Acquisition of Fayetteville Oil and Gas Shale by BHP Billiton Limited

This report has been prepared with an intention to report accounting treatment of acquisition of US Oil and gas major by BHP Billiton Limited, an Australian Company. The company acquired US Fayetteville Oil and gas shale in 2011. The report deals with the detailed analysis of the recognition, accounting treatment and measurement of the assets in terms of AASB.

Acquisition of Fayetteville
Oil and Gas Shale by BHP
Billiton Limited

TABLE OF CONTENTS
EXECUTIVE SUMMARY....................................................................................................................... 3
Appendix-1............................................................................................................................................ 4
Introduction........................................................................................................................................ 4
Recognising and measuring the acquisition of US Oil major as per Australian Accounting Standard
Board, Evaluating the Measurement of the aforesaid acquisition by BHP Billiton, Determining the
accounting for the aforesaid acquisition............................................................................................. 4
Appendix-2............................................................................................................................................ 9
Discussion regarding the factors that have influenced measurement of the proposed acquisition and
impairment loss of BHP Billiton andAccounting treatment of impairment of assets acquired.............9
References:......................................................................................................................................... 11

COMPANY AND FINANCIAL REPORTING
EXECUTIVE SUMMARY
This report has been prepared with an intention to report accounting treatment of
acquisition of US Oil and gas major by BHP Billiton Limited, an Australian Company.
The company acquired US Fayetteville Oil and gas shale in 2011. The purpose of
preparation of report has been detailed here-in-below:
(a) Recognising and measuring the acquisition of US Oil major as per Australian
Accounting Standard Board(Refer Appendix-1);
(b) Evaluating the Measurement of the aforesaid acquisition by BHP Billiton (Refer
Appendix-1);
(c) Determining the accounting for the aforesaid acquisition (Refer Appendix-1);
(d) Discussion regarding the factors that have influenced measurement of the proposed
acquisition and impairment loss of BHP Billiton (Refer Appendix-2);
(e) Accounting treatment of impairment of assets acquired (Refer Appendix-2).
The report deals with the detailed analysis of the above stated matter.

Appendix-1
Introduction
BHP Billiton is an Australian company incorporated in August 13, 1985. It is a global
resource company. The company deals in iron ore, copper, petroleum, coal etc. The
company is a multinational giant with operations in various country and generally sells
its output via supply agreements with its customer and exchanges.(Reuters, 2018)
BHP has recently acquired US Fayetteville oil and gas from Chesapeake Energy
Corporation on 31st March, 2011 and has expanded its business under non-conventional
mode. By this acquisition, the company tried to expands its business operation in USA.
The proposed acquisition amount to US $4,819 Mio and involved 100% stake in the
acquired company. The payment outflow of resources in cash.
The resources acquired in the proposed acquisition involved4,87,000 Acres of land
which was leasehold and properties producing natural gas including 3,000 wells of which
majority are Group operated.(Anon., 2011)
The proposed acquisition was executed with much hope and future prospect but the same
turned out to be a failure for the company and as an outcome company offloaded its
investment in US Fayetteville oil and gas to Texas Energy firm. The later part of the
report deals with the recognition, accounting treatment and measurement of the assets in
terms of AASB.
Further
Recognising and measuring the acquisition of US Oil major as per
Australian Accounting Standard Board, Evaluating the Measurement of the
aforesaid acquisition by BHP Billiton, Determining the accounting for the
aforesaid acquisition
Before understanding the recognition of the acquisition of US Fayetteville oil and gas in
the books of BHP Billiton, it shall be pertinent to understand the relevant Australian
Accounting standards that are hit by such acquisition. The first and foremost AASB 3
Business combination which states what shall constitute a Business combination and the
importance of fair value measurement under such acquisition which is covered under
AASB 13 Fair Value Measurement. Further, AASB 116 shall provide the requirement of
recognition of assets in the books of BHP Billiton post acquisition.(KPMG Audit Plc,
2011)
Further in terms of AASB 11 Joint arrangement deals with joint control in which the
property is joint controlled by two or more entities.(Australian Accounting Standard
Board, 2011)
In terms of AASB 3, the following are the criteria specified for acquisition method:

