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Question:

Task requirements:

You have been randomly assigned an Australian publicly listed company (refer to the separate excel spreadsheet provided to identify your company). Using the financial reports for your company, you are required to prepare an essay that addresses the 7 requirements listed below.

  1. Introduction (Company’s main operation/ what the assignment is about/ Topics covered)
  2. (a) Select a non-current asset from the financial statements of your company. Provide details of this item (including identify the valuation method used for this item).
    (b) With reference to qualitative characteristics, provide an argument for using an alternative valuation method for this non-current asset.
  1. (a) Provide details of the intangible assets reported by your company.
    (b) Evaluate how the company fulfilled its disclosure requirements in relation to intangible assets.
  1. (a) Provide details of the provisions and contingencies recorded or disclosed by your company.
    (b) With reference to one specific contingency recorded or disclosed by the company,provide an argument for and against the inclusion of the contingency in the financial report.
  1. (a) Provide details of leased items that are recorded or disclosed by your company.
    (b) Discuss the classification and presentation requirements relevant to leased items,and in doing so provide an explanation for how the leased items of your company have been presented on the financial statements.
  1. (a) Provide details of the revenue disclosed in the annual report of the company.
    (b) Justify the revenue recognition criteria for a specific (major) revenue of the company.
  1. Conclusion (final overview of the findings)
 

Answer:

Introduction

In this report, the performance of the company Oil Search will be evaluated in terms of several assets, liabilities, leases and revenues. The company oil search is associated with the business of oil exploration and production in Australia and had recorded a total production of 30.3 million barrels of oil. This company had also managed to increase its net profit by 236% and for this; the net profit of the company is measured as $302.1 million in the fiscal year of 2017 (Bushee et al., 2018). In order to state the financial status of the company, certain data from the financial report of the company such as assets, liabilities, leases and revenues has been covered in order to provide a lucid overview of the current position of the company in terms of financial activities.

Property, plant and equipments

In the property, plant and equipments segment of the entity, there are two sections which can be observed in the financial report of the company. These two sections are; oil & gas and other plant and machineries. In the year 2017, the disclosed value of oil and gas development, production is listed as $28.9 million and $6506.782 million respectively.

The oil and gas assets disclosed by the company are enlisted by calculating the production, amortisation and restoration value of the assets. Apart from that, the cost of the oil and gas assets of the company that is under development has been separately calculated and the cost related to the exploration, development drilling and other expenditure has been included in this measurement (Nobes, 2014).

Apart from the depreciated replacement cost method that is used by the company in the current scenario, market comparison approach can also be used in order to evaluate the PPE assets of the company. In this method, the total value of the asset is being calculated by comparing the current value of the asset with the sales of similar assets available in market. This method can be more appropriate for qualitative character of the asset as by using this method, the company can be able to evaluate the activities regarding this asset more clearly and the business done by the company in terms of other key competitor of the company can also be compared (Barth 2018). By using this method, the true development of the financial operations of the company can be evaluated in terms of its obtained assets.

 

Intangible Assets

The intangible assets of the company are enlisted as the total value of license of the exploration and evaluation assets of the company. This is being calculated by following the successful efforts method. The cost of exploration licence acquisition has been capitalised as the cost is directly associated in the development of the drills and wells acquired by the company (Cuccia, 2018). The total amount of intangible assets that is disclosed by the company is amounted as $1055.9 million in the exploration and evaluation assets segment of the company.

The disclosure of the intangible assets has been made on the exploration and evaluation assets segment in the financial report of the company. In this segment, it is stated that the licence was expired and it was not renewed, thus a total amount of impairment had been applied in the value of intangible assets (Gigler et al., 2014). The activities relating to the exploration and appraisal activities of the assets did not lead any economical recoverable reserves discoveries. It is also stated that the total value of exploration and evaluation assets cannot by totally recoverable by the company in any terms.

 

Provisions and contingent liabilities

In the financial report of the company, three kinds of provisions can be observed which the company discloses. These provisions are employee entitlement, site restoration and other provision. These provisions are also divided into two groups current and non-current in the financial report of the company (Ge et al., 2017). The total current provision of the company which is enlisted in the financial statement of the company is being calculated as a total of $29 million. In the current provisions of the company, the employee entitlements provisions has been calculated as $6.9 million, the site restoration provisions has been listed as $21.9 million and the total value of other provisions is disclosed as $210000 in the fiscal year of 2017. The non-current provision of the company which is enlisted in the financial report of the company is calculated as $584.7 million in the financial report. In this segment, the total value of employee entitlement is estimated as $11.9 million, total site restoration is enlisted as $572 million and other provisions are being enlisted as $526000.

From the given disclosure stated in the financial report of the company, there are some issues which can be discussed in favour and in opposition of employee entitlements provision. It is a fact that this provision helps the company to get compliance with law, improve the financial saving limit of the company, provide a competitive edge in the operating market by the company and help to sustain top class employees in the company, but there are some limitations of this provision too (Cohen et al., 2017). However, this requires a complex process to allocate and implement these provisions among the employees (Beck et al., 2016). The overall cost and administrative charge for implementing this provision is also not cheap. Some offerings under this obligation can also cause the legal compliance for the company.

