actually cook it yet. This is what raw materials is basically like – you have the ingredients to make your product, but you haven’t used those ingredients yet to make a finished product, then for it to be sold to the customers. Also, you have the finished goods. This is where the products have been developed using the raw materials, and are ready to sell to the customers! Referring back to my (basic) cooking skills, this would be where I’ve finished cooking and I’m ready to serve it! After looking at AGL Energy’s inventories and footnotes, I was quite keen to look at their inventory policy. As I mentioned before, I had a bit of trouble finding the footnotes, and finding out how my company outlines their inventory policy. As I looked through the financial reports through the ‘Significant Accounting Policies’ section, this is where I found the following statement about my company’s inventory policy:‘Inventories are measured at the lower of cost and net realizable value. Costs of inventories are determined on a first-in-first-out or weighted average basis. Net realizable value represents the estimated selling price for inventories less the estimated costs necessary to make the sale’.

I must say that I found it very interesting and intriguing to see that AGL Energy disclosed two methods - the FIFO method and the weighted average method. I couldn’t help but think to myself ‘So, what is their primary costing method?’ That wasn’t made clear in their inventory policy. If you read the above policy here, you’ll notice that they don’t say both FIFO and the weighted average method, but they actually say the FIFO method OR the weighted average method (Highlighted in yellow). Since AGL Energy uses either of these two methods, they could have possibly used the weighted average in 2013, for example, and then changed it to the FIFO method in 2014. This concerns me a little bit, as I always assumed that all companies

should be as consistent as possible with regards to what costing method they use. I do believe that AGL Energy uses either of these two methods to record their inventories and costs, as typically, both of these methods are easy to apply to, and the fact that both of these methods don’t allow any manipulations with their profit figures. The difference between the FIFO method and the Weighted Average method is that the Weighted Average method calculates the average unit cost, using the number of units and the cost of these units. This is opposed to the FIFO method, where it has an assumption that the cost of the oldest units are those units that get sold first. As you can see here below, I’ve set out the cost of inventories using the weighted average method. My opening balance for my business ‘Kate and the Chocolate Factory’ had 100 units altogether, with the units costing $2 each. Now, this is where the magic happens! On the 2nd October, I decided to purchase 90 units of dark chocolate from ‘The Three Amigos’, at $4 each. As I said before, the weighted average method calculates the average cost of each unit. So, what I’ve done here is input 190 units (Beginning inventory + Purchase of 90 units), added the total costs ($200 + $360), and then calculated the average unit cost by using the formula Total costs/Total number of units. Therefore, the average weighted cost is $2.9474 per unit. This is opposed to the FIFO method, where it sticks with the exact same costs for each different type of unit. From my perspective, I believe that AGL Energy would most likely use the FIFO method as their main approach to calculate their cost of inventories, as the FIFO method is more known to companies rather than the weighted average method. Table 4: Example of Weighted Average method

Table 5: Example of FIFO method

Although AGL Energy had disclosed information about their costing methods, I noticed that AGL Energy did not disclose any information about what inventory system they use. I always thought that all companies, especially huge companies such as AGL Energy, had to disclose information about what inventory system they used. From my understanding, I know that there are two different types of inventory systems, and they are known as the perpetual system and the periodic system. The perpetual system involves recording and updating all inventories and the cost of goods sold continuously after each transaction. The perpetual system is known to be quite costly, but however, provides more detail with records of inventories. However, the periodic system is different to the perpetual system, as the periodic system involves performing a stocktake, of which will determine the ending balance for the period. The ending balance for the period then determines the cost of goods sold. Unlike the perpetual system, the periodic system doesn’t continually update the cost of goods sold or any inventories. Although the periodic system is not overly expensive, it doesn’t provide as much detail as the perpetual system does. So, as you have probably read from here, these two inventory systems are very different, and typically, will produce two very different outcomes of the ending balance. Also, both of these inventory systems are subject to errors and miscounts. Since I didn’t know what to do if my company didn’t disclose this information, I decided to post it on the Facebook page and see what responses I get. So, after getting a response from Tia, Samantha, and Katherine, as well as using my detective skills again, I determined that my company should be using the perpetual system. Why, you might ask? Well, if

