Accounting Standard and Practices for Impairment Test - BHP Billiton Case Study

This article discusses the accounting standard and practices for impairment test with a case study of BHP Billiton. It covers key estimates and judgements, measurement and recognition, calculation of recoverable amount, key issues and complexities involved in the testing for impairment, and disclosure requirements as per AASB 136.

Running head: ACCOUNTING STANDARD AND PRACTICES
Accounting standard and practices
Name of the company
Name of the university
Student ID
Author note

1ACCOUNTING STANDARD AND PRACTICES
Table of Contents
Answer (a)..................................................................................................................................2
Answer (b)..................................................................................................................................4
Answer (c)..................................................................................................................................5
Answer (d)..................................................................................................................................6
References..................................................................................................................................7

2ACCOUNTING STANDARD AND PRACTICES
Impairment test analyses whether the items from balance sheet are worth the stated
amount in the balance sheet. The amount in the balance sheet shall be reduced if impairment
test signifies lower value. The testing for impairment can be applied for tax accounts as well
as commercial that is audit accounts (Guthrie and Pang 2013). Impairment is the accounting
principle that states permanent reduction of the value of company’s assets, generally the fixed
assets. While the test for impairment is carried out, total profit, other benefits and cash flow
that are expected to be created from particular asset are compared periodically with the book
value of the assets (Bepari, Rahman and Mollik 2014).
Answer (a)
Key estimates and judgements
While determining the assets recoverable amount in absence of the quoted market
price, the estimates are made for the present value of the future tax cash flows. The estimates
need considerable management judgements and the judgements are subject to uncertainty and
risk that are beyond the company’s control (Bond, Govendir and Wells 2016). Therefore,
possibilities are there that the changes in the circumstances will alter the projections
materially that may impact the asset’s recoverable amount at the reporting date. Further, the
projections are made from the judgement of market participant that includes volumes for
future production, prices, tax attributes, discount rates and operating costs.
For the year ended 30th June 2017, BHP Billiton charged US$ 193 million under
impairment. Out of total US$ 193 million, charges for impairment for various assets are as
follows –
 Petroleum sector – US$ 102 million
 Copper sector – US$ 14 million

3ACCOUNTING STANDARD AND PRACTICES
 Iron ore – US$ 52 million
 Coal sector – US$ 20 million
 Group and unallocated items or eliminations – US$ 5 million
Further, out of total impairment of US$ 193 million, US$ 160 million was charged
against the plant, property and equipment and balance US$ 33 million was charged against
goodwill and other intangible assets.
Measurement and recognition
Tests for impairment are carried out yearly for goodwill. Apart from this, the
impairment test for all the assets are carried out while any indication is there for impairment.
If carrying amount of asset is more than the recoverable amount then the assets is impaired.
Thereafter the amount of impairment loss is charged against the income statement for
reducing the carrying amount in balance sheet to the recoverable amount (BHP 2018).
Further, the assets which are previously impaired except the goodwill are reviewed if there is
any chance for reversal of impairment at every reporting date. However, the reversal amount
of impairment cannot be more than the carrying amount that would have been computed if no
impairment loss was recognised for the assets under cash generating unit. For the year ended
30th June 2017 there was no reversal for impairment.
Calculation of recoverable amount
Recoverable amount of any asset is higher among the fair value of asset reduced by
disposal cost and the value in use. For assessing the impairment, the assets are grouped at
lowest levels for which separately the cash flows separately (BHP 2018).
Methods for valuation

4ACCOUNTING STANDARD AND PRACTICES
Fair value reduced by disposal cost – it is the estimate of the amount that the market
participants are ready to pay for the assets or the cash generating unit reduced by disposal
cost.
Value in use – it is computed as present value of projected future cash flows that is expected
to be generated from continuous use of asset in the present form and the eventual disposal.
Answer (b)
Key issues and complexities involved in the testing for impairment
Assets values are under microscope as the market scenario is challenging. Further
managing the investor’s trust with regard to transparency and accurateness of the asset’s
value is crucial. However, the regulators and the investors are continuously concerned for the
asset’s recoverability under the uncertain market (Khokan Bepari, Rahman and Taher Mollik
2014). In such scenario, the robust testing for impairment is critical. Further, as 20% of the
ASX listed companies are valued by market reduced by book value of the assets, disconnect
among the management valuation and investors perceptions are clear. Apart from this, the
main issues in impairment testing are as follows –
 CGU and segments – the most important issue in impairment testing is the selection
of level at which the test shall be carried out. The answer to this issue will depend on
asset’s testing and dependency on other assets for generating cash inflows. If the asset
requires other assets under the value chain for supporting their carrying amount then it
shall be tested with other smallest group of asset for impairment. Further, the method
of allocation may be inappropriate if the non-performing assets are recognized along
with other assets those are successful for the business.

