BHP Billiton Dam Failure Provision

This assignment examines BHP Billiton's accounting treatment of a provision made for its obligations related to a potential dam failure. It analyzes the company's application of AASB 137, 'Provisions, Contingent Liabilities and Contingent Assets,' to recognize and disclose the provision in their financial statements. The analysis considers factors like estimates, assumptions, uncertainties, and the required disclosures as per the standard.

Running Head: Accounting treatments of various elements
Financial Reporting

Accounting treatments of various elements 1
PART I
ABSTRACT
This report identifies the significance of qualitative characteristics of financial information.
The financial information contained in the annual reports helps the users of financial reports
in making various decisions regarding their association with the reporting. This report
incorporates all the necessary characteristics that must be possessed by the financial
information so as to influence the user’s decision. The preparers of financial reports must
give importance to each and every qualitative characteristics, as prescribed by the conceptual
framework, while preparing the annual financial reports.
INTRODUCTION
Every entity has to prepare financial reports for every fiscal year. This report contains the
information regarding the transactions and events entered into by the entity. The information
contained in the annual reports is generally given in the financial terms. Annual reports helps
the entities in promoting their business by communicating the key achievements and financial
results of their businesses. These reports are intended to be delivered to various stakeholders
of the company. Financial reports helps the stakeholders to assess the financial health of the
company so to take the sound and informed economic decision. Annual report is a
comprehensive set of financial documents such as statement of financial information, state of
financial position and cash flow statement. These statements covers the financial information
regarding all the important aspects of the business of the reporting entity
PART 1
Financial reporting is the process of preparation and presentation of financial reports of the
entity which contains information of all the significant transactions and events undertaken by
it in any fiscal year. An annual report serves as the only mean of communication of

Accounting treatments of various elements 2
information regarding the entity’s state of affairs, between the company and its stakeholders.
Stakeholders are the parities who uses these reports to take sound economic decisions
regarding the reporting entity. These stakeholders are generally classified in two categories
i.e. internal stakeholders and external stakeholders. Internal stakeholders are the ones who are
directly involved in managing the regular operations of business of the entity. However, the
external stakeholders are not directly involved in the regular business operations of the entity,
yet their decisions are influenced by the information contained in the financial reports.
As information contained in the financial reports can directly influence the decisions of the
intended users, it must possess all the qualitative characteristics as prescribed by the
conceptual framework (Benston et al., 2007). The financial reports must be prepared and
presented in such a way that it complies with the requirements of conceptual framework
(AASB, 2013). The qualitative characteristics of useful information can be bifurcated into
sections. One is fundamental qualitative characteristics and other is enhancing qualitative
characteristics. As the fundamental characteristics, the framework defines relevance and
faithful representation of financial information and as the enhancing qualitative
characteristics, it defines comparability, verifiability, timeliness and understand-ability of the
financial information.
To influence the decisions of the users of financial reports, the information must be faithfully
represented and it must also be relevant. However, the usefulness of information enhances if
it is verifiable, comparable and easily understandable at the same time. An information is said
to be relevant when it is capable of influencing the reader’s decision. To make any difference
to the decisions of intended users of financial reports, the information contained it must have
confirmative or predicative values or both. The predictive value of the information is
achieved when it can be referred as input for the processes used by the stakeholders to predict
the future financial outcomes of related transactions. Whereas, the confirmative value of the