you read through my blog post, of which details information about my company AGL Energy, you can see that they’re quite a large firm. As Tia has mentioned below, the perpetual system is quite costly, meaning that this system wouldn’t be suitable for small businesses. I can already imagine that using the periodic system would provide great difficulty for AGL Energy, as they would have to be quite a lot of inventories to count, and they would be more likely to make a mistake on miscounting their inventories in stock. This is opposed to small businesses, where they wouldn’t have as much inventories as AGL Energy does, which is why small businesses would use the periodic system. Also, using the perpetual system would enable AGL Energy to continuously update their inventories after each purchase and sale that they make.

I believe that AGL Energy does have a few concerns with regards to how they manage its inventory. First of all, how did AGL Energy end up with so much inventory within the last 4 years? I’m concerned that AGL Energy currently has almost as much raw materials as their finished goods. From my understanding, I believe that one of the issues that this could possibly be caused by is when AGL Energy is purchasing more raw materials and finished goods then what they’re actually selling. I start to wonder if perhaps, this had a major impact on their downhill from 2013 and onwards. From my perspective, this would tell me that their production process could be quite

slow, which could possibly explain why they have so much raw materials. Another issue that may cause AGL Energy to not produce many goods is the cost of production. AGL Energy is such a large company, and when you look at their previous financial years before 2016, they have achieved quite a lot with regards to their financial matters. When it comes to the costs of production, it tends to cost a lot more for larger companies to produce their goods as opposed to small and medium businesses where they may not have to produce as much as larger companies. Another concern that I have with this company is their costing method. Although they have disclosed their costing methods, both the FIFO method and the weighted average method is subject to errors and mistakes. For example, a disadvantage of using the weighted average method is that the product can easily be underpriced. This could particularly happen if a unit has been updated to some extent, meaning that the price could possibly be higher than what was calculated. The FIFO method could more likely happen the other way around, where each unit that is sold might be overpriced. From my research, whenever there is inflation, the prices of raw materials usually tend to rise quite rapidly. This means that the cost of inventories can easily become overpriced, and the total profit of a company could become overestimated. So overall, I could feel that I definitely underestimated how AGL Energy really handles their inventories. I wasn’t sure what to expect coming into the second half of this assignment, and I have to say that it was quite an adventure for me. Although my anxiety was technically right, however, I have to say that my motivation definitely helped me pull it off with researching my company, and finding out plenty of information about their inventories. I remember something that Martin has said in the last tutorial in Rockhampton, and I remember him saying like ‘If you don’t find this challenging, then you’re not truly learning anything at all’. I find that to be so true, as I have certainly found this step quite challenging, but also interesting at the same time! I’m very glad to have uncovered a lot of information in depth about my company AGL Energy. I’m going to be very honest and say that I’m a bit nervous for the next few steps coming up, but I can’t wait to get into the practical stuff and see how I go on MYOB! 😁😁

Step 8: MYOB Setup, Training, and Quiz

MYOB Setup last screenshot

MYOB Training last screenshot

MYOB Quiz Questions screenshots

Step 9: MYOB TransactionsAs I mentioned before in Step 7, I was quite frankly interested and excited to start doing some transactions through MYOB! Initially when I was planning my 10 hypothetical transactions, I have to be quite honest and say that I didn’t exactly know what I was doing initially. However, as you can see here below, these are the 10 transactions that I’ve hypothetically created for my business AGL Energy. Because AGL Energy owns quite a lot of valuable and probably expensive inventory, that’s why the prices and amounts in each transaction is quite high compared to other products that people may have. For my transactions, I decided to make my own assumption that AGL Energy already had some inventories, rather than actually going to purchase a million units of solar panels and solar batteries for the business. For the screenshots that I’ve attached after my business transactions, I decided for all the statements except for the All Journals report to send it to PDF and then screenshotted it in this step. For the All Journals report, I exported it to Excel, edited it to make sure that the transactions are the same as what I typed in MYOB, and then screenshotted it. You can also see my very detailed *winks* analysis of my financial transactions after the screenshots.

