Running performing Gas assets which are less significant

Running head: ACCOUNTING

Standard for Lease

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(i): AGL Energy Ltd has made a decision that the company will concentrate over
projects related to core gas and will divest non performing Gas assets which
are less significant and non-core activities. The core and significant projects
which AGL Energy is planning to retain includes recently incorporated New
Castle Gas Storage Facility, Wallumbilla Liquefied Petroleum Gas plant,
Silver-Springs underground storage facility, Gloucester Gas project and Camden
Gas Project (Kabir, Rahman & Su, 2017). It will enable the company to
enhance various small gas projects which include strategically significant gas
storage along with preventing huge capital expenditure. It will help in
releasing No Performing as well as allow the management for enhancing value of
shareholder through the group.

(ii): According to AGL Energy, the present impairment approach leads to low
comparability in accounts. Also the impairment testing for goodwill has
restricted relevance and effectiveness, according to the intensity of
subjectivity which is involved. The Annual testing method is extremely time
consuming and complex which involves a lot of assumptions and judgements. In
many of the cases, effort and time which is spent over the exercise and
activity was explained as important in comparison to other domain which
concerns financial reporting, though the advantage was questionable (Huikku,
Mouritsen & Silvola, 2017). This can have a significant impact over the
individuals who spend good time observing analysis and disclosures of companies
with respect to impairment testing of goodwill.

(iii): AGL energy performed an explanatory review for natural gas assets which
are categorized as evaluation and exploration assets, equipment’s and plant,
property and gas and oil assets, as on December, 2015. As a consequence, AGL
identified impairment charges and expenses of approx. $795 million prior to tax
in Group operations segment. The reduction in prices of global oil had a
significant impact over long term gas prices of Queensland which led to
impairment for natural gas Assets of AGL in Queensland (??????, 2015). This impairment expense also consists of $50
million which is related to increment in provision of rehabilitation of
enforcement and lower inventory value for projects of gas operations.

(iv): An impairment test values and measures whether item of balance sheet is
of the amount which is stated and mentioned over the balance sheet. The amount
of balance sheet must be lowered if the test of impairment shows a reduced
value. Impairment testing is applied and implemented for tax accounts and
commercial accounts. Various nations, tax jurisdictions and accounting standards
can have varying rules over what needs to be tested, how and when. It can be
relevant for conduct and performing more recurrent impairment testing instead
of justice value of reporting unit which is lowered below carrying the prices
(International Accounting Standards Board, 2004). Instance of catalyst events
include losing the key employees, regulatory changes, lawsuits as well as
expectations of reporting unit that will be sold.

(v): There is a lot of subjectivity which leads to opportunistic behavior
between the management while Impairment testing of goodwill. Since allocating
goodwill in cash generating units as well as to calculating the recoverable
prices is subject to the allowance and discretion, the studies explain that
management of a company takes action opportunistically regarding Goodwill
impairment testing.  The management and
its remuneration framework affects possibility of Goodwill impairment (Kabir,
Rahman & Su, 2017). Except few intangible assets and goodwill, where it is
mandatory to have an impairment testing annually, the entities are needed to
perform impairment tests if an indication or sign for impairment of asset is

(vi): Impairment of Assets ensures and makes sure that the assets of the
company are not used and utilized at not more than the recoverable prices which
is more of its fair price minus value in use and disposal costs. Except few
intangible assets and goodwill, where it is mandatory to have an impairment
testing annually, the entities are needed to perform impairment tests if an
indication or sign for impairment of asset is there. The impairment can be
performed for unit that generates cash where the asset may not generate inflows
of cash which are primarily independent and exclusive from all other assets
(Capalbo, 2013).

(vii): In order for AGL energy to make transformation occur in the sector of
energy, operating models needs to be altered as well as new foundations of
organization are required to be developed. To thrive and survive in the dynamic
industrial market environment, the company is developing agile systems and
processes of business capable for adapting and anticipating it for taking
benefits of the chances and opportunities. The structure of organization of AGL
Energy is enabling the internal changes in culture. The organization is
creating a growing and deep pool of talent for conducting impairment testing (“AGL | Electricity Providers | Gas Suppliers |
Solar Energy | AGL”, 2018). The business definition of AGL energy
involves harnessing insights for enriching the energy experience of customers.

(viii): Underlying Operating Earnings Before Interest and taxes and profits are
known as statutory profit or loss and statutory earnings before interest and
tax respectively that are modified for changes which are made in fair value
measurement for the financial instruments. As per AGL Energy the Underlying
Operating EBIT and Profits give a good explanation of the financial statements
and it allows for much relevant and reliable comparing of the performance of
financial statements between the financial time period. The significance of
Underlying Operating EBIT and Profit lies in the fact that they help in
removing items which are relevant items of expense or revenue which are not
linked with the activities of business and help in facilitating comparison
between time period of varying financial performance (Capalbo, 2013). It also
helps in removing the changes and alterations in fair value measures of
financial instruments which are identified in profit and loss statement for
removing the volatility which is developed by variations in valuations of
derivatives as well as underlying assets.