Accounting treatments of various elements 3
information is achieved when it is capable of providing feedbacks for the past evaluations
made on the basis of financial reports. The predictive and confirmative values of the
information are generally interrelated. Materiality is the other important characteristic of
financial information which increases its usefulness. An information is called as material
when its misstatement or omitting can influence the user’s decision that they make using the
financial information. Materiality of information is determined on the basis of the nature or
magnitude the elements to which the information is related. Faithful representation of
information is also an important criteria to judge the quality of the financial information. An
information is said to be faithfully represented if it complete, free from misstatements and
unbiased (Draft, 2015). The completeness of the information is achieved when it contains all
the necessary explanations and description regarding the matters involved in the financial
reports. Neutral information does not imply that it has no influence or purpose rather
neutrality is achieved when information is selected and presented in the completely unbiased
manner. An unbiased information is never slanted or manipulated to inflate the profits to
impress the stakeholders of the company (Whittington, 2008). Moreover, when the
information is free from errors it does not imply that it is accurate in all the respects. Rather,
when the information is said to be free from errors it means that there exists no error or
omission in the process used to generate the reported information. Financial information
contained in the annual reports of the company must be both relevant and represented fairly
and faithfully so as to be useful for the intended users (Nobes & Stadler, 2015). If the
information is faithfully represented but is irrelevant from the viewpoint of intended users
than it would not be able to influence the decision making process of the users. At the same
time, if information that is relevant enough to affect the reader’s mind but is not represented
faithfully, then it would not allow the users to make the appropriate decisions regarding the
reporting entity.

Accounting treatments of various elements 4
The other qualitative characteristics which enhances the quality of information will be
discussed further. Since user’s decisions often involves selection of alternative courses of
action. In such cases they require the information that can help them in identifying the
similarities and differences i.e. the potential benefits and limitations of available alternatives.
Along with comparability the information contained in the financial reports must also be
consistent (Obaidat, 2007). Consistency is achieved when a same or constant method is
applied for the same methods to determine their values (Joyce, Libby & Sunder, 1982). The
comparability feature of the information must not be confused with the uniformity. Another
important characteristic of financial information is that it must be verifiable. Verifiability of
the information is achieved when different people who are knowledgeable and independent
enough to reach at the consensus. An information need not to be verifiable from a single
point (Barua, 2005). Along with these qualities it is very necessary to make the information
available on the time so that right decisions can be made on the right time by the
stakeholders. Therefore, the timeliness of the information is of high importance. Even if the
relevant information is delivered to the users on time but in the complex manner which is not
easily understandable by the readers the information (Halabi, Barrett & Dyt., 2010). Annual
reports are prepared and presented in such a manner that any person who has reasonable
financial knowledge of entity’s business and its economic activities can easily read, analyse
and interpret the financial results of the company (Graham, Harvey & Rajgopal, 2005).
CONCLUSION:
From the above report it can be concluded that while preparing and presenting the annual
financial reports, the preparers must emphasise on delivering the best quality of the financial
information to the intended users. The financial information serves as the strong base upon
the readers of annual reports makes informed and sound economic decisions. Therefore, the
information contained in the financial report must meet the definition and criteria of

Accounting treatments of various elements 5
relevance, reliability, faithfulness. Besides these basic characteristics, the financial
information must also be verifiable, understandable and comparable to enhance its usability.

Accounting treatments of various elements 6
References:
AASB, 2013. Amendments to the Australian Conceptual Framework. Retrieved from: <
http://www.aasb.gov.au/admin/file/content105/c9/AASB_CF_2013-1_12-13.pdf> Accessed
on: 15.01.2018.
Barua, A., 2005. Using the FASB's qualitative characteristics in earnings quality measures.
Benston, G.J., Carmichael, D.R., Demski, J.S., Dharan, B.G., Jamal, K., Laux, R., Rajgopal,
S. and Vrana, G., 2007. The FASB's conceptual framework for financial reporting: A critical
analysis. Accounting Horizons, 21(2), p.229.
Draft, I.E., 2015. Conceptual Framework for Financial Reporting. 2015-05-01)[2015-07-20].
http://kjs. mof. gov. cn/zhengwuxinxi/gongzuotongzhi/201506 P.
Graham, J.R., Harvey, C.R. and Rajgopal, S., 2005. The economic implications of corporate
financial reporting. Journal of accounting and economics, 40(1), pp.3-73.
Halabi, A.K., Barrett, R. and Dyt, R., 2010. Understanding financial information used to
assess small firm performance: An Australian qualitative study. Qualitative Research in
Accounting & Management, 7(2), pp.163-179.
Joyce, E.J., Libby, R. and Sunder, S., 1982. Using the FASB's qualitative characteristics in
accounting policy choices. Journal of Accounting Research, pp.654-675.
Nobes, C.W. and Stadler, C., 2015. The qualitative characteristics of financial information,
and managers’ accounting decisions: evidence from IFRS policy changes. Accounting and
Business Research, 45(5), pp.572-601.
Obaidat, A.N., 2007. Accounting information qualitative characteristics gap: Evidence from
Jordan. International Management Review, 3(2), p.26.

