Accounting Theory and Contemporary Issues

The report evaluates the methods employed by BHP Billiton in the construction of general purpose financial reporting (GPFR) and analyses its financial performance. It also discusses the ethical obligations of the company and compares its financial performance with its competitor Rio Tinto. The report concludes that BHP Billiton has failed to maintain competitive edge over Rio Tinto due to increased operating expenses and high leverage. It has followed all the corporate governance principles mentioned in ASX by reviewing its own standards and efforts are made continuously to improve them further. Finally, it could be assessed that the organisation uses historical cost approach for recognising its tangible assets such as property, plant and equipment.

Running head: ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Accounting Theory and Contemporary Issues
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Executive Summary:
The current report intends to evaluate the disclosures and financial performance of
BHP Billiton in accordance with the prevailing laws and principles in Australia. It has been
found out that the organisation uses straight-line method and units-of-production method for
depreciating its fixed tangible assets. The financial analysis carried out states that BHP
Billiton has failed to maintain competitive edge over Rio Tinto due to increased operating
expenses and high leverage. It has followed all the corporate governance principles
mentioned in ASX by reviewing its own standards and efforts are made continuously to
improve them further. Finally, it could be assessed that the organisation uses historical cost
approach for recognising its tangible assets such as property, plant and equipment.

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Table of Contents
Introduction:...............................................................................................................................4
1. Methods employed by BHP Billiton in the construction of general purpose financial
reporting (GPFR):......................................................................................................................4
1.1 Method of depreciation used and useful life:...................................................................4
1.2 Amount of accounts receivable:.......................................................................................5
1.3 Provision for bad debts:...................................................................................................5
1.4 Contingent liability:.........................................................................................................6
1.6 Lease liability:..................................................................................................................7
1.7 Three non-financial areas included with the GPFR:........................................................8
2. Process for introduction of new AASB standard:................................................................10
2.1 Relationship between AASB and conceptual framework:.............................................11
2.2 Key points in relation to the new lease standard:...........................................................11
2.3 Lease of BHP Billiton and approach taken to record leases:.........................................12
3. Ethical obligations of BHP Billiton:....................................................................................13
3.1 Application of ethical theories:..........................................................................................13
3.2 Addressing conflict between profit and ethics:..............................................................14
4. Financial analysis of BHP Billiton and its competitor, Rio Tinto:......................................14
5. BHP Billiton’s global reports for the consolidated group:...................................................18
5.1 Key points in relation to accounting measurement:.......................................................18
5.2 Current system of accounting including historical cost and other accounting models:. 18

3ACCOUNTING THEORY AND CONTEMPORARY ISSUES
5.3 Approach taken towards measurement on the part of BHP Billiton:.............................18
Conclusion:..............................................................................................................................19
References:...............................................................................................................................21

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Introduction:
Different methods are used by the organisations these days in construction of GPFR,
in which many companies attempt to maintain the conceptual framework of ethical
obligations. The objective of the report is to analyse the general purpose financial reports of
the selected company BHP Billiton. Moreover, the paper will also focus on analysing
whether the selected company has failed to comply with the ethical obligations. BHP Billiton
is positioned as global resources company that has an asset group operating in all over
Australia that operates within several commodities such as iron ore, metallurgical coal,
titanium and copper. The competitor of the company Rio Tinto has been selected in
evaluating and comparing the financial performance of these companies.
1. Methods employed by BHP Billiton in the construction of general purpose financial
reporting (GPFR):
1.1 Method of depreciation used and useful life:
It could be observed from the annual report of 2017 that BHP Billiton uses straight-
line method as well as units of production method for depreciating its various classes of
assets. There are four types of assets that are depreciated in BHP Billiton and they include
buildings, plant and equipment, mineral rights and petroleum interests along with capitalised
exploration, evaluation and development expenditure. It has disclosed its useful lives of the
assets and the depreciation methods applied for such assets in “Page 178 of the Annual
Report”.

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As per the GPFR, it is necessary to disclose the depreciation type, rate and amount for
an organisation in its annual report (Dunbar and Laing 2017). BHP Billiton has provided all
the relevant disclosures about depreciation in its annual report and hence, the item has been
represented adequately.
1.2 Amount of accounts receivable:
As observed from the annual report, the organisation has $2,836 million in the form of
trade and other receivables in 2017, which was $3,155 million in 2016. This amount has been
disclosed in the balance sheet statement of the organisation, which could be obtained from
“Page 106 of the Annual Report”.
1.3 Provision for bad debts:
BHP Billiton makes transactions with joint operations, subsidiaries, associates, joint
subsidiaries and management personnel of the organisation. The transactions occurred
between each parent firm and its subsidiaries are removed under consolidations and the