Answer (i):  The Chairperson of
the IASB trusts that the previous bookkeeping standard for leases (AASB 117/IAS
17) did “not reflect monetary reality. In his speech he said that as per
the present requirements of accounting, more than 80 percent of leases are
either not maintained over the balance sheet, or they are mentioned as
operating expenses. No matter, the operating leases are not mentioned in
balance sheet, they still develop true liabilities. IFRS 16 will make sure that
all the leases virtually are recorded on balance sheet of the company. It can
mean that both operating leases that are presently included only in footnotes
of statements of finances and finance leases that are recorded over balance
sheet of the company will be maintained over the balance sheet like liabilities
and assets (Öztürk & Serçemeli, 2016). There will be no categorization
of leases into finance or operating leases. Instead it will be a competitive
option which will give flexible capital and finance expenditure keeping aside
all the risks related to full ownership of asset and technology obsolescence. IFRS
16 will consider all the issues and will recognize and identify all the leases
as liabilities and assets, which will better help reflecting the true economic

Answer (ii): For many years, corporations have harassed
loophole of financial accounting by making structures of transactions related
to lease to account them into operations leases. It led them to prevent
recognizing liability for lease over the balance sheet, and hiding and veiling
their debts. The SFAS 13 (Statement for standard of Financial accounting)
required the companies with capital leases for reporting a lease asset and
liability over the balance sheet (Mellado & Parte, 2016). This renting
standard assumes away their concealing position to shroud obligation for leases
over a year. Also the criteria for categorizing the lease which the companies
use for preventing lease capitalization and turns steps for hiding the
liabilities of lease off the company balance sheet to a useless exercise.

Unfortunately, the creative lessors and lessees created a cottage market
industry or place where the lessees may get the financed assets easily and also
prevent recognizing the lease liability over balance sheet. IFRS 16 may not
alter the leases nature but the accountancy needs. It can be interpreted that
leases can be a flexible source and attractive source of finance for the
organizations who do not want to stand the risk to own the equipment fleets and

Answer (iii): As per the current Accounting standards which
are used for the leasing arrangements, the information regarding the
undiscounted promises of company for the leases recorded off balance sheet is
given in the footnotes section of the financial statements. Though
sophisticated investors and stakeholders may make use of this information for
estimating liabilities and assets which arise from these leases, a lot of
investors such as retail investors cannot make these analyses. These new
accounting standards for leases will thus make a more levelled and balanced
field for all the corporations such as airline companies. It will also result
in making strong the confidence of market (Edeigba & Amenkhienan, 2017).

The investors will also be able to see these leases being recorded over the
balance sheet of lessees and will get a complete and fulfilled picture of
labilities and assets which are utilized in operations along with the lease
expenses which are unavoidable. It will help and aid investors to compare and
better evaluate the financial operating and leverage flexibility in

Answer (iv): As per IFRS 16, the companies with
capital leases need to report their lease asset and liability over the balance
sheet. This requirement to report for capital the lease as well as the influence
it will have over the balance sheet will make them undesirable in comparison to
operating lease. A company having capital lease along with displaying correct
asset use, the liabilities for operating lease will be displayed by the balance
sheet that may impact the leverage ratios and appearance of the balance sheet.

Consequently, the creditors and investors may alter or modify their financial
health perception regarding the company (Rapoport, 2013). For most of the
organizations, this change can make leasing activity less attractive in
comparison to buying the real estate, since the liability will be shown in the
balance sheet in both the ways. It can give the extra incentive relevant for
the corporations for taking the leap as well as buying the building. This
leasing standard takes away their hiding place to hide debt for leases more
than a year. Also the criteria for categorizing the lease which the companies
use for preventing lease capitalization and turns steps for hiding the
liabilities of lease off the company’s balance sheet to a useless exercise.

Answer (v): Since the former standard for accounting
for lease does not record the capital leases in the company’s balance sheet, it
creates problems as the financial analysts and information investors do not get
the correct information from the company’s balance sheet and it does not
reflect a true economic reality. It can cause understating the liabilities
because a company can have many assets in agreements of operating lease which
may not be unveiled in financial statements. For clearing this issue, the
analysts and investors should make efforts for adjusting the balance sheet as
per the information they have like using present value. Therefore it can be
estimated that investors prefer and rely over transparent framework which gives
more precise reflection about the liabilities of the companies and also
maintain the consistency over worldwide platform (Lin & Graham, 2017). The
latest modification related to reporting of each and every lease will help in leading
a better and informed decision for investment by the investors as well as towards
a balanced decision for leasing versus buying capital assets by the management
of a company. IFRS 16 may also help in improving the allocation of capital
which is adequately beneficial for growing economy.



| Electricity Providers | Gas Suppliers | Solar Energy | AGL.

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Finance Journal, 11(3), 3-19.

Huikku, J., Mouritsen, J., & Silvola, H. (2017).

Relative reliability and the recognisable firm: Calculating goodwill impairment
value. Accounting, Organizations and Society, 56,

International Accounting Standards Board.

(2004). International accounting standards IAS 36, Impairment of
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Kabir, H., Rahman, A. R., & Su, L. (2017). The
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Test-Related Disclosures in Australia.

Lin, K. C., & Graham, R. C. (2017). How Will the
New Lease Accounting Standard Affect the Relevance of Lease Asset Accounting?.

Mellado, L., & Parte, L. (2016). Determinants of
corporate lobbying intensity in the lease standard-setting process. Revista
de Contabilidad.

Öztürk, M., & Serçemeli, M. (2016). Impact of New
Standard” IFRS 16 Leases” on Statement of Financial Position and Key
Ratios: A Case Study on an Airline Company in Turkey. Business and
Economics Research Journal, 7(4), 143.

Rapoport, M. (2013). Lease accounting may
shift—Companies might have to increase amount of debt they report under
change. Wall Street Journal, C2.

??????, ?. (2015). Impairment of assets.