Financial Reporting Disclosures in Australian Corporate Sector - Assignment Example

Financial Reporting Disclosures in Australian Corporate Sector Student’s Name Institution Abstract The Australian Accounting Standards are set forth by the Australian Accounting Standards Board (AASB). These standards require companies to make disclosures on investment in joint ventures, reportable segments, and related party transaction and disclosures in line with AASB 128, 8, and 124. Santos Limited and AGL Energy Limited have disclosures made on these items in their most recent published annual reports. This paper compares the disclosures made in the financial statements by Santos and AGL Energy. Keywords: disclosures, reports, industry Financial Reporting Disclosures in Australian Corporate Sector Introduction Dagwell, Wines and Lambert (2006) argue that directors of company’s in Australia must ensure that their company’s financial reports are made out in accordance with the applicable accounting standards that the Australian Accounting Standards Board (AASB) has approved (p. 504). In any case a compliance with these standards does not result into the presentation of a true and fair view; the standard’s provision will still apply. Dagwell, Wines and Lambert (2006) further argue that these standards provide more detailed guidance through prescribing allowable accounting policies and the required disclosures of certain details of transactions and balances. Some of these disclosures are on; investment in joint ventures, reportable segments, and related party transaction. These are in line with AASB 128, 8, and 124. This paper compares the disclosures made in the financial statements of two Australian Companies; Santos Limited and AGL Energy Limited, to those required by the Australian Accounting Standards, and between themselves. Company Overview AGL Energy is among the leading integrated energy firms in Australia involved in the purchase and sale of electricity and gas; construction and operation of energy processing infrastructure and power generation; and development of natural gas manufacture facilities among others. This company has major investments in wind and hydro and ongoing developments in vital renewable energy areas like biomass, geothermal, bagasse, and solar among others. This company realised a profit after tax of 558.7 Million in 2011 compared to 356.1 million in 2010. Santos Limited is also among the leading Energy firms in Australia; a leader in the Australian domestic market gas production. It majors in petroleum and gas exploration and production, treatment and marketing of crude oil, natural gas, petroleum gas, condensate and naphtha. It also carries out transportation of crude oil by pipeline. This company is pursuing a transformational liquefied natural gas strategy (LNG) as one of its joint ventures. Disclosure Requirements The major aim of the AASB accounting standards is to provide a detailed guidance through prescribing the allowable accounting policies and requiring the disclosure of specific details of various transactions and balances. AASB 101 requires the financial reports to be clearly identified and distinguished from other information contained in the same published document. According to Deegan (2009), the financial report when incorporated in the annual report of the company, should be clearly identified. In addition, certain items in the financial report recognized by the firm should be disclosed on the face of the report or in the notes to the financial statement. Items to be disclosed range from; cash and cash equivalents, liabilities and assets for current tax, equity items, dividends, investment in joint ventures, reportable segments, and related party transaction and disclosures among others. AASB 128, 124 and 8 cover investment in joint ventures, reportable segments, and related party transactions and disclosures respectively. 1. Investment in Joint Ventures AASB 128 outlines requirements for disclosure of investment in associates and joint ventures. According to Dagwell, Wines and Lambert (2006), these standards are applicable to annual reporting periods that begin on or after first January 2013 (p. 226). AASB 128, has been modified to do away with specific guidance that is presently contained in AASB, 10, 11, and 12. A joint venture is simply a contractual arrangement between two or more parties whereby they agree to undertake economic activities that are subject to joint control. The investment in associate and joint ventures integrates IAS 28 (Investment in associate and joint ventures), released by the International Accounting Standards Board (IASB). This standard has a main objective of prescribing the accounting for investment in associates and setting out the specifications for the application of the equity-based method when accounting for investment in joint ventures and associated. This standard is applicable to entities that are investors with joint control of or have significant influence over investees. This standard requires the following to be factored in publishing the financial statements; Recognition of assets controlled and liabilities incurred, and share of income earned together with expenses incurred by a venture in jointly controlled operations, Recognition of share of jointly controlled assets, liabilities incurred, share of liabilities jointly incurred, income from the sale or use of share of output of joint venture, and any expense incurred in respect of interest in the joint venture. Accounting for all of the interests in jointly controlled entities through the use of cost model, equity method, or fair value model. Santos annual report shows its joint venture in the Gladstone liquefied natural gas (GLNG) with PETRONAS, Total and KOGAS. This joint investment decision was settled in January 2011 after environmental approval in October the previous year. In the 2011 financial results, it has been reported that, $2.5 billion expenditure is expected on the PNG, GLNG, and LNG joint venture projects. This presentation does not cover the specification of AASB 128; for example assets controlled and the liabilities incurred have not been recognized. Furthermore, the share of jointly controlled assets has not been specified. This could probably be because; AASB 128 has not yet been implemented, given that it will be operational as from January 2013. AGL Energy has also disclosed its investment in joint venture operations in end 2011 annual statement. This joint investment known as the ActewAGL energy is a partnership between AGL and the ACT government-manned enterprise, Actew Corporation. In this joint venture, AGL holds 50% interest and has derived a profit of $29.8 million in 2011. Just like Santos’s annual report, AGL’s annual report fails to disclosure information about assets controlled and liabilities it incurred in this joint venture. 