Financial Reporting: Recognition and Measurement of Assets and Impairment Charges

This report analyzes diverse facets of financial accounting and system of documentation of business transactions particularly in the financial declarations of the firm. It discusses the recognition and measurement of assets and impairment charges in financial reporting, using the example of BHP Billiton's acquisition of Fayetteville Oil and Gas Shale. It also covers the impact of changing oil prices on impairment charges and the treatment of accounting for losses of impairment.

Running head: FINANCIAL REPORTING
Financial Reporting
Name of the Student:
Name of the University:
Authors Note:

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Executive Summary
The main intention of the current report is to analyse diverse facets of financial accounting
and system of documentation of business transactions particularly in the financial
declarations of the firm. In this study, charges for impairment, measurement along with
recognition of firm’s assets can be considered to be common factors illustrated in the report
under deliberation. Also, charges for firm’s impairment and unsuitable treatments of
accounting related to the firm BHP Billiton are considered in the current report. The pertinent
treatment for accounting related to loss of impairment of particularly Fayetteville Operation
has been elucidated comprehensively in the report.

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Part A
Solution to Task 1
The recognition as well as measurement regarding acquirement of the “US Fayetteville Oil
and Gas shale” can be analysed as per directives as well as decree of standards proposed
AASB. As suggested by Chen et al. (2017), pertinent standards declared by Australia
Accounting Standards Board-AASB for firm acquirement is AASB 3. The current report
refers to the operations of the firm BHP Billiton. In essence, BHP Billiton had purchased the
“Fayetteville Oil and Gas Shale” particularly on 11th March categorising investment as
particularly business combination. Essentially, principle of recognition for this type of
principle needs to be founded on acquisition date of the firm BHP Billiton Company. BHP
Billiton RH has the need to identify the assets/resources of the target firm individually from
goodwill of the firm (Errunza and Ta 2015). Besides this, identifiable assets acquired during
procedure of acquirement must meet the criteria so as to become a part of firm’s
assets/liabilities of the firms must satisfy certain specific terms as well as conditions as
reflected by structure for preparation as well as presentation of pecuniary data and accounts.
For the purpose of qualifying according to the standard directives and situations, it is
important that firm’s assets as well as liabilities of target firms need to be in control of
acquiring else the target firm (Chang and Yen 2015). This need not create outcomes of any
business transactions. Also, the firm BHP Billiton else wise acquiring enterprise must take
account of assets of target firm by means of model set of laws and directives. Furthermore,
there needs not be double counting in the process of identifying resources/assets of the firm.
This needs to be such that acquirement has considered this previously. For instance, goodwill
as well as other intangible assets of the business firm need not be taken into account by the
firm BHP Billiton in case if the same is not detected by the acquire firm in balance sheet

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(Gackstatter and Möller 2016). Particularly, business transaction can direct the way towards
generation of goodwill between two different enterprises but these need to be acquired and at
the same time documented according to standards prescribed by AASB-Australian
Accounting Standard Boards. In essence, accounting standard boards also provide course of
action of identifying operating assets as well as liabilities of business concerns.
Principle of measurement as per standards of AASB 3 mentions that the firm BHP can
enumerate net identifiable assets along with liabilities of the firm according to fair value of
assets/liabilities of the firm at the date of acquirement of assets. In essence, it is
recommended by standards of accounting that the firm BHP Company have the need to
compute assets/resources of acquiring firm at fair value otherwise liquidated value of firm’s
assets. In addition to this, the business concern utilizes measurement basis undertaken by
BHP Company for the purpose of business combination the purchase method earlier until the
year 2009. Particularly, the purchase technique engages recognizing net assets/resources of
the target firm (Dickinson et al. 2016). Again, the business combination for particularly the
financial year was documented by appropriate implementation of an acquirement mechanism
of accounting, firm’s net identifiable assets/liabilities are documented at fair value at
acquirement date.
Solution to Task 2
Analysis of enumeration of the enterprise Fayetteville Oil and Gas Corporations was carried
out by acquirement mechanism by the enterprise BHP Company. Essentially, net assets
possessed by the target enterprise need to be valued at market price for the current period.
Thereafter, there can be a re-examination of balance sheet of target firm. In addition to this,
fair value ascertained of the target firm can then act as the foundation for current market of
the acquiring firm plus target price (Chen et al. 2009). In addition to this, the firm BHP

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Company presented business transaction using method of business combination else wise
acquirement mechanism. Again, under corporation’s assets as well as liabilities of target
enterprises are fused and combine with acquiring corporation by correct percentage risk
(Chang and Yen 2015). The acquiring company applies and the rest of the portion is
determined as minority interest in the target company’s balance sheet. The balance sheet of
the firm BHP recommends that enterprise had reported goodwill of just about USD 552
million. In essence, this was a division of firm’s goodwill in the acquirement of firm “US
Fayetteville Gas Company”. Essentially, the entire amount of additional payment is because
of goodwill identified in mainly balance sheet of acquiring firm. In general, the total amount
is enumerated as the additional potential that the target firm can recompense in normal course
of the corporation. Carey et al. (2014) suggests that accounting suppositions and
determination of fair value assets/resources of the firm can be considered to be important
concerns of the enterprise and need to be analyzed. Again, the accounting supposition and
ascertainment of true potency of the firm of “US Fayetteville” can also be regarded to be
violent. Furthermore, the enterprise had expended around USD 30 bn in the acquirement deal.
Essentially, the enterprise had the need to charge impairment on additional assets amount that
the firm had disbursed after reduction in prices of oil. The amount of impairment was
observed to be 105 out of the deal value of approximately 2.8 bn dollars.
Solution to Task 3
The treatment of accounting and process of documentation of acquirement of the enterprise
Fayetteville oil and gas was carried out by utilizing acquisition mechanism. Using the
acquisition system, net identifiable assets as well as liabilities of the target enterprise are
identified at balance sheet assertion of the firm. This is necessarily presented at firm’s book
value at the historical prices for the business. The re-evaluation of assets/ liabilities of the