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Whittington, G., 2008. Fair value and the IASB/FASB conceptual framework project: an
alternative view. Abacus, 44(2), pp.139-168.

Accounting treatments of various elements 8
PART II
ABSTRACT
Valuation of company is the most important process to understand the overall worth of the
entity and its business. Business valuation is undertaken for various purposes such as while
entering into mergers and acquisition transactions, disposing a particular unit of business, to
assess the financial health of the business etc. In this report, the fair value accounting is being
discussed. Under this approach the fair values of the significant elements of the balance sheet
of the entity is determined on the basis of various assumptions and estimates. The fair value
accounting helps the firm in determining the accurate valuation of its assets and liabilities
based on their mark to market values. However, this approach suffers from various
limitations which have been discussed in this report.
INTRODUCTION
The Australian accounting standard board has issued an accounting standard AASB 13. This
standard defines the term fair value. It is the price that will be received by selling the asset or
paid to settle a liability by the market participants on a measurement date. Fair value provides
an important basis to valuation of assets and liabilities of the business entity. It enables the
managers to determine the price that they might realise if an asset is sold in the market or
what price they will require to pay to transfer their liability on a particular date. Fair value
accounting is also called as mark to market accounting.
PART II
Fair value accounting is an important approach of financial reporting under which entities are
required measure and report the assets and liabilities that are carried by them in the business
at the estimates of the prices that can be received on disposing an asset and paid on settling a
liability (AASB 13, 2015). The companies following fair value accounting are required to

Accounting treatments of various elements 9
report the losses in the books of accounts when the fair value of its assets declines and also
when the fair value of its liabilities increases. The reported losses due to such reasons reduces
the entity’s reported equity and also it could reduce the entity’s reported earnings (Laux &
Leuz, 2009).
The main objective of fair value accounting is to enable the firms to estimate best possible
prices at which the currently held position would change in the orderly transactions, on the
basis of available information and conditions of the market. To meet this objective, the
entities must incorporate recent data and information regarding the cash flows and the risk
adjusted discounting rates as fair value accounting seeks to ascertain the values of assets and
liabilities on their current market prices. The current market prices are determined on the
basis of the present values of cash flows that are related to those assets and liabilities. In
financial statements the approach of fair valuation is primarily used in following situations:
For the measurement of certain assets and liabilities on every balance sheet date.
For the measurement of certain assets and liabilities in the cases of their initial recognition in
the entity’s financial statements or in the cases of transition of national to international
financial reporting standards (Barlev & Haddad, 2003).
For the determination of impairment loss on the assets of the company.
Despite of various strengths carried by the fair value accounting approach such as accurate
valuation, timely information, measurement of true income etc., it suffers from various
limitations (Campbell & Owens-Jackson, 2008). The downsides of fair value accounting are
discussed below.
 It causes extreme fluctuation in the business valuation:

Accounting treatments of various elements 10
Many businesses do not benefit at all from fair value accounting method as they carry those
assets whose value fluctuates in large amounts more often during the entire reporting period.
Extreme fluctuation in the values of assets and liabilities can lead to determination of
misleading gains and losses in short run. Also, it causes heavy swings to the company’s
worth and its earnings (Barth, Hodder, Stubben, 2008).
 Unsatisfied investors due to losses of their individual incomes.
Fair value accounting causes dissatisfaction among the investors of the company as the
decline in the value of net income, due to fluctuation in the value of assets and liabilities,
becomes the income loss of the investors also. Since the investors generally trades in the
commodities instead of holding them as investment, the extreme fluctuation in its value can
reduce their satisfaction below the acceptable level (Trajkovska, Temjanovski & Koleva,
2016).
 Manipulation of the fair price information by the entity itself:
In obtaining the estimates of fair value, there is a high risk of manipulation of prices by the
companies themselves because in the case of illiquid markets, firm’s trading could impact
both traded and quoted prices as well.
 Loss of historical value perspective:
Due to the use of fair value accounting a firm loses the historical perspective of accounting.
Though, the current values of important elements of the company is necessary but at the same
it is important to consider the historical values to track the actual financial results.
 Disturbance to the overall financial statement of the economy
Fair value accounting can also contribute to the pro-cyclicality of financial system of
economy. Pro-cyclicality is the ability of exaggerating the financial as well as economic