 

Leases

The assets held by the company in terms rewards and risks for the ownership has been accounted as a lease in the financial statement of the company. The lease amount is declared in the total payable segment of the company and being calculated as an amount of $ 17 million. The total lease amount of the company is being calculated by the taking into consideration the minimum value of lease payments or lowering the fair value of the total amount of lease incurred by the company. The assets which are enlisted in the segments along with leases are initially recognised and being accounted in accordance with the same method which is applicable for accounting the assets of the company. The assets that are held under other various types of leases cannot be included in the financial statement of the company as these assets and being measured as operating leases (Chen et al., 2016).

The payments that are being made for the operating leases are being recognised in the profit and loss statement of the company. This recognition is made by based on a straight line basis and the time period which is being taken into consideration is the overall term of the lease. The incentives which are being received by the leases are being received by the company are being recognised as an integral part over the total lease expenses (Armstrong et al., 2015). The payments made for the leases are being made as a finance expenses, this expenses are being allocated to the lease terms for each period, and a periodic rate of interest is being included in the remaining liability of the company.

Revenue

There are certain revenues that have been recognised by Oil Search Ltd that signifies certain risks and rewards which has been gained by transferring the ownership of the produced goods to the customers. The overall cost and the return associated with the goods are being estimated on a periodic basis relying upon a historical evidence of the business entity and this includes the discontinuation of continuing management involvement with the goods (Carcello et al., 2017). The main revenue generating activities of the company is being recognised into four parts, which are liquefied natural gas, oil and condensate, gas and dividend income.

The recognition revenue gained from the liquefied natural gas sales are being done when the ownership of the goods are being transferred to the customers of the company. For the revenue recognition of oil and condensate, the revenue is recognised after loading of the vessels. For the production of Gas, the revenue is being recognised when the produced product is being delivered to the customers through pipelines. The dividend income of the company is being measured when the dividends are being declared to the shareholders or the dividends are received from other entities (Fang et al., 2015).

 

Conclusion 

From the given report, an evaluation and analysis is conducted about the non-current assets of the company, the recognition of it and the comparison and evaluation between current and probable accounting method. It can be concluded from the report that the company follows depreciated replacement method for the valuation of non-current assets. On analysing the intangible items of the company and the disclosures made by the management it can be found that, the company has intangible assets of license of the exploration and evaluation. The provisions stated by the management and benefits and limitations of certain limitations have also been discussed in this essay. The items that are leased to the customers or being taken in a lease has also been stated in this assignment. The revenue of this organisation has also been introduced in this segment and the proper disclosures about the probable revenues have also been stated.

 

References

Armstrong, C., Guay, W. R., Mehran, H., & Weber, J. (2015). The role of information and financial reporting in corporate governance: A review of the evidence and the implications for banking firms and the financial services industry.

Barth, M. E. (2018). The Future of Financial Reporting: Insights from Research. Abacus, 54(1), 66-78.

Beck, M. J., Glendening, M., & Hogan, C. E. (2016). Financial Statement Disaggregation, Auditor Effort and Financial Reporting Quality. working paper, Michigan State University.

Bushee, B. J., Goodman, T. H., & Sunder, S. V. (2018). Financial Reporting Quality, Investment Horizon, and Institutional Investor Trading Strategies. The Accounting Review.

Carcello, J. V., Eulerich, M., Masli, A., & Wood, D. A. (2017). Are Internal Audits Associated with Reductions in Operating, Financial Reporting, and Compliance Risk?.

Chen, K. C., Cheng, Q., Lin, Y. C., Lin, Y. C., & Xiao, X. (2016). Financial reporting quality of Chinese reverse merger firms: The reverse merger effect or the weak country effect?. The Accounting Review, 91(5), 1363-1390.

Cohen, J., Krishnamoorthy, G., & Wright, A. (2017). Enterprise Risk Management and the Financial Reporting Process: The Experiences of Audit Committee Members, CFO s, and External Auditors. Contemporary Accounting Research, 34(2), 1178-1209.

Cuccia, A. (2018). Potential of IFRS 8: Managerial" customization", relevance of subsidiaries and separate financial statements. FINANCIAL REPORTING.

Fang, V. W., Maffett, M., & Zhang, B. (2015). Foreign institutional ownership and the global convergence of financial reporting practices. Journal of Accounting Research, 53(3), 593-631.

Ge, W., Li, Z., Liu, Q., & McVay, S. E. (2017). When does internal control over financial reporting curb resource extraction? Evidence from China.

Gigler, F., Kanodia, C., Sapra, H., & Venugopalan, R. (2014). How frequent financial reporting can cause managerial short?termism: An analysis of the costs and benefits of increasing reporting frequency. Journal of Accounting Research, 52(2), 357-387.

Nobes, C. (2014). International classification of financial reporting. Routledge.

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