2. Reportable Segments The reportable segments requirements is outlined in AASB 8, which requires companies to disclose information that will enable the users of their financial statements to evaluate the financial effects and nature of the business activities which they involve in and the economic environment in which it is carried out (Dagwell, Wines, & Lambert, 2006). Additionally, this standard requires business entities to report separately information about each of their operating segments. Reportable segments must be the business and geographical segments for which a large portion of the company’s revenues are earned from, especially in their sales to external customers. This revenue has to be ten-percent or more of the total revenue the firm earns. The following information is to be disclosed for each reportable segment that has been reported using the primary segment reporting format; Segment revenues, differentiating between sales to external customers and revenues received from transactions with other segments, Segment result either profit or loss Carrying amount of segment assets, liabilities, total cost incurred in reporting period to acquire segment assets expected to be used in more tan one reporting period, Total amount of non-cash expenses incorporated in the segment results, and the total of the equity profit or loss among others. Santos’s financial statements shows that this standard has been adhered to, for example; the segment information is provided in page 51 of the annual statement. Santos identifies four of its business units in Eastern Australia, Asia Pacific, Western Australia and Northern Territory, and Gladstone LNG (GLNG). The revenue, cost, and profits for these segments have also been provided in accordance with AASB 8. The only aspect not covered extensively is the assets and liabilities incurred by these segments, given that assets have been combined into one entry and liabilities have not been reflected. AGL on the other hand, has disclosed information relating to its operating segments in the notes to the financial statements section. AGL has four reportable segments; retail energy, merchant energy, energy investment, and upstream gas. Financial information of the segments which includes; segment revenue, financing costs, assets, liabilities, and profits have also been disclosed. AGL compared to Santos has disclosed information about its segment’s assets and liabilities. The only shortcoming is tat it has ignored amounts of investment in associate and joint ventures in the segments. it has treated these values separately. 3. Related Party Transactions and Disclosures The related party transactions and disclosures are outlined in the AASB 124 accounting standard. This standard seeks to ensure that the information necessary to capture attention to the possibility that the financial position and loss or profit may have been influenced by the existence of related parties and with their outstanding balances and transactions they have undertaken with the firm. These related parties are the persons related to the company preparing the financial statement. These people could be persons or close members of their family that have; control or joint control over the reporting company, significance influence over the company, or is a member of the key management of the reporting company. Related party transactions are the transfer of resources, obligations or services that take place between related persons regardless of whether a price has been charged or not. Disclosure is usually required in these transactions under the following instances; Relationship between the parent firm and its subsidiaries regardless of whether a transaction has taken place or not. Disclosure of key management personnel compensation in total for; short-term employee benefits, termination benefits, share-based payment benefits, and other long-term benefits. Related party transaction An overview of Santos’s financial statements shows that related parties information has been disclosed. The related party transactions have been disclosed in the notes to the financial statements especially the ones relating to; amounts owing from other related entities, parent company financial guarantees, controlled entities, interest in associates, interest in joint ventures and disclosure relating to key management personnel. The only aspect lacking in this annual report in relation to related party transactions is the kinds of transactions that needs to be disclosed. Transactions related to commitments to carry out some actions in the occurrence of certain events in the future have been left out. AGL on the other hand has only disclosed information related to key management personnel. This information covers movements in the number of share performance rights over ordinary shares in the parent company during the financial year. Information related to controlled entities, interest in associates, and interest in joint ventures has been left out, unlike in Santos’s where they have been disclosed. References Dagwell, R., Wines, G., Lambert, C. (2006). Corporate accounting in Australia (4th ed.). Sydney, NSW: UNSW Press. Deegan, C. (2009). Australian financial accounting (6th ed.). Spring Hill, QLD: Irwin/McGraw-Hill. AGL Energy Annual report 2011. Retrieved from: http://www.agl.com.au/Downloads/2011%20Annual%20Report%20and%20ASX%20release.pdf Santos Financial Report 2011. 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