6ACCOUNTING THEORY AND CONTEMPORARY ISSUES
disclosures of such transactions are not made in the annual report. It has been identified that
the organisation has not realised any provision for bad debts in relation to any accrued
balances from the related parties, which could be found in “Page 202 of the Annual Report”.
GPFR requires the provision for bad debt amount to be realised in the financial
statements of an organisation along with the recognition criteria and if there is no such
provision, clear disclosure should be made with explanations (Luke 2016). In this case, BHP
Billiton has made the relevant disclosure that no provision for bad debt has been recognised
in 2017 with clear explanation.
1.4 Contingent liability:
It has been observed that the contingent liabilities for BHP Billiton have been $3,610
million in 2017, which were $3,442 million in 2016. The organisation has been facing issues
relating to tax matters, litigation and other claims, which have made the resolution timing and
probable economic outflow uncertain. The obligations and matters evaluated having likely
future economic outflows, which could be measured reliably, are included in the overall
amount of contingent liabilities. This could be viewed from “Page 203 of the Annual
Report”.

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1.6 Lease liability:
It has been identified that BHP Billiton has recognised financial lease liabilities
amounting to $897 million in 2017 (2016: $346 million). This is because few lease payments
might be subject to clauses of inflation escalation due to which there are ascertainment of
contingent rentals. Such information could be seen in “Page 203 of the Annual Report”.

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1.7 Three non-financial areas included with the GPFR:
It is necessary for an organisation to disclose environmental, social and governance
information in its annual report for its users of the financial statements (Luke 2017). BHP
Billiton has made its environmental disclosures, which could be found in “Page 50 of the
Annual Report”.

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BHP Billiton has been highly responsible to operate with ethics and integrity by
delivering greater value to the shareholders and other related stakeholders of the organisation.
This could be found in the sustainability section laid out in “Page 47 of the Annual Report”.
Finally, it has followed all the corporate governance principles mentioned in ASX by
reviewing its own standards and efforts are made continuously to improve them further,
which could be identified from “Page 124 of the Annual Report”.

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2. Process for introduction of new AASB standard:
The following series of steps are followed in order to introduce new AASB standard:
 IASB or IFRIC or IPSAB identifies a technical issue, which is closely monitored on
the part of AASB depending on the importance of public sector financial reporting in
Australia (Newberry 2015).
 After this, AASB identifies a technical issue, which might be referred to IASB for
profit entities or it would be solved domestically in case of non-profit entities.
 The stakeholders might raise issues for enhancing the reliability and relevance of
financial information or minimising the financial reporting costs.
 After the identification of the issue, a project proposal would be formulated on the
part of AASB.

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 The proposal developed through agenda papers would address the issue scopes,
alternate options and output timings (Ryan et al. 2014).
 After the completion of the research, associated documents would be published for
public comments and discussions with the shareholders.
 AASB issues the proposed standard by considering the needs based on the nature of
the entities regardless of their operating sectors.
 The inputs received from the stakeholders are submitted to the international
regulations.
 Comments are received from the Australian stakeholders further for different
consultative documents.
 Finally, the standard would be implemented backed by constant follow-up to ensure
compliance with the introduced standard (Sharma 2016).
2.1 Relationship between AASB and conceptual framework:
AASB is an Australian government agency and it receives considerable funds from
the Australian territories and states. On the other hand, the IASB has developed the
conceptual framework, which is a private sector organisation working independently in
London, UK (Watts and Zuo 2016). The AASB provides considerable monetary contribution
yearly to the IASB contributions.
2.2 Key points in relation to the new lease standard:
The new lease standard, AASB (IFRS) 16, would make the companies to disclose
operating leases on their balance sheet statements. The equipment and property leases not
realised previously on balance sheet would be recorded as right-of-use asset and lease
liability. This would help in ensuring transparency regarding the lease commitments of an
organisation and as a result, certain financial indicators like asset turnover, gearing ratios and

12ACCOUNTING THEORY AND CONTEMPORARY ISSUES
EBITDA would be changed. However, there would be minimal or no impact on the lessor
accounting.
2.3 Lease of BHP Billiton and approach taken to record leases:
According to the annual report of BHP Billiton in 2017, there is no capitalisation of
operating leases, while the rental payments are recorded in the income statement based on
straight-line over the long-term. Financial lease payments might be subject to clauses of
inflation escalation due to which there are ascertainment of contingent rentals. The lease-
related information of BHP Billiton could be found from “Pages 176 and 203 of the Annual
Report”.