1. On 1st July, AGL Energy purchased 50 units of 4KW solar panels on credit Hanwha at $2,000 per unit, and paid a deposit of half the total amount.

2. On 3rd July, Solar Choice purchased 200 units of 5KW solar panels on credit from AGL Energy at $4,000 per unit including GST. Solar Choice paid a deposit of $200,000 via cheque.

3. On 5th July, AGL Energy purchased 150 units of solar batteries via cash payment from Sunverge at $1,000 per unit.

4. On 10th July, AGL Energy received payment via cheque from Solar Choice for $150,000 from 3rd July.

5. On 13th July, AGL Energy purchased safety equipment from Bunnings Warehouse for a total of $500.

6. On 18th July, AGL Energy returned 5 units of solar batteries to Sunverge due to damages that were made to the solar batteries while delivering them.

7. On 23rd July, AGL Energy had done some project work for 12 hours with drilling walls to extract gas on the property of the Camden Council. As a result, AGL Energy had received payment from the Camden Council for a total of $30 per hour to 150 workers.

8. On 26th July, AGL Energy received an outstanding payment from Solar Choice for $250,000 from 3rd July via cash payment.

9. On 28th July, AGL Energy paid the rest of the payment from 1st July to Hanwha for the solar panels.

10. On 31st July, AGL Energy received an invoice from Ergon Energy for 70 5KW solar panels at $4,500 per unit, 200 solar batteries at $1,500 per unit, and 20 4KW solar panels at $2,000 per unit.

When I broke down the Profit and Loss Statement, or known as the Income Statement, I was honestly surprised to see the profit figure of $1,153,545.45. Considering that I only did 10 transactions, the profit figure is quite different compared to how AGL Energy is currently performing on. Having a large

profit figure would indicate to me that AGL Energy’s revenues balances out its expenses. I believe that one of the reasons why the total profit is so high is because I decided to assume that AGL Energy already had inventories in stock. This means that less money was spent purchasing thousands of solar panels and batteries, so AGL Energy had less inventories to purchase off other companies. When I looked at AGL Energy’s individual sales accounts, I noticed that the 5KW Solar Panel Sales (Originally named ‘Sales Type B’) had taken up the most revenue out of the three sales accounts, with a total of $1,013,636.36. To calculate how much percentage a revenue or an income account takes up its total revenue, the formula is simply the total revenue/sales account divided by the total revenue (Not total profit), and then multiply it by 100. If you add up all of these percentage figures, it should add up to 100%, so that’s how you know that you’ve calculated it correctly (This was previously done in Step 4 for the Chart of Accounts). So, when I calculated these figures, it turns out that the 5KW Solar Panel Sales takes up 76.63% of the total revenue, whilst the Solar Batteries Sales takes up 20.62% and the 4KW Solar Panel Sales takes up 2.75%. I believe that the 5KW Solar Panels take up the most revenue, as the 5KW Solar Panels are the most expensive products out of the three, with it being $4,500 selling price per unit. Normally, solar panels are probably way more expensive, depending on where you live. For example, according to my research, the average 5KW Solar Panel system costs over $8,000 in Brisbane, as opposed to Perth, where the average price was just over $6,600. I assumed that these costs don’t include any other packages such as batteries for the solar panels or any tools that might be needed. In Rock Vegas where I live *winks*, I would imagine that solar panels would probably be a bit cheaper than what’s offered in capital cities. So, with regards to my estimation of the prices of solar panels, I probably underestimated the prices a little bit. However, regardless of that, AGL Energy’s transactions tells me that they are making the most out of their profits. How do I know that AGL Energy is creating its profit? Well, that’s because their total net profit margin is at 87.2%! I calculated my company’s net profit margin by simply dividing the total profit by the total revenue, and then multiplying it by 100, just like what was previously done in ACCT11059. Their total expenses of $53,545.45 is considerably small and minimal compared to its total revenue of $1,322,727.28, which is a good sign that AGL Energy is controlling their expenses properly. Another aspect to consider is how much profit can be made from making sales. This would be known as the Return on Assets Ratio, which is calculated

