Financial Reporting: Impairment Charges and Accounting Treatments

This project discusses the recognition and measurement of assets, impairment charges, and accounting treatments relating to BHP Billiton Company. The evaluation of the measurement of Fayetteville Oil and Gas Corporations is also discussed. The factors affecting the recognition and measurement of impairment loss of Fayetteville Oil and Gas Operation are analyzed. The treatment for the impairment losses or the charges is also discussed.

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

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Executive Summary
The aim of the project is to study about the various aspect of financial accounting and the
recording of transactions in the financial statements of the company. The impairment charges,
recognition, and measurement of the assets are some of the common factors discussed in the
assignment. The impairments charges and inappropriate accounting treatments relating to the
BHP Billiton Company has been taken into account. The relevant accounting treatment relating
to the impairment loss of Fayetteville Operation has been discussed in the assignment.

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Table of Contents
Part A...............................................................................................................................................3
In Response to Question 1...............................................................................................................3
In Response to Question 2...............................................................................................................4
In Response to Question 3...............................................................................................................5
Part B...............................................................................................................................................6
In Response to Question 4...............................................................................................................6
In Response to Question 5...............................................................................................................9
Reference.......................................................................................................................................11

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Part A
In Response to Question 1
The recognition and measurement for the acquisition of the US Fayetteville Oil and Gas shale
according to the AASB. The relevant AASB for the acquisition of the company is the AASB 3
that states that the company can undergo. The BHP Billiton Company had acquired the U S
Fayetteville Oil and Gas Shale on March 11 classifying the same investment as a business
combination. The recognition principle for such kind of principle should be based on the date of
acquisition the BHP Billiton Company should recognize the assets of the target company
separately from the goodwill of the company (Russell 2017). The identifiable assets acquired
during the acquisition process should qualify to become a part of the assets and liabilities of the
companies must meet certain terms and conditions as presented by the Framework for
Preparation and Presentation of Financial Data and Reports. To qualify as per the standard
guideless and conditions the assets and liabilities of the target companies must be in possession
with the acquiring or the target company and should not generate with results of any other
transactions. The BHP Billiton Company or the acquiring company should account for the target
company’s assets by the standard rules and guidelines. There should be no double counting of
recognizing assets of the company, which the acquire has already taken into account. For
example, Goodwill and other Intangible assets of the company should not be considered by the
BHP Billiton Company if the same is not recognized by the acquire company in there balance
sheet (Tran and Zhu 2017). The transaction could result in the creation of goodwill between the
two companies but the same should be acquired and recorded as per the Australian Accounting

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Standard Boards. The Accounting standard boards also gives the guidelines of recognizing
operating assets and liabilities of the companies.
The measurement principle according to the AASB 3 states that the BHP Company can
measure the net identifiable assets and liabilities of the companies as the fair value of the assets
and liabilities of the company at the acquisition date of the assets. It is suggested by the
accounting standards that the BHP Company should measure the assets of the acquiring
company at either fair value or at the liquidated value of the assets. The company uses the
measurement basis done by the BHP Company for the Business combination the purchase
method earlier until the year 2009. The purchase method involves identifying the net assets of
the target company. The business combination for the fiscal year was accounted by application
of the acquisition method of accounting, the net identifiable assets and liabilities of the
companies are recorded at the fair value at the acquisition date (Jin, Shan and Taylor 2015).
In Response to Question 2
Evaluation of the measurement of Fayetteville Oil and Gas Corporations was done by the
acquisition method by the BHP Company. The net assets of the target company will be valued at
their current market price and then there will be a reassessment of the balance sheet of the target
company. The fair value determined of the target company will then serve as the base for the
acquiring company current market along with the target price (Carey, Potter and Tanewski
2014). The BHP Company showed the transaction under the business combination method or the
acquisition method under which the assets and liabilities of the target companies are merged with
the acquiring company by the amount of percentage stake 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 BHP company suggests that the company had reported an approximately

