Accounting Business Reporting for Decision Making

CHAPTER 5 Balance sheet 181

We stated earlier that provisions are liabilities for which uncertainty is associated with the amount or

timing of the expected sacrifice of economic benefits. Consider the liabilities discussed thus far. There is

a high degree of certainty associated with the timing and amount of payments to creditors and lenders,

so these are not regarded as provisions. The provisions of JB Hi-Fi Ltd comprise lease provisions and

employee benefits provisions.

• Provisions for employee benefits relate to payments expected to be made to employees in relation

to benefits that the employees have accrued. The provision account represents an estimation of the

amount owing in relation to entitlements such as annual leave, sick leave and long service leave.

• Lease provisions relate to the estimated amount required to return the group’s leased premises to their

original condition.

• Other types of provisions that you might find on the balance sheet include provisions for warranties

and restructuring costs, and provisions for dividends if the dividend has been declared, determined or

publicly recommended by the entity but remains unpaid at the end of the reporting period. There are

stringent accounting rules covering what can and cannot be recognised as provisions on the balance

sheet.

The disaggregation of JB Hi-Fi Ltd’s assets and liabilities is not inclusive of all the assets and lia-

bilities that could appear on a balance sheet. Depending on an entity’s operations and changes in regu-

lations, other assets and liabilities may arise. For example, earlier we discussed how lease financing

may not result in balance sheet applications. For example, JB Hi-Fi Ltd has leases, with terms of two

to thirteen years, relating to stores. As the company does not have an obligation to purchase the leased

assets at the end of the lease period, there has not been a requirement to record the leased assets and

liabilities on the balance sheet. Nevertheless, entities with future lease commitments do need to disclose

the commitments. JB Hi-Fi Ltd discloses its lease commitments in note 25. The note discloses that JB

Hi-Fi Ltd has $363 479 000 in future minimum lease payments. This is not recorded on its balance sheet,

yet it represents in excess of 50 per cent of JB Hi-Fi Ltd’s total liabilities.

Another example of what we will see on balance sheets in the future is carbon liabilities. There is

currently no accounting standard governing reporting of carbon liabilities; however, some entities are

voluntarily disclosing and measuring carbon-related information. The reality check, ‘AGL’s carbon lia-

bilities’, highlights unrecognised carbon liabilities.

REALITY CHECK

AGL’s carbon liabilities

Under the Clean Energy Act, AGL and a number of its subsidiaries incurred direct carbon liabilities

arising from emissive facilities (primarily electricity generation), participation in joint ventures and the

embodied emissions associated with natural gas supply to customers. In FY2014, AGL had 17 ‘liable

entities’ within its corporate group, with liabilities totalling 24.6  million tCO2e. At the fixed price of

$24.15 per tonne, the cost of this liability is $595 million.

In June 2014, AGL acquitted its interim liability for the FY2014  compliance year, which was equiv-

alent to approximately 75 per cent of the liability incurred during the year. AGL surrendered a total of

18.8 million eligible carbon units, including almost 725 000 Australian Carbon Credit Units registered

under the Carbon Farming Initiative, thereby discharging its obligations under the scheme. The remaining

25 per cent of the FY2014 liability is due to be acquitted before 2 February 2015.

Source: Orton, F 2014, ‘AGL’s FY2014 carbon liabilities’ AGL Energy Sustainability Blog, 31 October.

Equity

Depending on the entity structure, the terminology and equity classifications appearing on the bal-

ance sheet will vary between entities. For example, in the case of ATC, a sole operator business, the

equity comprises capital that the owner, Nicholas Cash, has contributed plus profits generated by the

business since its commencement less any drawings. The equity section of the 2015 balance sheet for