Role of Professional Judgment in Accounting

This presentation discusses the role of professional judgment in accounting, using BHP as a case study. It explores the importance of professional judgment in ensuring trust, making informed decisions, and serving as a referee in economic life. The presentation also covers the impairment disclosures made by BHP, the valuation method used, key estimates and judgments involved, and the impairment charges incurred. It concludes by discussing the application of professional judgment and the adherence to fundamental characteristics of financial reporting.

FINANCIAL ACCOUNTING ASSIGNMENT
NAME OF THE STUDENT
NAME OF THE UNIVERSITY
STUDENT ID

Introduction
BHP is an ASX listed entity and have yearend on 30th June
2018. Further, the financial statements of the entity are
prepared in compliance with requirement of Australian
Corporation Act 2001 and in compliance with the IFRS
and interpretations issued by IASB. It is engaged in
acquiring, discovering, marketing and developing the
natural resources from all over the world (Bhp.com
2019).

Role of the professional judgment in accounting
Role of professional judgement in accounting is –
Ensuring that the regulation related to accounting policies and
determining the ways for improving accounting in the general terms
Creating the climate of trust among the business managers and the
owners of the capital
Allowing the users of the financial statements in making reasonable
decisions on the basis of the financial information provided
Serving as the referee among the parties of economic life, specifically
the providers of accounting information and auditors who certify the
quality and thereby ensures the reliability (Aasb.gov.au 2019)

Impairment disclosures made by BHP
As per the disclosure made by the entity in context of impairment
BHP performs impairment test for all the assets if there is an
indication that the asset may get impaired, however goodwill is
tested for impairment at least annually. If carrying amount of assets
exceeds the recoverable amount of the assets, the same is impaired
and the impairment loss is reported in the income statement for
reducing the assets carrying value in balance sheet and to reduce it
to recoverable amount (Vogt et al. 2016).

Valuation method
The recoverable amount is higher among the fair value of the asset
reduced by the disposal cost and the VIU (value in use). While assessing
the impairment, assets shall be grouped at lowest level for which cash
flows are separately identifiable. Fair value of the asset reduced by the
disposal cost is the estimate of amount that the market participant will
pay for the CGU or for the asset. Generally the fair value for the petroleum
and mineral assets is determined through using the independent
assumption from the market for computing present value of the future
post-tax cash inflows (Abuaddous et al. 2016).

Estimates and judgements
Key estimates and judgements are used for determining asset’s
recoverable amount, in absence of the quoted market price the
estimates are made for computing the present value of the future
post-tax cash inflows. The estimates require to be made on the basis
of significant judgement by the management and are subjected to the
uncertainty and risk that may be beyond control of the entity
(Bhp.com 2019). Hence, possibility is there for the changes in the
circumstances that will alter the projection materially and will have an
impact on recoverable value of the asset at each of the reporting date.

Impairment charges for the year
For the year ended 30th June 2018 the entity charged US$ 333 million
as impairment losses for the following assets –
Petroleum segment - $ 76 million
Copper segment - $ 213 million
Iron ore segment - $ 14 million
Coal segment - $ 29 million
Unallocated and group items or eliminations segment - $ 1 million
(Bhp.com 2019).

Application of professional judgement
As per the requirement of AASB, estimates are made on the basis of
significant judgement by the management and are subjected to the
uncertainty and risk that may be beyond control of the entity (Bhp.com
2019). Further cash flows are discounted through using the appropriate
post tax market discount rate for arriving at the net present value of the
asset. Hence, it can be stated that the entity is applying professional
judgement while estimated the cash flows and discount rates for
computing the impairment loss (Bhp.com 2019).

Fundamental characteristics
As per the requirement of fundamental characteristic of the useful
financial information the information shall be relevant, presented
faithfully and the information shall be complete, free from error
and neutral. It can be identified from the disclosures made by BHP
regarding impairment is relevant for the purpose of the users,
presented faithfully and are complete, neutral and free from error.
Further, the proper break up for each item for which impairment
charges has been made is disclosed through notes (Rennekamp,
Rupar and Seybert 2014).

Conclusion
It can be concluded from the above discussion that as per the
requirement of professional judgments, estimates for cash flows are
made on the basis of significant judgement by the management.
Further, cash flows are discounted through using the appropriate
post tax market discount rate and the recoverable amount is higher
among the fair value of the asset reduced by the disposal cost and
the VIU (value in use). Hence, it can be stated that the entity is
complying with all the requirement of financial reporting.

Reference list
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