AS91404 Demonstrate understanding of accounting concepts for a New Zealand reporting entity (2023)

This assessment is based on Mercury Energy Limited's Annual Report for 2022. Mercury Energy Limited is an Aotearoa New Zealand electricity generator and retailer. Mercury Energy Limited's Annual Report for 2022 explains the company's electricity generation as follows:

We generate electricity from 100% renewable sources: hydro, geothermal, and wind. Our electricity generation sites are located along the Waikato River (hydro), the nearby steamfields of the northern part of the Central Plateau (geothermal), and in the Manawatū, South Taranaki, and Otago regions (wind).

On 30 June 2022, Mercury Energy Limited's generation assets had a fair value of $7723 million.

Hineata is a young person who was keen to invest in a company that is committed to kaitiakitanga (guardianship and protection) and demonstrates a sustainable relationship with the environment in which it operates. With this in mind, Hineata chose to invest in Mercury Energy Limited shares.

In this examination MEL can be used to refer to Mercury Energy Limited.

Question 1

Question 1.a

Explain how each of the following statements in Mercury Energy Limited's 2022 annual report would have helped Hineata to make her decision to purchase shares in Mercury Energy Limited.

Question 1.a.i

A commitment to the te ao Māori concept of kaitiakitanga (guardianship and protection) guides the way we work with natural resources and power stations that were built by earlier generations of New Zealanders. A wider application of this principle extends to Mercury's support and commitment to the decarbonisation of New Zealand's economy.

Question 1.a.ii

A final ordinary dividend of 12.0 cents per share has been declared. This brings the full-year ordinary dividend to 20.0 cents per share, up from 17.0 cents per share, marking our fourteenth consecutive year of ordinary dividend growth.

Question 1.b

Mercury Energy Limited's accounting policies include the following statement:

These financial statements are presented in New Zealand Dollars ($), which is the Group's functional currency. Unless otherwise stated, financial information has been rounded to the nearest million dollars ($m).

Justify Mercury Energy Limited's use of New Zealand Dollars, rounded to the nearest million, to report financial information in its annual report. In your answer refer to:

the monetary measurement concept
the qualitative characteristic of materiality
Hineata's decision to buy shares in Mercury Energy Limited.

Question 2

During the year ended 30 June 2022, Mercury Energy Limited completed the purchase of Tilt Renewables' New Zealand wind farm assets for a total cost of $1 026m. Mercury Energy Limited is now New Zealand's largest generator of electricity using wind energy for sale to the wholesale market.

Question 2.a

Explain why Hineata would be interested in the purchase of wind farm assets when making her decision to purchase shares in Mercury Energy Limited.

Question 2.b

Justify why the wind farm assets meet the definition and recognition criteria of an asset.

Question 3

In this question financial assets refers to shares held in other companies.

The purchase of the Tilt Renewables New Zealand wind farm assets was partly financed by the sale of financial assets that generated a net gain on sale of $367m. This gain on sale was disclosed in the consolidated income statement as a gain on sale of financial assets. The remainder of the purchase cost was funded by debt amounting to $189m.

Question 3.a

Explain why the purchase of the wind farm assets, partly funded by debt, indicates Mercury Energy Limited is a going concern.

Question 3.b

Justify why the $367m net gain on sale of financial assets was reported as income in terms of the definition and recognition criteria of income.