(a) Identifying who is the acquirer: BHP Billiton Limited;
(b) Determining the date of acquisition of the company: 31st March, 2011;
(c) Identifying the asset acquired and liability assumed by the acquirer and measuring
them: BHP Billiton has acquired assets and assumed liability under the same
arrangement. Further, the acquisition involved outlay of resources of $ 4,819 Mio;
(d) The most important principle involved recognition of and measurement of goodwill
or bargain purchase as a result of acquisition: In the present acquisition, initially the
recognition involved a provisional basis but later goodwill was recognised in the
books which were later impaired. Hence, the required condition for business
combination was satisfied by BHP.1(Australian Accounting Standard Board, 2015)
Further, as per Para 10 of AASB 3, the purchaser on the date of acquisition shall
recognise in its books of accounts besides goodwill or bargain purchase the liabilities
andassets acquired under the proposed acquisition along with minority interest. Further,
the AASB also states that the above recognition shall be subject to framework of AASB
and both asset and liability shall be required to meet the definition as defined under the
relevant para of AASB 1048 “Framework for the preparation and presentation of
Financial Statements”ontheacquisition date. It has also been stated that the asset
acquired and liabilities assumed under the acquisition shall form part of business
combination and should not constitute a separate transaction.
Further in terms of AASB 116 Property Plant and Equipment a disclosure shall be
required of the assets acquired under business combination. In addition the standard
states that asset shall be recognised in the books only if it can be ascertained that
economic benefits associated with the particular item shall flow to the entity and the cost
of such can be measured fairly.(Australian Accounting Standard Board, n.d.)
In addition, in terms of AASB 13 Fair Value Measurement states that the cost of an asset
shall be the fair value that would be received on disposing an asset in an orderly
transaction between the market participants at the date of measurement.(Australian
Accounting Standard Board, n.d.)
Further, under the present case, BHP Billiton has recognised the asset and liabilities at
fair value on provisional basis. (The law relating to recognition of asset and liabilities on
provisional basis is stated in below). Further, specific asset have been recognised in
compliance with AASB 3, AASB 116 and AASB 13. In addition, since the acquisition
involved 100% stake acquisition using internal funds of the company, question of non-
controlling interest does not arise. The asset acquired and liabilities assumed under the
proposed acquisition has been detailed here-in-below:
1Refer Note 24 of Annual Report 2011 of BHP Billiton Page No 200

Analysis of Acquistion
Sl No Particular
Provisional Amount (US$
M)
1 Property Plant and Equipment (PPE 4803
2 Inventory 3
3 Trade receivables and others 38
4 Account Payables -21
5 Provision -4
6 Net Asset that is acquired 4819
7 Payment made for acquisition 4819
8 Goodwill/Bargain Purchase 0
Note: The above figures were provisional estimates reported in Annual report of BHP in
terms of relevant para of AASB 3.
Further, as per Para 45 of AASB 3 Business Combination Measurement period, BHP
Billiton shall be entitled to report provisional figures in the financial statement for the
year ended 31st June, 2011 if the initial accounting of the proposed acquisition has not
been complete by the end of the reporting period i.e 31st June, 2011. Accordingly, BHP
Billiton has reported asset acquired and liabilities assumed under provisional basis as
described above in terms of para stated above.
Since the present acquisition involved the net asset acquisition amounting to 4819 US
Mio which is equivalent to consideration paid no goodwill or bargain were recognised in
the books of BHP for the year ended 30th June, 2011. Further, disclosures were made in
the books and financial statement for acquisition and assets were added at fair value and
disclosed accordingly in terms of AASB 116 PPE.
The company further complied with requirement of AASB 3 Business combination by
expending the amount incurred in executing the proposed acquisition. Further, the
incurred for acquisition was treated as operating expense under cash flow statement a
part of financial statement.Further, no discounting of payment made for acquisition was
made as the said payment for settlement was not deferred by BHP and paid from internal
accruals of the company.
The company post lapse of 1 year recognised the asset at fair value and made adjustment
to the provisional amount made earlier in the books of accounts in terms of Para 45 of
AASB 3. The said amount is disclosed and the final value arrived has been disclosed in
the books of accounts and the financial statements prepared accordingly. The details are
here-in-below:

Analysis of Acquisition (30Th June,2012)
Sl.
No Particular
Provisional Amount
(US$ M)
Adjustment
made
Final Fair Value (US
$M)
1
Property Plant and
Equipment (PPE 4803 -523 4280
2 Inventory 3 3
3
Trade receivables
and others 38 38
4 Account Payables -21 -21
5 Provision -4 -24 -28
6
Net Asset that is
acquired 4819 4272
7
Payment made for
acquisition 4819 5 4824
8
Goodwill/Bargain
Purchase 0 552
On perusal of the above, one can understand that the adjustments have been made in the
books of accounts of company by reducing the value of PPE in terms of AASB 116 and
disclosing the same in notes to accounts of the Annual report for June ended, 2012. The
goodwill created in the books of the company shall be tested for impairment in terms of
AASB 136 Impairment of Asset and AASB 116 Property Plant and Equipment and
AASB 13 Fair Value. The amount of goodwill recognised under AASB 3 Business
Combination stands at US $ 552 Mio which is tax deductible2. Further, the same has
been disclosed as recognised on the basis of synergies.(KPMG Audit Plc, 2011)
The goodwill recognised was later on impaired in terms of AASB 136 in the financial
statement and appropriate disclosure stating carrying value and recoverable value.
The asset was also subject to depreciation in terms of AASB 136 Property Plant and
Equipment.
Further, the journal entries made at the time of acquisition of US Fayetteville Oil and
Gas has been detailed here-in-below;
Date Particulars LF Amount Amount
Property Plant and Equipment
A/c…Dr 4803
Inventory A/c….Dr 3
Trades Receivables and Others
A/c..Dr 38
To Account Payables A/c 21
To Provision A/c 4
To Consideration for Purchase A/c 4819
2 Refer Page 211 Note 24 Business combination of Annual Report of BHP Billiton for June ended,
2012.