by dividing the net profit by the total assets, and of course, multiplying it by 100. When I calculated this, it came to a total of 91.6%! This tells me that AGL Energy can greatly make a lot of profit from selling its units of solar panels and solar batteries. Moving onto the Balance Sheet! Unlike the Profit and Loss Statement where it shows a company’s revenues and expenses, the Balance Sheet shows a company’s assets, liabilities, and equity. The first thing that I decided to look at is the Net Assets. To calculate the total Net Assets, it’s Total Assets minus Total Liabilities. In this situation, that would be $1,258,500.00 - $104,954.55 = $1,153,545.45. AGL Energy seems to be doing very well with their total Net Assets, which tells me that there’s not any accounts such as bank overdraft that a company is due to pay for. There’s still an outstanding payment of $200,000 that AGL Energy is still waiting to receive from Solar Choice, of which is from Solar Choice’s payment of 5KW Solar Panels. As you can see in the Liabilities section, the GST Collected greatly outweighs the GST Paid, which indicates to me that AGL Energy is selling its units for higher prices than what they’ve purchased for. As a result, this means that there has been more GST Collected than what has or needs to be paid for. When looking at the cash flow statement, I found out that AGL Energy has quite a lot of cash flow. This indicates to me that AGL Energy is capable enough to flow its cash in and out of the business. AGL Energy doesn’t have any investing or financial activities in its cash flow statement, so there’s no activity that’s happening in those two areas. However, AGL Energy, does have some cash flow going on in the operating activities. I was quite surprised to see that AGL Energy does have a positive cash flow, considering that there were more negative amounts than positive amounts. There’s still $200,000 of what Solar Choice owns to AGL Energy, and then there’s also the $5,000 that AGL Energy lost from damages to the solar batteries. As I’ve mentioned before, the GST Collected greatly outweighs the GST paid, as AGL Energy has made a few sales where they’ve managed to make the most out of their profits and reduce as much expenses as it can. From analysing the profit and loss statement, the balance sheet, and the cash flow statement, all of these statements tells me that AGL Energy is more than capable enough to operate its company. These statements from MYOB and even AGL Energy’s financial reports tells me that their inventory is very valuable, and so they should utilize its inventories. I have to keep in mind that although it may seem that AGL Energy can operate its company, it’s only based on 10 transactions, and that there are things that could doubt that AGL Energy could operate. For example, I could have made some errors whilst I was entering my transactions. Considering my experience with MYOB, I’m pretty confident that it should be correct, although it’s certainly a possibility that human error has been made on my part. Also, there would obviously be more activity than what my 10 hypothetical transactions show,

as there would be lots of projects, sales, and purchases that go behind the scenes. So, overall, I must say that I surprisingly enjoyed doing this activity of entering transactions into MYOB. From analysing these business transactions, its story tells me that AGL Energy has been doing very well. As I’ve said a couple of times before, AGL Energy is very capable of operating its company and making profits out of its revenues and its assets. AGL Energy can potentially have the opportunity to grow even further, provided that there’s no controversy that surrounds AGL Energy, and that AGL Energy does its best to control its expenses as much as possible. If I was doing around 15-20 transactions, then I believe that there would be more to this story than what is shown in each of these financial statements. Because I assumed that AGL Energy already had some inventories in stock, I do believe that AGL Energy could easily succumb to having too much inventories, so they should make sure that its inventories don’t get too overstocked.