5ACCOUNTING STANDARD AND PRACTICES
 Difference among value in use and fair value – Understanding the difference among
value in use and fair value is crucial. Value in use includes the economies of scale and
synergies specific to the business. On the other hand, fair value of the asset includes
risk, cost and benefits of improvements or restructuring of the assets that are not
included in the balance sheet. However, forecasts of costs and the benefits are not
always reasonable. Further, the assumptions regarding the synergies and restructuring
are not always correct (Kabir and Rahman 2016).
 Using appropriate rate of discount – most of the companies use CAPM and WACC to
determine the discount rates for the purpose of computing the value in use. However,
practically different CGU uses different discount rates owing to difference in currency
risk, country risk, market maturity and the product risk.
 Tax – tax is the added source of complexity for impairment testing. The common
mistake is including the inconsistent assumptions for tax in the model. The company
may discount the cash flows (pre-tax) wrongly through using the post tax discount
rate (Linnenluecke et al. 2015). If post tax discount rate is applied, the post tax cash
flows are also required to be assumed other wise 30% will be added up to the cash
flows effectively. Apart from this, another common mistake is including the benefits
of previous year’s looses on account of tax under the value in use method.
Answer (c)
As per AASB 136 the entity shall disclose –
 Impairment losses amount that is recognized under the profit and loss account and
line items under the statement of the comprehensive income where the impairment
losses are recognized.

6ACCOUNTING STANDARD AND PRACTICES
 Impairment loss amount on the revalued assets that is recognized under the
comprehensive income for the period
 Amount for impairment loss reversal recognized under the profit or loss account and
line items under the comprehensive income statement under which the impairment
losses are reversed.
 Amount for impairment loss reversal recognised in other comprehensive income
It was found that BHP Billiton for the year ended 30th June 2017 disclosed
impairment test as per the requirements of AASB 136 on Impairment test. The company
disclosed the details of impairment test through note no. 12. It stated the details of the
measurement and recognition criteria, calculation of recoverable amount and details of the
assets that were impaired along with the values (Legislation.gov.au 2018).
Answer (d)
As per the requirement of general purpose financial reporting the company disclosed
various segments for which the impairment losses have been recognised. Further, it stated
that there was no reversal of impairment for the year ended 30th June 2017 (Ji 2013). The
company also disclosed the individual goodwill or CGU for which the impairment loss have
been recognized. However, it did not mention the circumstances or events that led to reversal
or recognition of impairment loss. For better transparency the company should have stated
the reason that led to impairment.

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References
Bepari, M.K., Rahman, S.F. and Mollik, A.T., 2014. Firms' compliance with the disclosure
requirements of IFRS for goodwill impairment testing: Effect of the global financial crisis
and other firm characteristics. Journal of Accounting and Organizational Change, 10(1),
pp.116-149.
BHP., 2018. BHP Billiton | A leading global resources company. [online] Available at:
https://www.bhp.com/ [Accessed 22 Apr. 2018].
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by
Australian firms and whether they were impacted by AASB 136. Accounting &
Finance, 56(1), pp.259-288.
Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from
2005–2010. Australian Accounting Review, 23(3), pp.216-231.
Ji, K., 2013. Better late than never, the timing of goodwill impairment testing in
Australia. Australian Accounting Review, 23(4), pp.369-379.
Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting discretion
under IFRS: Goodwill impairment in Australia. Journal of Contemporary Accounting &
Economics, 12(3), pp.290-308.
Khokan Bepari, M., F. Rahman, S. and Taher Mollik, A., 2014. Firms' compliance with the
disclosure requirements of IFRS for goodwill impairment testing: Effect of the global
financial crisis and other firm characteristics. Journal of Accounting & Organizational
Change, 10(1), pp.116-149.

8ACCOUNTING STANDARD AND PRACTICES
Legislation.gov.au., 2018. AASB 136 - Impairment of Assets - August 2015. [online]
Available at: https://www.legislation.gov.au/Details/F2017C00297 [Accessed 22 Apr. 2018].
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries:
implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.