Date Particulars LF Amount Amount
Consideration for Purchase A/c..Dr 4819
Chespake Energy Corporation A/c 4819
Bank A/c..Dr 4819
To Chespake Energy Corporation
A/c 4819
Profit and Loss A/c..Dr 17
To Business Combination expense 17
The amount charged to depreciation shall be written off in Profit and Loss account and
correspondingly Accumulated depreciated account shall be increased.
In addition, in next year the value of Property Plant and Equipment was reduced by 523
US Mio and provisions were increased by 24 US Mio to result in creation of goodwill in
the books of BHP amounting to US 552 Mio..(KPMG Audit Plc, 2012)

Appendix-2
Discussion regarding the factors that have influenced measurement of the
proposed acquisition and impairment loss of BHP BillitonandAccounting
treatment of impairment of assets acquired
The assets are impaired in the balance sheet on the basis of situation existing on the
reporting date that display that asset value has reduced below the carrying value and
accordingly test for impairment is carried out. The factors that indicate or have
influenced the impairment of asset has been detailed here-in-below:
(a) Drastic fall in price of oil and shale gas in the global commodities market for the
period 2011 to 2017 leading to existence of conditions for which testing of
impairment of acquired company became mandatory. Further, the price of
commodity plays a significant role in testing of the indicator for asset impairment.
(Anon., 2012). Further, the change in price of output has bearing on following factor
which have bearing on recoverable value of the asset:
(i) Growth rates forecast;
(ii) Budgeted Volume of sale;
(iii) Cost structure;
(iv) Cash flow timing;
(v) Expenditure that is planned for future of capital nature and budgets for
exploration;
(vi) Activities of operational nature.
(b) The second factor that impact the impairment of asset is that the estimation of
reserves by the companies are subject to assumption is not precise. The same can be
revisited upward or downward in future. Accordingly, impairment may occur on
decline in the estimated volume of oil or gas. Also reference may be had toPage 57
Para 2.13.1 of Annual Report of BHP Billiton Limited, 2012, where BHP has stated
the same reason for impairing assets of of US Fayetteville Oil and Gas.
(c) Stalling of project and delay in exploration of resources on account of judicial and
legal sanctions, approval from government, regulations under environmental laws
leading to delaying of project;(KPMG Audit Plc, 2011)
(d) Closure of project, redundancy and contractcancellation shall also influence the
testing of impairment of assets for BHP;

(e) Asset may also be impaired if target future production budgets are not met from the
asset purchased : Probable reserves and resources;
(f) Exchange Rates: Current Exchange rates prevailing in the market;
(g) The rate of discount used for funding the project. (KPMG Audit Plc, 2011)
The above are some of the factors that have influenced the recognition of impairment in
the books of BHP Billiton. Accordingly, impairment was recognised in the books of
BHP for asset acquired of Fayetteville shale gas assets to the tune of US$2.8 billion
(US$996 million tax benefit) for year ended June, 2012
Accounting for Impairment
Under the provision of AASB 136, the asset shall be impaired if the carrying value of
such asset in the books is higher than recoverable value of such asset as computed in
terms of AASB 136. In addition the AASB states that recoverable value is higher of
value-in-use or fair value less cost of disposal. Further, the fair value under AASB 136
shall be determined in terms of AASB 13 Fair Value Measurement.(Australian
Government, 2015)
The standard also states relevant disclosure shall be made in terms of AASB 116 and
AASB 136.(Australian Accounting Standard Board, n.d.)
In addition, as per Para 59 of AASB 136, if the recoverable amount of the asset is below
the carrying value of the asset, the asset shall be impaired and the loss on account of such
impairment shall be recognised in Profit and Loss Account in terms of Para 60 of AASB
136.
In relation to US Fayetteville Oil and Gas, the initial impairment was recognised in June,
2012 and the amount stood at AUD 2835 Mio
In addition the law states that, while apportioning an impairment loss over the assets in
case of Cash Generating Unit, the first part of the loss shall be adjusted against goodwill
and balance over other assets proportionately on the basis of carrying value.
Accordingly, BHP Billiton recognisedthe loss in Profit and Loss of the company for the
period ended June, 2012 and a tax credit provision of 996 US $ Mio was created.(KPMG
LLP, 2016)

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