Executive Summary
Property, plant, and equipment are real or tangible properties that are long-term assets and usually last longer than one year. Land, farm, and equipment (PP&E) examples include undeveloped land, buildings, machinery, office furniture, vehicles like trucks. Fixed assets, which are long-term physical assets, are also called land, plant, and equipment investments. For a company, it is necessary to correctly report its PP&E on its balance sheet.
In the event that an organization needs to sell properties to collect capital, it is necessary for businesses to control their PP&E. Although most fixed assets depreciate over time and are not readily turned into cash, certain assets will rise in value over time allowing a business the potential opportunity to collect cash. This report analyses the major accounting policies used to determine the best PPE value based on AusNet Company and AGL Energy Limited.
Introduction
As one of the balance sheet’s significant sections, good accounting policies should be developed for Plant, Property, and Equipment (PPE). In the structuring of accounting policies for PPE, all the factors that are related to it, such as useful life of an asset, appropriate model for determination of asset values, depreciation method for PPE, PPE impairment policy, initial and subsequent recognition criteria, and useful asset life are included. Below is a detailed analysis of two companies’ PPE policies in the Utility Sector listed in the Australia Stock Exchange for AusNet Services Limited and AGL Energy Limited. Further comments of the considered factors in the framing of the accounting policies for PPE have been evaluated.
Evaluation of AusNet Services Limited and AGL Energy Limited’s PPE Accounting Policies
AusNet Services Limited
Property, plant, and equipment are calculated at the expense the particular company. The Cost of contributed assets is assumed to be the fair value of the purchase when we gain control. In the financial statements, land, plant, and equipment are divided into different groups: land, buildings, easements, gas distribution network, other plant and equipment, capital works in progress, and transmission networks. These groups refer to the asset class aggregations in the Registry of Fixed Assets.
The Accounting Units and Components
Companies accounting units and components are a measure of respective financial strengths and asserts. Property, plant, and equipment products also consist of various sub-components (Lau and Wong, 2019, p. 173). AusNet Services accounts separately in the Fixed Asset Registry for land, plant, and equipment components using different useful lifetimes. Components also need to be replaced or refurbished before the completion of the life of the total asset. These are often combined in the Fixed Asset Registry into a single asset (for example, for contestable metering assets). The Asset Accounting and control team will conduct a partial de-recognition of the aggregate asset when individual objects are replaced.
Depreciation
Land, plants, and facilities have limited useful lives, excluding land and easements. At some stage in the future, they will stop to deliver financial assistances to AusNet Services. Accordingly, the asset’s cost is amortized by a P&L depreciation expense over its beneficial life. Land and easements have valuable lives on an infinite basis and are thus never depreciated. When the asset is can function in the mode expected by management, depreciation shall commence. For most network assets, this is known to be when the assets are detected and put into operation (in-service date). In certain situations, an asset may be considered available for use and, thus, depreciation may begin, even though it is not currently in use.
Subsequent costs
The cost identification of the carrying amount of land, plant, and equipment ceases to be recognized when the asset is in the state and condition required to function in the manner expected by the management. When depreciation of the asset starts, this is considered to occur.
Retirement, Replacement, and Disposal
The carrying sum of an item of land, plant, and equipment shall be de-recognized if removed, substituted, disposed of, or if no potential economic benefits from its use are required. The service or loss should be involved in the profit or loss on de-recognition. However, any assistance should not be considered as returns but as a negative expenditure.
AGL Energy Limited
In Australia, AGL Energy Limited is the biggest retailer of gas and electricity. It effectively owns, manages, and builds infrastructure for renewable energy. PPE are quantified as rate less accrued depreciation and damage losses. The profit and loss account is paid for repairs and maintenance. The benefit or loss on the sale of land, plant, and equipment is recognized and taken to P&L as a difference between the sale proceeds and the asset’s carrying value.
The Accounting Units and Components
AGL Energy Limited, a renewable energy producer and retailer, such as landfill gas and electricity, concentrates on discovering and producing new gas and oil reserves. AASB116 does not cover accounting for these properties. In the year in which such expense is incurred and is calculated at cost, exploration and evaluation expenditure is regarded as an exploration and evaluation asset. The accumulated exploration and appraisal expenditure are converted to oil and gas properties when an oil or gas field is approved for production by the government.
Depreciation
Depreciation is provided on property, plant, and equipment on a straight-line system, except land. The Cost of each asset is written off over its planned useful life, less its residual value.
Subsequent Costs
Cost includes all expenses and is directly factored as the attainment and growth of the asset. Any subsequent charges are added to the asset’s carrying amount if there is a probability that its future economic benefits will go to the entity. The cost of this item can be measured correctly.
Retirement, Replacement, and Disposal
Other elements of the norm relating to depreciation, disposition of properties, and impairment identification also complied with its accounting practices.
Factors considered when setting up company accounting policy relating to PPE.