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USD $552 Million amount of goodwill that was as part of the goodwill in the acquisition of the
US Fayetteville Gas Company (Dickinson, Wangerin and Wild 2016). The amount extra paid is
due to the goodwill recognized in the balance sheet of the acquiring company (Wangerin 2017).
Generally, the amount is calculated as the extra potential, which the target company can pay off
in the due course of the business. The accounting assumptions and determining the fair value
assets of the company are some of the key concerns the company might want to analyze. The
accounting assumption and determining the true potential of the company of the US Fayetteville
company was too aggressive. The company had spent around US $30 Billion in the acquisition
deal. The company had to charge the impairment on the extra amount of assets it had paid after
the decrease in the oil prices the impairment amount was around 105 of the total deal value
around 2.8 billion dollars (Su and Wells, 2018).
In Response to Question 3
The accounting treatment and the recording of the acquisition of the Fayetteville oil and gas was
done by using the acquisition method. Under the acquisition method, the target company net
identifiable assets and liabilities are recognized at the balance sheet of the company, which are at
the book value of the company at the historical prices for the company. The reassessment of the
balance sheet assets and liabilities is done after determining the fair value of the assets and
liabilities of the company (Paugam, Astolfi and Ramond 2015). The BHP Company determines
the acquisition cost for the US Fayetteville company after the initial reassessment of the balance
sheet of the company. The BHP company had then reassess as 30 billion dollars as the
considerable value for the company’s assets. The things which was taken into assumption by the
company was the cash flow generation by the target company. The company determined the cash
flow generation at the asset peak cycle, which had overvalued the targets company assets and

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shown an increased potential of the company assets in the generation of the cash flows. The
significant assumptions had led to overvaluation of the company assets and valuation for which
the goodwill component had a considerable weightage. The BHP Company did the impairment
in the year 2015 when the oil price started falling and the reassessment for the company assets
was done in the case. The true value of the assets and the potential pf the assets had significantly
fallen which had lead the company to write an impairment in the goodwill or the extra amount,
which had paid. The impairment charges for the company was around 2.8 billion dollars, which
was noted in the financials of the company (Kimbro and Xu 2016).
Part B
In Response to Question 4
The factors that affected the recognition and measurement of impairment loss of Fayetteville Oil
and Gas Operation was the changing oil prices and the rapid fall in the oil prices in the year
2015. The oil prices have fallen from a peak of about 120$ per barrel to a low of about$45 per
barrel. The significant amount of oil prices was not expected by the BHP Company, which had
raised questions on the accounting assumptions and the valuation analysis done by the BHP
Company. The company valuation and assumptions was affected taken down by the company
did not expect the significant drop down in the oil price. The impairment loss treatment would be
done under the Australian Accounting Standards under, which the company had underwent
through. The target company can take the assumption of future cash flow as 10% volatility in the
cash flow generation but the volatility which was actually seen was greater than 50%/. The
impairment loss treatment will be done under the corridor approach of accounting where the loss
will straight away not affect the income statement of the company (Duh, Lee and Lin 2009). The

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loss or the impairment charges arising out of the reassessment of assets will be restated in the
other comprehensive income statement of the company and the same would be allowed to be
capitalized if the loss arising from the same is reversible. The losses or the impairment noted on
the revaluation date of assets and liabilities will be treated as an expenses and recognized in the
income statement of the company if the same is not reversible in nature. The impairment charges
noted down by the company was around 2.8 billion dollars the fall in the productive value of the
assets. The stakeholders and the investors of the company for going for the acquisition with the
company at times when the fair value of the assets was too high or at the boom period. The
company should have performed many types of analysis before the valuation of the assets and
liabilities. The trend analysis alone could not have given a significance amount of base for the
evaluation and determine the price of the assets and liabilities. The BHP Company should have
also gone for scenario analysis in determining the assets price of the company in the case where
the volatility in the assets price are seen to be very high. The analysis would have given the
company a chance to analyze and get the value of the assets in different scenario and different
possible cash flow scenarios (McClean and Hölscher 2014).