Accounting treatments of various elements 11
fluctuations (Power, 2010). As fair value accounting is dependent on the assumptions which
are based on the market conditions, it could make the market experience slump followed by
the disrupted financial situation of the company. This could ultimately cause financial crisis
in the market. As financial institutions are directly related to the companies and their business
cycles, the decline in the fair values of entity’s assets will reflect the losses in the bank’s
capital (Laux & Leuz, 2010).
 Use of Unrealistic or unreliable assumptions:
Moreover, it is also possible that the value that is being observed in the market does not
indicate the fundamental value of asset. The market could be inefficient and sometimes it do
not reflect the available information in its own estimates. The uncertainty of fair value can
lead to large value deviations in the financial statements (Benston, 2006).
The fair value accounting can also adversely affect the down market.
 Difficulty in valuation of specialised business assets:
Businesses with special assets which are generally not traded actively on the public
exchanges, may find it quite difficult to value such assets in the open market. As market
information is not available regarding the values of such assets, fair value measurements
become irrelevant. Therefore, to value such specialised assets the accountants have to make
their own professional judgements regarding their valuation.
CONCLUSION:
Therefore, it is easy to conclude that fair value accounting is an important measure to value
the assets and liabilities of the business or the securities and commodities held as investments
by the individuals. However, this approach is criticized in the market due to the existence of
extreme volatility factor under this method of valuation. The fair market values of the items

Accounting treatments of various elements 12
changes frequently in the market. These changes even occurs daily at times and hence it is
difficult to value the businesses. Making comparison of the fair value of the assets of the
entity becomes problematic over a time period when a component of price change is closely
related to the sporadic market activity.
REFERENCES:
AASB 13, 2015. Fair Value Measurement. Retrieved at: <
http://www.aasb.gov.au/admin/file/content105/c9/AASB13_08-15.pdf> Accessed on 16-01-
2018.
Barlev, B. and Haddad, J.R., 2003. Fair value accounting and the management of the
firm. Critical Perspectives on Accounting, 14(4), pp.383-415.
Barth, M.E., Hodder, L.D. and Stubben, S.R., 2008. Fair value accounting for liabilities and
own credit risk. The accounting review, 83(3), pp.629-664.
Benston, G.J., 2006. Fair-value accounting: A cautionary tale from Enron. Journal of
Accounting and Public Policy, 25(4), pp.465-484.
Campbell, R.L. and Owens-Jackson, L.A., 2008. FAIR VALUE ACCOUNTING.
Danbolt, J. and Rees, W., 2008. An experiment in fair value accounting: UK investment
vehicles. European Accounting Review, 17(2), pp.271-303.
Laux, C. and Leuz, C., 2009. The crisis of fair-value accounting: Making sense of the recent
debate. Accounting, organizations and society, 34(6), pp.826-834.
Laux, C. and Leuz, C., 2010. Did fair-value accounting contribute to the financial crisis?. The
Journal of Economic Perspectives, 24(1), pp.93-118.
Power, M., 2010. Fair value accounting, financial economics and the transformation of
reliability. Accounting and Business Research, 40(3), pp.197-210.

Accounting treatments of various elements 13
Trajkovska, O.G., Temjanovski, R. and Koleva, B., 2016. FAIR VALUE ACCOUNTING-
PROS AND CONS. Journal of Economics, 1(2).