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3. Ethical obligations of BHP Billiton:
3.1 Application of ethical theories:
The company failed to maintain the deontological Ethics as in theory an action taken
by the company is deemed to be morally good because of the characteristic of certain actions
and not because the product of action is good. This ethical value is observed to be breached
by BHP Billiton for the reason that anti-corruption watchdog indicated that fine imposed on
the company over hospitality to the foreign officials has set certain warning to international
corporate giants. Virtue Ethics is applicable in the case of BHP Billiton for the reason that the
company has always focused on maintaining ethics that considers an individual character as a
major aspect ethical thinking. This is rather than the rules regarding the act themselves or
their consequences (Holland 2016). Virtue Ethics is deemed to be breached by BHP Billiton
for the reason that the US Securities and Exchange Commission accused the company of
violating the anti-bribery and corruption laws at the time it invited 176 foreign officials
within Olympic Gin Beijing. Libertarianism theory in BHP Billiton considers maintaining a
political philosophy which indicates confirming the rights of the individuals regrading
bribery in order to acquire attain exchange of holding (Filip et al. 2017). Considering this
theory BHP Billiton failed to maintain the protection of individual rights as the primary role
of the state. This is for the reason that the company faced constant issue for compliance
people in order to maintain close regard of a foul in jurisdictions in development of new
projects. Utilitarianism ethical considerations are observed to be maintained by BHP Billiton
for the reason that the company attempts to take the best action that can maximise its utility
(Huber 2017).

14ACCOUNTING THEORY AND CONTEMPORARY ISSUES
3.2 Addressing conflict between profit and ethics:
Conflict between ethics and profits can be addressed by BHP Billiton in maintaining
social responsibility that can facilitate the company in attaining increased financial returns.
Financial profits are deemed to be increased for the company through maintaining efficiency
measures, effective risk management along with skilled employees. These strategies are
deemed to address conflict between BHP Billiton’s profit making and ethics through
remaining highly predictable returns in considerably short frames (Kabir, Rahman and Su
2017).
4. Financial analysis of BHP Billiton and its competitor, Rio Tinto:
For conducting the financial analysis of BHP Billiton, its main competitor Rio Tinto
has been taken into consideration and the following ratios are taken for the analysis:
Profitability analysis:
According to the above table, it could be observed that the gross margin of BHP
Billiton has increased from 67.46% in 2016 to 76.27% in 2017 and the trend is similar for
Rio Tinto as well; however, it is not as high as BHP Billiton. Although Rio Tinto has
maintained the same cost of sales in both the years, it is lower in contrast to BHP Billiton,
which has helped the latter to be placed in a better position (Bhp.com 2018). However, the
net margin of both the companies depicts the opposite scenario. This is because BHP Billiton

15ACCOUNTING THEORY AND CONTEMPORARY ISSUES
has incurred significant expenses in depreciation and amortisation, while no such expenses
are inherent from the income statement of Rio Tinto, due to which it is enjoying competitive
advantage over BHP Billiton in the Australian mining industry.
Liquidity analysis:
Current ratio is measure of liquidity that signifies the ability of an organisation to
convert its liquid assets into cash immediately (Barth 2015). Even though the current ratio of
BHP Billiton is lower than Rio Tinto in 2016, the ratio has increased significantly for the
former in the year 2017 due to huge increase in cash and cash equivalents. Quick ratio is
considered as a superior measure of liquidity, since it does not consider inventories and
prepaid expenses while assessing the liquidity position of an organisation (Birt, Muthusamy
and Bir 2017). The trend is similar like current ratio and there are no prepaid expenses for
BHP Billiton in both the years. Hence, it could be remarked that the liquidity position of BHP
Billiton is better than Rio Tinto in the mining industry of Australia.
Efficiency analysis:

16ACCOUNTING THEORY AND CONTEMPORARY ISSUES
According to the above table, it could be observed that the inventory turnover for both
the organisations has increased significantly; however, it is greater for BHP Billiton. The
lower the ratio in terms of days, the better it is for an organisation, since adequate demand is
there in the market (Bradbury 2015). In this case, the product demand of BHP Billiton is
falling in the market in contrast to Rio Tinto. On the other hand, the trend of receivables
turnover has been identical like inventory turnover in case of both the organisations;
however, it is higher for BHP Billiton as well. The lower the ratio in terms of days, the better
is the ability of the organisation to collect the money from its debtors (Cohen and Karatzimas
2017). In this case, Rio Tinto has been collecting amounts from its debtors at a faster rate
than BHP Billiton and thus, it is inherent Rio Tinto is placed in a better position in terms of
efficiency in the market.
Solvency analysis:

17ACCOUNTING THEORY AND CONTEMPORARY ISSUES
The above table clearly inherits that the debt-to-equity ratio of both the organisations
has remained almost identical in both the years. This implies that BHP Billiton as well as Rio
Tinto is reliant highly on debt like bank loans and bonds for funding its major business
activities and operations. On the other hand, significant increase in interest coverage ratio
could be observed for both the organisations, which denotes that they have considerable
abilities to meet their interest expense with the help of operating income (Cordery and
Sinclair 2016). In this case, the ratio is higher for Rio Tinto and thus, in terms of solvency,
the position of Rio Tinto could be considered superior compared to Rio Tinto in the mining
sector.
Finally, based on the overall evaluation, it could be inferred that Rio Tinto is enjoying
better financial position in the mining industry of Australia; however, the only exception
could be found in liquidity position where BHP Billiton is enjoying competitive edge over
Rio Tinto.
In addition, it could be found that BHP Billiton has produced global reports for a
consolidated group and it embraces the accounting standards of Australia, UK and US in an
orderly structure; thus, denoting that it has followed harmonised accounting standard for
developing its financial statements.

