Company and Financial Assignment

Running head: COMPANY AND FINANCIAL REPORTING
Company and financial reporting
Name of the Student:
Name of the University:

COMPANY AND FINANCIAL REPORTING 1
Executive Summary
The primary objective of this discussion is to examine the various financial accounting aspect
and the transactions recording in the financial reports and statement of the organization. The
charges for impairment, recognition and assets measurement are some of the general factors
discussed in the assignment. The impairments charges and inappropriate treatments of
accounting of the Company of BHP Billiton have been taken in account. The accounting
treatment that is relevant relating to the loss of impairment of Fayetteville Operation has been
discussed in the project.

COMPANY AND FINANCIAL REPORTING 2
Table of Contents
Introduction......................................................................................................................................3
Part A...............................................................................................................................................3
Solution to question 1..................................................................................................................3
Solution to question 2..................................................................................................................4
Solution to question 3..................................................................................................................6
Part B...............................................................................................................................................7
Solution to question 4..................................................................................................................7
Solution to question 5..................................................................................................................8
Conclusion.......................................................................................................................................9
References......................................................................................................................................10

COMPANY AND FINANCIAL REPORTING 3
Introduction
The discussion deals with the acquisition of the Fayetteville oil and gas Shale by BHP
Billiton. The company acquisition refers to a situation that took place when the Australian
company of BHP Billiton purchases most or all of another company that is Fayetteville oil and
gas Shale shares for taking control. This has taken place due to impairment of non-financial asset
and inappropriate treatment of accounts (Angwin 2015). The acquisition occurred when the BHP
Company gets more than 50% ownership in the company of Fayetteville oil and gas Shale that is
targeted. As part of the transaction, the company BHP who is acquiring purchased the
Fayetteville oil and gas Shale Company’s inventory and other resources, that made the acquiring
company to make the decisions regarding the newly acquired assets without the shareholders
approval of Fayetteville oil and gas Shale company (Green 2016).
Part A
Solution to question 1
As per the Australian Accounting Standard Board, the AASB, at the time when the entity
is acquired, other than where the acquisition is a reconstruction within an economic entity, the
identifiable assets acquired along with the applicable liabilities assumed to be measured at the
acquisition date at their fair values as at the acquisition date (Bowen and Khan 2014). If there is
any distinction between the acquisition cost and the total of the assets fair values acquired, it is
needed to be accounted for in according to Accounting Standard AASB 1013 “Accounting for
Goodwill”. The acquisition mechanism may consist of the acquisition of the assets group,
individual asset or net assets. The AASB Standard prescribes the accounting for acquisitions of

COMPANY AND FINANCIAL REPORTING 4
assets and, to the extent they form part of the net assets of an entity or operation acquired, the
accounting for the liabilities considered. Due to the crash in the oil prices of Fayetteville oil and
gas Shale Company was acquired by BHP Billiton (Goncharov, Riedl and Sellhorn 2014). As per
the annual report of Fayetteville oil and gas Shale Company the measurement of the acquisition
took place as per the AASB standard by measuring at the acquisition date at their fair values as at
the date of acquisition.
Solution to question 2
There are numerous ways in which the business operations can be measured. The
indicators that can measure the operations of the business are Net profit margin, gross profit
margin net profit and debt asset ratio. Analysis of yearly report of the firm BHP reveals that the
goodwill of approximately USD552 million that increased from the acquirement of the business
of Fayetteville gas during the period 2011 was necessarily allocated to essentially Fayetteville
CGU (Laux 2016). In particular, The Fayetteville CGU takes in natural gas reserves of
Fayetteville and takes into account resource; wells of gas manufacture and related facilities; and
gas accumulating system situated in particularly USA (Chen, Shroff and Zhang 2017). Thorough
analysis of the report replicates the fact that goodwill allocated to the firm Fayetteville was
entirely impaired during the period 2012. In view of that, a goodwill impairment examination
was not necessary to be carried out during the year 2013 (Rani, Yadav and Jain 2016). Reports
reveal that the group necessarily acquired different subsidiaries as well as operations during the
specified period as presented below:

COMPANY AND FINANCIAL REPORTING 5
In addition to this, the company also incurred costs associated to acquisition to oil as well as gas
property as mentioned below:
In addition to this, the as per the financial statements for the year ending 30 June 2011 that
includes the provisional fair values disclosure of the identifiable liabilities and assets of the
business of Fayetteville Shale gas that were acquired in March 2011. The fair values were
provisional at 30 June 2011 due to the complexity of valuation process. The provisional fair
values of the liabilities and assets that were acquired and approximated the amount of
consideration paid (US$4,819 million) and hence no bargain purchase gain or goodwill was