Step 10: DepreciationTable 6: Percentage of depreciation and amortisation expense that takes up AGL Energy’s total revenue

Year 2013 ($m) 2014 ($m) 2015 ($m) 2016 ($m)Revenue $11,150 $10,678 $10,445 $9,716Depreciation and Amortisation

(287) (326) (379) (478)

Percentage 4.37% 3.55% 3.12% 2.95%

I was quite excited and interested to get back into depreciation, as I remember doing depreciations back in high school. Before I started to look at my company’s depreciation figures, policy, and footnotes, I had decided to outline the basic core foundation of depreciation and amortisation, just to make sure I have the understanding. From my understanding, depreciation and amortisation is the allocation of the asset to the accounting periods in which it is expected that the asset will contribute to the production of revenue. Typically, depreciation and amortisation are used interchangeable but however, they do have a difference. Depreciation typically deals with tangible non-current assets, whilst amortisation deals with intangible non-current assets. Depreciating non-current assets happens where the useful life of the non-current asset decreases over time. I remember that there are two different types of depreciation, of which are the straight-line method and the reducing balance method, of which I’ll discuss about this a bit further down in the next paragraph.

I wanted to see whether depreciation was a big expense for AGL Energy or not. To calculate this, it’s simply Depreciation (In negative) divided by the total revenue. As you can see in table 6, the total percentage of depreciation taking up its revenue is not a lot. Sometimes, when I initially look at expenses such as depreciation and amortisation, it may seem that this expense takes up a lot of the company’s total expenses. However, when I did the calculation and went into AGL Energy’s revenue a bit more, I found that my company’s depreciation expense doesn’t actually take up a lot of its revenue. I noticed that when I compared these percentages, it was decreasing every year. This tells me that AGL Energy assets probably have a long life ahead, and that its assets are not being expensed anytime soon. These percentages also tell me that AGL Energy’s depreciation and amortisation expenses are not very significant to its company, as in every financial year, it has only taken up less than 5%. Another thing that I should point out is that AGL Energy combines depreciation and amortisation together, rather than having separate accounts for depreciation and amortisation. I found this a bit unusual, as I always assumed that depreciation would have its own account, and amortisation would have its own account too. I also noticed that I couldn’t find any footnotes that were attached to this account! So, as I ventured on my company’s annual reports, I decided to do was to look at my company’s policy for depreciation, as I needed to know which method they use, and how they handle depreciation of their assets. I wasn’t surprised to see that AGL Energy uses a straight-line method when depreciating its assets. The straight-line method would be more suitable than the reducing balance method, as the straight-line method loses its economic benefit evenly over a period of time. This is opposed to the reducing balance method, where it loses its economic benefit in the early periods of an asset’s life. AGL Energy hasn’t changed any of its depreciation methods over the last 4 years. I believe that they haven’t changed its depreciation method, as the straight-line method is more suitable for them, and that changing its depreciation method could have dramatic effects on its financial statements. From my research, changing the depreciation method from the straight-line method to the reducing balance method, or vice versa, would be a change in the accounting estimate. According to the Australian Accounting Standards Board, it quotes ‘When depreciation rates or depreciation methods are changed, the change must be accounted for as a change in accounting estimate’. The International Accounting Standards defines a change in accounting estimate as an adjustment of the carrying amount of an asset or a liability. I noticed that AGL Energy has outlined its useful lives for its assets, of which the assets are outlined as freehold buildings, leasehold improvements, and

plant and equipment. Freehold buildings have a useful life of 50 years, while plant and equipment has a useful life of around 3-35 years (Or the relevant units of use). Leasehold improvements will whether have a useful life of less than the lease period, or a useful life of 20 years. To further investigate into these assets, I decided to look at the footnotes for property, plant, and equipment, and see how much net carrying value each asset had. To calculate an asset’s carrying value, it’s simply the total cost minus the accumulated depreciation. Table 7: Total depreciation for property, plant and equipment (As at 30 June)

