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HI5020 FinanciaL Position of Aspen Group Inc and AGL Energy Limited Assessment Answer

Assessment Details and Submission Guidelines
TrimesterT3 2019
Unit CodeHI5020
Unit TitleCorporate Accounting
Assessment TypeIndividual Assignment
Assessment TitleRaising funds for corporate operations and liabilities, provisions, contingent liabilities
and contingent assets. Measurement Basis for Assets.
Purpose of the assessment (with ULO Mapping)
This assignment aims at developing a clear understanding of students on different sources of funds used/raised by companies. They will need to identify different sources of fund used by two selected companies, discuss the evolution of the sources of fund used by the selected companies over a period of 5 years. They will have to relate the relative merits of different sources of funds used by the selected companies and shed lights on why the selected companies are using different sources of fund differently. Students will also have to summarise the key concepts under the AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets and identify use of this standard by the selected companies. Students will have to identify all different categories of assets recorded by the selected companies and examine the measurement basis used by the
company for each class of assets. (ULO 1, 2, 4, 5, 6, 7).
Weight40 % of the total assessments (Written assignment 30 % + Presentation 10 percent)
Total MarksWritten assignment 30 marks + Presentation 10 marks
Word limit3,000 words ± 500 words

Assignment Specifications

Purpose:

This assignment aims at developing a clear understanding of students on different sources of funds used/raised by companies. They will need to identify different sources of fund used by two selected companies, discuss the evolution of the sources of fund used by the selected companies over a period of 3 years. They will have to relate the relative merits of different sources of funds used by the selected companies and shed lights on why the selected companies are using different sources of fund differently. Students will also have to summarise the key concepts under the AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets and identify use of this standard by the selected companies. Students will have to identify all different categories of assets recorded by the selected companies and examine the measurement basis used by the company for each class of assets

Assessment task:

Collect the latest annual reports of Two (2) ASX listed companies for the last 3 financial years. Based on your collected annual reports, do the following tasks:

  1. Identify the different sources of fund that have been used by your selected companies.
  2. Examine the evolution of the sources of fund used by the company over the last three financial years with specific focus on the changes of different sources of funds.
  3. Identify the percentage of the fund that is internally generated and the percentage of the fund that is externally generated for each selected company.
  4. Explain the relative merits and shortcomings of the different sources of fund used by your selected companies.
  5. Critically examine different types of liabilities shown in the balance sheet of your selected companies? Identify which ones of the liabilities are interest bearing and which ones are not interest is bearing.
  6. Critically examine the key provisions under the AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets.
  7. Identify if your selected companies have made any reference to this particular standard (AASB

137) in their annual reports.

  1. Identify all different categories of assets recorded by the selected companies.
  2. Critically examine the measurement basis used by the company for each class of assets recoded by the selected companies.
  3. Assignment Structure should be as the following:

Instruction for video presentation:

Based on your written assignment you will have to make a summary video presentation at a length of 10 minutes. Your presentation should explain the assignment tasks and your key findings. You will have to upload the presentation in You Tube and submit the you tube link at Blackboard so that the marker can watch and mark your presentation. Your presentation will be marked based on the following criteria:


Presentation Style (3
marks)
Content (4 marks)Clarity of the presentation
(3 marks)
Excellent3-2.54-33-2.5
Very good2.5-1.753-2.52.5-1.75
Good1.75-1.52.5-2.001.75-1.5
Satisfactory1.5-1.002.00-1.001.5-1.00
Unsatisfactory1.00-01.00-01.00-0


Answer

Introduction

This report is a compilation describing the financial position of two ASX listed company Aspen Group Inc. and AGL energy limited for the last three financial years. It starts with identification and evaluation of different sources of funds used by the company with specific focus on the changes of different sources of funds, next there is a brief highlight on the percentage of the fund that is internally generated and the percentage of the fund that is externally generated along with relative merits and demerits, later there is an examination on different types of liabilities shown in the balance sheet and which ones of the liabilities are interest-bearing and which ones are not interest bearing. It also contains the key aspects under provisions under the AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets with its relevance to the mentioned listed companies, and there is an identification of all different categories of assets recorded and their measurement basis. In the end of this report, there is a brief conclusion containing the description of the working of the company.

