Understanding the Implementation of AASB Conceptual Framework

This essay discusses the implementation of AASB Conceptual Framework in BHP group and compares it with relevant accounting standards followed in Australia. It also identifies the costing system followed by BHP group and suggests an appropriate costing system for financial reporting.

Running head: UNDERSTANDING THE IMPLEMENTATION OF AASB CONCEPTUAL
FRAMEWORK
Understanding the Implementation of AASB Conceptual Framework
Name of the Student
Name of the University
Author’s Note

1UNDERSTANDING THE IMPLEMENTATION OF AASB CONCEPTUAL
FRAMEWORK
Introduction
The information pertaining to the study have shown application of relevant inventory
measurement system in BHP group and comparing the same with relevant accounting standards
followed in Australia. They essay also identifies the notable costing system which is followed at
BHP group. The study has finally shown about the inferences made from the costing system after
identification of the relevant standard adopted by the company. Lastly, it has also suggested on
implementing an appropriate costing system which will be suitable for its financial reporting.
Inventory recognition standard followed by Australian entities
As per the assertions of relevant accounting standards, it can be stated that the Australian
companies recognise inventory based on “Accounting Standard AASB 102 Inventories”. This
type of accounting system is conducive for measuring the inventory is based on carrying amount
and related revenue associated to them. The implementation of such a standard act as a guiding
principle for assertion of appropriate revenue and cost associated with a recognition of expenses
(Statements 2018). It can be further stated that the implementation of such an accounting
standard relies on writing down the net realisable value of inventory. Therefore, AASB 102
Inventories acts as a guiding principle for assignment of appropriate cost to the inventories. As
per the measurement of inventory valuation, the corporate entities the picked the expenses based
on written down value of inventory is and revenue. In addition to this, it is also important to
understand that this type of standard is not apt for instruments such as “AASB 132 Financial
Instruments” and “AASB 9 Financial Instruments” (Venter 2016).
Identification of inventory measurement system followed by BHP group
As stated in appendix 1, it can be clearly inferred that irrespective of type of inventory
and its phase in the process of production, the valuation of inventory is based on “lower of cost

2UNDERSTANDING THE IMPLEMENTATION OF AASB CONCEPTUAL
FRAMEWORK
and net realisable value”. The implementation of this type of inventory measurement system is
directly relevant to “Accounting Standard AASB 102 Inventories” as execution of such an
accounting standard relies on writing down the net realisable value of inventory (Bhp.com 2019).
The quantities for mineral inventory was primarily taken for assessment as per surveys and
assays. On the other hand, the petroleum inventory quantities are derived as per tank volume
measurement and flow rate and compared the same with sample analysis. During FY 2018, the
total inventory write-downs amounted to US$18. In compared to 2017, that inventory write-
downs amounted to US$112 million. It can be further inferred that the costing of processed
inventory is based on absorption costing method (Sorrentino 2017).
By referring to appendix 2 some of the key judgements on estimates of inventory shows
that the accounting for inventory is based on the use of estimates and judgements associated with
measurement and evaluation of the inventories held during the production process. The
significant estimates often involve the expected work in progress volumes and metal recoveries.
The overall estimate used for the inventory undergoes periodic reassessment by taking into
account the technical analysis and historical performance. It is to be further understood that the
changes in estimates are held for prospective adjustment on a project basis. As per the
operational information it can be inferred that an increasing compliance to production cuts by
both non-OPEC and OPEC members contributed to a substantial reduction in inventory overhang
(Burca, Mates and Puscas 2015).
Determination of the costing method implemented by BHP group and rational for the same
As per the given information and a recognition and measurement in financial report it can
be clearly inferred that costing of processed inventory are based on absorption costing method.
The rational for adopting such a system was appropriate for the company as absorption costing
was conducive in indicating the manufacturing costs which have been assigned as per direct

3UNDERSTANDING THE IMPLEMENTATION OF AASB CONCEPTUAL
FRAMEWORK
labour, direct material, variable manufacturing overhead and fixed manufacturing overhead. The
main aspects of cost for BHP group comprised of cost of production, purchasing raw material
and cost of attributable mining and manufacturing overhead by consideration of normal
operating capacity. Therefore, as the company follows traditional costing method, it involves
fixing the cost of finished units in inventory as a sum total of direct materials, pages of direct
labour and both variable or fixed manufacturing overhead (Lewis and Canicais 2018).
Assessment of the influence on adoption of various costing method by BHP group
The discussions in the previous sections clearly show that BHP group has adopted a
traditional means of costing such as absorption costing method. As a result of this, the costs were
derived from cost of production, cost of purchasing raw material and cost of attributable mining
and manufacturing overhead. This type of costing system is based on dividing the total cost of
products with the direct labour amount. In several instances such a method is criticised for
incorrect assertion pertaining to manufacturing process and may involve severe loss of money
(Yao, Percy and Hu 2015).
Some of the most notable indirect cost can be recognised with the consideration of
maintenance cost and setup cost of the machines. The adoption of new costing methodologies
such as activity-based costing will be beneficial for segregating the cost into relevant cost pools
such as cost of production, cost of purchasing raw material and cost of attributable mining. The
identification of the rate of activity for each cost driver will be able to prevent any instance of
inappropriateness in costing pertaining to traditional costing system such as absorption costing
(Cheung and Lau 2016).

4UNDERSTANDING THE IMPLEMENTATION OF AASB CONCEPTUAL
FRAMEWORK
Conclusion
The overall depictions made in the essay have shown that Australian companies
recognise inventory based on “Accounting Standard AASB 102 Inventories” which involves
writing down the net realisable value of inventory. On a similar note, it can be found that BHP
group’s valuation of is based on “lower of cost and net realisable value”. Costing of processed
inventory are based on absorption costing method. On a conclusive note, it can be stated that
there is a significant scope in assessment of appropriate cost by adoption of new costing
methodologies such as activity-based costing will be beneficial for segregating the cost into
relevant cost pools such as cost of production, cost of purchasing raw material and cost of
attributable mining.

5UNDERSTANDING THE IMPLEMENTATION OF AASB CONCEPTUAL
FRAMEWORK
References
Bhp.com. 2019. [online] Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2018/
bhpannualreport2018.pdf?la=en [Accessed 7 Feb. 2019].
Burca, V., Mates, D. and Puscas, A., 2015. Standard-Setters Versus Big4 Opinion, Concerning
Iasb Revision Project of the Conceptual Framework for Financial Reporting. the Case of
Presentation and Disclosures Chapter. Studia Universitatis „Vasile Goldis” Arad–Economics
Series, 25(2), pp.81-107.
Cheung, E. and Lau, J., 2016. Readability of Notes to the Financial Statements and the Adoption
of IFRS. Australian Accounting Review, 26(2), pp.162-176.
Lewis, P. and Canicais, A., 2018. Corporate directory.
Sorrentino, M., 2017. Towards a Full Accrual Accounting in the Public Sector: A Critical
Analysis of IPSAS 12. International Business Management, 11(12), pp.2196-2202.
Statements, F., 2018. Financial statements: 30 June 2017. Notes, 117(287,832), pp.277-997.
Venter, H., 2016. Digital currency–A case for standard setting activity. A perspective by the
Australian Accounting Standards Board (AASB) http://www. aasb. gov.
au/admin/file/content/c/AASB_ASAF_DigitalCurrency. pdf.
Yao, D.F.T., Percy, M. and Hu, F., 2015. Journal of Contemporary Accounting &
Economics. Journal of Contemporary Accounting & Economics, 11, pp.31-45.

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FRAMEWORK
List of Appendix
Appendix 1
Appendix 2