Year 2013 ($m) 2014 ($m) 2015 ($m) 2016 ($m)Freehold land and buildings

(1) (1) Nil (1)

Leasehold improvements (4) (6) (3) (2)Plant and equipment (210) (247) (337) (421)Total ($m) (215) (254) (340) (424)

As you can see in Table 7, the first thing that I noticed was consistent with each financial year was that the plant and equipment seemed to be the most valued asset out of the three asset accounts. Considering that AGL Energy does specialize in providing energy through specialized equipment to various properties, I could definitely see that plant and equipment would definitely be significant to the company. It was quite interesting to note that freehold land and buildings didn’t have any depreciation expenses for 2015. I wondered why freehold land and buildings had no depreciation expenses in 2015, but yet had depreciation expenses of $1 million in every other year. However, I remember reading the depreciation policy and as well as learning from the lecture that land is not depreciated, which means that only the buildings are depreciated. From looking through each financial year, it seems to me that the amount of depreciation from Leasehold improvements and Freehold land and buildings is quite small compared to its plant and equipment. From my understanding, if the net carrying value is decreasing and is coming close to 0, then the asset must be expensed straight away, which means that the asset doesn’t have its life anymore and a new asset may replace the old asset. So, for example, within the first year, AGL Energy has a total cost of $32 million for its Leasehold improvements, with an accumulated depreciation valued at $19 million. When talking about accumulated depreciation, I always have to keep in mind that accumulated depreciation does NOT mean cash on hand, but it means that a portion of an asset’s cost is being transferred to the depreciation expense. So then, take the accumulated depreciation from the total cost and if calculated correctly, you should get a total net carrying value of $3 million for AGL Energy’s Leasehold improvements. Compared to how much net carrying value its other assets have, this is relatively small for

AGL Energy. I must say that it would be very interesting to know the latest results for AGL Energy’s depreciations on its assets, particularly the leasehold improvements. After reading about property, plant and equipment, I came across a note on the next page that mentions about an impairment loss for its natural gas assets, of which it details in another footnote. It basically details a decision where AGL Energy has decided to not use its natural gas assets due to the instability of commodity prices and the lengthy time of development. The fall in oil prices all around the world has also resulted in an impairment loss to its natural gas assets. I was quite interested in reading about this, as it really gave me an insight into how sometimes, circumstances out of a company’s control can lead to impairment losses of its assets. I always just assumed that a company could easily expense its assets once it had reached its useful life span. I thought it was very good to note this, as I thought it was very interesting to read about this. The other thing that I should mention about is intangible assets. AGL Energy’s policy about intangible assets states that its assets are initially measured at cost, which I assume would mean that AGL Energy estimates its cost. Their main intangible asset that AGL Energy has outlined is an account called ‘Customer relationships and contracts’, of which has a useful life of between 3-20 years. AGL Energy has other intangible assets, which includes goodwill and licenses, where both of these intangible assets have an indefinite number of lives. It’s good to discover that intangible assets that have an indefinite number of lives have to be tested for impairment on an annual basis, so that these assets can be calculated to see how much impairment loss exists. Table 8: Total amortisation for intangible assets (As at 30 June)

Year 2013 ($m) 2014 ($m) 2015 ($m) 2016 ($m)Good will Nil Nil Nil NilLicences Nil Nil Nil NilCustomer relationships and contracts

(47) (54) (29) (29)

Other Nil Nil Nil (4)Total ($m) (47) (54) (29) (33)