Different sources of the funds

  • Equity capital-It is one of the common methods by which funds are generated by the company, in this companies raise capital by selling equity shares or stock in the market. Both Aspen Group Inc. and AGL energy limited have used this method to raise capital (Mookdee, & Bellamy, 2017). The equity capital of the company is ideally used by most of the organization to raise the funds due to the fact that company does not have to pay these amount of capital in the certain period of the time (AGL energy limited, 2019).
  • Debt capital in this method firm raises finance to fulfil its working capital needs or for some capital expenditure needs by selling debt instruments in the market and in return generates loan, for lending the money the individuals or institutions become creditors and receive principal and interest on the debt amount. Both companies have used debt funding also to raise capital. Sometimes high debt funding leads to an increase in financial leverage. A company should maintain an optimal balance between debt and equity funding (Tasman, Masdupi, & Safitri,2019).
  • Borrowing from banks and financial institution-It is another method generally used to raise capital. The most common types of the financial institution include commercial banks, investment banks, brokerage firms, insurance companies, and asset management funds. Loans provided by banks are not a permanent source of capital as it carries specific interest rates and loan must be repaid within a specific period of time. 

Evaluation of the sources of funds and analysis 

Aspen Group Inc. and AGL energy limited both have raised funds using equity and long term debt as a source of finance (Aspen Group Inc., 2019).

The equity holding of Aspen group has continued to increase from the year 2016 to 2019 it has increased from AUD$ 11000 in the year 2016 in A$19000 in the year 2019. Overall it has changed 20% considering the change in the last 3 financial years.  The long terms debt has also been increased by the company i.e. company has raised capital using long term debt continuously. The company has raised AUD$ 8,344.89 from 2016 to 2019 (Levine, Tam, & Beatty, 2016).

Sources of funds of Aspen group (Aspen Group Inc., 2019).
(All numbers in thousands)
Particulars
2019
2018
2017
2016
Common Stock
19
18
14
11
Retained Earnings
-42,050
-32,772
-25,711
-24,605
Accumulated other comprehensive income
-
-
-
-
Total stockholders' equity
26,461
33,734
7,840
1,813
Total liabilities and stockholders' equity
43,205
41,589
10,674
4,507
Long Term Debt
9,647
1,000
-
1,302
Other Liabilities
746.176
77.365
86.937
29.169
Deferred Long Term Liability Charges
300.824
-
-
-
Minority Interest
-
-
-
-
Negative Goodwill
-
-
-
-
Total Liabilities
16,743
7,855
2,833.31
2,693.79

AGL energy limited has maintained consistent equity holding from the last three financial years. While the long term debt of the company has decreased continuously this depicts the continuous decline in financial leverage of the company (Endah, & Wahyudin, 2017).

Sources of funds of AGL energy
(All numbers in thousands)
Particulars
2019
2018
2017
2016
Common Stock
6,223,000
6,223,000
6,223,000
6,696,000
Retained Earnings
2,248,000
2,269,000
1,335,000
1,243,000
Accumulated other comprehensive income
-33,000
-102,000
16,000
-24,000
Total stockholders' equity
8,438,000
8,390,000
7,574,000
7,915,000
Total liabilities and stockholders' equity
14,821,000
14,639,000
14,458,000
14,604,000
Long Term Debt
2,599,000
2,790,000
3,143,000
3,067,000
Deferred taxes liabilities
97,000
-
-
-
Deferred revenues
17,000
176,000
18,000
50,000
Other long-term liabilities
375,000
178,000
336,000
263,000
Total non-current liabilities
3,837,000
3,941,000
4,153,000
4,125,000
Total Liabilities
6,383,000
6,249,000
6,884,000
6,678,000

% of the internal sources and external sources funds 

The Aspen Group Inc. has maintained a good balance between externally and internally generated funds in 2016 but in 2017, 2018 more funds have been generated internally which depicts the increment in cost of capital of the company (Aspen Group Inc., 2019). In 2019, the balance maintained by the company is average and not very good (Endah, & Wahyudin, 2017).