COMPANY AND FINANCIAL REPORTING 6
recognized at 30 June 2011. The assets Fayetteville Shale are reported as new and acquired
operations until there is a comparison of full-year. The New operations has risen the Underlying
EBIT by amount of US$1.2 billion primarily due to steady performance at the BHP Billiton
operated Pyrenees oil facility and the inaugural input from the Fayetteville shale assets that were
acquired recently.
Solution to question 3
Identification of accounting treatment and recording for the acquisition:
The company has invested in the area of growth either by means of projects within the
firm’s assets or else by means of exploration otherwise acquirements. The acquirement
mechanism of accounting is mainly utilized to take into consideration business combinations of
the entire group. As suggested by (), the Treasurer of the nation Australia sanctioned the merger
that are subject to specific conditions. Also the firm has the need to comply with specific
conditions specified under Foreign Acquisitions and Takeovers Act of the year 1975 (Kabir,
Rahman and Su 2017). According to the annual statement of the firm, it can be hereby mentioned
that the company categorizes assets as particularly novel and acquired operations until there is
full year period for comparison. Novel and acquired operations lessened EBIT by roughly
USD86 million in financial year during 2012. For example, acquirement of iron ore of the
business of HWE Mining in particularly Western Australia enhanced underlying earnings of the
corporation by roughly USD$97 million. Essentially, this is was offset by a decrease in
Underlying EBIT for firm’s Onshore Asset in the US with a loss of roughly USD140 million
during the financial year 2012 in comparison to a profit of particularly USD43 million in
financial years 2011(Sun and Zhang 2017). Analysis of annual statements, thus, helps in
understanding then fact that business combinations are taken into account by implementing

COMPANY AND FINANCIAL REPORTING 7
acquisition mechanism of accounting. In this, the identifiable assets/liabilities along with
contingent liabilities ate enumerated based on fair value particularly at the date of acquirement
(Harris 2015). When group’s fair value for different identifiable net assets acquired surpasses
acquirement costs, the variance is essentially identified in the income assertion. Again, amounts
disbursed for the purpose of acquirement of particularly identifiable intangible assets are
primarily capitalized particularly at the fair value of mainly consideration paid and are registered
at cost after deduction of accumulated amortization as well as impairment charges. In essence,
specific intangible assets having a finite life are necessarily amortized particularly on a straight-
line method over their anticipated economic life that is characteristically no better than 8 years
(Chang and Yen 2015). In particular, exploration as well as evaluation action is within a
specified area of interests that was previously obtained as an asset acquirement or else in a
business combination and enumerated at fair value on acquirement. Also, cost can be considered
to be fair value provided to attain the asset during the period of acquirement.
Part B
Solution to question 4
The impairment loss refers to the fall in the net carrying value, the cost of acquisition
subtracting the depreciation, of an asset that is more than the undisclosed cash flow n future of
the similar asset. The process of impairment takes place when there is sale of assets when the
company does not expects them to benefit operations that are long-run (Huikku, Mouritsen and
Silvola 2017). It is separate from writing down of asset since the impairment losses at times may
result in a tax deferral for the asset. The stockholders of a publicly held organization may also
lose equity in their shares depending on the type of asset being impaired, which results in a lower

COMPANY AND FINANCIAL REPORTING 8
debt-to-equity ratio. When it comes to the factors that affects the impairment loss, the initial step
is the identification the factors that may lead to the asset impairment. Some factors may include
changes in market conditions, innovation in legislation and regulatory enforcement. The
turnover in the workforce or decreased asset functionality due to aging may also lead to loss in
impairment. In some cases, the asset itself may be functioning, but new techniques or new
technology may make the fair market value of the asset fall significantly (Bena and Li 2014).
The calculation of fair market is key asset impairment that cannot be recognized without a good
approximation of fair market value. Fair market value is the price the asset would fetch if it was
sold on the market. This is known as the future cash flow the asset would expect to generate in
continued operations of business. The other term for this value is known as the recoverable
amount. Once the fair market value is assigned, it is then compared to the carrying value of the
asset as represented on the financial statements of the business (Collett 2015). The carrying value
does not need to be recalculated at this time since it exists in previous accounting records. If the
calculated costs of holding the asset exceed the calculated fair market value, the asset is
considered to be impaired. If the asset in question is going to be disposed of, the costs associated
with the disposal must be added back into the net of the future net value less the carrying value.
Solution to question 5
The recognition of the losses of impairment are either by the model of cost or by
the model of revaluation. It depends on whether the amount that was debited was changed with a
new, fair market valuation that is adjusted as described in the above section. In case the results of
impairment in a small tax benefit for the organization, the impairment realization is bad for the
organization as a whole. It generally highlights the need for a rise in reinvestment. There are
several requirements for the recognition and measurement of the impairment loss includes the