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balance sheet assertions is undertaken for ascertainment of fair value of enterprise’s asset/
liabilities of corporation (Reilly and Schweihs 2016). Fundamentally, the firm BHP Company
ascertains acquirement cost for the firm US Fayetteville after early reconsideration of balance
sheet of the concern. Again, BHP company re-evaluated 30 bn dollars as extensive worth for
the firm’s assets. Particularly, the thing that was considered by the firm was essentially
generation of stream of cash by target enterprise. Essentially, the business concern
ascertained course of cash creation at the apex cycle of the asset/resource. This necessarily
overvalued assets of the target firm and reflected an augmented potency of the firm assets in
the system and due course of creation of streams of firm’s cash (Caruso et al. 2016). In
particular, the important suppositions that showed the way to overvaluation of assets of the
firm and assessment for which goodwill element had a substantial weightage. Particularly, the
firm “BHP Company” undertook the impairment during the FY2015 at the time when prices
of oil price began decreasing and the re-examination for assets of the firm was undertaken in
the current case. Also, proper value of firm’s assets and potency of firm’s assets had
drastically decreased. This directed the enterprise to write and charge impairment for firm’s
goodwill or additional amount that company had disbursed. The charges for impairment for
enterprise were approximately 2.8 billion dollars, which was noted in the financials of the
company (Reitmaier and Schultze 2017).
Task: Part B
Solution to Question 4:
Various factors that exerted impact on recognition as well as measurement of loss from
impairment of “Fayetteville Oil and Gas Operation” include altering prices of oil and speedy
descend in prices of oil during the period 2015. In essence, the prices of oil have decreased
from a tip of approximately $120 for every barrel to a low level of roughly $45 for every

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barrel. As such, the considerable amount of prices of oil was not anticipated by the firm BHP,
that lifted up questions on assumptions of accounting and varied valuation evaluation carried
out by the firm BHP. In essence, valuation with suppositions of the company got affected and
the enterprise did not anticipate the substantial declined in prices of oil. The treatment for loss
of impairment would be undertaken by sticking to the guidelines of the standards stipulated
under AASB. In actual fact, the target enterprise can assume cash flow in the future and
consider 10% volatility in generation of flow of cash, however, volatility that was in fact
observed to be higher than 50%. Also, the accounting treatment for impairment loss can be
carried out using corridor system of accounting. In this approach the loss shall at once not
have an effect on income assertion of the business (Edwards 2017). Essentially, the loss else
wise charges of impairment stemming from revaluation of assets/resources can be restated in
firm’s other comprehensive statement of earnings of the firm. Again, the same would
necessarily be permitted to be capitalized in case if the loss stemming from can be reversed.
Kuter et al. (2018) suggests that the losses otherwise the impairment recorded on date of
revaluation of firm’s assets as well as liabilities can be treated as expenditure. Essentially, the
same can be detected in firm’s income declaration in case if the same cannot be reversed. A
charge for impairment noted by the firm was just about 2.8 bn dollars that reflected drop in
overall productive worth of firm’s assets. Stakeholders as well as financiers of the firm are
going for acquirement with the firm as assets’ fair value was excessively high (Errunza and
Ta 2015). The firm could have carried out varied kinds of evaluation before valuation of
firm’s assets as well as liabilities. In this case, trend evaluation alone cannot give
considerable base for analysis and ascertain price of firm’s assets as well as liabilities.
Additionally, the BHP Company must have carried out scenario evaluation in ascertainment
of assets price of firms in cases where fluctuations in prices of assets are observed to be

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extremely high. The evaluation carried out provides the firm an opportunity to evaluate and
analyse assets worth in diverse state of affairs and scenarios of cash flow (Chen et al. 2017)
Figure below shows the historical trend of prices of oil:
Figure: Historical Prices of Trend
(Source: Brent Crude Oil Price | Historical Charts, Forecasts & News 2018)

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Solution to Question 5
The treatment of accounting for losses of impairment otherwise charges of impairment has
been used on revaluation date of firm’s assets as well as liabilities. Essentially, charges for
impairment are enumerated after reassessment of fair as well as true value of resources and
liabilities of the enterprise. Also, charges were enumerated after revaluation of assets as well
as liabilities of the enterprise BHP Company (Chang and Yen 2015). Charges for impairment
enumerated on firm’s intangible assets after a drop in production or else creation of flow of
cash from resources is not definite in this case and assets get re-valued. In essence, worth of
asset is generated by economic advantages it would deliver to the firm.
The charges for impairment enumerated can be ascertained by the decline in overall
productive assets of the firm (Rennekamp et al. 2014). According to then given case under
consideration, drop in overall value of production was roughly 2.8 bn dollars. Again,
impairment particularly under present standard and system of accounting mentions that
charge of impairment is reversible only when validation for the same is reasonable. In
essence, accounting for this can be carried out in two different ways (Gackstatter and Möller
2016). The methods are such that in case if the losses are anticipated to be reversed, then in
that the loss can necessarily be capitalized in firm’s income assertion. In case if charges for
impairment for the firm are anticipated to be non-reversible, then in that case, expenditures
need to be reflected as expend under the income declaration for the subsequent financial year.

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In essence, categorisation of charges for impairment can be carried out after a careful
evaluation of class of asset, future value and anticipated stream of cash to be generated by the
business enterprise.

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