Sources of funds of Aspen group
(All numbers in thousands)
Particulars
2019
2018
2017
2016
Total stockholders' equity
26,461
33,734
7,840
1,813
Total non-current liabilities
10,393
1,077
87
1,331
Total
36,854
34,811
7,927
3,144
% of  internal sources of funds
72%
97%
99%
58%
% of  external sources of funds
28%
3%
1%
42%


AGL Energy Ltd. has maintained a good balance between externally and internally generated funds in 2016, 2017, 2018 & 2019. Although the percentage increase in internally generated funds has increased considerably every year but a balance maintained is satisfactory (AGL energy limited, 2019). The satisfactory balance between the sources of funds also depicts the satisfactory balance between financial leverage and the cost of equity of the company (Fitriyani, & Khafid, 2019)

Sources of funds of AGL Energy Ltd.
(All numbers in thousands)
Particulars
2019
2018
2017
2016
Total stockholders' equity
8,438,000
8,390,000
7,574,000
7,915,000
Total non-current liabilities
3,837,000
3,941,000
4,153,000
4,125,000
Total
12,275,000
12,331,000
11,727,000
12,040,000
% of  internal sources of funds
69%
68%
65%
66%
% of  external sources of funds
31%
32%
35%
34%


Merits and shorting coming of the funds

  • Equity capital

Merits 

  • With equity funding, the burden of loan repayment within the specific period of time reduces and the interest burden is not present which would enable the businesses to channel more money into their business without worrying. Both the companies have deployed their funds in equity capital and have less interest burden on them (Hogan, Hutson, & Drnevich, 2017).
  • If the company faces credit troubles due to a low credit rating score than prescribed, equity funding is the most feasible option.
  • Sometimes debt financing offered carries a high amount of interest, which makes equity financing the most feasible option.  

Demerits 

  • The main demerit of equity capital is the loss of control, as shareholders become owners of the company and would involve in the decision of the company. The company has to call a general meeting every year to inform the shareholders about the conduct and working of the company which is a hectic procedure (Levine, Tam, & Beatty, 2016).
  • The profits of the company are shared among the shareholders i.e. the profits are divided.
  • Sometimes, potential conflicts may arise due to the difference in opinions among the shareholders.
  • Both companies have deployed a huge amount of funds in the equity capital which depicts the increased cost of capital of the companies.


  • Debt Capital

Merits 

  • The lender does not get any control in the organization; he is only liable to get the amount lent and interest due on the principal amount.
  • Interest on the loan is tax deductible which is not in case of dividends.
  • The principal and interest amount are well known in advance, hence the company can work on cash flows hence debt capital is more predictability which prepares organisation for the future (Maulida, Amboningtyas, & Fathoni, 2019).

Demerits 

  • The principal amount and the interest have to be repaid within the specified period of time.
  • The high amount of debt in the company may lead to high risk and would increase the financial leverage of the company.
  • Loan from Banks and Financial institution 

Merits 

  • It is an easily available source of finance if companies hold good credit ratings
  • It incurs a low cost of capital as compared to equity financing.

Demerits 

  • It debt is not repaid timely by the companies it could affect the credit rating of the companies and could have a negative impact on the public image of the company (Mookdee, & Bellamy, 2017).

Types of the liabilities including % of interest bearing and non-interest bearing

Both companies hold a good amount of liabilities. The liabilities are shown in the liabilities side of the balance sheet and are bifurcated between current liabilities i.e. liabilities which may arise in 1 year or less depending upon its type (Pawsey, 2017).