As you can see in this table above, the first thing that I noticed was that the most significant impairment loses under intangible assets was customer relationships and contracts. Since AGL Energy had over 3.6 million customers this year (The lowest out of all the financial years), I can definitely see that customer relationships and contracts would be a very significant intangible asset for AGL Energy. I found it quite interesting to see that goodwill and licences didn’t have any amortisation at all! I needed to research this further,

as surely there would be more activity going on than just not having any amortisation. So, I went to research this further and found out that goodwill and licences are allocated to cash-generating units for impairment testing. Cash-generating units includes ‘Energy Markets’, ‘Group Operations’, and ‘New Energy’. In 2013, these accounts were known as ‘Retail Energy’ and ‘Merchant Energy’. Table 9: Impairment testing for goodwill and licences

Year 2013 ($m) 2014 ($m) 2015 ($m) 2016 ($m)Good will 2,640 2,758 2,792 2,791Licences 301 301 311 311Total 2,941 3,059 3,103 3,102

To be honest, I didn’t exactly know what these terms meant, or what was even meant by cash-generating units. After some googling, it turns out that cash-generating units are a group of assets that generates cash flow, and where the cash flow is independent of cash flows that is generated by other assets. This is then used to determine the impairment of certain assets, which in this case, is goodwill and licences. In table 9 above, it outlines the total amount of goodwill and licences that is allocated to cash-generating units. The other issue that I had was with the account Other intangible assets. I wanted to know what Other intangible assets means, since it had an amortisation of $4 million within the last financial year. I couldn’t really see anywhere in this financial report where it mentions what is included in other intangible assets. I know that examples of intangible assets would include trademarks, copyrights, licensing agreements, and use rights such as drilling rights or water rights. Date

Journal Entry Debit Credit

30/6

Depreciation Expense – Plant and EquipmentAccumulated Depreciation – Plant and Equipment(Depreciation expense for the year)

$42,100 $42,1

00

Date

Journal Entry Debit Credit

30/6

Amortisation Expense – Customer relationships and contractsAccumulated Amortisation – Customer relationships and contracts(Amortisation expense for the year)

$2,900 $2,9

00

Date

Journal Entry Debit Credit

30/6

Depreciation Expense – Leasehold improvementsAccumulated Depreciation – Leasehold improvements(Depreciation expense for the year)

$200$200

So, after a lot of research and analysis of my company’s depreciation and amortisation, I couldn’t wait to get stuck into creating my own journal entries! When I created these journal entries, I wanted it to reflect how AGL Energy might depreciate and amortise these assets, and how it may be entered into a journal. I also wanted to use a variety of journal entries and show different ways of how AGL Energy may depreciate and amortise their assets, rather than just only show depreciation expenses or only show amortisation expenses. I used the 30th June for all of my journal entries, since that is the last day of every financial year for my company. These figures that I’ve decided to put in was based off on how much my company has depreciated within the last financial year. To make these figures as realistic as possible, I decided to add an extra 2 0’s to all of my figures, as the total amounts in this exercise is in the usual amounts. For example, the third journal entry is a debit to its depreciation expense for $200, rather than equating it to $200 million. Compared to how much AGL Energy depreciates its assets, these figures are relatively small. Yes, they may seem like huge figures to you and me, but however, the value of AGL Energy’s depreciations is probably way more than what I’ve outlined. As I discussed earlier, depreciation and amortisation isn’t a significant expense for AGL Energy, which is why the total amounts of these transactions isn’t exactly huge. There’s a very good possibility that AGL Energy could easily manipulate these entries. For example, if AGL Energy were to change its depreciation method from the straight-line method to the reducing-balance method, then this could have a dramatic change on how AGL Energy depreciates its assets. When it comes to depreciation and amortisation, these types of accounts are always estimated. As a result, this means that AGL Energy could very easily underestimate or overestimate how much depreciation is involved in their assets. This could be caused by incorrectly estimating the asset’s useful life span, and by incorrectly estimating how much the asset costs. AGL Energy could intentionally manipulate the figures to make their figures look better than what they’ve actually calculated. They can do this by correctly estimating the asset’s life span and estimating the asset’s depreciation value through using both depreciation methods to see which one is more valuable. So therefore, there are lots of ways where AGL Energy can manipulate these journal entries and its figures.