COMPANY AND FINANCIAL REPORTING 9
time the amount of recoverable asset is less than the carrying amount, in this case the carrying
amount is needed to be reduced to the amount that is recoverable (Bailey 2014).Therefore, the
distinction between the reductions from the previous carrying amount to the recoverable amount
is termed as the loss on impairment. The impairment loss should be recognized in the profit or
loss immediately unless the revaluation decreases treatment is prescribed in another standard of
accounting. In the given case of acquisition of the company of Fayetteville by BHP the loss in
impairment is recognized and accrued to revaluation of asset record. As per the annual report of
2012, the asset has been revalued; fluctuations in market value are periodically calculated. The
certain intangible assets, such as goodwill, are impairment tested on an annual basis.
For calculation of impairment loss, in case the cost model is applied, then the impairment
loss is calculated as: Debit: P/L-impairment, Credit: Asset (allowance account)
In case the revaluation model is applied, then the impairment loss is recognized as:Debit:Equity-
Revaluation surplus, Credit: Asset (allowance account).
However, the Fayetteville must be alert because in case there was no revaluation surplus
in the equity, in such scenario, they should recognize impairment loss to profit or loss account.
Moreover, the company must to adjust the depreciation for the future periods.
Conclusion
In the acquisition of the Fayetteville oil and gas Shale by BHP Billiton has taken place
due to impairment of non-financial asset and inappropriate treatment of accounts. The
acquisition occurred when the BHP Company gets more than 50% ownership in the company of
Fayetteville oil and gas Shale that is targeted. There are several requirements for the recognition
and measurement of the impairment loss includes the time the amount of recoverable asset is less

COMPANY AND FINANCIAL REPORTING 10
than the carrying amount, in this case the carrying amount is needed to be reduced to the amount
that is recoverable. However, the Fayetteville must be alert because in case there was no
revaluation surplus in the equity, in such scenario, they should recognize impairment loss to
profit or loss account. Moreover, the company must to adjust the depreciation for the future
periods

COMPANY AND FINANCIAL REPORTING 11
References
Angwin, D., 2015. Mergers and acquisitions. Wiley Encyclopedia of Management, pp.1-3.
Bailey, M.P., 2014. Mergers and acquisitions. Chemical Engineering, 121(8), pp.71-72.
Bena, J. and Li, K., 2014. Corporate innovations and mergers and acquisitions. The Journal of
Finance, 69(5), pp.1923-1960.
BHP | 2011 Annual Report, Summary Review and Form 20-F. (2018). Retrieved from
https://www.bhp.com/media-and-insights/reports-and-presentations/2011/09/2011-annual-report-
summary-review-and-form-20-f
Bowen, R.M. and Khan, U., 2014. Market reactions to policy deliberations on fair value
accounting and impairment rules during the financial crisis of 2008–2009. Journal of Accounting
and Public Policy, 33(3), pp.233-259.
Chang, M.L. and Yen, T.Y., 2015. Does Reversal of Asset Impairment Loss Matter? Evidence
from China. International Research Journal of Applied Finance, 6(4), pp.197-222.
Chen, W., Shroff, P.K. and Zhang, I., 2017. Fair value accounting: Consequences of booking
market-driven goodwill impairment.
Collett, N., 2015. Mergers and acquisitions. Wiley Encyclopedia of Management, pp.1-7.
Goncharov, I., Riedl, E.J. and Sellhorn, T., 2014. Fair value and audit fees. Review of
Accounting Studies, 19(1), pp.210-241.

COMPANY AND FINANCIAL REPORTING 12
Green, M.B., 2016. Mergers and acquisitions. International Encyclopedia of Geography: People,
the Earth, Environment and Technology: People, the Earth, Environment and Technology, pp.1-
8.
Harris, R.S., 2015. Mergers and Acquisitions. Wiley Encyclopedia of Management, pp.1-2.
Huikku, J., Mouritsen, J. and Silvola, H., 2017. Relative reliability and the recognisable firm:
Calculating goodwill impairment value. Accounting, Organizations and Society, 56, pp.68-83.
Kabir, H., Rahman, A. and Su, L., 2017. The Association between Goodwill Impairment Loss
and Goodwill Impairment Test-Related Disclosures in Australia.
Laux, C., 2016. The economic consequences of extending the use of fair value accounting in
regulatory capital calculations: A discussion. Journal of Accounting and Economics, 62(2-3),
pp.204-208.
Rani, N., Yadav, S.S. and Jain, P.K., 2016. Mergers and Acquisitions. India Studies in Business
and Economics ReDIF-Book.
Sun, L. and Zhang, J.H., 2017. Goodwill impairment loss and bond credit rating. International
Journal of Accounting & Information Management, 25(1), pp.2-20.