Accounting treatments of various elements 14
PART III
ABSTRACT
In this report, the accounting treatment of liabilities of the business is being discussed. As
liabilities constitutes significant element of the entity’s financial statements, it must be
measured and recognised in the most appropriate manner. To promote the consistency and
uniformity in the accounting treatment of liabilities the regulatory bodies of Australia has
developed various accounting standards. AASB 137 is also one of those standards that deals
with the accounting treatment of provisions and contingent liabilities.
INTRODUCTION
Liabilities are those items that involves sacrifices of the future economic benefits which an
entity is obliged to make to the other parties as a result of past events. A liability must be
recognised in the financial statements only when it meets the recognition criteria. The
Australian accounting standard board has defined the recognition criteria for liability.
According to it a liability is recognised when there is a probability that future sacrifices of the
economic benefits will have to be made and the amount of such sacrifices i.e. the quantum of
liability is reliably measurable. AASB 137 defines provisions as the liabilities with uncertain
timing and amount. AASB has also defined the liability as the present obligation that arises
from the past events and requires outflow of resources embodying the future economic
benefits for its settlement. Provisions are a part of liabilities but separately identified due to
some distinguishing features. Provisions are differentiated from the normal liabilities like
trade payables or accruals because of the presence of uncertainty factor about the quantum
and time of future outflow of resources for their settlement.

Accounting treatments of various elements 15
The provisions are also different from the contingent liabilities as provisions are generally
recognised as the liabilities because these are the present obligations for which outflow of
resources involving future economic benefits is probable to settle them (SAC 4, 1995). But
contingent liabilities are never recognised as the liabilities because these are merely the
possible obligations (not the present obligations) as it is yet not confirmed whether there
would be a requirement of outflow of the resources that embodies the future economic
benefits.
Following recognition criteria is prescribed by the AASB in the relevant accounting standard
(AASB 137) for the provisions. It must be recognised when there is a present obligation
whether legal or constructive, on the entity to settle the liability. This obligation arises from
any past event and it is probable that there will be an outflow of the resources that embodies
future economic benefits. Also, the amount of settling the obligation can be reliably
measured. All the conditions of recognition are required to be satisfied to recognise the
provision in the financial statements.
However, there is no requirement of recognising the contingent liability as per AASB. It is
rather required to be disclosed unless there is a remote possibility of outflow of economic
benefits. Contingent liabilities may evolve in a way that is not expected in the initial periods
(AASB, 2004). Therefore, it is required to be monitored and assessed continuously to
ascertain as to whether there is any probability of outflow of resources involving the future
economic benefits (Cebotari, 2008). If any probable outflow of resources is identified for any
item that was previously identified as the contingent liability, then the provision will be
recognised in the statement of financial position of the year in which the change in the
probability takes place. But it is not so in the exceptional circumstances where it not possible
to make a reliable estimate.

Accounting treatments of various elements 16
The amount at which a provision must be recognised by the entity shall be the best of
estimate of the required expenditure to settle the existing obligation at the reporting period’s
end. It is the amount which is rationally paid by the entity to meet the obligation or to transfer
the liability to the third person. This estimate of amount that the entity will rationally pay in
order to settle its liability gives the best estimate to measure the present obligation arising out
of past events. These estimates are the outcomes of entity’s own judgement supplemented by
entity’s experience in the similar transactions or by the expert’s reports. The uncertainties that
are associated with the amount that is to be recognised as provisions, are to be dealt as per the
requirements of circumstances. When the provision which is required to be measured
involves huge set of items, then the obligation is measured by weighing all the possible
outcomes with their respective probabilities. When it is important to consider the time value
of money, the amount of provision is determined on the basis of present value of all the
expenditures which will be require to settle down the obligation. To determine the time value
of outflow of resources, the discounting rate that will be used must be pre-tax rate or rates
which can reflect the current assessments of time value of money and also the risks
associated with the liability. The adjustment of risk involved in the cash flows increases the
amount at which any liability is measured. However, the element of uncertainty does not
warrant creation of provision with excessive amount. Moreover, the discounting rate must not
reflect the risks for which adjustments have been made to the estimates of future cash flows.
Further, those future events which may impact the amount that is required to settle the
liability shall also be reflected in the provision amount if there are sufficient and objective
evidences available which indicates the probability of their occurrence. For any future
operating loss, the provision shall not be recognised as these losses do not meet the
prescribed definition of liability. The expected future events are particularly important for the
measurement of amount of provision (Wells, 2011).