Non-current liabilities are those which do not arise in the near future and are held by the company for a longer period of time. However, company has recorded average 14% of the non-current liabilities in its books of account which reveals that company has strong financial position in its recorded books of accounts (Aspen Group Inc., 2019).

The liabilities of the Aspen group have increased in the past years. The major cause of increment is the increase in long term debt of the company and other liabilities .there is 113% increment in liabilities of 2019 as compared to 2018. the average increase in liabilities for the past years has been 99% for the Aspen group Inc. The interest-bearing liabilities held by the company are long term debt and non-interest-bearing liability is deferred Liability (Sarycheva, 2016).

Sources of funds of Aspen group
(All numbers in thousands)
Particulars
2019
2018
2017
2016
Accounts Payable
1,699
2,227
756.701
9.201
Short/Current Long Term Debt
50
1,050
50
50
Other Current Liabilities
3,950
2,842
1,677
1,126.66
Total Current Liabilities
6,350
6,778
2,746
1,363
Long Term Debt
9,647
1,000
-
1,302
Other Liabilities
746
77
87
29
Deferred Long Term Liability Charges
301
-
-
-
Minority Interest
-
-
-
-
Negative Goodwill
-
-
-
-
Total Liabilities
16,743
7,855
2,833.31
2,693.79

The liabilities of AGL energy limited has increased in 2019 as compared to 2018 but overall from 2016, it has reduced considerably (AGL energy limited, 2019).The major cause of increment in 2019 is the increase in deferred tax liabilities and other long-term liabilities (Storey, 2017).

Overall from the year 2016, the liabilities have decreased 1% on average.

 The interest-bearing liabilities held by the company are long term debt and around 8% interest is charged on them, and non-interest-bearing liability is deferred tax Liability.

Sources of funds of AGL energy
(All numbers in thousands)
Particulars
2019
2018
2017
2016
Liabilities
 
 
 
 
Current Liabilities
 
 
 
 
Total Revenue
79,000
19,000
173,000
22,000
Accounts Payable
951,000
942,000
907,000
903,000
Taxes payable
-
-
-
-
Accrued liabilities
-
-
-
-
Deferred revenues
4,000
2,000
-
-
Other Current Liabilities
36,000
35,000
70,000
328,000
Total Current Liabilities
2,546,000
2,308,000
2,731,000
2,553,000
Non-current liabilities
 
 
 
 
Long Term Debt
2,599,000
2,790,000
3,143,000
3,067,000
Deferred taxes liabilities
97,000
-
-
-
Deferred revenues
17,000
176,000
18,000
50,000
Other long-term liabilities
375,000
178,000
336,000
263,000
Total non-current liabilities
3,837,000
3,941,000
4,153,000
4,125,000
Total Liabilities
6,383,000
6,249,000
6,884,000
6,678,000

(AGL energy limited, 2019).

AASB 137 and contingent liabilities provision

The AASB 137 deals with the application, identification and disclosure requirements relating to the Provisions, Contingent Liabilities, Contingent Assets, onerous contracts and restructuring program.

The standard defines in detail the abovementioned terminology and the disclosure requirements associated with them.  The disclosure requirements mentioned should be followed by the companies strictly otherwise it would lead to misrepresentation of financial statements and would not depict the true picture and working of the company leading to negative public image and penalties in certain cases (Tasman, Masdupi, & Safitri, 2019).

The standard mainly talks about the activities which are not recorded under the balance sheet or income statement of the company as they may not carry any amount but has significant importance in judging the position of the company and must be conveyed to the stakeholders. These should be majorly represented by the way of a footnote in the balance sheet or any other manner as described in the standard (Tran, & Zhu, 2017).