Accurate Assets Valuation
An asset’s valuation refers to the value attributed to a particular property, including inventories, options, shares, houses, equipment, or land. It is typically carried out when a business or asset is to be sold, insured, or taken over (Karapavlović, Obradović, and Bogićević, 2020, p. 96). Such valuations as bonds issued by a company may be made on either an asset or a liability and purchases can be divided into tangible and intangible.
The Flow of Economic Benefits in the Company
The company should work out a break-even analysis to establish the quantity and the right price a product can be sold to secure a good profit margin. It should also ascertain whether to consolidate its debts using a business debt consolidation calculator (Ali and Ahmed, 2017, p.432). Using the corporate evaluation cut-rate cash-flow; the firm should compute a business valuation based on cash-flow method, which illustrates how variations in the planned evolution rates and investment assumptions influence the industry’ NPV (Karim, Islam, and Bhuyan, 2020, p. 26). The company should also use the cash flow calculator to determine its liquidity as a going concern.
More than One Year Useful Life of Assets
Useful life refers to the approximate utility period imposed on a range of company properties. For instance, such properties may include houses, machinery, equipment, automobiles, electronics, and furniture (Kartiko et al., 2018, p. 22). Useful life forecasts end at the point where assets are projected to become outdated (de Azevedo et al., 2020, p. 208). The design of each asset’s valuable life, premeditated in years, can be used as a reference for depreciation plans to inscribe outflows related to investment goods’ purchase.
Detailed View on the Subsequent Measurement of PPE
The PPE should be measured at the cost model or revaluation model
PPE must be measured at its cost, i.e., Purchase Price +Import duty +directly attributable costs (site preparation, freight in, installation cost, testing, professional fees, and unavoidable cost (dismantling, removing &restoring the site) – Trade discount or rebate. Policy choices must be subsequently taken to use either the cost model or the revaluation model. Under the cost model, if fair value can be calculated accurately, the asset is carried at its cost less accumulated depreciation less impartment loss.
For most property categories, plant and equipment, IAS PPE specify the accounting treatment. The cost model includes assets being held at a lower price of depreciation and impairment loss (Nadar and Wadhwa, 2020, p. 47). In contrast, the asset is carried at the revalued rate if the revaluation model is used. This is the fair value of less cumulative depreciation of the asset and any lack of impairment.
Conclusion
The above report establishes the principles considered during the identification of Property, Plant, and Equipment assets, for the calculation of their carrying quantities and the measurement of the depreciation and damage. In the analysis of the two companies, a clear similarity is shown as they both have a policy of measuring their PPE at cost. This makes it reasonable for PPE to be measured at Cost plus other addition to getting the asset’s actual cost for potential valuation purposes. The sum of the less accrued asset depreciation goes to the balance sheet of the financial statement, and the fee over the years goes as a cost to the profit and loss account. Indeed, both businesses meet the assets’ right depreciation rate, and both follow the foreign reporting requirements from my estimation.
Recommendations
Policy choices must then be taken in order to use either the expense model or the revaluation model. Under the cost model, if fair value can be calculated accurately, the asset is held at its cost less accrued depreciation less impartment loss and under the revaluation model; the revalued sum is equal to fair value at revaluation date less any resulting accumulated losses of depreciation & impairment. According to IAS 16, all of the assets in the class can be revalued if one asset is revalued. For example, if the company wishes to revalue its buildings & equipment and has ten machinery & five buildings, it will reevaluate all ten machinery & five buildings. Since it is quick to compute and easy to understand, I suggest a cost model over a revaluation model.
Reference List
Ali, M. J. and Ahmed, K. (2017) ‘Determinants of accounting policy choices under international accounting standards’, Accounting Research Journal, 30(4), pp. 430-446.
de Azevedo, R. R. et al. (2020) ‘Financial management information systems and accounting policies retention in Brazil’, International Journal of Public Sector Management, 33(3), pp. 207-227.
Karapavlović, N., Obradović, V. and Bogićević, J. (2020) ‘The use of historical cost and fair value for property and plant and equipment measurement: Evidence from the Republic of Serbia’, Economic Annals, 65(227), pp. 95-118.
Karim, A.K.M.W., Islam, S. and Bhuyan, R. (2020) ‘On the revaluation of property, plant and equipment (PPE): Motivations, value relevance, and effects on audit fees’, International Journal of Accounting and Business Finance, 6(1), pp. 24–41.
Kartiko, S. et al. (2018) ‘Measuring accrual-based IPSAS implementation and its relationship to central government fiscal transparency. BAR-Brazilian Administration Review, 15(4).
Lau, C. K., and Wong, L. L. (2019) ‘The market discount of property developers’ shares and accounting policies’, Journal of Property Investment & Finance. 37(2), pp. 172-193..
Nadar, D. S. and Wadhwa, B. (2020) ‘The effect of accounting framework on the utility of fundamental tools’, IUP Journal of Accounting Research & Audit Practices, 19(2), pp. 45-64.