Accounting treatments of various elements 17
To illustrate the accounting treatment of provisions and contingent liabilities, the annual
report of BHP Billiton is examined. BHP company has it’s headquarter based in Australia. It
is one of the leading companies of Australia and also listed on the Australian securities
exchange and deals in global resources. It is engaged in the business of extracting and
processing various resources such as oil, minerals and gases. These products are sold by it
globally. The company operates through its two parent companies i.e. BHP Billiton Limited
and BHP Billiton but the company is yet operating as a single operating entity.
In November2015, an iron ore operation named as Samarco had experienced a dam failure.
Samarco is co-owned by BHP Billiton Brasil and Vale S.A. The financial impact of dam
failure was given in the financial statements of the BHP Billiton. The same has been treated
as the exceptional item. As at the year ending on 30 June, 2017, the company has identified
the provisions and contingent liabilities, as a result of Samarco dam failure. The core
operations of mining and processing were suspended due to the dam failure. There are
various uncertainties regarding the time and nature of the future operations. Considering the
uncertainties and on the basis of currently available information, BHP Billiton has recognised
a provision, before tax but after discounting, of US $ 1.1 billion as on 30 June, 2017. The
provision was previously recognised as US $ 1.2 billion (BHP Annual Report, 2017). This
provision is being made in regards to its obligations as per the Framework Agreement. To
measure the provision, various estimates and assumption are to be used. Along with the
estimates, various other factors were also considered to determine the quantum of provision
such as changes in the scope of work and the required funding amounts under the Framework
Agreement. Since the final decision about the Framework Agreement’s ratification is still
pending and the agreement is still binding on the parties to the agreement the provision is
continued to be recognised in the financial statements of the BHP Billiton. Also due to the

Accounting treatments of various elements 18
pendency of proceedings, the provision of possible range of outcomes is not possible and
hence a reliable estimate cannot be made.
As per AASB 137, for every provision the entity shall disclose following facts.
The carrying amount of the provision both at the beginning as well as end of the year. The
amounts utilised from the provision during the reporting period. The effect of change in the
discounting rate and the additional amounts taken to the provision. Along with these facts the
entity also has to disclose the brief description of nature of entity’s present obligation and the
indications of all the uncertainties regarding the timing and quantum of outflow of resources
embodying the economic benefits (AASB 137, 2010).
CONCLUSION:
Therefore, it can be concluded that the BHP Billiton has duly complied with the requirements
of accounting standard in regards to the treatment of its provision made in respect of
obligations towards the dam failure. It has appropriately recognised the provision in the
financial statement of the year ending June considering all the estimates and other
information (from the Framework Agreement) available with the company. The company has
also fulfilled the disclosure requirement in the context of provision by clearly disclosing all
the relevant facts in accordance with AASB 137.

Accounting treatments of various elements 19
REFERENCES:
AASB, 137, 2010. Provisions, Contingent Liabilities and Contingent Assets. Retrieved from:
< http://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-
11.pdf> Accessed on 16-01-2018.
AASB, A.S., 2004. Presentation of Financial Statements. Balance Sheet, 68, p.73.
BHP Annual Report, 2017. Retrieved from: <
https://www.bhp.com/-/media/documents/investors/annual-reports/2017/
bhpannualreport2017.pdf> Accessed on 16-01-2018.
BHP, 2018. About us. Retrieved from: <
https://www.bhp.com/our-approach/our-company/about-us> Accessed on 16-01-2018.
Cebotari, A., 2008. Contingent liabilities: issues and practice(No. 8-245). International
Monetary Fund.
SAC 4, 1995, Definition and Recognition of the Elements of Financial Statements. Retrieved
from: < http://www.aasb.gov.au/admin/file/content102/c3/SAC4_3-95.pdf> Accessed on 16-
01-2018.
Wells, M.J., 2011. Framework-based approach to teaching principle-based accounting
standards. Accounting Education, 20(4), pp.303-316.