18ACCOUNTING THEORY AND CONTEMPORARY ISSUES
5. BHP Billiton’s global reports for the consolidated group:
5.1 Key points in relation to accounting measurement:
There are four key points related to accounting measurement, which are described as
follows:
 The facts that are reported in accounting could be disclosed in monetary amounts,
which could be considered as money measurement concept (Xie 2015).
 Business accounts are not for personal use of the owners; instead, they are kept for the
organisation and thus, it denotes entity concept.
 It is assumed in accounting that an organisation would continue for indefinite period,
which is termed as going concern concept.
 Fair value is used for reporting monetary assets, while cost is used for reporting other
assets, which could be adjudged as asset measurement concept (Xie 2015).
5.2 Current system of accounting including historical cost and other accounting models:
AASB 116 Property, Plant and Equipment is the standard, which provides
information about historical cost, fair value and other accounting models. Since most of the
organisations listed in ASX use either historical cost or fair value for their items in the
financial reports, emphasis has been placed on these two models. The intention is to
determine the carrying amount of the assets, useful lives and rates of depreciation (Yong, Lim
and Tan 2016).
5.3 Approach taken towards measurement on the part of BHP Billiton:
It has been observed from the annual report of BHP Billiton that it has used the
historical cost approach for recognising its property, plant and equipment in accordance with
the conceptual framework. This is because it recognised property, plant and equipment at cost

19ACCOUNTING THEORY AND CONTEMPORARY ISSUES
less impairment and accumulated depreciation. This could be observed from “Page 176 of
the Annual Report”.
Conclusion:
Based on the above discussion, it could be evaluated that BHP Billiton has followed
all the necessary principles laid out in the general purpose financial reporting by depicting its
depreciation method, useful lives and other information. The various items of the financial
statements have been disclosed appropriately in its annual report. In addition, it has been

20ACCOUNTING THEORY AND CONTEMPORARY ISSUES
found that the organisation has not breached any code of ethics, which has been explained
with the help of the various ethical theories. Furthermore, it has been evaluated that Rio Tinto
has surpassed BHP Billiton, since it is maintaining better financial position in the Australian
mining industry. Finally, it has been found out that BHP Billiton uses the historical cost
approach for recognising its tangible assets like property, plant and equipment in accordance
with the conceptual framework.

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Bhp.com., 2018. [online] Available at:
https://www.bhp.com/-/media/documents/investors/annual-reports/2017/
bhpannualreport2017.pdf [Accessed 1 May 2018].
Birt, J.L., Muthusamy, K. and Bir, P., 2017. XBRL and the qualitative characteristics of
useful financial information. Accounting Research Journal, 30(01), pp.107-126.
Bradbury, M., 2015. Capital maintenance in a contemporary context.
Cohen, S. and Karatzimas, S., 2017. Accounting information quality and decision-usefulness
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Accountancy Research, 25(1), pp.95-113.
Cordery, C.J. and Sinclair, R., 2016. Decision-Usefulness and Stewardship As Conceptual
Framework Objectives: Continuing Challenges.
Dunbar, K. and Laing, G.K., 2017. Deconstructing the Accounting Standard AASB 13 Fair
Value: Exit vs Entry Price for Assets. The Journal of New Business Ideas & Trends, 15(2),
pp.12-19.
Filip, A., Hammami, A., Huang, Z., Jeny, A., Magnan, M. and Moldovan, R., 2017.
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Holland, D., 2016. Simplifying income recognition for not-for-profit entities. Governance
Directions, 68(11), p.666.

22ACCOUNTING THEORY AND CONTEMPORARY ISSUES
Huber, W.D., 2017. Irreconcilable differences? The FASB's conceptual framework and the
public interest. International Journal of Critical Accounting, 9(5-6), pp.514-523.
Kabir, H., Rahman, A.R. and Su, L., 2017. The Association between Goodwill Impairment
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Ryan, C., Mack, J., Tooley, S. and Irvine, H., 2014. Do Not‐For‐Profits Need Their Own
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Accounting Review, 25(2), pp.204-216.

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