Example of Activities that would cover by this standard is like lawsuit pending in court against the company, provisions for bad and doubtful debts etc. These are those Liabilities that may or may not arise in the future depending upon the contingency of event but certain funds have to be allocated against them to meet the future obligations. Therefore, it could be inferred that there is need to set up proper compliance program by the listed companies to strengthen the transparency. The AASB 137 helps company to maintain the contingency account to strengthen the contingency liabilities recording framework in the books of accounts of the company.

AASB 137, contingent liabilities and other provision in company

After reading the annual report and looking at the financials of the Aspen Group Inc. and AGL energy limited it has been noticed that companies have not made any provision or contingent liabilities as no legal obligations have arisen to do the same (Wang, 2019).

Different categories of assets recorded 

Both Aspen Group Inc. and AGL energy limited has investments in current assets and non-current assets.

Categories of current assets which would liquidate in one year and are held by Aspen Group Inc. are cash and cash equivalents, net receivables and other current assets. These assets are recorded at the value which would be transferred to the current cash equivalents, net receivables and other current assets  (AGL energy limited, 2019).

Categories of Non-Current assets held are Property, plant and equipment, Intangible assets, Goodwill and other assets (Wang, 2019). These non-current assets are recorded at value after impairment test implication. These are recorded at the value after deducting the impairment loss from the carrying value. This shows the actual amount of these assets which are recorded at the fair value (Aspen Group Inc., 2019).

In the context of AGL energy limited

Categories of current assets which would liquidate in one year and are held by Aspen Group Inc. are cash and cash equivalents, net receivables and other current assets. These assets are recorded with a view to determine the cash equivalents, net receivables and other current assets for the recorded assets  (AGL energy limited, 2019).

Categories of Non-Current assets held are Property, plant and equipment, Intangible assets, Goodwill and other assets (Wardani, Viverita, Husodo, & Sunaryo, 2019). The impairment test is also implement to determine the value of the non-current assets which reveals the actual value. 

Measurement basis used by the company for each class of assets recoded 

  • Current assets 

These are the company’s liquid assets i.e. they are expected to liquidate in 1 year depending upon the operating cycle of the company and are used to meet short term obligations of the company .the measure used by the company to record the assets under this category are (Wilson, Kacer, & Wright, 2018).

  • Cash and cash equivalents: measurement is done based on the amortized cost or fair value.
  • Net receivables: It is recorded at net realizable value or at fair value.
  • Inventory: It is recorded at lower of cost or net realizable value.
  • Other current assets: It is recorded at the original value. However, these other current assets are recorded and valued they are expected to liquidate in 1 year depending upon the operating cycle of the company and are used to meet short term obligations of the company.
  • Non-Current Assets

These are the company’s long term assets i.e. they are expected to stay till the company exists and are used by the company for its working. The measures used by the company to record the assets under this category are as follows (Aspen Group Inc., 2019).

  • Property, plant, and equipment: Measurement is done using the historical cost approach (original value minus deprecation).
  • Intangible assets: It is measured after using the impairment test. The impairment test helps company 
  • Goodwill: It is measured after using the impairment test. However, in case of the internal generated goodwill value the valuation of the goodwill is done with the recorded values only. 

Conclusion

After reading the annual report and looking at the financials of the Aspen Group Inc. and AGL energy limited it has been concluded that both the companies are working efficiently in their fields. The Aspen Group has more amount of internally generated funds which shows a higher cost of equity for the company while AGL energy limited has tried to maintain a fair balance between their internally and externally generated funds. The long term liabilities of ASPEN Inc. has increased considerably for the last three financial years while AGL ltd. has tried to maintained consistent liabilities over the years. The increase in liabilities shows a high amount of financial leverage present in the company.  The investors are advised to take an informed decision while investing in the companies depending upon their approach and expectation from the companies. However, all the impairment test is used to assess the recorded value of the assets to set up the real value of the assets. Now in the end, it could be inferred that all the transaction should be recorded in the books of accounts with a view to strengthen the transparency in recorded accounts. 

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