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Figure 1: Historical Trend in the Oil Prices
(Source: Brent Crude Oil Price | Historical Charts, Forecasts & News 2018)

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In Response to Question 5
The treatment for the impairment losses or the charges, which the company had assessed on the
revaluation date of assets and liabilities of the companies. The impairment charges is calculated
after reassessing the fair and true value of the assets and liabilities of the company. The charges
was calculated after there was revaluation of assets and liabilities of the BHP Company (Chen,
Wang and Zhao 2009). The impairment charges is calculated on the intangible assets of the
company after a production fall or when the generation of cash flow from the assets is not certain
in that case, the assets are revalued. The asset value is created by the economic benefits it would
provide to the company (Chang and Yen 2015).
The impairment charges calculated will be determined by the fall in the productive assets of the
company. In the case of the BHP Company, the fall in the production value was around 2.8
billion dollars. The impairment under the current accounting standards says that the impairment
charge is only reversible under the case when the evidence for the same is justifiable. The
accounting for the same could be done under two ways the methods are as such that if the loss
are expected to be reversed the same loss can be capitalized in the income statement of the
company. If the impairment charges for the company are expected to be non- reversible than the
Present Value of
Benefits Created/
Economic Asset Value
Today=
Return on 1st Year
+
Return on 2nd Year
+
Return on Nth Year
(1 + Interest Rate) (1 + Interest Rate) (1 + Interest Rate)

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expenses should be shown as an expense under the income statement for the following year. The
classification of the impairment charges should be done after an careful analysis of the assets
class and the future value, expected cash flow to be generated is ascertained by the company
(Vogt et al. 2016).

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Reference
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
Brent Crude Oil Price | Historical Charts, Forecasts & News. (2018). Retrieved from
https://www.focus-economics.com/commodities/energy/brent-crude-oil
Carey, P., Potter, B. and Tanewski, G., 2014. AASB Research Report No.
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, S., Wang, Y. and Zhao, Z., 2009. Regulatory incentives for earnings management through
asset impairment reversals in China. Journal of Accounting, Auditing & Finance, 24(4), pp.589-
620.
Dickinson, V., Wangerin, D.D. and Wild, J.J., 2016. Accounting Rules and Post-Acquisition
Profitability in Business Combinations. Accounting Horizons, 30(4), pp.427-447.
Duh, R.R., Lee, W.C. and Lin, C.C., 2009. Reversing an impairment loss and earnings
management: The role of corporate governance. The International Journal of Accounting, 44(2),
pp.113-137.
Jin, K., Shan, Y. and Taylor, S., 2015. Matching between revenues and expenses and the
adoption of International Financial Reporting Standards. Pacific-Basin Finance Journal, 35,
pp.90-107.

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Kimbro, M.B. and Xu, D., 2016. The accounting treatment of goodwill, idiosyncratic risk, and
market pricing. Journal of Accounting, Auditing & Finance, 31(3), pp.365-387.
McClean, P.L. and Hölscher, C., 2014. Liraglutide can reverse memory impairment, synaptic
loss and reduce plaque load in aged APP/PS1 mice, a model of Alzheimer's disease.
Neuropharmacology, 76, pp.57-67.
Paugam, L., Astolfi, P. and Ramond, O., 2015. Accounting for business combinations: Do
purchase price allocations matter?. Journal of Accounting and Public Policy, 34(4), pp.362-391.
Russell, M., 2017. Management incentives to recognize intangible assets. Accounting & Finance,
57, pp.211-234.
Su, W.H. and Wells, P., 2018. Acquisition premiums and the recognition of identifiable
intangible assets in business combinations pre and post IFRS adoption. Accounting Research
Journal, (just-accepted), pp.00-00.
Tran, A. and Zhu, Y.H., 2017. The impact of adopting IFRS on corporate ETR and book-tax
income gap.
Vogt, M., Pletsch, C.S., Morás, V.R. and Klann, R.C., 2016. Determinants of goodwill
impairment loss recognition. Revista Contabilidade & Finanças, 27(72), pp.349-362.
Wangerin, D., 2017. M&A Due Diligence, Post-Acquisition Performance, and Financial
Reporting for Business Combinations.